‘LBO bubble, what bubble?’

The media suggests there is an LBO bubble: too much money is chasing too few deals; increased leverage has increased risk too much and there is an unsustainable private equity bubble forming. We classify a ‘bubble’ as an increase in prices of certain goods, a disconnect of prices from any fundamental valuations and a large increase in market participants with many newcomers and unusually high liquidity. Careful examination of the data, however, suggests that there is no LBO bubble forming, but that the unusual LBO activity is driven by an overheated debt market that, in the wake of the collapse of the US subprime market, has seen a correction over the summer. We expect the LBO market to slow and returns net to LPs to migrate to historic long-term averages of about 20 per cent IRR and 1.5 × multiple but continuing to outperform the public markets.