Three stories today on the buy out boom and the debt market raise the issue that higher interest rate may force a slow down in the private equity market:
• Has boom in going private hit its peak? | csmonitor.com
• Buyout Boom Could Slow as Investors Push Back - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times and Private Equity Investors Hint at Cool Down - New York Times
• Behind Buyout Surge, A Debt Market Booms - WSJ.com
Like the leverage buy-out boom of the 1980's, the current boom is financed by cheap debt. Back then, it was junk bonds; today it is low interest rates. As rates go up, debt becomes more expensive - and deals become harder.
So, what has this got to do with intangibles? For the past year or so, I have been researching the monetization of intangible assets. One form of monetization is securitization -- where intangible assets (such as brands) are spun off and the royalty income used to back the sale of bonds. It is exactly the same process as used for mortgage-back securities.
Up until now, intangibles have had only limited use in securitization. That might change. Last year, three private equity companies used securitization of the Dunkin' brands to partially finance the purchase (see Caroline Salas, “LBO Firms Use Ice Cream Recipes, Toy Stores for Low-Cost Bonds,” Bloomberg, June 13 2006). Using the royalties from the brands as collateral moved the bonds to the AAA rating, dramatically lowering the cost of capital for the deal.
Whether or not this form of financing takes hold in the private equity market remains to be seen. It is a difficult transaction - with a lot of back-up mechanisms needed. And the problems in the mortgage securitization market from sub-prime loans may just scare everyone off.
But key an eye on this one -- and look for our Athena Alliance paper on the subject coming out later this year.
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