Market Overview: Outlook for LBOs in the Early 1990s

The private placement market for newly issued debt of leveraged buyouts (LBO) has become highly selective, and financial entrepreneurs face some limitations on their ability to attract new equity capital. Equity investors probably are the most objective about the consequences of a downturn in business earnings. Banks have evolved large infrastructures to work in the leveraged acquisition marketplace. The major life insurance companies have always been selective buyers of this paper, having long ago invested with LBO equity sponsors to ensure themselves a captive deal flow. Over the coming year, the financial markets generally will withhold financing from transactions larger than $500 million. As sellers come to realize that the relatively high prices of recent years are not available, they will seek liquidity through other means or withdraw from the market. If current problems in LBOs result in a significant and visible number of financial restructurings that include lost employment, considerable pressure will be exerted on Congress to legislate against LBOs.