Small Private Equity Fry May Be Better Catch

Large private equity firms fishing for the next huge deal may ultimately not profit as much from their big catch as their smaller counterparts, according toBusiness Week. True, the mega deals of this year –Kohlberg Kravis Robertspurchase ofHCAfor $33 billion tops among them – have brought 40% level gains for not only KKR in its buyout but also toThe Blackstone Group, The Carlyle GroupandTexas Pacificin their respective deals. Tempting as that may be,Paul HicksofHicks HoldingstoldBusiness Week, that those levels won’t last, and the law of diminishing returns will set in, making the big deals less profitable. That is why he says he prefers smaller targets. Just last week he teamed up withInvestcorpto buy a Dallas-based trucking company for just $730 million. It’s that approach, he says, that has garnered him consistent returns of 30% or more – and led him to pass up a deal with some large p.e. firms forClear Channel Communications.Thomas H. LeeandBain Capital Partnersended up shelling out $18.7 billion in that deal. Hicks says it "came down to who was willing to accept the lowest equity return. I think they are looking at a return in the high teens." That is where future mega deals may end up, especially as rising interest rates will lead to fewer financial engineering opportunities. "All studies show that the top quartile of private equity funds outperform the market,"Jim LeachofOntario Teachers Pension Plan内部的私人股本基金said in aBusiness Weekinterview. "But other than that they don’t necessarily outperform the public market. It’s a question of how good your private equity manager is."