Dear Reader

It’s hard to believe the first quarter has already come to a close. Deal volume is off to a strong start, as the $9 billion GMAC deal by Kohlberg Kravis Roberts & Co., Five Mile Capital Partners and Goldman Sachs Capital Partners helped boost the quarterly total to about $42 billion, eclipsing last year’s Q1 close of $40 billion. And judging by the amount of money private equity firms are in the midst of raising, sponsored LBO volume in 2006 could end up even higher than the record levels of 2005. In other words, the race is still on.

While the totals are noteworthy, I was more interested to look at the types of deals that private equity firms are doing. For one, there is really no sector preference. When you look at our quarterly list you’ll see that virtually every industry is getting attention from private equity firms. From a diversification standpoint, that’s probably a good thing.

What’s not so good, in my view, is the continued flow of sponsor-to -sponsor transactions. Private equity firms are still passing around companies, as about 12% of the first quarter completed deals were sponsor-to-sponsor deals. With all the concerns about downward pressure on returns, you have to wonder if sponsor-to-sponsor deals are contributing to the problem. I know most of you would argue that there’s still value to be added to these companies, and presumably you wouldn’t buy them if you felt otherwise. To be fair, I’m not suggesting two private equity firms can’t own a company consecutively and create value, but it does seem like a hard proposition. If there’s more value to be added, why didn’t the previous private equity owner create that value? Then you factor in the double-dipping issue for LPs, and there are some legitimate reasons for concern. What sponsor-to-sponsor deals wind up looking like is a quick way for private equity firms to make a decent return, but not necessarily the best return possible. Whatever the case, the prospect of extracting healthy returns from any investment at today’s multiples won’t be an easy task for any buyer.

Sincerely,

Danielle Fugazy