Looking Back: The Law Of Large Numbers

Ten years ago, Buyouts magazine reported that prices for deals had entered the “stratosphere,” pushing disclosed deal volume to $15.5 billion for second quarter 1998 (July 6, 1998). That was a record at the time and represented a 25 percent increase over the next most prolific period, which happened to be the previous quarter.

“It’s been a staggering two quarters so far,” an investment banker breathlessly told Buyouts at the time.

That number was buoyed by four—count ’em, four—deals with values above $1 billion. They included the $1.6 billion purchase of Regal Cinemas by Kohlberg Kravis Roberts & Co. and Hicks, Muse, Tate & Furst. Hicks Muse also completed a $2.0 billion buyout of SFX Broadcasting.

The advent of such large deals sparked fears at the time that some firms were seeking out bigger deals—and therefore bigger funds—just “to push capital out the door,” Buyouts reported. “It seems like deals are going faster and transactions are getting larger,” an anonymous deal pro lamented.

Amazingly, 10 years later, in 2Q 2008, buyout firms closed on $10.1 billion in deals (the lowest in six years), unable to match the firepower of 1998. But that was a time when the market was heating up and LBO shops were in the ascendency. Fundraising was at a fever pitch—Bain Capital, for instance, collected a whopping $1.5 billion in 1998 despite charging an unprecedented 30 percent carried interest. Fundraising is still going strong in 2008, but the deal market is moribund.

The big difference between 1998 and 2008 is what constitutes a big deal. In 1998, going over $1 billion marked a new kind of extravagance. Now, when firms eked out just three $1 billion-plus LBOs, it’s a cause for doom and gloom on Wall Street. Granted, we’re now looking through the lens of 2006 and 2007, a one-year period when the industry racked up nine of the 10 biggest deals in history.

There’s another notable difference between 1998 and 2008. Buyout firms in Q2 1998 racked up 57 closed deals. Ten years and the founding of dozens of new firms and spin-out groups and specialist vehicles later, the buyout industry racked up more than 150 new deals in Q2 2008. But that, too, represents a stark drop-off from Q2 2007, when firms closed more than 300 deals.