Key Takeaways
- • Buyout funds captured $66 billion of the $95 billion raised by private equity firms in Q3 2017, demonstrating the continued dominance of leveraged buyouts as a core financing strategy despite market maturation.
- • Private equity firms held nearly $1 trillion in dry powder as of September 2017, according to Preqin data, positioning the industry for continued deal activity amid record capital availability.
- • The current private equity landscape mirrors 1986 market conditions—characterized by intense competition, unlimited financing availability, and rapid proliferation of boutique firms—conditions that historically preceded major boom-bust cycles.
- • Leveraged buyouts have evolved from a 1980s phenomenon into a permanent fixture of corporate finance, having survived two major boom-bust cycles since the mid-1980s, with the first major bust arriving in the early 1990s.
- • Rising deal competition continues to drive valuations higher and increase leverage risk, mirroring concerns from 1986 that warned excessive risk would eventually lead to market calamity.
Summary
The private equity industry faces a familiar paradox as leveraged buyouts remain one of Wall Street's most favored financing tools, even as structural market conditions echo warnings from the 1986 peak. Institutional Investor's analysis draws a striking parallel between today's market and the frenzied leveraged buyout environment of three decades ago, when the publication asked whether the LBO boom could sustain itself. That 1986 skepticism proved partially prescient—the industry weathered its first major bust in the early 1990s—yet buyouts never disappeared and have since become a permanent feature of corporate finance.
The scale of current capital deployment underscores the asset class's maturity and reach. Buyout funds dominated private equity fundraising in the third quarter of 2017, capturing $66 billion of the $95 billion raised across the entire private equity sector. Preqin data reveals that as of September 2017, private equity firms were sitting on nearly $1 trillion in dry powder, representing the highest levels of accumulated, uninvested capital on record. This capital reserves suggest sustained deal activity ahead, though distribution velocity and deployment risk remain open questions for investors.
Market dynamics driving today's boom resemble those of 1986 in several critical ways. Unlimited financing availability, intense competition among an expanding roster of boutique and established firms, and steady pension fund allocations into private equity have collectively inflated valuations and compressed deal margins. According to Frederic Dannen's original 1986 analysis, competition was the internal force most likely to destabilize the market—by driving up company acquisition prices and forcing firms to accept riskier deal structures. That dynamic persists today. Many private equity firms have diversified into private credit and real assets to diversify revenue, but the leveraged buyout remains the flagship product commanding the largest share of new fundraising.
The core tension identified in 1986 remains unresolved: the competitive pressure to deploy capital and complete deals naturally incentivizes firms to pay higher prices and assume greater leverage, behaviors that sow the seeds of eventual market correction. While the private equity industry has demonstrably weathered boom-bust cycles and emerged resilient, historical precedent suggests current record capital levels and valuation pressures warrant careful due diligence from institutional investors evaluating deal risk and return expectations in this capital-rich environment.
The scale of current capital deployment underscores the asset class's maturity and reach. Buyout funds dominated private equity fundraising in the third quarter of 2017, capturing $66 billion of the $95 billion raised across the entire private equity sector. Preqin data reveals that as of September 2017, private equity firms were sitting on nearly $1 trillion in dry powder, representing the highest levels of accumulated, uninvested capital on record. This capital reserves suggest sustained deal activity ahead, though distribution velocity and deployment risk remain open questions for investors.
Market dynamics driving today's boom resemble those of 1986 in several critical ways. Unlimited financing availability, intense competition among an expanding roster of boutique and established firms, and steady pension fund allocations into private equity have collectively inflated valuations and compressed deal margins. According to Frederic Dannen's original 1986 analysis, competition was the internal force most likely to destabilize the market—by driving up company acquisition prices and forcing firms to accept riskier deal structures. That dynamic persists today. Many private equity firms have diversified into private credit and real assets to diversify revenue, but the leveraged buyout remains the flagship product commanding the largest share of new fundraising.
The core tension identified in 1986 remains unresolved: the competitive pressure to deploy capital and complete deals naturally incentivizes firms to pay higher prices and assume greater leverage, behaviors that sow the seeds of eventual market correction. While the private equity industry has demonstrably weathered boom-bust cycles and emerged resilient, historical precedent suggests current record capital levels and valuation pressures warrant careful due diligence from institutional investors evaluating deal risk and return expectations in this capital-rich environment.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.