The RJR Nabisco deal of 1989 is actually legendary in the investment circles, ultimately becoming a symbol corporate greed on which a best-selling book was written & even a movie was made. Called Barbarians at the Gate
, it dramatises the events leading up to the buyout - check out the trailer here
So why does this matter?
Reading this news yesterday instantly reminded me of the words of my professor who taught me Private Equity & Asset Management at the University of Oxford.
Back in 2014, he had explained to us that when the number & value of private equity deals start increasing, it’s invariably because large investors now have more money to spend.
” is the term used to describe money that PE firms have already raised, but not yet spent. Aggregated across all PE firms globally, this is currently at a record high
of $2.5 trillion
- that’s trillion
Like most things in finance & economics, private equity spending also has its own cycle - and when PE spending increases like this, it sends a signal regarding the health of the broader financial system.
Since such deals are financed primarily via issuance of bonds & taking loans from banks, they signal that bondholders are looking for higher yields, which such deals tend to offer.
The search for higher yields brings with it additional risks, and is a function of the broader market sentiment. Basically, in such an environment, equity/bond investors are willing to take on more risks, which often cause bubbles that ultimately burst.
Interestingly, 8 of the top 10 largest-ever PE deals were done during 2006-2007, just some time before the global financial crisis officially erupted in 2008.
Please note that none of this is yet grounded in academic research - but this deal is a signal to me that it’s time to look at the larger macro picture & analyse what (if any) possible cracks might be appearing in the global financial markets.
And this signal will become even stronger, in my humble opinion, if news of more such deals follow.
-Vikas Bardia, CFA