Everyone has heard about the excess money flooding the system thanks to the Federal Reserve keeping the markets afloat -- at least until the bottom falls out of the markets. However, here is an insightful article which explains that the private equity bubble is actually a debt bubble as lenders lower credit standards for private equity funds to buy ongoing businesses. Here is a quote from the Boston Globe article:

"I think of this as a debt bubble, not a private equity bubble," Landry says. "That's the horse, and we're the cart."

Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies.

Got that? Low rates, more leverage, practically no conditions. How do you think that story is going to end?

"The reality is the markets are willing to provide extraordinary amounts of debt, almost indiscriminately," says Scott Sperling , copresident of Thomas H. Lee Partners, the big Boston private equity firm. "It's hard to put these companies into default. I can't think of the last time we had a real covenant in one of our deals."
And here is a link to the full article:

http://www.boston.com/business/articles/2007/05/01/private_equity_debt_bubble/

Mike