LBO deal size to take time to recover

NEW YORK (Reuters) - Private equity deals will remain small in size and volume for some time compared to their 2007 peaks, as a logjam of debt prevents banks from adding more to their portfolios, a director of private equity firm Quadrangle Group said on Wednesday.

Private equity deals peaked last year with a string of leveraged buyouts such as the $34.1 billion takeover of telecoms firm BCE Inc. (BCE.TO: Quote, Profile, Research, Stock Buzz), still yet to be closed.

"I think it will be a long time before you see another (BCE)," said Joshua Steiner, Quadrangle managing principal, at the Reuters Hedge Funds and Private Equity Summit. "Deals of that size will take a long time to come back, if ever."

The credit crunch put a halt on large leveraged buyout deals as it left banks holding billions of dollars of loan debt that they couldn't sell, the private equity fund executive said. Those deals, the bread-and-butter of the private equity industry, can't get struck to any great extent again until the system unclogs.

Reports on Tuesday that Citigroup (C.N: Quote, Profile, Research, Stock Buzz) is close to a deal to sell $12 billion of its leveraged debt "is some indication that the big financial institutions are interested in disposing of these highly leveraged loans," Steiner said. But he wasn't "entirely confident the logjam has yet been broken."

Banks used to finance buyouts mainly with loans on their balance sheets, but then moved to package and sell that debt to investors using instruments called "collateralized loan obligations" (CLOs).

CLOs group various loans together to diversify risk and are similar to mutual funds. Managers of CLOs can be large global, institutional investors or as small as one person operations. CLOs and hedge funds had been reliable buyers of leveraged buyout debt.

"That whole market has dried up," said Steiner. "So the opportunity for the banks now is to free up capital and to a certain extent get back to the lending business. Now the question is, 'Are they freeing up capital to a certain extent to make that available to people such as ourselves?'"

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Megan Davies, editing by Richard Chang)