Blackstone's James sees $40 billion LBO

NEW YORK (Reuters) - The president of private equity firm Blackstone Group BG.UL, Tony James, said on Tuesday that he foresees at least one $40 billion leveraged buyout in the next year, a deal that would be double the largest so far.

Speaking to the Reuters Investment Banking Summit 2006, James said a deal of that size would probably be the limit of what LBO firms could execute, given the current pool of equity in large firms and the depth of the debt finance markets.

"Practically speaking, it's very hard to do a deal over $40 billion," James said. "The debt markets are limited and the amount of equity is so large, it's hard to cobble it together in a quick and quiet way.

"No one can walk into a board and say, 'I have enough equity to do a $40 billion deal,'" he added.

Leveraged buyouts have been getting increasingly larger this year as private equity firms have raised funds around the $20 billion level. Blackstone recently raised one of the largest buyout funds at $15.6 billion, but the fund could grow still larger.

James said he foresees at least one $40 billion deal in the next year and possibly more, and that he hoped Blackstone would be involved. He didn't name any possible LBO candidates.

James, whose firm owns or co-holds 46 companies with a combined $80 billion in revenue, also said his firm is looking to hold and develop portfolio companies longer to increase value for investors.

Private equity firms have been criticized in recent years for executing "quick flips" -- or full or partial exits within a year or two, raising questions about their ability to create long-term value and the reputation that they seek to perpetuate.

"I'm encouraging our people to hold them longer," said James, who said the firm aims to hold companies for five years on average. "It pays off over a longer period of time."

NO COLLUSION, SAYS JAMES

James also said the firm isn't concerned about news of a recent U.S. Securities and Exchange Commission investigation into possible collusion among the major buyout firms, in particular over allegations that firms may have sought to limit bids in some deals.

"I'm not concerned about collusion because I don't think it happens," said James. "We're viciously competitive with each other."

In other subjects, James said Blackstone is gradually increasing its presence in the hedge funds like other major LBO firms. The firm now has a distressed debt fund with some $500 million and a long-short equity fund with about $1 billion. Next year, he said, the firm will probably start another.

James also said that he is not concerned that too much money is flowing into private equity firms, saying that if Blackstone had more funds, it would be able to get in on other good deals.

"We're constrained in opportunities because the equity pools are too small to do many of the deals being done today," James said. "There are great values out there even bigger that are now out of our reach."

James also said corporate governance laws like Sarbanes-Oxley has made U.S. companies improve their auditing practices, but is concerned that it may be causing more companies to hold initial public offerings outside the United States to the detriment of the U.S. financial services industry.  Continued...