The Private Equity Boom Continues

The IHT reports that private equity giant Kohlberg Kravis Roberts and an inside investor have outbid their competitors and secured Alliance Boots, Britain's largest drugstore, for $22.2 billion. This enormous price represents a 40% premium on the market price. The largest leveraged buyout ever in Britain, the purchase gives KKR control over 3100 stores.

KKR has been extremely busy this year, having spent $109 billion on three buyouts including $44 billion for TXU, a Texas power utility. Merger mania seems to have hit Wall Street in general and private equity in particular has been constantly in the news.

Analysts predict that the intense bidding over Alliance Boots, which saw KKR raise its bid three times, indicates that other British companies will soon be targeted. Retailers like Carrefour, a titan in Britain, are the subject of speculation.

The question many average investors are asking is: "What prompted this frenzy of activity?" The answer is much more complicated than any one factor, but perhaps the leading reason for the burst of activity is the surge in investment capital being put to aggressive use from major pensions and private universities. There is no global shortage of capital and savvy investors chasing alpha are becoming much more prominent.

Private equity represents the latest fad on Wall Street for creating out-sized returns. Giants like Goldman Sachs are rebuilding their operations around more aggressive use of capital in order to emulate the success of upstarts like KKR.

Private equity seems to have a particular advantage in companies under public scrutiny because executive compensation and other issues don't have to be reported like at most public corporations.

The boom shows no signs of slowing as the careful managers of private equity firms have yet to ridiculously overbid for worthless assets. But the increasing competition for companies like Alliance Boots demonstrates the declining returns that private equity will be able to squeeze out of the market.

Are More Nuclear Power Plants in Our Future?

CNN reports that TXU, a utility company acquired by two private equity firms earlier this year, is working to build the largest nuclear power plants in the country. Something big must be under way in Texas, because the Wall Street Journal suggests that at least three other utilities are considering building nuclear power plants in Texas.

No new nuclear power plants have been built in the United States in decades, but TXU has apparently been consulting with Mitsubishi Heavy Industries of Japan who would build the reactors, so there might actually be fire at the bottom of all this smoke.

The global warming debate has cast nuclear power into a sudden environmentally friendly light. If people are really more worried about global warming than nuclear accidents or terrorism, then the country might follow the French model which derives the vast majority of electrical power from nuclear energy.

The more capitalistic angle on this renewed interest in nuclear power questions what impact private equity has had on TXU's priorities. If private equity's ability to focus on long-term profits has allowed TXU to finally act on long simmering plans, this could have major repercussions for the economy as a whole. In a world where private equity is capable of even considering spending $50 billion for Dow Chemical, no public company is safe.

Greater willingness to take on spectacular risks will undoubtedly result in higher eventual payoffs for everyone in society, but the financial disasters will be larger too. Society just needs to make sure that the risks remain purely financial and not allow private business to avoid appropriate technological safeguards.