PE & LBO boom - Debt/equity arbitrage
An interesting take by Citi on the Private Equity / Leveraged Buy-out boom since 2003: Global Equity Strategist, The New Carry Trade
. . . global HY rates fell by over 600bp in 2003 and traded in a 7.0-8.5% range for
the next four years.This offered an historic arbitrage opportunity (Figure 2) — borrow off the credit markets at 7.5% and buy 10% cash earnings in the equity market. One industry was perfectly placed to exploit this carry trade — private equity.
Cheap debt and attractive equity valuations were fuelling a buy-out boom, especially in the US and UK. In addition, listed companies were buying back their shares as well as those of their peers (through cash/debt-financed M&A). This de-equitisation provided a key support to equity markets.
They go on to say that the good times for Western PE/LBO deals are over - not much of a surprise given the credit deflation currently under-way. So, what next?
A combination of rising oil and falling share prices means that a barrel of oil will now buy enough equities to deliver $8 of corporate earnings per year; > 5x above it’s long term average.
. . . at current prices, total world oil reserves ($135trn) could buy the S&P 500 index eleven times over. Just one year of production ($3.3trn) would buy the whole MSCI Emerging Market index.
oil producers are being offered a once-in-a-lifetime opportunity to build up very significant weightings in global equities at a time when nobody else seems to want to buy them.
Very interesting. Now, how do we get access to some of that cheap oil money? 
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