In the cult movies that bore its name, Godzilla was a mythical monster who crushed whole cities. Now so-called multi-billion dollar “mega-funds” dominate the skyline of private equity's largest, and hottest, sector: leveraged buyouts.
One industry grandee recently forecast that a relatively small club of global groups will account for 80 cents of every LBO dollar invested in the not-too-distant future. Two thirds of the $71bn raised for buyouts so far this year went to vehicles worth $2bn or more.
Funds of all sizes have gorged on cheap money chasing returns. But larger funds, which tend to outperform smaller rivals, have the structural advantage of being able to take down bigger prey. Analysis by Private Equity Intelligence, a research agency, suggests only 10 European funds might be capable of bidding for a target worth €2bn or more on a standalone basis.
That compares with 30 to 45 potentially fighting it out for a target worth up to €500m. The mega-funds' reach might well make green-eyed monsters of their mid-market rivals. For investors, however, not all that is big is beautiful. Take management fees, for example.
These keep the fund manager ticking over until the investment, hopefully, pays off. But the cut remains stuck at around 1.5 per cent even as many funds have been super-sized. Anyone who cringed at the ropy special effects of those old Godzilla movies knows handling the monster was a challenge. But it was never that expensive.