David Prosser: Football fans may hate them but leveragedbuyouts are here to stay

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The Independent Online

Outlook Assuming the deal goes through, Liverpool fans will no doubt be delighted that the purchase of their club by New England Sports Ventures is not another leveraged buyout. In contrast with the 2007 takeover of the club, NESV is not expected to place any acquisition debt on Liverpool's balance sheet.

Still, if you think that implies the era of the LBO is coming to an end, think again. Dislike of such deals may be just about the only thing on which football fans in Merseyside and Salford can agree, but in both Europe and the US, LBOs are making a comeback as the transaction of choice for private equity firms sitting on cash piles raised before the financial crisis prompted the closure of debt markets.

In Europe alone, LBO-backed deals were worth $8bn (£5bn) during the third quarter, more than in any three-month period since the collapse of Lehman Brothers. It's a similar story in the US, where high-profile deals on the block include takeovers of Sara Lee and Burger King.

There are good reasons for this. Football fans may regard the LBO model as financial engineering of the worst kind, but the trick is actually simple. Borrow the money to buy an asset and then service the debt from that asset's earnings. You need small amounts of capital to secure large investments and, assuming the asset returns more than the cost of the borrowing, the gains are magnified. In time, sell the asset on, repay the debt and count the geared-up winnings.

For a time, the credit crunch put paid to LBOs, but this is one sector where debt markets are unfreezing more quickly than most. Not least this is because LBO investors have emerged from the crisis remarkably well – experts put default rates at around 4 per cent over the past two years.

In the secondary market, where lenders can trade the loans they have made on LBOs, prices have been rebounding all year amid the realisation that such debt has been much less badly hit by the crisis than feared. Whisper it quietly on the Kop, but the experience of Liverpool excepted, LBO deals are turning in much better performances than Steven Gerrard and co.

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