London, July 17:

The Euro11 billion fund just raised by private equity firm Permira may be a European record, but the real interest is in what it says about the s-tate of the industry globally.

Permira is not alone: other private equity firms are also raising record amounts; pension funds, hedge funds and other investors are desperate to get into the industry while banks and other lenders are also eager to tap into the generous returns. That has raised a fundamental question: is private equity poised to enter the next phase of its five-year-long bull run? Or is it an over-exuberant, highly leveraged bubble waiting to burst? The industry has certainly undergone dramatic change. As recently as three years ago, private equity was about buying unloved companies with good real assets behind them, waiting until sentiment improved and selling them on, perhaps taking a profit on refinancing the property assets while they waited.

That is no longer enough. These days, private equity firms view practically any company as a restructuring opportunity - and increasingly they are ganging together to make that happen. Last year five firms, including Permira and rivals Blackstone, KKR and Apax Partners, clubbed together to buy Danish telecoms business TDC for $15 billion, including the value of its debts; today, businesses like Unilever and British Telecom — worth 36 billion pounds and 20 billion pounds respectively — are regularly talked about as targets. Last week, private equity houses were thought to be the main buyers alluded to by retailer GUS when it said it had received approaches for its Argos and Experian divisions. Indeed, private equity buyers account for one in three of all business purchases and will be on the selling side of many more. And companies in the hands of private equity houses account for one employee in five outside the UK’s public sector.

Permira openly admits that its fund-raising is designed to ensure it retains its place in the big league. It is more than twice the Euro5.1 billion it drummed up last time round, and 70 per cent more than was recently raised by Cinven last month, but that puts it only fourth in the global league, behind the US giants Blackstone, KKR and Texas Pacific, all of which are in the process of raising $14.5 billion-$15.5 billion.

“Private equity has one thing in common with investment banking,” says Charles Sherwood, a Permira partner. “The ability to employ capital in quantum is important for large transactions and important for competitive advantage.” He adds, “Private equity has a different emphasis at the larger end. Demand does drive supply, of course, but it works the other way too - supply drives demand. The amount of capital available without question makes viable transactions today that were not possible yesterday.”

Given the amount of money being raised, the list of viable transactions will grow ever longer. By the end of June, $150 billion had been raised worldwide, according to research house Private Equity Intelligence (PEI), Compared with $280 billion in the whole of the last calendar year.

And that first-half figure excludes Permira’s new funds, as well as the $35 billion currently being raised by the US giants, which suggests that the year’s total could be well ahead of 2005.

The industry was hardly short of cash anyway:

PEI estimates that there is more than $700 billion already available for investment worldwide — enough, says managing director Mark O’Hare, to finance more than two years’ worth of deals.

And the popularity of private equity is growing fast: a survey conducted by PEI indicates that, taken together, pension funds, insurance companies, banks and wealthy families have $1.3 trillion available for investment.

But this equity funding tells only part of the story. Buyouts and other private equity deals will also include a high level of borrowings — loans and other debt instruments can account for as much as five times the amount of actual equity invested, depending on the type of deal. And debt funding is attracting just as much interest from investors as equity: while five years ago much of the debt taken on in a buyout would have been held by banks and a few specialist firms like Intermediate Capital Group, today much of it is packaged up in bundles known as ‘CDOs’ - collateralised debt obligations - and sold on to hedge funds or conventional investors.

The amount of debt involved in private equity transactions has been increasing dramatically. The putative bid for the London Stock Exchange by Australian bank Macquarie, for example, would have involved debt of more than 10 times the earnings of the company, and while that was extreme, debt levels generally have been creeping higher, it is indicative of a general trend.