The LBO market may be headed for trouble, with some companies faring well and others failing completely. That's the forecast from Wilbur Ross Jr., chairman and CEO of WL Ross & Co.
LBOs, or leveraged buyouts, occur when a financial sponsor uses borrowed money, such as bonds or loans, to acquire controlling interest in a target company. Ross agreed with a report in Wednesday's Wall Street Journal that indicated the LBO deals helping to drive the markets today dwarf the buyout frenzy of the 1980s. Ross says the situation is troubling.
"More importantly, the multiples being paid are also higher and even worse than that, the amount of debt being put relative to EBITDA (earnings before interest, taxes, depreciation and amortization) is also at a peak," Ross told CNBC's "Squawk Box." "It's now up to about 5.7 times EBITDA, on average."
Ross believes LBO returns will be lower and more erratic and he is forecasting a huge increase in default rates as well starting a year from now.
"I think you are going to start to see more of the skewing of performance among the LBO funds," said Ross. "Some will get through because they manage things properly and pick the right names and their performance will stay fairly good. Others are going to get crushed."