Power & Money Special Report

The House Financial Services Committee has been holding hearings on the impact of private equity – most recently, how it is affecting workers. As the wags say, if Congress is holding a hearing on a subject, it’s pretty much old news.

That may not be the case this time around. Private equity is reshaping the U.S. economy as well as its capital machetes; it is a force to be reckoned with and examined – which explains CNBC's day of special coverage May 17.

For several years now, private equity groups have been raising billions of dollars of cash to create buyout funds. And those funds have been busy putting the money to work. Cerberus Capital Management’s agreement to buy Chrysler for $7.4 billion is the latest – though hardly the largest – example of the buyout binge now under way. Last year was a record year for private equity M&A with some $410 billion worth of deals, and according to Standard & Poor's, there are now 12 private deals alone involving S&P 500 members.


By some measures, private equity is just getting started. The Blackstone Group plans to sell stock to the public through an IPO. That will open up private equity to a whole new group of investors as well as open the firm – and, by association, the industry – to greater scrutiny and, presumably, regulation.

Private equity has been around longer than people may think. Blackstone has been around since 1987 and has invested in some 100 companies through a $32 billion war chest. Kohlberg Kravis Roberts was founded in 1976 and through 2006 had completed 150 transactions. Its equity investments were valued at $74 billion, more than twice its invested capital.

The deals of the past, such as the infamous 1988 battle for RJR Nabisco won by KKR, were known as LBOs, leveraged buyout offers. Leverage is still a big part of the business; it’s just not advertised as such. There’s some concern that debt levels are too high and thus creating a bubble that awaits an inevitable bursting. Major players in the business have said as much, but the deal making wheels on.

All of this is just the backdrop for CNBC’s special coverage. You’ll hear Charles "Chip" Kaye, CEO of Warburg Pincus, which has assembled a $15 billion fund with eyes on China, as well as Mohamed El-Erian, Harvard University’s endowment manager.

You’ll also find out how the Ontario Teachers' Pension Plan has benefited from private equity, having been a direct investors in it for some 15 years, and what companies and sectors are next on private equity’s shopping list – which some say is already trending toward questionable deals.

Nevertheless, private equity has been good to its investors and principals, many of whom are now among the world's richest people.

Private equity, or, as we call it here, power and money.

The Deals: Too Much Of A Good Thing?

The private equity sector is striking increasingly larger deals, but is the race to capture cash and raise megafunds forcing firms to invest in questionable deals? Christian Oberbeck, managing director at Saratoga Partners, and John Adler, private equity director at the SEIU capital stewardship program, debate the issues on "Squawk Box".

Oberbeck says most of the deals make sense, but admits there's "always a lot of risks" in the private equity business. And even though we are in the late stage of both the economic and debt cycles, the cost of debt remains relatively cheap. "Very large, very attractive businesses are for sale," he adds.

Adler says that if you raise a mega funds you have to put the money to work and than can lead to deals with questionable financials (purchase prices multiples are higher than traditional levels. In some cases, Adler adds, given the amount of debt involve, there is "very little margin for error" if the business being acquired doesn't perform as well as expected or the economy falters.

Targets, Players, Investors

Companies In The Sights of PE

Given the acquisitive nature of private equity and the current M&A fever, you could say there's no shortage of targets and that almost any deal is imaginable. There was talk of a $100 billion one.

As Melissa Lee reports, two big investment banks following the PE game think that's a bit rich. Merrill Lynch says "the probability of such events occurring is less than generally thought." Morgan Stanley calls a deal of that size "heroic." To give you an idea of what kind of company a deal that size would involve, consider that Dow Chemical -- on one PE takeover target list --could fetch as much as $65 billion.

So what are the big targets these days? Watch the video to see which household companies are on the the lists of the two Wall Street firms.

The Next Generation of Power Players

KKR's Henry Kravis and Blackstone's Steve Schwartzman are private equity legends. At some point in the not too distant future, they'll also be taking a back seat to young blood.

As Scott Cohn reports, like any other business, private equity buyout firms need a succession plan and a permanent supply of talent.

Potential heirs to Kravis are Marc Lipschultz, who run's KKR's energy and natural resources practice, and Scott Nuttal, who led the recent takeover of First Data. At Blackstone, former Credit Suisse banker Tony James is expected to replace Schwartzman.

Potential Pitfalls for Pensions

Carrie Coghill Kuntz, president of D.B. Root, and Susan Mangiero, president & CEO of Pension Governance, took sides on the dangers that private equity might pose for pension funds.

Mangiero –- who notes that she’s neither an advocate nor a critic of private funds –- told CNBC's Mark Haines her biggest concern is that investors are not doing enough to vet the risks of so-called “alternative” investments. She said an “underserved area of information” is “who is doing the valuations,” and by what methodology. She cited a “huge” red flag: whether a fund’s "mark-to-market" numbers are being provided by internal sources, or by “impartial” observers.

But Kuntz insisted that “the reason private equity works so well” is both its illiquidity and its freedom from the constraints of the public market. She said that hedge funds and other alternative investments can actually help shield pensions and other vital income sources from the risks of traditional public-equity investments. And she said that she sees pension managers coming directly to D.B. Root and its peers for assistance in navigating the confusing private-equity waters. “They know they need guidance,” Kuntz said.

Playing The Buyout Boom

Money managers and investors alike are trying to cash in on the tide of private-equity deals. Robert Olstein, Olstein All Cap Value Fund president & CIO, is one of them. He has $2 billion under management and looks for under-valued companies with excess cash flow selling at a discount. Olstein says thus far 30 stocks in his portfolio have attracted buyers.

Olstein dismisses talk of a bubble, saying private-equity players "know what they are doing and they're paying good prices."

Among the stocks he's holding that look like good targets: Marsh & McLennan, BoydGaming and Gap.