A recent orgy of debt-financed corporate buyouts risks destabilizing world financial markets, the IMF warned on Tuesday.
In its latest Global Financial Stability Report, the fund noted that so-called leveraged buyouts (LBOs) by private equity funds, which finance takeovers of companies through borrowed money, have seen a "massive increase."
Typically, such equity groups then remove the company from its public stock market listing and hive off its most profitable parts.
The surge in LBOs has been spurred by a "desire to reduce the scrutiny associated with being a public company" and a big influx of cash from investors into private funds, the IMF said.
"The LBO-acquired firms that have become heavily indebted may be more vulnerable to economic shocks," the report warned.
"A collapse in one or more high-profile deals could leave banks with exposure during a syndication stage and could trigger a wider reappraisal of risks across a broader range of credit products," the report said.
After emerging in a big way in the 1980s, LBOs reached a record level last year with more than half the deals happening in the US.
Their worldwide value stood at nearly US$600 billion, a 70 percent rise over 2005, according to the corporate consultancy Dealogic.
In February, a US private equity consortium led by Kohlberg Kravis Roberts and Texas Pacific Group, backed by Wall Street banks including Goldman Sachs, launched a record US$45 billion bid for Texas energy group TXU.
That trumped the previous record for an LBO, rung up just days before by the Blackstone Group's US$39 billion takeover of US group Equity Office Properties Trust. That deal included US$16 billion of debt.
Jaime Caruana, director of the IMF's monetary and capital markets department, expressed concern that a possible "relaxation of standards" by regulators may have helped to fuel the LBO boom.
And he stressed that the company targeted in such a deal, once saddled with massive debts, would find itself "in a more difficult situation to cope with changing economic conditions."
The IMF report was issued ahead of the fund's annual spring meeting that begins on Saturday.
Tomorrow, G7 finance ministers are likely to debate the secretive hedge fund industry at their talks in Washington. Calls for tougher regulation of hedge funds have mounted in recent months with Germany leading the charge for controls on the trillion dollar industry.
Concern has grown because ostensibly conservative pension funds have joined the rush to invest in hedge funds despite their secretive trading practices.
According to press reports, the largest of the highly speculative investment funds -- Blackstone, Cerberus and Fortress -- are likely to take part in the G7 talks.
But the US and Britain, home to the biggest hedge funds and corporate deal-making, have resisted the calls and supported instead more self-regulation.
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