According to Cost: "When LBOs were the rage, apparel firms had almost no debt on their balance sheets. Because they didn’t borrow money, the balance sheets could support a lot of borrowing to get the LBO done, and the owner would get his payout with borrowed money.
"What I’m seeing now is that firms in general have a fair amount of debt. The banks are not lending as much even though many are flush with cash. The more debt firms have on their balance sheets, the harder it is to refinance. That chills the LBO possibility, and is one of the reasons why many deals now don’t get done."
Jim Abbott, an attorney at Carter Ledyard & Milburn specializing in corporate and private equity transactions, pointed out that the conservatism of banks about how much they are willing to lend has left many buyout firms sitting on substantial pools of cash. "They would like to invest that money, but just can’t put together the deals and have them financed in the way that would promise the [requisite return] to their investors."
Abbott expects to see an increased interest by buyout firms in the retail and apparel industry. "Now they are looking at solid businesses that can make a profit and generate revenue with some measure of consistency."
Wilbur Ross — whose private equity firm WL Ross & Co. manages funds that are owed millions of dollars in the Burlington Industries bankruptcy — said that textile firms can be ideal candidates for LBOs because the receivables and inventories are often the easiest to finance. Recent LBOs in the sector have included WestPoint Stevens and Spring Mills.