The private equity frenzy is starting to feel like the dot com bubble. Whenever I hear talk of new business paradigms, it's a case of deja vu. And the risks are getting bigger.

One of the tell-tale signs is the bid for Australia's biggest and iconic airline Qantas by a consortium led by Macquarie Bank and US private equity player Texas Pacific Group.

True, Australia's Prime Minister John Howard has said the country's laws won't be changed to protect Qantas but don't underestimate the size of the risks here.

Quite apart from its iconic status, and the political sensitivities around Qantas, airlines around the world are plagued by cash flows that are volatile and vulnerable to pressures ranging from oil spikes to terrorist attacks.

As The Economist points out, America's airlines have lost a staggering $35 billion over the last five years, and four of America's six big airlines had been in Chapter 11.

And with Qantas in Australia, there's also the potential risk of confrontation with the unions and foreign ownership restrictions.

So what does that mean? Simply that the deals are getting bigger, more complex and riskier.

And it's a pattern we're seeing around the world.



In Britain, the Financial Services Authority (FSA) has released a paper Private Equity: A Discussion of Risk and Regulatory Engagement which highlights some of the big risks, including excessive debt, damage to the quality, size and depth of public markets, conflicts of interest and market abuse.

Think also of the quality of the loans being extended to private equity. With syndication and securitisation of loans, the banks are no longer managing the risks themselves but are passing it on. And that's a worry.

The world's best investor, Warren Buffett, says he has no time for private equity, according to this report.

He says he hangs up on these "deal flippers" quickly whenever they call him. "They invariably auction the business and are looking for strategic buyers," he said. "A strategic buyer is just someone who pays too much."

And Ralph Nader has expressed concern about the way private equity is creating a bubble in Real Estate Investment Trusts.

Nader writes: "Twenty years ago, Felix Rohatyn, leading partner of Lazard Frères & Company, a major investment bank, told me he worries a lot about speculative excess on Wall Street. 'The thing that strikes me in a lot of this is how little real professionals,' he said, 'understand risk. The leveraged buyout is a risk evaluation. People take a pedestrian company with 20 percent debt and 80 percent equity and they turn it into 80 percent debt and 20 percent equity, all of a sudden you have a terrific business. It doesn't make any sense.' It may not have made sense then, but for the first acquirers it usually made them a lot of dollars."

Unfortunately, the history of bubbles tells us that lots of other people are going to get burnt.