Every few weeks there is news of a takeover in the Canadian market. Increasingly, the buyers are private equity firms rather than other industry players. Of course, this is just part of a worldwide phenomenon. Private equity firms are hungry for deals because they have amassed huge pools of capital to invest on behalf of their pension, endowment and high net worth clients.

I'm not sure that anything is out of range as a potential takeover candidate anymore. Certainly nothing in Canada is safe, outside of the banks and the companies with controlling shareholders. CN or CP Rail could be done with pocket change. Presumably, acquiring Suncor or Encana could be done by aggressively selling forward future production and then levering up the balance sheet. Are the mega-firms like General Electric, Pfizer and British Petroleum next to go?

Not only are the private equity managers playing with a lot of equity capital, but there are two factors that amp up the dollar amounts even more. First of all, these firms are increasingly pooling their resources. The private equity club has got quite cozy as competitors share deals with each other. In September, a consortium of firms led by Blackrock made a US$17.6 billion bid for Freescale Semiconductor. They beat out another consortium led by KKR and Bain Capital. The second factor relates to the debt markets, which are very accommodating right now. The world is awash with capital that is looking for a higher yield and there is no shortage of creativity at the investment dealers to make any deal work.

As I see it, the evolution of the private equity business will have numerous effects of the first and second order.

By first order, I'm referring to the effect private equity is already having on our public markets. This highly motivated capital is pushing markets up. Takeover premiums are being paid for public companies and there are fewer overlooked turnarounds being left to languish. In the past, it was generally the case that strategic buyers (i.e. firms in the same industry) could pay more for acquisitions because there were more cost synergies with the existing business. Today, the prices being paid have often left these buyers on the sidelines.

Also, the risk/reward on private equity acquisitions is less attractive than it was in the past because of simple supply and demand. There are more dollars chasing the same number of opportunities. Last month Apollo agreed to buy the "advanced materials" division of GE. I don't know anything about this business, but it's fair to assume that Apollo is not getting an asset that was poorly managed or had runaway costs. GE would have found most of the low hanging fruit.

In my mind, the second order effects are inevitable. Returns are likely to become more pedestrian. As private equity firms get bigger, they will increasingly gravitate toward the median. Not only will size be a factor, but the new collaborative nature of the business will also breed 'group think' and lead to mediocrity. I also wonder if private equity will provide investors with less diversification in the future as these firms increasingly take on the appearance of conventional equity managers.

I don't have a sense of where we are in the evolution of private equity. Things are changing fast and there are no signs of a slowdown. It will be interesting to watch.