Private equity’s doughnut hole

February 27, 2013, 1:30 AM UTC

FORTUNE — Private equity has become the proverbial fat man in the doorway of a doughnut shop. He knows that going inside isn’t good for his health, but he just can’t help himself. After all, he’s fat for a reason.

Today at the SuperReturn International conference in Berlin, speaker after speaker talked about how leveraged buyout prices have become unreasonably high — driven by both surging public equity markets and Ben Bernanke’s refusal to raise interest rates. Leon Black of Apollo Global Management (APO) even uttered the phrase “bubble,” while distressed investor Howard Marks of Oaktree Capital Management (OAK) suggested that he would soon be picking through the wreckage. Moreover, no one seems to believe that short-term growth in either the U.S. or Europe will outperform tepid, save for in select sectors like energy.

In other words, this is the time when private equity firms probably should be slamming on the breaks. Or at least becoming more opportunistic, and perhaps not taking every dime of debt that bankers are willing to provide. After all, sellers are selling for a reason — and even if an equity ratio are small, it is still subordinate to debt on the company’s cap table. As one senior PE investor explained it to me: “You might get excited that someone is willing to put $1 billion of debt next to your single dollar, but remember that your bill is now sitting beneath one billion or them.”

Unfortunately, no one seems to be suggesting a pullback. Instead, folks are talking about just the opposite. Often during the very same presentation, letting the contradiction hang out there like a pregnant punchline.

Seriously, I saw several sessions today in which speakers began by bemoaning market froth, then moving onto another topic before concluding with how they expected to increase new deal activity in 2013. It’s as if they had two speechwriters, but neither one was able to view the other’s work.

So why is this happening? One particularly cynical explanation is that deal-makers are paid to do deals. Literally. Private equity firms often receive fees for closing new transactions and for “monitoring” said transactions. Those 20%+ returns will come eventually, because private equity has long-term time horizons that basically allow firms to time the exit market (an unpopular proposition that does actually have some basis in fact).

A corollary to this is that deal-makers like to do deals. These are folks who get a rush from getting board sign-off, particularly if it means leaving a rival in the dust. A lot of that was put on hold in 2009-2011, in favor of the much more tedious work of trying to salvage the last rash of overpriced deals. But now sellers want to sell again. It’s as if the doughnut shop had spent the past several years selling vegetable smoothies, before finally reversing course. Fat man would be in a sleeping bag before reopening day, just to be woken up by the smell.

Finally, I can’t discount the fact that most private equity investors fancy themselves the smartest guys in the room. Other firms are falling into the pricing trap, but not us. Sure we’re paying a 25% premium for a listed company at Dow 14k, but this is the one company that’s actually worth it. Plus, my partner sits on a nonprofit board with the company’s CFO, so we’re actually getting a slight bargain. Yes, it sounds that dumb when you hear it first-person — particularly when you hear it from virtually everyone.

To be clear, I’m not arguing that we’re about to have another rash of TXU’s on our hands. But that’s due more to capital constraints than it is to changed attitudes or behaviors. What I am saying is that private equity investors are aware of a disconnect between their head and their heart. And they don’t plan to do anything about it.

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