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The death of private equity’s largest deal

FORTUNE — The Wall Street Journal is reporting that Texas electricity giant Energy Future Holdings is preparing to file for bankruptcy protection, after failing to successfully restructure its $41.6 billion of debt.

This will clearly be the largest private equity failure of all time. I say “clearly” because Energy Future happens to double as the largest leveraged buyout in history, being acquired for $45 billion in 2007 by Kohlberg Kravis Roberts & Co. (KKR), TPG Capital, and Goldman Sachs (GS). At the time, it was known as TXU.

I’ve already heard some people say this morning that this bankruptcy would be an indictment of mega-buyouts, particularly those that occurred shortly before the 2008 financial crisis. And perhaps there is a grain of truth in that, in terms of fund portfolio management (i.e., hard to dig positive returns out of an abnormally large hole).

In general, however, Energy Future represents a failure of energy pricing predictions rather than one of financial engineering. The private equity sponsors essentially believed that U.S. natural gas prices would continue to climb — or at least remain stable — thus enabling Energy Future’s coal-fired power business to increase both its prices and market share. But here is what actually has happened to natural gas prices:


Yes, prices have rebounded a bit so far this year, but that’s several dollars short and years late for Energy Future Holdings and its investors (some of whom have effectively hedged Energy Future a bit with unrelated shale investments). No amount of operational improvements, divestitures, or other maneuverings could overcome this core shift.

So when private equity’s largest deal is finally buried, the tombstone shouldn’t lament some of the industry’s more questionable business practices. Instead, it need only highlight a much more fundamental lack of business judgment.

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