Serious Money: It is almost 20 years since Michael Douglas won an Oscar for his portrayal of Gordon Gekko in Oliver Stone's Wall Street, writes Charlie Fell.

The film epitomised the excesses of the 1980s and Douglas delivered some memorable lines, including the unforgettable: "Greed, for lack of a better word, is good . . . and mark my words, will save . . . that other malfunctioning corporation, the USA." Wall Street, alongside bestsellers such as Barbarians at the Gate and Den of Thieves, ensured that the leveraged buyout (LBO) activity that characterised the so-called decade of greed will remain forever tainted in the public domain.

Two decades on and the buyout kings are back and bigger than ever, flush with cash as pension funds divert large sums of money their way in an attempt to boost returns.

The 1980s hold important lessons for today's "masters of the universe" and would-be investors.

Most of the commentary on the 1980s is pure fiction. The broad application of the LBO, which involves the acquisition of another company using a significant amount of debt, was undoubtedly one of the most successful financial innovations in modern history.

The emergence of LBO specialists such as Kohlberg, Kravis and Roberts (KKR), rejuvenated corporate America and laid the foundations for the bull market of the 1990s.

LBOs of the early 1980s were enormously successful. The buyout specialists raised funds from investors - which typically accounted for roughly 20 per cent of the price - and borrowed the remaining from banks and bond investors. The bonds were rated below investment grade and considered "junk", due to the high levels of debt. The acquired firm was restructured post-buyout and sold after a number of years to a strategic buyer or to equity investors via an initial public offering (IPO).

A perfect example is KKR's purchase of the grocery chain Safeway in 1986. KKR acquired the company for $4.2 billion, which included $2 billion in "junk" bonds and $130 million in equity.

It disposed of unprofitable outlets, which raised $2.4 billion and enabled the firm to pay off debt quickly. Safeway's value had increased eightfold by the time it was returned to the market in 1990.

The success of the deals in the early 1980s attracted new players and consequently, the number of LBOs increased from just four in 1980 to more than 400 deals eight years later. The injection of more capital caused valuations to rise and the equity component of deals to fall - by 1989, the equity contribution had dropped to just 7 per cent. Additionally, buyout firms increasingly relied on the high-yield bond market for debt financing as banks grew more cautious. The end game was inevitable - roughly one-third of the deals completed between 1985 and 1989 defaulted before the economic expansion of the 1990s began.

Just one of the deals from the early 1980s defaulted by the end of 1991! Despite the poor deals late in the decade, the buyout specialists returned more than 17 per cent per annum from the mid-1980s to the mid-1990s.

Today, the buyout firms are bigger than ever. Capital under management has grown eightfold since 1990.

The largest fund is almost $16 billion (€12.5 billion) as compared with just $67 million in 1980. Furthermore, the recently announced acquisition of hospital company HCA for $33 billion eclipsed KKR's purchase of RJR Nabisco in the late 1980s as the largest deal of all time. Indeed, nine of the 10 largest deals ever have been announced in the past 18 months.

If buyouts continue at their current pace, the LBO market should record almost $100 billion this year, surpassing the record of $95 billion in 1988.

But do the buyout funds deserve your money? I doubt it as many of the conditions that precipitated the 1980s bust exist today. Too much money is chasing too few deals. The number of players continues to rise as traditional Wall Street firms and hedge funds enter the fray.

Indeed, even Bono has his own buyout fund. The industry has uncommitted capital of almost $300 billion - current deals are transacted at one-quarter equity, three-quarters debt, which means their total firepower is more than $1 trillion.

Not surprisingly, valuations are rising, while the equity component is falling. Debt to cashflow multiples have increased by almost 50 per cent since 2001, while the equity contribution to deals has dropped from 40 per cent in 2002 to 25 per cent today.

The buyout industry needs to sell roughly $500 billion worth of assets over the next three years in order to achieve its return objectives. However, the IPO market is relatively soft and consequently, the buyout kings have increasingly resorted to dividend recaps to boost returns.

A dividend recap involves the payment of a special dividend to the LBO sponsor from the proceeds of a further debt issue. There have been more than 60 recaps so far this year, involving debt issuance of $25 billion. Furthermore, unlike the 1980s, operational improvements are unavailable as profits already command a record share of GDP.

Indeed, the industry has already sullied its reputation as the supposedly fixed Burger King disappointed investors on its first earnings release, following its IPO in May. Its share price languishes almost 20 per cent below its issue price.

The omens for the buyout specialists are not good. Indeed, Hollywood has already vilified the Carlyle Group with its connections to the Bush and Bin Laden families in Michael Moore's Fahrenheit 9/11.

History never repeats itself exactly, but it does tend to deliver hard blows to those who ignore its message.

The current buyout craze will end badly.

• Charlie Fell is an independent consultant and lectures in finance and investment at UCD and the Institute of Bankers in Ireland