Private Equity KeyTrends
March 26, 2013
A concise fortnightly distillation of key private equity news, with links to noteworthy PE articles and studies, edited by Palico – The Online Marketplace for Private Equity LPs, GPs and Advisers
PUBLIC-TO-PRIVATE-DEALS, THE ENGINE BEHIND PE’S LAST CYCLICAL PEAK, have pushed dealmaking to a post-2007 high, notes Steve Miller, Forbes contributor, as well as founder and managing director of S&P Capital IQ Leveraged Commentary & Data. The volume of announced leveraged buyouts in the first quarter stands at a post-financial crisis record of $78.2 billion, propelled by $60.5 billion in public-to-private deals. In addition to bids for Heinz and Dell, the P2P resurgence includes KKR’s $3.9 billion deal for Gardner Denver. Interestingly, the authors of Bain & Company’s just released, exhaustive Global Private Equity Report 2013 observe that in an industry that is not likely to “become much bigger anytime soon,” one element that “could push the amount of PE capital invested into a higher orbit” would be “a major revival of public-to-private deals. Between 2004 and 2007, public-to-private buyouts accounted for 90 percent of the increase in total buyout deal value. Since 2007, the end of take-private deals contributed to 83 percent of the drop in deal value.”
WHO SAYS BIG INSURERS AREN’T NET BUYERS OF PRIVATE EQUITY? Certainly not Partner’s Group: the highly respected, Zug, Switzerland-based private equity manager, with E28.6 billion in limited partner assets under management, bucked last year’s poor fundraising environment, revealing in their annual report that 10 percent of their 2012 commitments, or E490 million, came from big insurers in the U.S. and Europe – the second biggest source of new capital behind pension funds. Partners Group complains about Solvency II’s capital constraints on insurers, but observes that they are affecting mostly smaller insurance companies. In another bullish sign for insurance company investment in private equity, French insurer AXA confirmed last week that though it was “monetizing” its AXA Private Equity division in a management-led buyout, it planned to invest on average E1.2 billion in the spin-out’s funds annually between 2014 and 2018. “We believe private equity is an attractive asset class for the group,” AXA group chief financial officer, Gerald Harlin notes in the insurer’s press release. Meanwhile, a Bloomberg story, discussing the appeal of alternative investments for insurers, notes that American International Group has $18.9 billion in alternatives like PE, while insurance rival, Lincoln National Corp is adding $600 million to alternatives “with the majority in private equity.”
INTEREST IN JAPAN’S OUT-OF-FAVOR PE MARKET IS RISING A NOTCH, as Bloomberg reports that Bain Capital mulls a potential multi-billion dollar initial public offering of Skylark, a Japanese restaurant chain it purchased in 2011 for $1.7 billion. “Abenomics, the set of economic policies advocated by Prime Minister Shinzo Abe that include stimulus spending and relaxing monetary policy, is expected to fuel activity,” write Mai Mizuta and Nozomi Toyama in a Financial Times story on Japan’s improving private equity climate. Japan and China were singled out by Carlyle’s two co-chief executives William Conway and David Rubenstein as Asia’s most promising private equity markets in their recent Q4 earnings call. Noted Conway: “The rate of contraction in Japan seems to have moderated significantly since October. This fact, coupled with the Japanese central bank’s newly accommodated monetary policies has improved our outlook for Japan.”
“DELIVERING THE GOODS” is the title of a new report on mid-market outperformance in Europe from the European Venture Capital Association. According to the report, funds investing in European companies with revenues of E50-E500 million produced an average annual return of 17.2 percent in the 22-years through 2011 versus a 9.1 percent average annual return for all private equity funds. “Medium-sized companies can be influenced more easily, making it easier to generate good returns,” says Capvis partner Daniel Flaig in a Reuters article that digs into the report’s findings.
THE COLLATERIALIZED LOAN OBLIGATION MARKET IS BACK WITH A VENGENCE. TPG Capital hired Douglas Paolillo, previously a managing director at Blackstone-owned debt specialist GSO Capital, to run a new CLO group, writes Bloomberg. With Paolillo’s hiring, TPG joins a range of heavyweight CLO finance providers from private equity, including Apollo Global Management and Blackstone Group. CLO issuance, a key to plentiful debt for private equity buyouts, quadrupled to a record $55.4 billion last year and the market is forecast to rise to $80 billion in 2013 by Wells Fargo & Co.
“TECHNOLOGY IS THE KEY TO UNLOCKING ASIAN-STYLE RETURNS IN AFRCIA,” writes Andrea Bohmert, partner at private equity firm Knife Capital. “Africa’s growth, particularly in the vast Sub-Sahara region is increasingly being driven by a range of technologies that permit the leapfrogging of traditional development timelines,” she observes in Palico’s blog, concluding that the region is the “best buyers market there is today for private equity investors.”
THECITYUK’s ANNUAL SOVEREIGN WEALTH FUND REPORT IS OUT. According to the 12-page report SWF assets rose 8 percent last year to a record $5.2 trillion with 57 percent of SWFs investing in private equity. The report, which ranks SWFs by size and country concentration, notes that the investable assets of SWFs are “much smaller” than those of pensions and insurers, but that they are “increasing at a greater pace.”
FEES TIED TO THE NEW $50,000-MINIMUM-INVESTMENT CARLYLE feeder fund offered by Central Park Group are hefty. Bloomberg’s Matthew Zeitlin takes a look at the Securities and Exchange Commission filing and finds that “while a typical private equity fund has a management fee of 1-2 percent and takes 20 percent of profits after a certain level of returns, the new Carlyle fund layers more and more on top. The fund charges a 3.5 percent sales load on the initial investment and then annual fees estimated at 3.68 percent,” before any carried interest. Investors may also face further levies. “As the SEC filing puts it: ‘To the extent that the Fund invests in an investment fund that is itself a fund of funds, the Fund will bear a third layer of fees.” That’s a lot to fork over for small investors, particularly when institutional investors gripe about PE’s standard 2-and-20 management fee and carried interest model.
VIDEO – HOW TO BENCHMARK GENERAL PARTNER PERFORMANCE. “It’s a tricky but critical categorization to make – against which peer group should a fund manager be benchmarked?” Discussed in this Privcap video: “Why some GPs are fooling themselves if they think they have no competitors, how some GPs remove ‘non-core’ deals from their track records, and how emerging markets managers should be benchmarked. This is an important discussion to watch for any GP about to hit the fundraising trail or any LP seeking to improve the way they vet managers.”
VIDEO – BLACKSTONE PRESIDENT TONY JAMES REFLECTS ON HIS CAREER. In this nine-minute video from OneWire, Tony James discusses his career as a banker at Credit Suisse and his transition to private equity, explaining how he started on his career path: As a junior in college “I applied to 300 jobs and didn’t get any of them. I determined that I was unemployable, and decided I would go to Harvard Business School.” The video is part of a series that features similar interviews with other notable private equity general partners, including Charlie Ayres of Trilantic Capital Partners, James Dunne of Sandler O’Neill & Partners, Jeffrey Leeds of Leeds Equity and William Comfort, a former chairman of Citigroup Venture Capital.