Private Equity KeyTrends
October 9, 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

 

HAVE YOUR SAY. Below each KeyTrend, is a thought-provoking question related to the issue at hand. We’ll publish select responses in the future. Let your peers know your opinion.

Please email your thoughts to: talk@palico.com.


DOLLAR-WISE, IT’S SHAPING UP AS THE BEST PE FUNDRAISING YEAR SINCE 2008,
when the financial crisis put an abrupt end to a four-year period of consecutive annual records. Private equity funds holding a final close in the first 9 months of 2013 collected $311 billion, a 20 percent increase from the same period in 2012, according to Preqin. The bad news for the nearly 2,000 vehicles currently seeking to raise $721 billion: fewer funds are getting capital. In the first 9-months of 2013 only 606 funds hit a final close, down from 684 in the same period last year, as average fund size soared 36 percent to $513.2 billion. A relatively small number of funds achieving final close, coupled with rising average fund size, is a trend noted by a range of data providers. With small and mid-sized PE investors taxed by the huge growth in fund manager numbers over the past decade, and with larger investors pruning portfolios, limited partners are increasingly avoiding smaller funds where due diligence is challenging or large investment is difficult.

PREQIN

What’s your opinion? Beyond promoting an above average track record, what can GPs do to make fundraisings stand out?

CONSOLIDATION COULD BE PARTICULARLY USEFUL FOR PE LIMITED PARTNERS, Edmund Truell, the head of the London Pensions Authority observes. In a Financial News story reporting that the $7.5 billion public pension fund would like “to manage other pension schemes’ money,” Truell says “the general aim and philosophy” of such a move “is that if public sector schemes consolidate, the costs will be lower than is currently the case.” He notes: “international evidence suggests that large funds, using internal management teams, particularly in areas such as private equity and real estate, can achieve large cost savings.” A relative skeptic of consolidation, Jack Wright, head of public sector consulting at Hymans Robertson, doubts that the scope of savings to be achieved in most asset classes is as significant as some claim but “conceded there was ‘clear scope’ to save money on high-fee investments such as private equity and infrastructure” for LPs. While there has been little consolidation so far among PE’s limited partners, there is increasing debate over its merits.

FINANCIAL NEWS

What’s your opinion? Will we see LP consolidation and what form could it take?

EUROPE’S “DISTRESSED DEALS SURGE, AS A CLOSED “SPIGOT” OPENS, writes Bloomberg’s David Carey in an impressively reported 2,000-word article on a rise in asset sales from European banks to PE firms like Apollo Global Management, Blackstone Group and Centerbridge Partners. Years of “inaction” have “given way” to a wave of deals, “as lenders from Lloyds Banking Group to Commerzbank cut loose soured real estate, corporate and consumer loans. Sales of loan portfolios and other unwanted assets by European Union banks could reach €60 billion in face value this year” versus €46 billion in 2012 and just €11 billion in 2010. It’s been “a game of waiting while the banks are able to provision more and more each quarter, each year,” observes Alexandra Jung, co-head of European investments at fund manager Oak Hill Advisors. As bank provisioning hits levels needed to book losses and spur sales, looming regulatory deadlines, and stabilizing economic and political environments are also encouraging deals. “Hedge funds and private equity firms have raised as much as €70 billion to invest in distressed European debt,” one tenth of what could be sold in the next decade, as “the supply of loans eclipses investor demand.”

BLOOMBERG

What’s your opinion? What are the keys to closing distressed deals in Europe and are U.S equivalents less complex?

AS GPs ZERO IN ON MINING, ARE THEY LOOKING IN THE RIGHT PLACE? That is the question raised by this story from Mining.com. As private equity mega firms TPG Capital, Blackstone Group, KKR & Co and many others actively hunt mining deals, “cash raised for investment funds dedicated to mining and oil has reached a decade high of $24 billion this year,” with “close to $100 billion accumulated for resource investments over the past six years.” In the mining sector, virtually all PE firms are looking to buy “the same thing,” says Mining.com: “companies that are late stage, low cost, low risk” and “producing, or close to production and with all permitting in place.” Philip Heywood, director for transaction services at PwC in Vancouver, tells the publication: “there aren’t too many” companies like that, suggesting investors may want to look at earlier stage mining projects, where there is less competition, “to diversify their portfolios.”

MINING.COM

What’s your opinion? Is private equity natural resource investing getting too crowded, given the number of available opportunities?

INVESCO OFFERS A CLOSE LOOK AT SOVEREIGN WEALTH FUND HABITS in this comprehensive 40-page report, incorporating information from 43 face-to-face interviews at 37 different SWFs. The report reveals a strong bias for alternative investments, including private equity, and “dissatisfaction with the risk/return profile” of listed equity investing. Notably, Invesco reports that the average rise in alternatives exposure “in the last twelve months” for SWFs ranges from 26 percent for western-based groups to 69 percent for those based in the Middle East. The average annual allocation of Asian SWFs increased 54 percent, while SWFs in other emerging markets saw alternatives allocation rise 60 percent on average. SWFs typically hold about 21 percent of their PE investments in co-investments, with a target allocation of 27 percent, according to Invesco.

INVESCO GLOBAL SOVEREIGN ASSET MANAGEMENT STUDY 2013

What’s your opinion? Will SWF desire to pursue co-investment and direct investment severely limit the importance of SWFs as a growing source of capital for traditional funds?

A PAIR OF STORIES DETAIL THE SPIN-OFF OF INSURANCE GROUP AXA’S PE ARM. Formerly known as Axa Private Equity, but now rechristened “Ardian,” the group’s sale values its $36 billion-in-assets at €510 million and “leaves management and employees owning 46 percent of the company,” while Axa will retain 23 percent and “French family offices and other institutional investors together will hold 31 percent,” according to Reuters. The FT reveals that Ardian’s long-time head, Dominique Senequier, owns “about 10 percent” of the group and states that “Axa’s stake is smaller than initially planned because of high demand” from the spin-off’s staff. Explaining high staff ownership, Senequier tells the FT, “Private equity has to be more about shared outcome, shared value and profit with investors, employees and companies we buy.” She adds: “Unlike hedge funds that specialize in trading securities, ‘private equity is here to stay because it’s the real world, with real entrepreneurs and real plants.”

REUTERS , FINANCIAL TIMES

What is your opinion? If you’re an LP, what key conditions should be in place before you would advise investing in a captive GP?

FOR GOLDMAN SACHS’ TAKE ON PRIVATE EQUITY, CHECK OUT THIS VIDEO interview of Alison J. Mass, co-head of the investment bank’s financial sponsors group. In the 4-minute Goldman Sachs-produced video, Mass discusses PE’s 30-year development from an almost exclusively U.S.-focused asset class to a global one. She notes that Goldman Sachs believes “there will be fewer funds going forward” since limited partners are “concentrating their investment focus.” She adds, LPs are “also asking for specialized funds, so we see more energy-focused, infrastructure-focused, real-estate and regional funds” in the future. With general partner portfolios “full of assets from 2006 and 2007,” Mass says “we still think there will be a lot of divestitures coming out of private equity firms.”

GOLDMAN SACHS

What’s your opinion? Will buyout funds lose market share to more specialized private equity funds and why?

PE GROUPS “ARE BRINGING FORWARD PLANS TO LIST” EUROPEAN ASSETS, writes the Financial Times. They are tapping “increasing investor appetite for riskier assets” as they seek to “exit leveraged buyouts made before the financial crisis,” mirroring a similar trend in the U.S. Capital raised “in PE-backed initial public offerings in Europe have more than doubled to $3.7 billion this year.” In the U.S., there has been “a 54 percent rise to $10 billion.” Jacques Callaghan, deputy head of European investment banking at Canaccord Genuity, tells the FT, “there’s huge institutional demand partly because there’s an improving sentiment towards Europe and because investors turn to equities for yields they can’t find in the bond markets.” Expectations of an end to exceptionally low interest rates in the next few months, if the U.S. Federal Reserve ends its quantitative easing, may also be playing a role in bringing IPOs forward.

Financial Times

What’s your opinion? How do you expect the end of quantitative easing to affect private equity dealmaking?