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Highlights:

– Bain Says Distributions to Fall and Fundraising to Become Harder
– New Record for PE Vehicles in Fundraising Mode
– The Silver Lining of Declining PE Exits is More Acquisitions
– Examining What Makes ‘Buy-and-Build’ Deals Work
– The Political Class Doesn’t Impress PE
– PE KeyTrends Quick Question Results



DISTRIBUTIONS WILL FALL AND FUNDRAISING WILL BECOME HARDER,
according to the most likely scenario in Bain & Company’s widely anticipated 72-page annual report on the current and future state of private equity. Driven by what Bain calls a “tsunami of corporate merger and acquisition activity,” Financial News observes that “investors have received a whopping $650 billion of capital back” from exited PE investments “during the past five years and paid out only $300 billion in capital calls.” Meanwhile, Real Deals’ coverage notes that Bain anticipates that recent PE fund investment activity – “far below that of the peak period between 2005 and 2010 – will lead to a falloff” in exits and distributions over the “coming five years.” As a result, fundraising is likely to drop significantly from post-financial crisis records

FINANCIAL NEWS
REAL DEALS

BAIN & COMPANY



THE NUMBER OF PE FUNDS SEEKING CAPITAL HAS HIT A NEW RECORD,
according to Palico data. Some 2,720 private equity funds are currently seeking $965 billion. While the number of PE vehicles in fundraising mode is up nearly 6 percent over the past year, the aggregate sum sought is static compared to 12 months ago. Last year, 2,570 funds were hoping to raise $972 billion, just 0.7 percent more than the sum targeted today. Meanwhile, $65 billion has been committed to PE funds this year through February 15, or 6.6 percent more than at the same time in 2015. It’s early in the year, but the figures illustrate interesting trends. Notably, buyout fundraising has dropped 48 percent to $11 billion compared to the same period in 2015. Buyout funds, likely to claw back market share as the year progresses, have nonetheless seen their appeal decline due to high prices for investments and the growth of alternatives to classic funds, including co-investment and managed accounts.

PALICO



AS PE EXITS FALL, THERE WILL BE A SILVER LINING –
lower purchase prices for investments. That was the consensus at SuperReturn International in Berlin last week, the world’s largest private equity conference. Executives at the conference expect numerous attractive investment opportunities after a long dry period. “The last [few] years have been characterized by fantastic exits – strategic buyers were active [and] the market for recaps was strong. On the investment side, things were a bit more challenging – there’s a lot of capital, prices were high, competition was intense,” William Ford, chief executive of high-profile fund manager General Atlantic, told Financial News. He added that an initial public offering market that’s “ground to a halt” and volatility in listed securities mean PE managers will “find it harder to exit businesses” this year. Echoing peers, Ford noted that slowing exits should be accompanied by falling valuations, making it easier for PE firms to spend record levels of committed but uninvested capital.

FINANCIAL NEWS



BCG EXAMINES WHAT MAKES ‘BUY-AND-BUILD’ WORK,
in collaboration with HHL Leipzig Graduate School of Management. After examining 2,372 deals exited between 1998 and 2012, the Boston Consulting Group and its partner report that ‘buy and build’ deals – where new corporate investments are merged with an earlier platform acquisition – generate an average annual return of 31.6 percent, versus 23.1 percent for standalone deals. The study also identifies the best buy-and-build strategies. “Buy-and-build deals that involve cross-border add-on acquisitions” do better than “deals involving domestic acquisitions;” transactions that “take the platform company deeper into an industry generate average annual returns of 43.5 percent, compared with 16.4 percent for deals that diversify the business;” and buy-and-builds that include only one or two add-ons outperform “those that include more than two acquisitions.” The study notes that the buy-and-build share of PE investment climbed to 53 percent by 2012 from 20 percent in 2000. Buy-and-build is widely seen as a way to compensate for today’s historically high acquisition prices.

BOSTON CONSULTING GROUP



THE POLITICAL CLASS DOESN’T IMPRESS PRIVATE EQUITY –
though that’s relative. Consider a light moment covered by the New York Times Dealbook at the SuperReturn International Conference: “As a former aide to President Jimmy Carter, David Rubenstein, the co-founder of the Carlyle Group, is often asked about his views on this year’s [U.S.] presidential race.” But at the conference, Rubenstein “posed a very different question: Among the remaining Democratic and Republican presidential hopefuls, to whom would you entrust your investments?” “You guys don’t like these people as investors,” Rubenstein said, “as only a few hands” showed support. Making sure that “non-Americans in the audience did not feel left out,” Rubenstein “put up a selection of other world leaders” including: Britain’s David Cameron, Germany’s Angela Merkel, China’s Xi Jinping, France’s Francois Hollande and Russia’s Vladimir Putin. Again, minimal support. Rubenstein then said, “I know, the answer is that this person is who you will give your money to,” showing a photo of Korea’s Kim Jong-un. Is it surprising that Rubenstein exited to laughter?

NEW YORK TIMES DEALBOOK


AND NOW THE RESULTS OF SOME OF OUR RECENT KEYTRENDS QUICK QUESTIONS:

  • 70 percent of respondents say that relative to classic 10-year funds, there won’t be a significant increase in fundraising for longer-term PE vehicles in 2016.
  • 58 percent of respondents say a European-focused private equity manager will break into the world’s top five by assets (a group currently composed exclusively of American firms) over the next five years.
  • 56 percent of respondents believe conflicts of interest between managers and investors at so-called “zombie funds” will become a major problem for PE investors over the next three years. “Zombie” is shorthand for groups unlikely to raise follow-on funds because of poor performance.


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