DIGEST
25
SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 25
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Growth, Not Leverage Earns PE A Profit
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Who Is PE Greening for
• New German study crunches mid-market numbers
France Telecom, Publicis Set Up Tech Fund Permira in $1.5bn Telecoms Deal • A comeback for buyouts?
Due Diligence Cuts into Holidays • Survey reveals dealmaking trend
Seed Stage Funding Growing • Web deals give quick returns in 2011
• Benefits of ESG up for debate
Simpler: New Reporting Templates Quote of the Week • Serving up the future
October 27, 2011
PRIVATE EQUITY PROFIT DRIVEN BY EARNINGS GROWTH, NOT LEVERAGE PE profits are driven by earnings growth at portfolio companies and not by the leverage used to fund buyouts, according to WSJ reporting on research released Wednesday. We included it here because such research may contribute to an improved image for buyout funds. They’re less apt to be seen as corporate raiders. The research, presented at the European Private Equity and Venture Capital Association's conference in Budapest, analyzed some 330 European companies bought by private equity firms between 1990 and 2011. Secondary buyouts, where private equity firms sell to each other, generated the highest returns making on average 3 times the amount of capital put into the investment. Sales to trade buyers and initial public offerings produced an average money multiple of 2.4, the research showed. The accompanying graphics show exits and profit drivers are sourced from Professor Käserer’s study Return Attribution in Mid-Market Buy-Out Transactions – New Evidence from Europe .
FRANCE TELECOM, PUBLICIS SET UP TECH FUND
It has been a while since a new and sizable fund in the corporate venturing arena was announced, so we’re noting a Bloomberg report that according to unnamed sources, France Telecom SA and Publicis SA will initiate a VC fund of about EUR100 million . The telecoms company and the advertising/public relations giant will allocate the new capital to European technology startups, probably Web-related media, commerce, and entertainment ventures, given the examples provided in the report. Europe is back on the technology investment map as companies such as fashion retailer Vente-Privee.com and Skype have become worldwide successes. In addition former dotcom stars, such as French billionaire Xavier Niel, have become business angels. “The majority owner of Iliad SA puts about 50 million euros a year toward startups. France Telecom and Publicis, both based in Paris, have been active for a while with startup investment. The phone company has partnered recently with Deezer, a music-streaming site, and invested in DailyMotion, a provider of online video. Publicis has acquired Web-focused startups including online marketing company Airlock and Big Fuel, a New-York based social media company.
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PERMIRA IN $1.5BN TELECOMS DEAL
Permira’s latest investment announcement is sparking hopes that the buyout market is making a comeback, reports CityAM. The background on CityAM’s reference to a “comeback” is that M&A activity has been trending downard as the graph from DowJones VentureSource above makes clear. The PE firm has bid USD1.5 billion for a call center software business that belongs to Alcatel-Lucent. Permira won the bidding for Genesys after six months of talks between Alcatel-Lucent and possible bidders. Hewlett-Packard, Cisco and Siemens Enterprise Communications had been among the leading candidates, despite Alcatel-Lucent’s net debt hitting EUR 376m at the end of June. Shares in the Franco-American telecom equipment-maker have halved since May, even as it nears the end of a three-year turnaround plan after making a series of annual losses. Permira will consider exploiting what it sees as a fragmented market to make bolt-on acquisitions to Genesys.
DUE DILIGENCE CUTS INTO HOLIDAYS Looks like beachcombing and dealmaking are increasingly going hand in hand. It takes more time to do M&A due diligence, so nearly three quarters of dealmakers worked on transactions while on recent holidays, according to a survey from Imprima, a provider of virtual data rooms and financial communication services. Mobile devices make it easier to work on deals while out of the office. Almost ninety percent of respondents said they use mobilephones for transactions. The most popular handset is the Blackberry. The majority of respondents said that the due diligence process has taken longer to complete over the past three years, and it had become more complex.
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SWELLING: SEED STAGE DEALMAKING An opinion piece in the Huffington Post by Mahendra Ramsinghani, a Detroit-based author and investor, says there is an increasing amount of activity at the micro end of the dealmaking market. Angel investment is growing. The author cites stats from the University of New Hampshire Center for Venture Research, that such deals are up in 2010 to USD20.1 billion. It is comparable to VC investments, at USD23 billion. Most of the angel money goes into healthcare and energy startups, according to the study (see graphic). Only seven percent of the angel-funded start-ups generate returns for angels, and vast majority of the start-ups will fail as is typical in the very early stage. But it is a good time to be a web business angel, according to the author, because mainstream VCs are keen to get into the web and social media tech category. The author said that some VC just “want to get their hands on a piece of one of today's tech darlings”. In such cases, the usual restrictions fall away. For example, how the capital is to be used by the target. Instead of being used to grow a venture, some of these deals buy out the very early shareholders. Two examples are included for consideration. 1) Half of Twitter's USD800 million went to “cashing out” current stockholders. 2) Airbnb's recent USD112-million enabled the founders to pocked USD 22.5 million. Other changes are noted in the article. Historically, VCs found an exit though an IPO or an acquisition but no longer are investors bound by these two options. A thriving secondary market for private company stock has brought much-needed liquidity to venture funds, angels and founders. At the same time LPs are cutting back on VC allocations. He chooses and extraordinarily off the chart year to compare though. He writes “Back in 1999-2000 'bubble' era had USD100 billion flowing into venture funds. Ten years and a lot of losses later, these LPs are bruised, and disillusioned. Only USD 12.7 billion has flown [sic] into venture funds in first three quarters of 2011.” A noteworthy quote from Tim Recker, Chairman of ILPA was made in the article, “Venture capital is not our only choice -- investors have plenty of other options to generate returns.” The author concludes: Irrespective of the debates, 2011 will still be a banner year for VC investments. Entrepreneurs should celebrate their seed investments while they can -- the Series A / B may take a while. Thus far, in the first three quarters 2011 -- USD21.7 billion has been invested. That's pretty close to USD 23.0 billion invested in all of 2010.” Data source for Dealmarket Digtest graphic: University of New Hampshire CVR
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WHO IS PE GREENING FOR?
Green as in the color of money, is more important than being green, it seems. FN reports that Paul Fletcher, chief executive at Actis, said that investors prize returns over a manager's environmental and social governance strategy and BVCA leadership recently cautioned investors to balance ESG expectations against realities of working in emerging market economies. But in the same article, KKR came out looking quite green , and not with envy. It is using ESG in some portfolio companies with positive results. It has case studies on how to do it with some preliminary a number from portfolio companies. Graphic Source : KKR ESG Report 2010
SIMPLER: NEW REPORTING TEMPLATES This week ILPA and Rothstein Kass released reporting standards templates and proforma financial statements, respectively. Both are responding to a pretty clear need to improve performance data reporting. The ILPA worked with both LPs and GPs to create its templates. ILPA intends for the templates to enable GPs to record more simply the majority of data points that LPs look for from their managers. Rothstein Kass, a PE industry legal and related services provider, also issued financial reporting templates, stating that added transparency has increased the compliance burden for many funds so Rothstein Kass provides its private equity proforma templates to enable managers to retain focus on the business of generating returns for their investors
QUOTE OF THE WEEK “Or I have people bring the future to me.” Who said it: Reid Hoffman, co-founder and chairman of LinkedIn Corp. and a partner at Greylock Partners Context: The entrepreneur turned venture capitalist was interviewed in a Bloomberg video at this week’s “Web 2.0 Conference”. Hoffmann answered the reporter’s question about how he can continue to stay on the cutting edge of web technologies. How will he find the next LinkedIn or PayPal? Will he have to create the future? Where we found it: Bloomberg
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The Dealmarket Digest empowers members of Dealmarket by providing up-to-date and high-quality content. Each week our in-house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global. To receive the weekly digest by email register on www.dealmarket.com. Editor: Valerie Thompson, Zurich
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