DIGEST
32
SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 32
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Equity Investing Waning Long Term?
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CVC in Billion Dollar Malaysian Fast Food Deal
• MGI studies the trends and finds equity gap
M&A Megadeals: Chips and Stones Venture Investing After the Bubble • A lost decade? SVB Capital provides the answer
How Not to Do PR in the PE Industry • CVC taken to task by PEI
LPs and Zombie Funds • Coller Capital’s Baromter on LP sentiment
M&A to Increase in Europe in 2012 ROPE TO SEE INCREASE M&A A Quote of the Week • Lady Gaga and Sovereign Wealth Funds
December 15, 2011
EQUITIES WANING LONG TERM? The Mckinsey Global Institute (MGI) sees a huge gap between where investors are putting their money and the amount companies will need to finance growth over the next decade. The consulting company analyzed data and trends around the world to discover that there is a potential USD12 trillion “equity gap” emerging. The report discusses in detail how individuals invest their money in developed and emerging markets, their taste for equities and the proportion of holdings in equity stocks over time. MGI projects that the share of global financial assets held in listed equities could fall from 28 percent to 22 percent by 2020 if these trends continue, which is significantly less than what companies will need to finance growth. As the diagram above shows, there are five factors driving the potential equity gap. Today 80% of all equities are held by investors in Europe and North America.
M&A MEGADEALS: CHIPS AND STONES Two large M&A transactions this week serve to end the dealmaking year of 2011 with a bang, one in the chip-making industry and the other in the construction materials market. Lam Research, a semiconductor manufacturing company, is acquiring rival Novellus Systems in an all-stock deal that values its peer at around USD3.3 billion, according to the WSJ. Also widely reported this week was the news that Martin Marietta Materials is making a huge bid to acquire its rival, Vulcan Materials. Both companies are active in the construction industry, supplying stones and sand and other materials. The Washington Post said that Vulcan Chairman and CEO Donald James, and Martin Marietta’s CEO C. Howard Nye communicated that the offer because Vulcan officials cut off negotiations that began over a year and a half ago. Vulcan’s shareholders issued a press release notifying shareholders of the unsolicited bid on Monday.
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VENTURE INVESTING AFTER THE BUBBLE In report called A Decade of Evolution, SVB Capital, takes a look at the performance of three vintages of venture capital funds. It was a decade shaped by two major economic events: the aftermath of the technology bubble and the global financial crisis of 2008 and 2009. The initial impact and ongoing legacy of these two economic collapses on the venture industry differs, and these differences are reflected in industry performance trends. It has clearly been a roller coaster ride for LPs invested in funds raised between 2004 and 2007, as Exhibit 1 shows. But these funds are “well-positioned” to generate very strong returns, says SVB Capital. For those funds that deployed significant capital prior to the economic downturn, SVB found that “proactive portfolio management” resulted in only a moderate increase in write-offs.
The 2004-2007 vintage funds, although significant uncertainty remains, have a feasible path to overall net returns of 2.5x+ for upper quartile funds of this vintage, with several generating 5-10x+ multiples. The funds in this group had early-stage exposure to companies that are currently valued very highly, such as Facebook and Groupon, for example but also LinkedIn, HomeAway, Fusion IO, Advanced Biohealing and AdMob. SVB says that returns for select funds will be as high as they were in the late 1990s. For funds that deployed significant capital prior to the economic downturn, SVB found that “proactive portfolio management” resulted in only a moderate increase in write-offs. Being slow to deploy capital prior to the downturn were then well-positioned to take advantage of the moderately lower valuation environment during the downturn.
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HOW NOT TO DO PR IN PE BIZ Once in a while editors of PE industry magazines take some time to analyze the public relations efforts that GPs make. This time it is CVC Capital Partners that gets taken to task. According to PEI, CVC put out a press release insisting its investment in Australia’s Nine Entertainment (NEC) wasn’t as troubled as some newspapers had suggested. It said four CVC funds were invested in the company, with less than 5 percent of their total capital. At the bottom of the page CVC said, “The overall performance of the CVC Funds continues to be top quartile after fully reflecting the latest financial position of NEC.” PEI points out that CVC did not describe its overall performance and said nothing about which firms CVC is benchmarking against. The news release asks readers to take at “face value” an unspecified sample of unnamed competitors. “This doesn’t amount to much, and the value of making the point in this way seems hard to grasp,” says PEI. The editorial closes with an imperative statement: CVC is one of the star players in global private equity, and widely considered an astute operator”, but PR is not “among its strengths … If the industry still wants to use ‘top-quartile’ as a classifier, it’s time to use it properly. Otherwise it is better to not use it at all,” said the editors of PEI.
COLLER CAPITAL SURVEY REVEALS ZOMBIE FUNDS Slightly more than half of LPs in North America funds feel that their capital is locked into underperforming funds, or Zombie funds, according to the Global Private Equity Barometer, from Coller Capital, as reported by LBOwire. The survey of 107 global institutional investors revealed that a majority of those surveyed would find “no solution for a majority or even all of the zombie funds”, that is, they won’t be exiting them. The study defines zombie funds as those where GPs have no prospect of carried interest but keep funds going to collect management fees. Also in the report is the news that fundraising will be challenging for 2012 as 93% of investors polled by Coller Capital expect to reject at least a portion of recommitments during the next 18 months, says LBOWire. Capital lockups might be extended too, as four-fifths of the investors surveyed expected to receive further requests in the next few years to extend the investment periods of private equity funds raised during the boom years of 2005 to 2008.
CVC IN BILLION DOLLAR MALAYSIAN FAST FOOD DEAL Reuters is reporting that London based CVC Capital Partners Ltd and the Johor state-backed fund of Malaysia have offered USD 1.65 billion to acquire fastfood companies KFC Holdings Bhd and QSR Brands Bhd. Reuters say that this could be the largest foreign private equity linked deal in the country. The latest offer for the assets is CVC's second attempt to make the buyout. State-linked Johor Corp, which already has an indirect interest in both KFC and QSR, created a special purpose vehicle with CVC Capital to bid for KFC Holdings's assets and liabilities.
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EUROPE TO SEE INCREASE M&A ACTIVITY IN 2012 Despite low share prices, companies are still not making M&A moves in Europe, begins a new report from BCC. But it is not all bad news as Reuters reports that in 2012, every sixth company says it is planning an acquisition of a rival with a revenue of greater EUR 500 Million. The survey polled 148 managers of European companies. Key points • 46% will not complete an acquisition. Which is slightly more than 41% in the last survey. The main reason is lack of fitting targets and valuations. • Acquisitions in emerging markets are planned by 28% of managers, up from 16% last year. Expansion and growth are the drivers. • More executives than last year expect deals in their sector to be cross-continental, a trend that comes with its own risks
QUOTE OF THE WEEK Sovereign Wealth Funds are currently the ‘Lady Gaga’ of global capital markets, being much discussed and very fashionable
Who said it: Gary Smith, global head of official institutions at BNP Paribas Investment Partners. Context: The comment was made by Smith in a from BNP PIP where he wrote about the growing interest in SWFs around the world, entitled Held in Reserve. The juxtaposition of Lady Gaga and SWFs struck as being something that only a deeply entrenched capital markets insider would think of to say. His text was written several weeks ago but has proven prescient, as Reuters just reported that China is preparing to set up a massive USD 300 billion SWF fund in the coming year. Where we found it : BNP PIP article Held in Reserve Image source: ibid
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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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