DealMarket Digest_Issue 42

DIGEST

42

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 42

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Quest Software in Take-Private for Two Billion Dollars

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PE Exhibits Modest Activity Despite Billions in Dry Powder

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Family Office Offers Club Deals in Real Estate

• Bain’s Latest Annual PE Study

Carlyle Raising African Fund Family Offices Set to Boom in Asia • Study by UBS and Campden

Quote of the Week: China and the Luxury Watch Indicator

March 16, 2012

QUEST SOFTWARE IN TAKE-PRIVATE FOR TWO BILLION DOLLARS The deal of the week looks to be the take private of Quest Software by Insight Venture Partners. The bid values the company at USD2 billion, according to Quest. The offer is still open to a sixty day “GoShop” process. The transaction will be financed through a combination of a USD210 million equity commitment from Insight, a rollover of the company’s CEO’s shares and USD1.195 billion of debt financing commitments from J.P. Morgan Chase Bank N.A., RBC Capital Markets and Barclays Capital.

RBC Capital Markets and Barclays Capital also acted as financial advisors.

PE EXHIBITS MODEST ACTIVITY DESPITE BILLIONS IN DRY POWDER A new and comprehensive report analyzing 2011 deal activity, returns, and trends in PE from Bain came out this week. Two points of view from other journalists about the key takeaways are listed below, followed by Dealmarket Digest’s editor’s summary of the key points. You can find the report here.

Asian VC Journal: The number of large companies in a country, not the size of its economy, is the most important indicator of a market’s capacity to absorb PE. Other key factors include the depth and liquidity of capital markets, protection of investor rights, the strength of the legal system and the availability of debt financing.

PE Hub: Mega-deals are unlikely to return any time soon. The middle market is crowded with a big overhang. Exit activity fell off after one quarter had highs not seen since ’07.

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Key points: • Nearly USD1 trillion in "Dry Powder", about half ear-marked for buyouts is spread out over PE firms of all sizes and types globally. Many older funds had substantial dry powder in 2011 (see graphic above, sourced from the report).

• Full-year investment numbers “mask a pivotal turn in the PE market recovery” (a downward turn) in the second half of 2011 • Sponsor-to-sponsor deals continued to be popular; in US, buyouts of private companies and public-to-private deals increased.

• Deal size remained concentrated in the middle market • The ready availability of relatively low-cost credit made it possible for PE funds to secure financing on better terms for a wider range of companies than in 2010, when generally only high-quality transactions got financed.

• Exit activity declined at the end of the year, as did fundraising success ratios.

• Not only closing fundraisings but closing deals is hard. Valuations for target companies are quite high due to competition from strategics.

• China is the only country in emerging Asia providing meaningful liquidity mainly via IPOs

FAMILY OFFICE OFFERS CLUB DEALS IN REAL ESTATE A former partner of Capricorn Investment Group, the family office established by eBay founder Jeff Skoll, which recently invested in social network metrics startup Yammer, has launched a new investment club aimed at helping family offices invest together directly in commercial real estate. It’s an alternative for families that would have traditionally invested in property funds or even those who might have gone it alone, according to a report in CampdenFO. The founder of the club says this is a new model that involves finding investments, doing due diligence and conducting negotiations, as well as managing and developing it for sustainability profit.

It says it can do this for less than half the cost of traditional funds.

CARLYLE RAISING AFRICAN FUND Africa is attracting big name PE investors, joining groups like 8Mile and Helios. It was announced this week that fundraising is underway by Carlyle for a USD500 million, sub-Saharan fund, according to MarketWatch. In a related article in Financial News it was reported that Carlyle expects a first close within the next few months. The interest in Africa will likely increase, as Carlyle tends to be a trendsetter or “pioneer”. Other PE houses tend to follow in its wake. For example, it was one of the first big names to enter the Chinese market. TPG was also an early market entrant there. Both were followed by other internationally active buyout houses.

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Africa is definitely on the PE map nowadays. Last year, we reported in a May issue of Dealmarket Digest about Bob Geldof’s 8Mile fund (named after the shortest distance between the African Continent and Europe), which had raised about USD 200 million for the region. Helios also closed a fund at close to one billion dollars, it reported last June.

FAMILY OFFICES SET TO BOOM IN ASIA Family offices are growing in importance for investing in private equity and individual deals, so we keep our eye out for news about FOs. The latest is a new study on FO trends in Asia, published by UBS and Campden. They discovered that the massive growth in the wealth of the Asia-Pacific in the last twenty years has yet to seriously impact the growth of family offices in the region. Estimates show that little more than 100 single family offices are based in Asia, which is small compared to the estimated 2,500 family offices globally. One of the report’s authors said that family offices are well established in financial centers such as Hong Kong and Singapore, and that growth is expected as entrepreneurial families in India, China and Taiwan, as well as in South East Asia set up family offices.

The study is based on a survey of the size, features and the concerns of family offices in the AsiaPacific. Entitled Growing Towards Maturity: Family Offices in Asia-Pacific Come of Age, the publisher claims it is the first extensive survey on the family office landscape in Asia-Pacific.

Other key findings listed by Campden • Strong link between existing FOs in the region and their family business (80% are still connected to the primary business where the money was first made).

• Asia-Pacific FOs have a large proportion of their assets tied up in core family business holdings and illiquid assets. Liquid assets only make up 40% of their total wealth.

• Hong Kong, Singapore and Australia are perceived to be the most attractive locations to set up FOs due to favorable economic, social and tax conditions.

• FOs in the region are not big employers; almost 40% employ less than six full-time staff, with 63% of offices employing family members. In Europe, Single Family Offices employ an average of 13 people.

• Confidentiality is the key cultural factor affecting willingness to outsource services and appoint third party providers (e.g. global custody services).

• Family offices in Asia-Pacific are more likely to want to bring services in-house, like the chief investment officer role, than outsource. In Europe and the US there is more of a tendency to want to outsource investment functions.

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QUOTE OF THE WEEK "For the first time since the study was launched in 2004, China surpassed the USA as the country exhibiting the highest demand for luxury watches, representing 23 percent of all watch-related searches.�

Who said it: Digital Luxury Group In Context: Reuters reports a milestone in consumer spending this week, reporting that China has overtaken the US as the country with the biggest demand for luxury watches. It said that China is the single biggest driver for the watch industry, according to Kepler Research, which estimates Asia will account for two-thirds of the luxury watch market by 2016 from little more than 50 percent last year. The World Watch Report, which we quoted above is an online survey of more than one billion internet users, also said the number of online searches for watches fell in Germany and Italy, but rose in Japan.

Where we found it: Reuters

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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.

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Editor: Valerie Thompson, Zurich

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