DealMarket Digest_Issue 51

DIGEST

51

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 51

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European PE Fundraising Up

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Asia-Pacific PE Grows: China and Australia Dominate

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Investing in Sustainability Makes Dollars and Sense

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Kickstarter is the Darling of Crowdfunding Sites

Three Key Trends for PE in India • Bain Study

China in Third Place as Home to World’s Largest Companies Hong Kong Regulator Cracks Down on IPOs : Weighs Prison Terms

• McKinsey Study

• Harvard Business School Working Paper

Quote of the Week: Suit Up

May 18, 2012

EUROPEAN PE FUNDRAISING UP According to EVCA, the European private equity and venture capital industry saw an increase in fundraising of 80 percent in 2011, reaching its highest levels since 2008 via PE Hub. Nearly EUR40 billion was raised in Europe last year. A spokesperson from EVCA posited that investors from pension funds to charities are increasingly turning to private equity and venture capital to deliver long-term, sustainable returns in a climate of uncertainty in Europe.

In 2011 venture capital funds saw a 50 percent growth of their fundraising activity, while buyout and growth funds doubled inflows in 2011.About 65 percent of the total new funds raised came from European countries and about 35 percent from the rest of the world. During the period, UK and Ireland, Nordic countries and France and Benelux managed more than 83 percent of the amount raised in 2011.

THREE KEY TRENDS FOR PE IN INDIA A new report published by Bain on dealmaking in India in 2011 shows that it was a standout year compared to previous years, although still not up to levels of the pre-financial crisis boom time.

Several trends are described in the report. Here are the top three summarized by Dealmarket Digest.

Graphic source: Euromoney

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1. More deals closed at lower valuations. Historically India high valuations have plagued PE investors because Indian entrepreneurs often looked at PE as funding of last resort and tended to ask for high prices for equity. The market is also fiercely competitive. But multiples fell showing that “promoters may have been more willing to acquiesce2 and that GPs are becoming more selective.

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2. A second trend in Indian PE is the big surge in early-stage deals focused on companies in the formative stages of growth. In 2011, 28 percent of the deals struck were with new companies founded within the last three years, up from a high of 25 percent in previous years. E-commerce companies led this trend, cornering about 40 percent of early stage capital. There has been widespread euphoria as both PE and VC funds attempt to ride the growth of this nascent sector.

Some of the larger deals included a USD200 million investment by SoftBank in InMobi, a global mobile advertising network, and a USD52 million investment in Snapdeal, an online deal discounts site, by IndoUS Venture Partners, Nexus Venture Partners and Bessemer Venture Partners through multiple rounds.

3. The third trend in 2011 was the dramatic decline in the number of exits. Only 88 investments exited PE fund portfolios, a 30 percent decline in 2011. The decline was attributed to the lack of IPOs on the countries “depressed stock market”

CHINA IN THIRD PLACE AS HOME TO WORLD’S LARGEST COMPANIES We found an interesting data point in corporate finance advisory firm Bain & Company’s recently published Global Private Equity Report 2012. China is now in the top three countries with a high number of large companies, that is, companies with revenues greater than USD250 million.

The number of larger companies is correlated with the nominal GDP of an economy, says Bain & Co. China has 1150 of such companies, Japan has a little over 2000, and the US which remains in the top spot for now has 3500. The data puts China ahead of Germany, France, UK, Italy Canada and Brazil.

The implication for PE is that China is no longer only a mid-market buyout region. Bain predicts a similar trend for India, which is currently mainly all about mid-market dealmaking. Just as a sign of the time, it is interesting to note that Bain has had to publish a note on almost every major link on its website distinguishing itself from Bain Capital, pointing out that they are separate companies with no shared ownership or governance. Bain Capital has been receiving a lot of unwanted media attention due to Mitt Romney’s US presidential election campaign.

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HONG KONG REGULATOR CRACKS DOWN ON IPOS: WEIGHS PRISON TERMS The upcoming Facebook IPO has captured many headlines this week and we’re sure you’ve read all about it, so we picked up on another news item about IPOs that you may have missed. New rules are underway for IPOs in Hong Kong after the stock market experienced several accounting scandals involving Chinese companies. The WSJ says the new regulations would make the city's regime one of the world’s toughest but the chances that a banker would face jail time for lack of due diligence remain slim. A related article by Bloomberg explains that if the new rules are enacted, underwriters may be criminally liable for information in prospectuses. Hong Kong reverted to Chinese rule in 1997 and has since benefited from USD 159 billion of IPOs by companies from the mainland, according to data compiled by Bloomberg.

ASIA-PACIFIC PE GROWS: CHINA AND AUSTRALIA DOMINATE The Asia Pacific region is now responsible for about USD50 billion in deals. After several years of declines, it climbed to a 17 percent share of global private equity, according to a McKinsey & Company private equity in the Asia-Pacific report, as reported by Financial Standard. Asia's share of the global private equity market was 11 percent. The same article reported that optimism about investment is reflected in a new Preqin Asian Private Equity Benchmark survey that showed that it outperformed the MSCI Pacific and MSCI EMF indices over the one, three- and five-year periods based on similar but not the exact same comparison data.

China is PE central with the largest number of PE managers. Australia is also a market leader with two Sydney-based private equity managers in the top 10, says the report. The study authors were surprised to note that Indian PE managers were missing from the study's top 30 due to investor sentiment in the sub-continent cooling despite the size and promise of the market.

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INVESTING IN SUSTAINABILITY MAKES DOLLARS AND SENSE There is money to be made investing in publicly-traded companies that have voluntarily adopted corporate responsibility practices and accounting, according to a new study published this month by Harvard Business School.

The study of 180 companies from a wide range of industries (see table created from the study data by Dealmarket Digest) provides evidence that “High Sustainability� companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance, particularly companies that are consumer-oriented and natural resource extraction (that would be mining and oil exploration, for example), says the report.

Image Source: HBS study

One of the more interesting aspects of the study was a discussion about stakeholder engagement, which also contributes to higher valuations. Some of the companies have defined stakeholders that illustrate values that are more compelling than the typical business view. For example, Southwest Airlines has identified employees and Novo Nordisk patients (basically, their end customers) as their primary stakeholders. Dow Chemical has been setting 10-year goals for the past 20 years and recently ventured into a goal-setting process for the next 100 years. Another company, Natura, has committed to preserving biodiversity and offering products that have minimal environmental impact.

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KICKSTARTER IS THE DARLING OF CROWDFUNDING SITES An off-the-cuff remark by Huffington Post founder Arianna Huffington gave Kickstarter an unexpected endorsement recently in Paid Content. It is just one mention in the press that Kickstarter has received in the past couple of weeks as its star rises in the world of crowdfunding. The crowdfunding site seems to have moved into top spot, if measured only by media buzz and attention. Huffington was fielding questions about a possible billion dollar buyback of her publishing company from AOL in an article published in Paid Content and she said that she was mulling using Kickstarter to raise the money. It was a joke because the most raised by one company on the platform is the 10.2 million dollars raised by a project called Pebble which is proposing an e-Paper iPhone and Android watch.

Kickstarter was also profiled by the New York Times in a report that says it has moved away from its roots to become a spot for startup companies to raise money. Kickstarter was also profiled by TPMIdealab where it was reported that the platform has successfully funded 21,922 separate projects. A project is successfully funded on Kickstarter when it reaches an arbitrary, pre-determined fundraising goal set by the project creator within a set window of time, usually about a month.

According to the NYT article USD200 million was raised for 20,000-plus products, out of about 50,000 projects.

Kickstarter itself has earned about USD10 million from hosting the projects on its website.

Industry Oil&Gas Producers Oil Equipment, Services&Distribution Chemicals Industrial Metals Mining Construction&Materials Aerospace&Defense General Industrials Electronic&Electrical Equipment Industrial Engineering Industrial Transportation Support Services Automobiles&Parts Beverages Food Producers Household Goods&Home Construction Leisure Goods Personal Goods Health Care Equipment&Services Pharmaceuticals & Biotechnology Retailers Media Travel&Leisure Fixed Line Telecommunications Mobile Telecommunications Electricity Gas, Water&Multiutilities Software&Computer Services Technology Hardware&Equipment

Share 4.4 3.3 5.6 1.1 1.1 1.1 1.1 4.4 2.2 3.3 1.1 1.1 3.3 1.1 4.4 3.3

3.3 2.2 7.8 4.4 5.6 3.3 3.3 2.2 1.1 6.7 3.3 5.6 8.9

Image Source: Pebble Technology

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QUOTE OF THE WEEK: SUIT UP

Image source: Bloomberg

“Mark in his signature hoodie — I mean he’s actually showing investors he doesn’t care that much… and I think that’s a mark of immaturity. I mean I think he has to realize he’s bringing investors in as a new constituency right now and I think he’s got to show them the respect that they deserve because he’s asking them for their money.”

Who said it: Michael Pachter, managing director and social media/gaming analyst at Wedbush Securities In Context: Bloomberg has a report about Michael Pachter view that wearing a hoodie sweatshirt to a meeting in New York with potential investors in the upcoming Facebook IPO, shows Mark Zuckerberg’s lack of maturity. Pachter likened Zuckerberg to Steve Jobs, the late Apple co-founder, who was known as an eccentric leader and who also had his own signature outfit: a black turtleneck, blue jeans and sneakers. However Pachter believes that Zuckerberg is probably better suited to be the chief product officer, the chief user-experience officer, to manage the design of the user interface, to decide every feature that goes in.

Where we found it: Bloomberg Tech Deals

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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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