DealMarket Digest_Issue 52

DIGEST

52

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 52

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Pitchbook’s Dry Powder in the USA Report

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PE Hungry for Restaurants and Hotel Chains

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Formula One Stake to Be Sold by PE Firm Ahead of IPO

Facebook IPO Fuss and Fizzle Ernst&Young Maps Exit Routes for VC in a Global Market Energy Deals Continue to Attract Billions in PE

Quote of the Week: PE Trends

May 25, 2012

PITCHBOOK’S DRY POWDER IN THE USA REPORT

Pitchbook has published a new report on capital overhang trends in PE in the US. The graphic above illustrates that beginning with the 2008 vintage; the rate that capital is called down has been gradually slowing. Funds raised from 1999 to 2007 held an average of 29% in unfunded commitments at the end of their third year. For the 2008 vintage, however, that number has risen to 38%, largely attributable to the rampant fundraising that occurred that year.

The amount of committed capital that firms fail to allocate during the typical five-year investing window now averages more than 10% and continues to rise. This phenomenon has created a bottleneck and slowed the rate of investment for subsequent vintages. The longer this trend continues, the deeper the problem will become. Just who has how much capital overhang or dry powder is shown in the table below.

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FACEBOOK IPO FUSS AND FIZZLE Several media outlets covered the recent Facebook IPO, which raised a whopping USD 16 billion, as well as the questions that emerged in its aftermath. Putting aside the fact that Facebook CEO Mark Zuckerberg wore a hoodie at a recent road show stop in suit-and-tie New York, the Deal Pipeline pointed out some issues with the company prior to the IPO, such as the USD 1 billion agreement to buy mobile photo sharing software startup Instagram, a startup that apparently does not generate revenue or exhibit an established business model.

Subsequent to the IPO, other issues with emerged, one a regulatory issue about disclosure during preIPO period and the actions of bankers related to the deal, as reported by Business Insider, and a technical problem experienced by the stock exchange NASDAQ on the day of the IPO, as reported by the WSJ. The share price of Facebook fell significantly after the IPO, rather than popping upwards, which serves to undermine confidence in the stock. At that point, Deal Pipeline chimed in again saying that the falling stock price of Facebook could “chill” the IPO trend for high growth companies, some of which are PE backed.

ERNST&YOUNG MAPS EXIT ROUTES FOR VC IN A GLOBAL MARKET

Image Source: EY Globalizing venture capital: Global venture capital insights and trends report 2011

M&A key exit for VCs in Western countries. A new report from E&Y about global venture capital trends says that the main exit route for VC-backed companies in Western countries is M&A, representing 80% to 90% of all exits. E&Y says prices “should remain fairly high” and M&A activity can be expected to remain constant or increase over the next year.

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For example, in the US for 2011, the five biggest acquisitions ranged from USD700 million to USD800 million. Google alone has acquired 48 companies in 2010 and 79 companies in 2011.

Similar acquisition trends are evident in rapidly developing nations, particularly China, where Tencent, Baidu, Alibaba, Sina, Huawei, ZTE are expected to be active.

One other major point made by in the study is that unlike the West, emerging markets, such as China, India, and Brazil are able to take the IPO exit route as the more common form of returning money to VC investors, as does Japan, Korea and Taiwan.

ENERGY DEALS CONTINUE TO ATTRACT BILLIONS IN PE One of the deals of the week is the Warburg Pincus lead investment of about USD 1.13 billion into Venari Resources, a deep-water oil exploration company, reports Bloomberg. The PE firm is joined in the transaction by Kelso & Company, Temasek Holdings and the Jordan Company. This is just the latest deal in the energy sector which has doubled in activity since last year to USD 33.3 billion from USD 17.5 billion in 2010, according to data compiled by Bloomberg. The same article lists other transactions such as Temasek’s USD 468 million investment in Cheniere Energy and Apollo Global Management’s acquisition of El Paso Corp.’s oil and gas exploration business for USD 7.15 billion, as well as KKR’s investment in gas producer Samson Investment to the tune of USD 7.2 billion.

PE HUNGRY FOR RESTAURANTS AND HOTEL CHAINS Two other large sized buyouts in recent weeks, and a mid-market deal, suggest that PE is hungry for restaurant and hotel deals. Last week one of the deals of the week was the acquisition of PF Chang’s, chain of upscale Chinese restaurants. This week again, the deal of the week is in the hospitality industry. Accor is selling its budget hotel chain to Motel 6 along with some other holdings to Blackstone for USD1.9 billion, according to Reuters. Blackstone already has a strong presence in hotels, having bought the Hilton Worldwide hotel chain five years ago, says the report, and it recently bought the a Columbia Sussex hotel portfolio in late 2010 and a European hotel chain called Mint last year.

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FORMULA ONE STAKE TO BE SOLD BY PE FIRM AHEAD OF IPO In one of the high profile PE deals of the past five or six years, CVC Capital announced it has sold a USD1.6 billion stake in Formula One, reports Reuters. CVC has had a 63.4 percent stake in Formula One since 2006. The pre-IPO deal cuts CVC's stake in Formula One to about 40 percent from 63.4 percent. Formula One holds 20 races around the world and has more than 500 million television viewers.

QUOTE OF THE WEEK: PE TRENDS

Image source: Corporate LiveWire

“Technology, digital media, segments of cleantech and real estate themes are clearly dominating the money raising efforts. What seems to be out of fashion is everything that requires large capital investments, long repayment periods and dependence on governments and regulators, such as biotech, healthcare, infrastructure, leveraged buyouts, and regionally peripheral Europe.”

Who said it: Urs Haeusler, CEO Dealmarket In Context: In a recent round-table discussion Urs Haeusler, the CEO of Dealmarket and publisher of this newsletter, gave his opinion on buyout trends and investment activity over the last 12 months, listing the above themes and sectors as being attractive. Since the company he heads up is an enabler of PE dealmaking as opposed to being an active investor in deals, his view is more neutral than that of an LP or a GP. Besides the sector trends quoted above by Haeusler, he said that he expects private secondaries to increase because PE firms need to improve liquidity and performance metrics. They also need to provide more transparency about performance and execution. An interesting emerging sector trend in his view is investments with “stable income streams and annuities”, such as music, film or pharma royalties and rights. They provide somewhat lower but more predictable returns, double digit mid-teens kinds of returns.

Where we found it: Corporate LiveWire

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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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