DealMarket Digest_Issue 61

DIGEST

61

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 61

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M&A Dealmaking Still Down Globally

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Recent Returns Drive Fundraising Success

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Secondary Buyouts Dominate LBO Statistics

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Getty Images Acquired by PE Giant for $3.3 billion

• Zephyr research

Mobile and Wireless Trends: $4 billion invested this year • Rutberg & Co Research

Quote of the Week: Extreme Discretion

August 24, 2012

M&A DEALMAKING STILL DOWN GLOBALLY The value values and volume of dealmaking globally continues to decline for the third half-yearly period in a row. But a Zephyr analyst says that the trend is not as dismal as it appears. Not every region is seeing shrinking M&A values. For example, Western Europe saw an increase in value of M&A totals by 37 per cent. Another positive data point is that five deals globally in the past six month were valued in excess of USD 10 billion. As for PE, deal values in Western Europe were also up (8 per cent) compared to the second half of 2011. Nevertheless, this is still quite a drop from the same period last year, said the analyst. One other region is on the upswing, the Middle East, while Asia Pacific and the US falter.

Image source: Zephyr

RECENT RETURNS DRIVE FUNDRAISING SUCCESS It looks like GPs intent on raising new funds must show LPs recent returns. Historical performance figures may have little relevance in today’s market, according to a WSJ article. Those with stellar recent returns in the past two years are tapping a “gusher of cash”. Some of those having difficulty include brand name fund managers. They are raising smaller funds or putting fundraising on hold. Companies in this category include, WL Ross & Co., Providence Equity Partners LLC, and Charterhouse Group.

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Those doing well on the fundraising circuit are GPs like Ares Management, Leonard Green & Partners, American Securities and Centerbridge Partners.

Pension plans, sovereign-wealth funds and other investors remain “keen” on PE, an assertion that is confirmed by recent data from Preqin and it is taking less time this year than last to close a fund. But a disparity in recent returns explains why some funds are “fighting off investors while others search high and low for them,” says the WSJ.

Image source: Preqin

SECONDARY BUYOUTS DOMINATE LBO STATISTICS It is not news that PE firms have been buying each other’s portfolio companies in recent times, but the degree and frequency is increasing, says TermSheet. At the moment, the most active buyers of private equity's leveraged buyout deals are other LBO funds. In the second quarter, 51% of all leveraged buyouts were bought with new debt by other PE firms, according to Standard & Poor's Capital IQ, which was cited in the article.

It is a trend that is not exactly thrilling industry observers. In the TermSheet article, one expert said that private equity funds have probably overgrown in the past and that the increase in secondary buyouts is likely due too much cash for too few really good deals. “Once a private equity firm has bought and sold an investment, most private equity buyers struggle to add value the second time around. Our findings show that follow-up deals create little, if any, differential value.” The article says that others studies PE veterans argue that firms have different expertise.

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So even after an initial buyout, a new private equity firm might make changes that the first private equity firm may not have thought of or tried. A consequence of the trend could be that LPs will balk at certain fees, according to another expert, if investors see that more and more of those investments come from PE’s “own backyard”, it will become “harder and harder for managers to justify their fees”.

MOBILE AND WIRELESS TRENDS: $4 BILLION INVESTED THIS YEAR Investment in privately owned mobile technology companies represented almost half of all technology investment (46%) in the first six months of this year.

This is just one of the data points that Rutberg and Co revealed in a slide deck of its latest research, which was reported in several media outlets. The first half of this year saw the highest level of mobile investment since Rutberg initiated coverage in 2001.

Furthermore, 2012 mobile VC investments are currently up by USD 1 billion compared to the first half of 2011, which was the largest year for mobile tech venture funding in a decade, reports FierceMobile.

There were also 50 M&A transactions announced during the period, for example, Apple's acquisition of AuthenTec and PayPal's purchase of Card.io, said the same source.

Rutberg analysts said that there is a “tremendous level of early stage activity”, with 61% of deals in 1H12 having a deal size of USD 5 million or less, as compared to 59% in 2011, 48% in 2010, 48% in 2009, and 25% in 2008. Private equity giant KKR invested in US based audio technology startup Sonos, pointed out PE Hub. Dealmarket Digest notes that investments are increasingly global, but Europe is lagging. Of the top 25 deals in mobile, only two were European startups, namely SoundCloud (Berlin) and Linkem (Rome). Silicon Valley still rules the roost with 15 of the 25 largest deals, but it was an Indian and Chinese company, one for each country, that captured the two largest rounds. Read more: Rutberg & Company Wireless Industry Newsletter July 2012.

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GETTY IMAGES ACQUIRED BY PE GIANT FOR $3.3 BILLION The deal of the week looks to be the acquisition of Getty Images by Carlyle Group for USD 3.3 billion, according to Bloomberg. We reported speculation about the deal size earlier in the summer. So far the size of this deal makes it one of the largest PE transactions in the past year, according to the WSJ, which also said that there aren’t too many other big ticket deals expected in 2012. Only one deal might be a blockbuster, namely Best Buy Co, the US based retailer, which could go for up to USD 10 billion in a PEbacked take private transaction.

QUOTE OF THE WEEK: EXTREME DISCRETION Silicon Valley is full of tight-lipped executives who fear divulging their companies' technological secrets. Then there's Martin Casado, co-founder of networking startup Nicira, who won't even disclose where he used to work.

Who said it: The quote above was made in a profile of Nicira, which was acquired by VMWare for a whopping USD 1.26 billion this summer, written by reporter for Fortune magazine, Richard Nieva.

In Context: Martin Casado (pictured here), the 35 year old Spanish-born co-founder of Nicira and recently minted multi-millionaire, has to be discrete about where he worked after completing his computer science degree from Northern Arizona University in 2000 because he apparently was employed by US-government intelligence agency to ensure that computer networks were “smart and flexible” enough to withstand any calamity, after 9/11, including a hostile act. In the process he discovered that the government's data networks were hopelessly outmoded and in many cases couldn't share important information among agencies. That work formed the basis of stealthy Nicira’s first products which are now being licensed by big names like eBay, Rackspace, AT&T and Nicira received some USD50 million in funding from brand name VCs, Andreessen Horowitz and NEA. Image source: Nicira website.

Where we found it: Fortune

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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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