DealMarket Digest_Issue 67

DIGEST

67

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 67

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Intralinks Sees M&A Activity Increase

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CVC to Take Over Insurance Firm Cunningham Lindsey

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European Fundraising More Resilient Than Expected

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Minority-Owned PE Firms Outpunch Mainstream PE

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More Multi- Millionaires in APAC than in the US and Europe

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Quote of the Week: Making it the US Mid-

Fundraising Stable, Dealmaking Down in Emerging Markets • EMPEA Research

• Unquote Survey

• NAIC research

• RBC Study

Market

October 05, 2012

INTRALINKS SEES M&A ACTIVITY INCREASE Global early-stage M&A activity for the second quarter is up by 23% compared to last year, said Intralinks, the virtual data room provider, this week in an announcement that reflects it its Deal Flow Indicator (DFI) findings. The DFI tracks global sell-side M&A mandates and deals reaching the due diligence stage prior to public announcement. All regions showed a year-over-year positive trend for Q2 2012 over Q2 2011, with the strongest growth in Asia Pacific (30 percent) and similarly positive trends in Latin America (19 percent), Europe/Middle East/Africa (23 percent), and North America (22 percent).

Image source: Intralinks

In a discussion of the data, Intralinks said that the global M&A market may experience an upturn in the next three to six months. The M&A activity by industry comparisons reveal that real estate and manufacturing sectors are experiencing the highest growth rates. At the midpoint of last year, the worsening Eurozone crisis slowed deal activity. But the market began to improve in Q2 2012, with the DFI reaching a peak quarterly level at 173% of Q1 2008 deal volume – a year that is widely viewed as the unofficial beginning of the financial crisis, or at least the end of the buyout boom. On a quarter-on-quarter basis, the DFI rose by 21% – the fastest increase since Q2 2011 and far above the average growth rate of 1% over the preceding nine months. “Casting a look at longer term DFI activity, the figures paint an equally optimistic picture: the year-on-year figures for prospective deal activity rose by 23%, while the trailing 12 month aggregate deal volume rose by 22%. By any of the above measures, we are seeing a substantial amount of potential activity bubbling,” said Intralinks analysts.

CVC TO TAKE OVER INSURANCE FIRM CUNNINGHAM LINDSEY The deal of the week looks to be the buyout of insurance sector company Cunningham Lindsey by CVC Capital Partners for up to USD 1 billion, according to Reuters. The seller is buyout firm Stone Point Capital and Fairfax Financial Holdings Ltd. The North American insurance sector has seen few private equity deals this year, the report said.

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FUNDRAISING STABLE, DEALMAKING DOWN IN EMERGING MARKETS Private equity fundraising is on track to match 2011 levels in the first half of 2012, according to statistics from the Emerging Markets Private Equity Association (EMPEA) . It is the larger more established fund managers that have been successful closing new funds, so-called mature platforms, including the largest pan-emerging markets fund raised to date, Capital International’s USD 3 billion sixth fund.

Image source: EMPEA

“For institutional investors seeking exposure to high growth markets but lacking the resources to source and manage multiple fund relationships, mature platforms with large funds present an efficient option,” said Sarah Alexander, founding President and CEO of EMPEA, in the report.

As for dealmaking volumes, the emerging markets are maintaining a 15% share of global totals, but the number of deals done was flat. Transactions in China and India declined, while transactions in other emerging parts of the world increased. The total invested capital fell by 34% and deal sizes on average dropped by 22% due to fewer USD 100 million-plus deals. The cause of the decline in dealmaking is attributed to legal and regulatory uncertainty and anticipated currency depreciation. PE fund managers are looking to listed markets for dealflow. EMPEA’s data reveals that five of the fifteen largest emerging market private equity deals in the first six months of 2012 were PIPE deals, or private investment in public equities. That is five times the number of PIPE deals done in 2011.

Dealmaking may be down in China and India but China still accounted for 40% of total investment and 30% of transactions in the study regions. Latin American markets including Brazil, and Emerging European markets including Turkey drew 12% and 8% of deals, respectively. Sub-Saharan Africa drew 7% of deals, while Russia accounted for 5% of transactions and the MENA markets represented 4%.

EUROPEAN FUNDRAISING MORE RESILIENT THAN EXPECTED Most GPs that closed fund this year reported that their existing LPs are re-upping or sticking with their relationships, and some are even increasing their allocations, according to unquote magazine’s research department, which just surveyed more than 40 European GPs.

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Specialist funds are more successful than generalists. Economy woes and regulatory burdens weigh on activity, but risk aversion is a more important factor. The unquote fundraising survey asked GPs who are currently out in the market, or recently closed, about their perception of the state of Europe's fund environment. A large group, 71%, said that the current economic conditions complicate fundraising significantly.

Image source: Unquote

Venture capitalists, in particular, pointed out that the current sense of risk aversion made fundraising more difficult. It is taking longer to get LPs to sign. On average, participants counted 3.6 meetings to convince an LP to sign on (again), excluding due diligence and follow-ups. Some noted that institutional investors were much slower in their decision process, driving some GPs to look to family offices and corporates, which are much more agile in their decision making. More importantly, the survey results show the importance of good relations with existing investors: more than three-quarters of GPs said 50% or more of their commitments at the time of first close had come from previous contacts. Overall, all participants relied on at least one quarter. The unquote" fundraising survey is a seven-question qualitative survey among GPs targeting Europe who are currently fundraising or have closed their latest fund in the past 18 months. The survey was conducted throughout August and September 2012.

MINORITY-OWNED PE FIRMS OUTPUNCH MAINSTREAM PE

Image source: NAIC

There is an emerging group with the PE fund management market in the US, diverse and minorityowned private equity firms, and this group, which is quite small at the moment, is producing superior investment returns compared to the general PE industry, according to a report called, Recognizing The Results, commissioned by the National Association of Investment Companies (NAIC), and performed by KPMG. The NAIC is an industry association representing diverse and minority-owned private equity firms, which are listed on its website. NAIC invests in what it says is the fastest growing market in the US, so-called minority consumers, which will in fact form the majority of consumers in the not so distant future (see graphic).

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The report compared the audited financial returns of NAIC firms against the broader private equity market across four industry benchmarks for the period 1998 – 2011 and the following is the result: • NAIC firms outperformed the upper quartile of the PE industry in realizing investment returns (20.9% vs. 11.8%) • on a median and capital-weighted basis, NAIC firms' internal rate of return performance was superior to the upper quartile of the PE market and buyout subset • NAIC firms significantly outperformed the PE industry returning capital to investors (NAIC Firms 160% vs. 67.1% for all U.S. PE and 89.1% for Buyout subset) • In 7 of 10 Years, NAIC firms realized returns in the PE industry's top quartile The report authors say that despite the strong performance of NAIC firms, the significant majority of institutional investors do not invest capital in diverse and minority private equity firms. The fact that NAIC Firms collectively managed only 0.24% of total private equity assets at year-end 2011 is a sobering reality check.

MORE MULTI- MILLIONAIRES IN APAC THAN IN THE US AND EUROPE More people in Asia became millionaires last year as the region’s economic growth and entrepreneurship helped generate affluence, according to a report by RBC Wealth Management and Cap Gemini SA, covered by Bloomberg. Asia-Pacific has taken a slight lead over the US and a bigger lead over Europe in the number of millionaires, while the US has a slight lead in the overall total of wealth. This is the first time APAC was home to most millionaires in the world. But overall wealth declined slightly in the most recent period of the study.

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Image source: Cap Gemini

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QUOTE OF THE WEEK: MAKING IT THE US MID-MARKET “It's the one I love talking about. It's fun.

We just sold it to WellPoint.

We made about four times our money in it.”

Who said it: Timothy Mayhew, Fenway Partners in an interview on Privcap In Context: Successful private equity investors always make it sound so easy when they talk about doubling, tripling, or even quadrupling their investments by growing revenues or margins in private companies. And so it is with the story of how Fenway Partners made four times its money on in a company with the unwieldy name of 1-800-CONTACTS. The quote above is the beginning of a Privcap interview, quoting Mayhew’s response to the interviewer’s request that he talk about his investment in 1-800-CONTACTS, a contact lens retailer that was acquired in June by WellPoint, Inc. one of the largest health benefits companies in the United States. It is reportedly paying USD 900 million for the venture. According to the interview, contact lenses are a consumer commodity item and yet this mid-market PE firm created value with it. Fenway took the company private in 2007 and kept the founder on board. They improved the customer service, sold the contact lens manufacturing assets and focused on the company’s direct-to-consumer business model. They also improved the website for sell through and achieved a real coup by hammering out a partnership with Walmart, which according to the interview sells about “a third of everything” in US. This gave the contact lens company a “bricks and mortar” component to its web and telephone sales channels. The fourth key to success was figuring out how to sell through mobile devices. Fenway claims that the company now generates 20% of sales through a portable device. To become successful on the mobile channel, the company recruited people that had experience developing apps just for mobile devices, rather than do an acquisition. The last thing the company did to grow the business was enter the eyeglass market, which has a better margin than contact lenses. According to the interview, contact lenses in the United States are about a USD 3.5 billion market, eyeglasses is USD 25 billion.

Where we found it: Privcap

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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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