DealMarket Digest Issue 68

DIGEST

68

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 68

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Chinese Private Equity Funds in Australian Mining Deal

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PEI Operational Excellence Awards Given To AIP (US), EQT (EMEA), Headland (Asia)

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Terra Firma Raising Large Energy Fund

BNEF Says Clean Energy Investment Declined in Q3

• Reuters

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One in Five of the Super-Wealthy are Giving It All Away

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Quote of the Week: PE Novelty

• Study: Forbes Insights and Credit Suisse

October 11, 2012

CHINESE PRIVATE EQUITY FUNDS IN AUSTRALIAN MINING DEAL One of the deals of the biggest deals of the week is a Chinese/Australian transaction. A PE fund founded

by Chinese billionaire Yu Yong and a fund backed by state-owned China Development Bank have offered to buy Australian-listed copper explorer Discovery Metals Ltd in an AUSD850 million transaction, reports Reuters.

This is not the first PE investment for the state-owned China Development Bank last year it announced agreements with three private equity firms, KKR, TPG Capital and Permira, according to Dealbook. It also invested in the Terra Firma energy fund reported in this week’s newsletter.

The agreements with K.K.R., TPG and Permira gave the Chinese bank access to their expertise in private equity. China Development Bank already owns a minority stake in TPG, which also has sold stakes to other government-backed investment companies, including the Singapore Investment Corporation and the Kuwait Investment Authority.

BNEF SAYS CLEAN ENERGY INVESTMENT DECLINED IN Q3 Bloomberg New Energy Finance (BNEF) published its figures for the third quarter and global investment in clean energy is down 5% since the previous quarter and 20% lower than last year. The total is still a significant USD 56.6bn, which is equivalent to the total yearly amount invested in 2004. The declines are attributed to weaker figures from the US and India, and a lull in wind farm financings.

One important aspect to note in the declining numbers trend is that the recent sharp falls in the costs of wind and solar photovoltaic technologies have meant that the same megawatt capacity can now be purchased for significantly fewer dollars, which is actually good news but it naturally has a downward effect on the totals invested.

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Image source: BNEF

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Based on the recent trend BNEF says that the full-year 2012 figure for investment in clean energy is likely to fall short of last year’s record $280 billion. If so, 2012 would be the first down-year for world investment in the sector for at least eight years.

Current challenges in the clean energy sector include policy uncertainty in the US, the UK and Italy, valuation declines on the public markets and restrained venture capital investment. Venture capital and private equity investors invested USD 1.3bn into clean energy firms in Q3 this year, down 20% on the second quarter and 34% lower than the third quarter of 2011. Established markets such as the US, Europe and China are losing momentum while newer markets in South America, Asia and Africa pick up steam, said BNEF.

PEI OPERATIONAL EXCELLENCE AWARDS GIVEN TO AIP (US), EQT (EMEA), HEADLAND (ASIA) The top private equity fund managers for operational excellence as selected by PEI are Europe’s EQT Partners, which won an Operational Excellence trophy for its investment in German cable group KBW. PEI says that EQT transformed KBW from a technology-focused utility style company to a mass-market, consumerfocused business with top quality products and service, growing revenues by 18 percent annually. American Industrial Partners investment in Brooks Instrument was the winner in the Americas; In Asia Headland Capital Partners was recognized for its achievement with Yonghui Superstores. Its minority stake was sufficient to drive Yonghui’s expansion from 58 stores in 2007 to 204 in 2011.

The awards are new and were launched as a result of a realization in the industry that private equity needs to “return to its roots” and be a value added partner for companies and management teams, to transform businesses and influence growth trajectories by providing both capital and expertise.

Returns are driven not by macro-plays but by real strategic and operational improvements in companies. They come as PE experiences several ongoing trends, including internationalization, difficult debt and fundraising environments, and the fact that returns-producing strategies that worked for a time do not anymore. The latter trend is one that PEI magazine has picked up on by adding the new award to its lineup of awards that recognize industry excellence. It has added an award for operational excellence for PE fund managers that demonstrate an ability to influence portfolio companies to become better businesses, and a new event to back it up.

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Image source: PEI

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Private equity is coming out the other side of the financial crisis with a greater focus on earning returns by increasing the value of portfolio companies through operational improvement, says PEI. The awards, like the PE industry, were global in scope. Judges for EMEA included Professor Eli Talmor, of the Coller Institute of Private Equity; Thomas Pütter, chairman of Ancora Finance Group; and Sir Edmund Truell, founder, Pension Corporation. For the Americas, judges included Jim Ilaria of Alvarez & Marsal; David Turner, head of PE at Guardian Life; and University of Chicago's Steve Kaplan. In Asia, judges included Vinit Bhatia, acting head of Bain & Company's private equity practice in Asia; Paul Mitchell, KPMG partner; and Jie Gong, executive director at Morgan Stanley AIP.

TERRA FIRMA RAISING LARGE ENERGY FUND Reuters reports that Terra Firma is raising a new USD 5 billion energy fund, targeting sustainable investments. Reuters was tipped by an unnamed source. The British PE fund manager will team with China Development Bank, which will market the new fund to potential investors in China, while Terra Firma will seek backers in Europe and the United States among traditional private equity investors and infrastructure fund investors, the person said. Reuters says that the news signals Terra Firma's plan to focus on potentially “safer” energy-related deals, after the firm lost GBP 1.7 billion of its own and investors' money on record label and media company EMI. Since 1994, Terra Firma has invested nearly GBP 14 billion in 31 businesses with an aggregate enterprise value of over GBP 44 billion, according to Terra Firma’s website.

It was the top venture capital and PE investor in its 2011 clean energy league table with over USD 250 million invested. These kinds of investments may offer lower-returns than the PE industry is used to, e.g. a 15 percent annual return, but are considered safer, says the article.

ONE IN FIVE OF THE SUPER-WEALTHY ARE GIVING IT ALL AWAY Giving to charity by the world’s wealthiest is a trend that is alive and well, according to a study by Forbes Insights and Credit Suisse. Some 54% of all respondents to a survey the report authors conducted said they will leave more than 25% of their assets to charity.

Nearly half (46%) of those with more than USD 20 million in investable assets plan to leave half or more of their assets to charity; nearly 1 in 5 of those with over USD 50 million in investable assets plan to leave 100% of their assets to charity. The study entitled, "Next Generation Philanthropy: Changing the World," was sponsored by Credit Suisse Group, as part of the Forbes 400 Summit on Philanthropy. It surveyed 264 high net worth individuals across the globe, including the U.S., China, Japan, India and the UK. Forty-six percent of the respondents had net investable assets of USD 4.9 million or less; 34% of the respondents had net investable assets of USD5 million to USD 19.9 million; and the remaining respondents reported net investable assets of USD 20 million or more.

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Key findings • A Business-Like Approach to Giving. 53% of all respondents agree with the statement "I find applying my business experience to my philanthropy is an effective and successful approach to giving."

This rises to 61% among those who are at the more than USD20 million level. More of them partner with businesses (40%) for their philanthropic endeavors than with government agencies (22%) or other nonprofits (28%).

• Taxes, U.S. Elections and Giving. Most (56%) feel that tax policy impacts their charitable giving. 64% believe the elections will impact tax policies, while 50% believe the elections will impact the climate for philanthropy.

• Motivation to give comes from the heart. 70% of respondents in the survey say that they are driven by personal values, while 36% say faith, 35% a sense of obligation or duty, 32% family legacy and 31% a desire to add value to society at large.

• Among the top areas for philanthropists that respondents say they consider are the organizational structure of giving, collaborations, vehicles of funding, measuring success and passing on the torch to the next generation.

• Family foundations are more important as asset levels grow. Fifty nine percent of those with investable assets of USD 50 million or more have established a philanthropic entity. The majority would like to see this entity be continued by their descendants.

• Social media takes hold as part of a philanthropic strategy, but is not a substitute for personal time and commitment. Facebook (37%), Twitter (24%) and YouTube (23%) were the top three social media platforms utilized by survey respondents. All of Forbes Insights' interviewees, however, indicated social media could only highlight a cause. Seeing a project through to the end requires a significant amount of time and commitment, in addition to publicity.

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Image source: Forbes Insight

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QUOTE OF THE WEEK: PE NOVELTY “If a GP ever comes up to me and says we’re not in the business of operational improvement, just financial engineering, the novelty of it all might tempt me to invest…”

Who said it: an unnamed limited partner in a Private Equity International special edition on its new Operational Excellence awards event In Context: PEI has been diligent in its reporting of the clichés in the private equity industry that limited partners reportedly love to make fun of, such as “we’re top quartile”. In this special report where we found the quote, which the LP made in a joking manner, the article says that a few other clichés are “we have proprietary dealflow”, “we add value”, and we have a “network of operating partners”.

These claims contrast with how GPs have made money in the past, through financial engineering, for example, or my getting the timing of an IPO right, or benefitting from a rising valuation cycle in the public markets. The rest of the article explains in interesting case studies and reporting about how GPs can and do execute on operational improvements in their portfolio companies. As always the case study stories make it sound easy and fun and straightforward, but the reality is quite different, which is probably why they make for compelling reading.

Where we found it: PEI Special Edition: Operational Excellence

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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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