DealMarket Digest_Issue 70

DIGEST

70

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 70

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European PE’s Glacial Dealflow Pace

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Rich Families Are Doing More Direct Deals

• Arle/Unquote Barometer

M&A Trend: Buying into Luxury Permira’s Big Bet on Genealogy Website Ancestry.com M&A Insider: Activity Disappointing in Third Quarter PE’s Appetite for Russian Deals Increasing • E&Y Capital Confidence Barometer

• Wharton Study in the News

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More Exits For PE Expected in 2013 Quote of the Week: Outperformance of Entrepreneurial SFOs

October 25, 2012

EUROPEAN PE’S GLACIAL DEALFLOW PACE Confirming reports earlier this month by other industry research groups, unquote says that third quarter PE dealflow plummeted in Europe by 35% to 185 deals, according to its latest PE Barometer which it publishes in partnership with buyout fund manager Arle Capital.

Volumes were down by 14% to EUR 11.7 billion in Q3. Buyout sector deals fell 15% but secondary buyouts increased, up by 28%.

Close to half of all deals completed during the three months to September 2012 were secondary buyouts, which increased in number from 28 transactions to 34.

So far this year, there have been 730 deals so far worth EUR 41.2bn. This is likely to represent a 50% drop in both volumes and values compared to 2010 and 2011. The decline is attributed to the macroeconomic environment and lack of political action to influence markets and economies.

M&A TREND: BUYING INTO LUXURY Luxury brands are moving online in a big way, according to a new report from mergermarket on the global M&A activity in the luxury goods sector. The trend is not surprising, given that online sales of luxury goods are USD 5.6 billion annually (2011) and growing rapidly. Last year, sales increased by 25% over 2010 totals.

As a result, of the popularity of consumers shopping for luxury labels online, M&A activity is expected to be quite robust. Currently it represents 5% of luxury M&A activity volume.

Large brands have acquired several online retailers, such CFR buying a majority stake in net-a-porter, a deal valued at USD 236 million. Recently Neiman Marcus invested USD 28 million into Glamour Sales, a Chinese fashion website. It is not only luxury brands that are interested in making acquisitions.

Softbank took the lead in the buyout of US-based Gilt, an online retailer providing fashion and luxury lifestyle brands, for USD 138 million. FabergĂŠ is taking a more direct route, eschewing M&A, in order to host its own shop.

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Not all acquirers will be luxury companies themselves, writes mergermarket, e-commerce veterans like eBay and Amazon are also expanding their coverage of the sector through M&A. eBay recently acquired Rue La La, an online, by invitation-only fashion retailer, and Amazon acquired BuyVip, an online purchasing community stemming from Spain.

Image source: mergermarket

PERMIRA’S BIG BET ON GENEALOGY WEBSITE ANCESTRY.COM This week’s deal of the week is Permira’s buyout of the genealogy website Ancestry.com. The transaction is valued at USD 1.6 billion, according to the WSJ. The buyout by Permira will enable Ancestry to accelerate some investments in the company’s growth, according to the company’s CEO who intends to stay on post-deal. It currently generates USD 400 million in annual sales, according to a local news report.

M&A INSIDER: ACTIVITY DISAPPOINTING IN THIRD QUARTER Global M&A activity was not at its usual levels in the third quarter this year compared to the same period last year with deal volume falling 16 % and deal value dropping by one fifth from USD 579 billion TO USD 461 billion, reports mergermarket in the latest issue of M&A Insider. North America’s overall figures declined but it is the global hotspot with the an aggregate deal value at the highest level since Q1 2011, and the buyout and exit values in the private equity arena showed healthy year-on-year increases.

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The US consumer sector showed higher-value deals: such as Kraft Foods’ spinoff of its snack business for USD 26 billion and Heineken’s move to acquire a majority stake in Asia-Pacific Breweries (APB) for USD 6.6 billion in July.

Mergermarket says that this quarter is off to a slow start and is not following the activity level increase that is usual after summer holiday period.

Image source: mergermarket

PE’S APPETITE FOR RUSSIAN DEALS INCREASING Russia and the CIS region have become more attractive to foreign PE funds compared to the first quarter, and now rank fifth pushing out Africa in the E&Y PE Capital Confidence Barometer survey.

More than 48% of the 100 foreign PE funds survey say they plan to deploy more capital in Russia. A number of factors are driving PE’s interest in Russia, specifically its 4% growth rate, underpinned by strong domestic consumer spending from the emerging middle class in Russia.

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Russia has a nascent PE industry relative to some other emerging markets, says the Barometer report.

In 2012 to date, less than US$500 million of deals have been done in Russia, while India has seen about 6 times as much investment as has Russia/CIS and China has had 13 times as much. Challenges for Russian dealmaking include lack of political transparency, legislative and administrative issues. An apparent shortage of good-quality large assets makes the country less attractive to larger funds’ investment strategies.

Changes are taking place that should improve PE prospects, according to the report. The Russian government is working on improving the perception of Russian PE, including the creation of the Russian Direct Investment Fund (RDIF). Russia also recently joined the World Trade Organization.

The investment culture is improving, and a track record of successful deals is encouraging PE interest.

These developments should act to boost the growth of PE in the country.

RICH FAMILIES ARE DOING MORE DIRECT DEALS Family offices increased their direct allocations to private companies and real estate last year to an average of 11 percent from 6 percent in 2009, according to BW, referencing the latest report by the Wharton Global Family Alliance. The drivers towards more direct investment include: declining fund returns and concerns about fees generated by outside managers, as well as concerns about conflicts of interest, says the BW report.

The biggest changes that Wharton found since 2009 are listed here: • Allotments to art collections and precious metals have increased fivefold, and now make up 5 percent of the portfolio on average in 2011.

• Average allocation to private equity funds fell to 9 percent from 11 percent two years earlier.

• The average portion in hedge funds stayed the same at about 12 percent.

• Allocations to funds of funds dropped to almost zero.

MORE EXITS FOR PE EXPECTED IN 2013 Amidst all the bad news about declining M&A activity and PE dealflow from around the globe, it is uplifting to read that industry insiders expect exits to increase in the coming 12 months, which has to be good news for LPs waiting for distributions and for GPs that want to raise new funds.

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Image source: E&Y

According to E&Y’s PE Capital Confidence Barometer, over 40% of PE firms it surveyed in all regions anticipate selling more assets (in terms of value) over the next 12 months. The respondents believe that the secondary market will continue to be an important exit route. Only a fifth of investors (22%) anticipate an increase in exits via IPO. About half of GPs also think that sales to strategic buyers will increase. E&Y says that it found that the majority of companies that intend to engage in M&A are expecting to do smaller deals (USD 500 million and less), so it posits that PE firms selling larger portfolio companies are likely to find the field of buyers more limited.

QUOTE OF THE WEEK: OUTPERFORMANCE OF ENTREPRENEURIAL SFOS “An entrepreneurial mindset, as evidenced by Single Family Office incentive schemes, asset allocation and optimism about future performance, correlates with higher annual net returns.”

Who said it: the authors of a study entitled, Benchmarking the Single Family Office: Identifying the Performance Drivers, 2012 published this month In Context: Wharton’s school of business has been making a tremendous effort to benchmark the successful practices and performance driving trends amongst the members of Wharton Global Family Alliance over the past three years.

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In Context: The quote was just one of the interesting findings that were included in a public summary of that analyzes the results of an extensive survey by Wharton and IESE completed in 2011. The SFOs were asked a wide range of questions and they provided quite detailed data for benchmarking (a breakdown of the size of those that participated is shown in the above image).

Other findings • risk management capabilities are being enhanced as a result of lessons from the 2008 crisis.

• SFOs are putting more emphasis on managing the risk of their investments, which is evidenced by more diversified investment portfolios.

• Higher value placed on risk management as an SFO activity and increased use of a wider range of risk measures, including less traditional measures, especially among higher wealth, billionaire SFOs. • Families are deeply concerned about potential vendor conflicts of interest. This has led to the internalization of activities that were in the past outsourced. They have also enhanced the process of manager selection and monitoring.

Where we found it: Wharton Global Family Alliance

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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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