DealMarket Digest_Issue 71

DIGEST

71

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 71

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October’s IPO Upsurge Price Tag Shock: the High Cost of Going Public • PWC Research

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Startup Adopts New PE Business Model

US and Korea Home to Bigger Buyouts This Week The PE View on Global Economic Trends and Fundraising • E&Y Survey

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Quote of the Week: Lots of M&A Talk, Little Action

November 01, 2012

OCTOBER’S IPO UPSURGE There was a dramatic increase in IPOs in the US in October, according to IPScoop.com. It said the month turned out 22 deals an increase by 14 over September’s tally. The report said that the last time more deals came to market was in May 2011 with 23 IPOs. The open window was not necessarily created by a rising stock market as the NASDAQ Composite Index has been down over September’s numbers, so the cause of the increase might be driven by regulatory from the Jobs Act. The technology and financial sector drove the US IPO market with 8 IPOs each in Q3. Over the past 12 months, the tech sector has been the dominant one, according to USA Today.

Elsewhere, PWC has some new stats out this month on all third quarter IPO activity around the world under its IPO Watch research.

Here are our takeaways after reading the PWC report.: Europe • Q3 2012 saw 57 IPOs raising EUR 4.4 billion, compared with 81 IPOs raising EUR 0.7 billion in Q2 2012. But the figure is down compared to the same period last year when 121 IPOs raised EUR 9.4 billion in Q3 2011.

• Upcoming floatation plans are shaping up for Direct Line, Megafon, Telefonica’s German O2 operations and Talanx.

US • Overall there were 29 IPOs raising USD 6.6 billion over twice the figure for last years Q3 • Financial and technology sectors drove the US IPO markets, with 58% and 13% of the proceeds, respectively.

Hong Kong

• IPO activity was substantially down due to a slump in the number of Chinese companies seeking to list.

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PRICE TAG SHOCK: THE HIGH COST OF GOING PUBLIC

Image source: PWC

The cost of becoming a public company can be long and expensive, with a price tag for a US IPO of greater than USD 1 million, according to a survey of CFOs conducted by PwC’s (see above chart). The survey indicated that CFOs of US firms that have gone public in the past several years said they were more likely to be surprised by the costs of going public than the costs of being public. Furthermore, the survey showed that 23% of CFOs said that the costs of taking their firm public had “exceeded their expectations by a significant amount”. A much smaller percentage, 13% of the participating CFOs, said that the costs of being public were significantly more than they had anticipated it to be before the IPO.

STARTUP ADOPTS NEW PE BUSINESS MODEL An article titled, Startup out to overturn private equity model, in Financial News this week describes a UK team called Kingsley that is setting out to “overturn” the traditional private equity fund model, investing on a deal-by-deal basis and only charging fees on invested capital caught our eye. It is a good report about Kingsley’s strategy, but the young fund manager is not the first to use this model. They are just the latest one to do so.

The deal by deal model or pledge fund model exists already. We’ve seen it emerge in the venture capital segment over the past 12 years or so, particularly in the early-stage and angel investment as this article explains, and the WSJ reports that Duke Street Capital is now doing it and that LPs, like the New Jersey state pension fund are negotiating accounts with the likes of Blackstone for such kinds of deals. And PEI adds the name of Quilvest to those practicing the model. Private Equity Manager published an article about the legal aspects of it in the private equity and buyout space. Nobody is saying that this model will take over the market, but they do conclude in most of the articles that it is an interesting trend and comes as a result of the growing reluctance amongst LPs about paying fees and tying up capital in the traditional model.

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US AND KOREA HOME TO BIGGER BUYOUTS THIS WEEK The last few days of October seems to have brought an upsurge in large-sized buyouts. We had several choices for deal of the week, such as the US Reynolds buyout, which according to Reuters, has KKR is bidding on the automobile software company for a deal worth USD 5 billion. In south Korea another deal is underway involving local private equity firm, MBK Partners, acquiring a near 30 percent controlling stake in water purifier maker Woongjin Coway, according to Bloomberg.

THE PE VIEW ON GLOBAL ECONOMIC TRENDS AND FUNDRAISING E&Y polled a panel of 100 PE investors in August through September 2012 to find out their sentiment on the global economy and fundraising.

Here are some of the findings: • PE investors are less optimistic about the global economy than they were six months ago. Only a quarter (23%) believe that the global economy is improving, down from 46% in April.

• The majority of PE firms (89%) and companies (85%) expect the current global economic landscape to persist for up to two years.

• Seventy-five percent of GPs say the fund-raising environment will improve or remain the same globally over the coming year.

• The current view on fundraising is more optimistic than last year with 33% of respondents indicating their expectations have improved in the last year. Forty-two percent say those expectations have remained the same.

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Image source: E&Y

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QUOTE OF THE WEEK: LOTS OF M&A TALK, LITTLE ACTION

“This is the busiest slowdown in M&A activity I’ve ever seen...”

Who said it: Steven Baronoff, global head of M&A at BofA In Context: Speaking at Bloomberg’s Dealmakers conference, Baronoff said that while banks are able, ready, and willing to finance deals, the hold-up is CEO’s concerns about the US economy, the debt crisis in Europe, presidential elections and the economic slowdown in China. According to mergermarket data, US M&A volume is down 8.4% year-on-year through October 25.

Where we found it: Forbes

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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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