DealMarket Digest_Issue 72

DIGEST

72

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 72

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How PE Can Tap Family Offices for Capital • Grant Thornton Report

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Are Secondary Markets Here to Stay?

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Will the US Election Have an Impact on PE?

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China’s Biggest Buyout Underway

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Gottschalg Finds the PE High Performers for 2012

• PEI Answers the Question

Ancestry.com Buyout Price Too Low, say Shareholders

• Latest Rankings

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Quote of the Week: Single Family Offices Worth Knowing

November 09, 2012

HOW PE CAN TAP FAMILY OFFICES FOR CAPITAL

Image source: Grant Thornton

As a result of a survey that found that single family offices (SFOs) are “eager” to build up their allocations to private equity, Grant Thornton issued some guidelines on fundraising and targeting SFOs. The aforementioned survey found that during the first quarter of 2012, nearly 90% of SFOs are expected to increase their dollar investment in private equity over the next three years. The figure is impressive considering that 109 of the SFOs surveyed were already investing USD 8 billion during 2009.

(Only 30 out of the 139 SFOs that responded were not investing in private equity at this time.) The report is a good one and worth reading. Here is just a small example.

Key criteria for an SFO decision on GP investments identified by Grant Thornton.

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Appropriateness for the family’s portfolio Expertise of the professional investors Track record Significant financial commitment by the professional investors Reputation of the financial institution

ARE SECONDARY MARKETS HERE TO STAY? Last week we reported E&Y’s extensive research on the current, apparently, high price tag for an IPO. A healthy and accessible IPO market is important for PE exits, and of course, for the growth of companies of all kinds. This week a high profile VC investor in the US presented his view of one answer to E&Y’s findings. In a Venture Capital Dispatch (Dow Jones) interview, Tim Draper explains his views on the need for secondary markets as opposed to - or complementary with - more highly regulated exchanges for capital raising and investor liquidity.

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Their emergence is no doubt part of a bigger trend that towards greater use of online processes and tools in the PE industry, so we digested it this week.

Xpert Financial, one of the electronic secondary markets that started up to compete with the higher profile SecondMarket, is currently “retrenching” after gaining some traction on the back of the Facebook IPO. Some of its key execs are moving to a new startup, CapRally that aims to automate individual portfolio company fundraising. Draper is the backer of both companies. He says that Xpert Financial [and by extension all secondary markets] have a “huge” market and are able to relieve major “pain points” around capital raising and liquidity. He said that the regulatory landscape shifting in their favor, such as the JOBS act, which is expected to grow the market for such exchanges.

Image source: secondmarket.com

Xpert is now trying to form a consortium of six to eight of the top VCs to become members, just as groups became members of the NYSE in its early days, says Draper. His pitch for CapRally is that it offers an online system for deal flow management. The offer is compelling, he said, because it helps with sourcing dealflow and sourcing investors by managing the relationships. “I think it can actually help me with all my fundraising for all my portfolio companies,” said Draper.

WILL THE US ELECTION HAVE AN IMPACT ON PE? A feature article by US-based correspondent for PEI says the answer to the question how could the US Election change private equity is “yes”, and it offers five areas to watch in the coming years. The question comes up as a result of media spotlight thrown on PE during the election campaigns in light of Mitt Romney’s Bain Capital background.

CHANGES TO THE TAX TREATMENT OF CARRIED INTEREST Democrats may have gained public support and the confidence to tax carried interest at a higher rate if tax reforms are undertaken by the US congress.

CHANGES TO THE TAX TREATMENT OF DEBT Obama announced plans to limit the deductibility of interest payments made by corporations, which could be “bad news” for private equity investors, says the article because the new tax liability costs would eat into returns.

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A MORE INTELLIGENT DEBATE ABOUT JOB CREATION The controversy over claims by Mitt Romney about PE’s contribution to employment growth encouraged the industry to get some positive messages out about its jobs record. The PEI articles cite only one example of a new source of statistics, the PEGCC (Private Equity Growth Capital Council) which is a US-based advocacy group for the PE industry.

A MORE ACTIVE ROLE FOR BIG LPS During the election several big name limited partners came to the defense of private equity, describing how its returns outperform other types of investments which benefits all kinds of pension funds and endowments. This endorsement had a “great effect”, according to PEI. The hope is that more of the larger LPs will speak out on behalf of the industry in the coming years.

MORE (AND BIGGER) POLITICAL DONATIONS The 2012 election opened the door for private equity to give. Changes in political donation regulation encouraged PE executives to who in some cases donated as much as USD 1 million to the political action committees (PACs). Some of the Romney-friendly PACs raised more than USD 9.6 million from individuals employed by private equity or venture capital firms like Sun Capital, Bain Capital and Kohlberg Kravis Roberts. PEI says expect more generous support for friendly politicians in the future.

CHINA’S BIGGEST BUYOUT UNDERWAY This week’s deal of the week looks to be a USD 3.7 billion buyout of Chinese advertising company Focus Media Holding (FMCN), making it China's biggest leveraged buyout to-date, reports Dow Jones Newswire. In August Carlyle Group made the take-private offer. In the meantime several banks have emerged to finance the offer, including Bank of America Merrill Lynch, Deutsche Bank AG, UBS AG, Citigroup Inc., Credit Suisse Group AG and Singapore bank DBS Bank Ltd. The six banks plan to provide a total of USD 1.65 billion.

ANCESTRY.COM BUYOUT PRICE TOO LOW, SAY SHAREHOLDERS Two weeks ago we highlighted Permira’s bid for Ancestry.com in the deal of the week. In the meantime, it looks like the USD 1.6 billion price that Permira offered may be notched a bit higher as a group of shareholders demand a higher per share price, according to Bloomberg.

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GOTTSCHALG FINDS THE PE HIGH PERFORMERS FOR 2012 Prof Oliver Gottschalg’ annual HEC study ranks TPG Capital as the world’s top-performing large private equity firm, according to efinancialnews. Hellman & Friedman, ranked second and distressed investment specialist, Oaktree Capital Management, came in third. Europe’s Nordic Capital came next.

Midmarket top spot goes to Friedman Fleischer & Lowe, a US buyout firm, and SCF Partners, based in Houston, Texas, was ranked top-performing in the small fund category.

The HEC methodology measures the performance of each fund managed by a general partner based on six performance indicators and it also aggregates performance of GPs independent of the vintage years of the underlying funds. The firms are ranked alongside their peers (based on size, rather than sector or geography). Fund sizes are based on fundraising figures provided by Preqin.

QUOTE OF THE WEEK: SINGLE FAMILY OFFICES WORTH KNOWING “Institutional investors are not going away, but it’s critical for fund managers to constantly develop new relationships in order to ensure they can raise fresh capital.

SFOs can be a good source of capital for funds. They are worth getting to know.”

Who said it: Kevin Hudson, Grant Thornton LLP’s national Private Equity managing director.

In Context: The quote is inside a report entitled “Raising capital from single-family offices: Perspectives for private equity firms and investment bankers” issued by Grant Thornton (and digested in this week’s newsletter) He says that it is not new that SFOs invest in PE, rather what is new is that GPs and funds are seeing the benefits of raising capital via SFOs. For example, while the larger institutional investors have strict guidelines to follow, SFOs have more flexibility with their investment choices — making them all the more attractive as LPs. An institutional LP may have a mandate to invest in a fund that will purchase U.S.-based middle-market companies, while an SFO can decide to invest in a fund that will purchase U.S.-based middle-market companies as well as make growth or mezzanine investments.

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Where we found it: Grant Thornton

www.DealMarket.com/digest

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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