DealMarket Digest_Issue 79

DIGEST

79

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 79

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M&A Trend: ESG Risks in Targets Can be a Dealbreaker

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The Biggest Dealmakers in Private Equity

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Clean Energy Investment Declining: Bloomberg Explains Why Mega Buyout in the works for Dell?

Weil’s Predictions for 2013 Quote of the Week:

A PE View on Technology Deals Growth and Leverage

January 18, 2013

M&A TREND: ESG RISKS IN TARGETS CAN BE A DEALBREAKER This week we found an interesting result from a survey by the United Nations-backed Principles for Responsible Investment Initiative (PRI), reported in AI CIO online. A large majority of corporate buyers of private equity portfolio companies said that poor performance on environmental, social and governance (ESG) factors affected their decisions to buy the company or prevented the entire deal. The survey shows that over 80% of companies had reduced the valuation of an acquisition target or not gone ahead with a deal because of poor performance on ESG factors, while 75% said poor performance in this area had prevented a deal from taking place.

Image source: UNPRI

The majority of companies, 63%, think that there has been a large increase in the influence of ESG factors in transactions in the last three years, and 75% perceive that there will be a large increase over the next three years (see figure above).

The article points out some recent examples of how ESG is affecting PE markets, such as Cerberus Capital Management’s decision to sell its investment in gun manufacturer Freedom Group in reaction to children being killed in shooting incidents during school hours, and CalSTRS decision to sell off investments in manufacturers of firearms that are banned in its home state of California. The PRI commissioned PricewaterhouseCoopers to conduct a survey of 16 companies to assess the attitudes of trade buyers of private equity companies, evaluating ESG risks and opportunities in their M&A activities. According to the article, the PRI has seen growing interest from private equity companies in ESG issues and now counts over 150 GPs and more than 130 LPs as signatories. You can download the report from the UNPRI site here.

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THE BIGGEST DEALMAKERS IN PRIVATE EQUITY Citing Preqin’s latest data Assets International CIO magazine said this week that Carlyle was the biggest dealmaker in 2012. (Preqin has a blog entry on the topic here.) The Carlyle Group dominated global PE with 48 acquisitions totaling USD26.87 billion, which was 10% of the industry’s total 2012 deal value. Second in the ranking was Apollo Global Management, which invested half of amount that Carlyle did. The article quoted William Conway, Carlyle Group’s co-founder and co-CEO, in a Q3 earnings call on November 8, speaking about this firm’s strong activity. He said, “First, we have a larger corporate private equity business than many of our peers… [which enables Carlyle to] find investments, where others can’t. And our experience gives us the comfort to pursue investments where others won’t.”

Carlyle also reportedly can get better debt rates.

The third most active PE group was Blackstone Group, doing 33 deals across a variety of industries in 2012, worth a total of $13 billion. Riverstone Holdings and Advent International were fourth and fifth.

CLEAN ENERGY INVESTMENT DECLINING: BLOOMBERG EXPLAINS WHY Despite ongoing innovation, such as Alstom’s recently marketed ECO 100 wind turbine shown here that can power 2000 homes, the appeal of clean energy investments has declined in the past two years. The PE and VC contribution to overall investment is currently running at USD 5.8 billion for solar, biofuel, wind and smart-grid startups worldwide last year, according to data from Bloomberg New Energy Finance (BNEF). In a fairly lengthy feature on news of declining clean energy investments, Bloomberg cited recent BNEF data and described the current state of the market for PE investors.

Here is a quick summary of the text:

Image source: Alstom

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• Investment activity declined for the second year in a row, since peaking in 2010 • Losses due to changes in the investment case for solar cell production is one reason • VCs are looking for the next hot spot as wind, solar, and light emitting diode (LED) deals lose their appeal • Cutbacks in government subsidizing of renewable energy is a factor, as is the fact that • Fewer entrepreneurs are seeking capital

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• Difficulty with exits is another, but it is not all bad news as • Industrial investors, such as Shell, continue to pump money into startups through corporate venturing activities, and • Warren Buffett’s holding company invested in solar plants in California

MEGA BUYOUT IN THE WORKS FOR DELL?

Image source: Dell.com

This week’s deal of the week could be a big one if it comes to pass. Several news sources reported that Dell, the company founded by Michael Dell (pictured here) who still owns 16% of the computer and hardware company, is in talks with PE players for a possible mega buyout. Investors Daily reports that the stock price jumped on rumors of the potential multi-billion dollar buyout, and Bloomberg broke the news in report that said Dell is discussing going private with TPG Capital and Silver Lake. Dell’s market cap is about USD 19 billion.

WEIL’S PREDICTIONS FOR 2013 Legal firm, Weil offers its predictions for 2013 in its Alert newsletter that we read and summarized here for you. The above graphic provides quick overview of 2012 activity. The list below is from the Weil forecast for the year.

Image source: created by Dealmarket Digest

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• Expect deal volume to be slow in the early months of 2013. The macro environment for private equity continues to be strong. Debt is available for buyouts.

• Expect more secondary LBOs. There will be willingness to sell from 2005, 2006, and 2007 vintage funds that are winding down. secondary LBOs. • Try Aisle 6 – We expect continued diversification by sponsors, with certain sponsors providing “onestop” alternative asset hopping to the LP community.

While some sponsors are rapidly becoming alternative asset supermarkets, others are dipping their toes into the pool of diversification by expanding into credit and other funds.

• Passing the Baton – As the industry matures (and its founders continue to age), succession issues will continue to be a major focus of sponsors as well as the LP community. According to Coller Capital, 73% of LPs are focused on succession issues at the sponsors where they invest.

• Continuing Need for Private Equity – We expect the private equity industry to continue to survive

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QUOTE OF THE WEEK: A PE VIEW ON TECHNOLOGY DEALS GROWTH AND LEVERAGE Because we invest in middle market tech companies, typically growth is our primary driver. Then there is an operational or strategic angle. Both come well ahead of leverage. Leverage is usually low on the list, behind those other factors. In fact, 50% of our investments have no leverage.

Who said it: Ajay Shah, Managing Direct of Silver Lake Sumeru, the part of the US-based technology oriented PE firm that invests in mid-market deals.

In Context: Shah is talking about mid-market deals here and how Silver Lake goes for returns based on steep growth potential and less on leverage. The article also provided his views on what are the hot areas for growth style investment, such as the storage market, including storage management, cloud based storage and solid-state storage. Less interesting is consumer electronics because he believes the sector offers fewer opportunities to create a new brand. Silver Lake is one of the few large-sized PE firms that is specialized in technology buyouts. It was in the news this week as it is rumored to be in talks for a take private of Dell, the US-based PC and computing company.

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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