DealMarket Digest_Issue 80

DIGEST

80

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 80

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Zephyr Says Global PE Activity Was Up in 2012; Deals Down

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Quote of the Week:

Europe’s Next Billion Dollar VC Exit M&A Activity Forecasts for 2013 • KPMG

Do Fees Match Performance?

• TorreyCove Capital Partners

Secret Success Factors for Family offices • NZZ

PE Growth

January 25, 2013

Still Lots of Room For

ZEPHYR SAYS GLOBAL PE ACTIVITY WAS UP IN 2012; DEALS DOWN

Image source: Zephyr

The latest figures from Zephyr’s research team reveal that global private equity investment grew for the third consecutive year in 2012, as the graph above shows. The value of deals done increased and is the highest recorded since 2008, but the total value is still significantly down on the pre-financial crisis investment peak.

The size of deals is up, which means that the actual number of deals fell for the second successive year to just 3,785 deals from 4,033. All of the top 20 deals by value were greater than USD 2 billion, accounting for 26 per cent of the total value global private equity investment in 2012. The largest was the USD 10.7 billion acquisition of Singapore based beverage-to-real estate conglomerate Fraser and Neave by a consortium comprising Farallon Capital. US and Canadian targets accounted for 11 of the top 20 deals in 2012.

EUROPE’S NEXT BILLION DOLLAR VC EXIT Magister Advisors, an investment banking boutique, says in IPTV News that there is a next wave of European tech companies maturing into high value businesses. Its list includes Shazam (which IPTV says has big ambitions for the TV market), Rovio (developer of the Angry Birds franchise), Wonga, a personal and business loans site, Klarna (e-payments), and online food deliveries platform Just-Eat.

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The momentum has been building for several years, according to a Magister press release. European exits had a value of around USD 15 billion against USD 30 billion in the US. The VC-backed technology exits in Europe in 2009-10 were remarkable compared to the US because they delivered half the amount of money but with one fifth of the capital resources. Funds invested in VC in the US amounted to USD 25 billion while in Europe it was only USD 6 billion.

M&A ACTIVITY FORECASTS FOR 2013 The latest heads up research for 2013 says that M&A activity is expected to remain stable, with a possible slight improvement in the coming year.

According to a recent survey conducted by KPMG LLP and SourceMedia, the publisher of Mergers & Acquisitions magazine, the responses of more than 300 M&A professionals at U.S. corporations, PE firms, and investment funds about the expected activity for 2013 revealed that despite economic challenges, dealmakers are cautiously optimistic and the vast majority of them said that they will be pursuing acquisitions this year.

Image source: KPMG

Selected Findings • According to 60 percent of the M&A professionals, companies’ large cash reserves will drive deal activity and 40 percent acknowledged favorable credit terms as a supporting factor.

• Opportunities in emerging markets will also be a catalyst for deals, said 26 percent of respondents.

• Primary reasons for making acquisitions varied among the survey population, with 20 percent of respondents reporting that expanding geographic reach would be their primary motivator, while 19 percent cited a quest for profitable operations, followed by 17 percent who anticipated making acquisitions in order to enter a new line of business.

Elsewhere KPMG said that M&A in 2013 will likely be characterized by those companies looking for longterm opportunity.

• Deals will be smaller and more strategic, as companies fill product gaps and seek new market opportunities.

• Ongoing European instability may also present opportunities for US buyers with healthy balance sheets. If a resolution is reached around the fiscal cliff and there is more stability in the Eurozone there could see a real spark in M&A activity in 2013.

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DO FEES MATCH PERFORMANCE? In an article on PI Online, TorreyCove Capital Partners said that there does not “seem to be a bankable relationship” between management fees and performance. Just looking at fees, thinking that the higher they are the better the performance might be, misses the point with private equity, says the report.

First of all most funds, including those with higher fees, performed well enough to cover the higher fees. But TorreyCove's research found a “slight negative correlation” between management fees and performance. The snapshot of a pool of 200 hundred fund revealed that the worst-returning group, with an average performance of -8.64% as of June 30 charged higher management fees than the middle-performing group and the highest-performing group — with an average return of 25.7% — had an average management fee of 1.677%.

SECRET SUCCESS FACTORS FOR FAMILY OFFICES

The NZZ had a feature this month on the secrets to growth in wealth amongst Family-Offices. We read it because it highlights where the world’s wealthiest are investing for returns during the current slump.

Here is our summary of the German article, which referenced several different experts as sources.

Selected Findings • Stocks, real estate and private equity are tops • Industries such as Energy, Healthcare, Biotech are favored, as are • Emerging markets

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PE Manager Gets Creative to Find the Exit in Current Slump Bloomberg reports that Standard Chartered, the British bank said its private equity business is exploring “creative” exit options in the Middle East and North Africa after share markets slumped, making trade sale and IPOs more difficult. To avoid being in a position six or seven years into an investment with no exit in sight, the bank will try to be creative. One tactic might be a sale back to the company and another might be the conversion of equity into debt or a preferred dividend, he said.

QUOTE OF THE WEEK: STILL LOTS OF ROOM FOR PE GROWTH “People ask .. what's the most important thing that you've learned over time from private equity? … it has been and I think it will continue to be a people business. It's about relationships. It's about contacts.

It's about being able to do business with people. That is still, I think, a very important component of the business.”

Who said it: Russell Steenberg, Managing Director, Global Head, BlackRock Private Equity Partner In Context: The above quote was Russell Steenberg’s view on the most important thing he’s learned about PE in 28 years. Another equally interesting idea presented in the interview is that his company sees growth ahead for PE. He said that there is more money chasing public securities in the world today than there is in the private equity world. And yet the number of private companies that exist in the world today is far greater than the 40,000 or so publicly tradable companies globally that his research team has tracked. So PE has only “scratched the surface” on private equity, he said. This does not mean that PE is not highly competitive or that there is more capital available for it than before. But relative to the other markets and the other choices people have to put their capital in, it is still small and has lots of room to grow. BlackRock manages USD 100 billion in assets Where we found it: Privcap

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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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