DealMarket Digest_Issue 82

DIGEST

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SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 82

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Endowments and Pension Funds Still Liking Alt Asset Class

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Towers Watson’s Top Five Predictions for Global M&A Market in 2013

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India’s Biotech Sector Potential is USD 100 in Next Twelve Years Dell LBO’s Big Buzz Tectonic Shift and a 10X Exit for European Venture Capital Quote of the Week: Google’s Larry Page on 10X

February 08, 2013

ENDOWMENTS AND PENSION FUNDS STILL LIKING ALT ASSET CLASS

Image source: NACUBO

Several articles this week report on the preferences for alternatives and private equity as expressed by pension funds and endowments. They are still putting money into PE, it seems. The top 200 pension plans are benefitting financially from alternative investments, according to Pensions & Investments latest retirement plan survey, although the survey results noted a decrease slightly in some of the PE categories, with buyouts increasing by 4%. The article said that private equity's share of assets was down 60 basis points to 9.4%. The WSJ says that US endowments are still increasing their allocations to PE on a steady basis. They are allocating about 54% on average to alternatives, which includes private equity (see image). Another study reported by Reuters says that pension funds in Australia, Canada, Japan, the Netherlands, Switzerland, Britain and the United States have upped alternative investments, including property, hedge funds, private equity and commodities, from 5 to 19 percent since 1995. The funds add riskier, higher-yielding assets to portfolios to compensate for shortfalls in funding. Britain has increased its exposure to alternative assets the most, from 3 to 17 percent, followed by Switzerland, Canada, the United States and Australia.

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TOWERS WATSON’S TOP FIVE PREDICTIONS FOR GLOBAL M&A MARKET IN 2013 It is still the season for prediction. This week, we learn that Asia Pacific is still strong in M&A, but European-initiated deal volume won’t be. These are just two ideas developed in a good article from Towers Watson.

Key points in the top five predictions • The Asian market will continue to grow, led by Chinese and Japanese firms.

• Chinese firms to Acquire in Europe in a big way. Expect some big-name companies to be targeted by cash-rich Chinese organizations.

• European deal volumes to remain subdued. 2012 was bad for European acquirers and 2013 volumes are unlikely to show much improvement.

• Surge in late 2012 is not a trend that will continue. Despite the large number of transactions completing in the final few weeks of the year, this is more likely to be a rush to the finish line for existing deals rather than signaling an upward trend.

• North American stability to continue. Not much change expected in M&A in North America during the first half of 2013, but there may a surge in activity if the economic conditions continue to improve and confidence grows.

INDIA’S BIOTECH SECTOR POTENTIAL IS USD 100 IN NEXT TWELVE YEARS

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Image source: ABLE Indian Biotechnology Roadmap to the Next Decade and Beyond

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India has a wealth of intellectual capital in biotechnology and healthcare to be developed, and its government is aiming to create a framework to develop it, according to The Hindu Business Line, which could be good news for private equity investors. As a reference, the article points out that Singapore’s Tamasek doubled its assets under management by investing in high tech industries. India could emulate such strategy for the kind of investment involved in growing it biotech sector into a USD 100 billion one by 2025.

DELL LBO’S BIG BUZZ The deal of the week is the USD24.4 billion take private of Dell by Silver Lake, a deal which also involves Microsoft Corp. The announcement adds details to our earlier coverage of the rumor in a digest last month. The size of the deal is mind-boggling after the smallness of LBO transactions since late 2008. As a result, it has everyone from CNET to Reuters as well as the PE trade press writing about it. If you are curious about the Silver Lake partner who is behind the deal, Egon Durban, see the WSJ’s Private Equity Beat short feature on him. Information on the advisers and some details are on PE Hub, and some analysis of the debt implications are provided by two Bloomberg writers here.

TECTONIC SHIFT AND A 10X EXIT FOR EUROPEAN VENTURE CAPITAL

Image source: Go4Venture

Go4Venture’s latest research says there’s a “tectonic shift” in European venture. Deal value has been increasing over the past three or four years, but the number of deals is down, illustrating the shift in the venture market.

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The key points are highlighted below: • Venture financing and venture capital are separating into two distinct fund categories • VCs have largely deserted early-stage and are now focusing their attention on expansion capital.

• High risk/high reward, early-stage investment is being left to business angels, governmentsubsidized funds, and a handful of the larger VCs which can afford to subsidize this largely moneylosing activity to feed their larger later-stage funds.

• December’s activity reflects the trends state above with five late-stage and five Series B transactions – no real Series A. • Trivago was acquired for EUR 0.5 billion by Expedia, for an estimated 5x historical revenues. The analysts estimate that the deal was a ten-bagger for Trivago’s investors. “A trade sale over EUR 100mn is not that common in European venture, so a deal of half a billion euros and a ‘ten bagger’ is an exceptional event,” writes Go4Venture. (This editor adds that a 10-bagger in VC is an exceptional event anywhere, including Silicon Valley) • The implication of the exodus from European VC is that the first steps of any company will have to be bootstrapped, funded by family, friends and fools or simply by the founders themselves. And even internet companies need to have market traction before VCs are prepared to commit.

QUOTE OF THE WEEK: GOOGLE’S LARRY PAGE ON 10X

Image source: Google Jobs website

"Page expects his employees to create products and services that are 10 times better than the competition. …

Thousand-percent improvement requires rethinking problems entirely, exploring the edges of what’s technically possible, and having a lot more fun in the process.”

Who said it: Steven Levy, Wired magazine In Context: When private equity experts talk about a ten-X deal, it means one thing but when Larry Page, CEO and cofounder of Google, talks about ten x or ten times better, he’s describing the high goals he sets for Google’s product and R&D teams. The “moon shot” kind of activity is underway at Google, according to a Wired profile of Page by Steven Levy this week. In Page’s view, a ten percent improvement means that a company is doing pretty much the same thing as everybody else. It might not be a fail strategy, and yet it is not going to be a great success-story either. It is the philosophy behind the search giants R&D effort, Google X, which is running projects on a self-driving car, a wearable computing system and an “artificial brain”, in which a cluster of computers running advanced algorithms learn from the world around them, much like humans do.

Where we found it: WIRED

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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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