Dealmarket Digest-08

DIGEST

08

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 08

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The Fittest PE Fund Managers

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Road to Positive Returns

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• A Darwinian List of PE Fund Managers • Future competitiveness ranking based on current strengths and weaknesses.

• Bain& Co on Consumer Goods and PE returns

Ex-CEO’s Enter buyout Business • Star-studded PE firms

M&A Dealflow Flat in 1st Quarter • Intralinks’ Deal Flow Indicators latest report

PE Reaching New Highs • PE Index maintained by PEGC reports growth

Eastern European PE Recovery • Confidence drives dealflow

Quote of the Week • Gentlemen’s clubs as barometer

May 20, 2011

THE FITTEST PE FUND MANAGERS

Darwin said that the fittest survive and thrive, and when it comes to PE the fittest fund managers in 2011 are Silver Lake Partners, Warburg Pincus and Nordic Capital, according to an empirical analysis

by Paris’ HEC School of Management Professor Oliver Gottschalg. The second annual fitness study identifies fund managers most likely to outperform over the next fund cycle. Gottshcalg uses data from DowJones’ databases, and draws on a long-running academic study into PE performance drivers. Some of the criteria used include “Scale of Current Activities”, “Ability to take advantage of cheap debt”, “Market Timing” and so on. Because the methodology and weighting underlying the scoring is quite transparent, it is worth keeping an eye on to see just how accurate such criteria turns out to be for predicting returns and success in buyout markets.

ROAD TO POSITIVE RETURNS IN THE CONSUMER GOODS SECTOR Buyout funds are eyeing opportunities in consumer goods. Nearly every major PE firm has been active in the sector, says Bain & Co. in a new report. There are plenty of opportunities to invest as major consumer packaged-goods companies are restructuring and refocusing, and divesting nonstrategic businesses, says Bain. For example, Kraft Foods's announced sale of its frozen pizza division was part of the company's post-merger portfolio rationalization preceding Kraft Food's 2010 acquisition of Cadburys. Examples analyzed in the report include Orangina, Waggin Trails and Bumble Bee Seafood. The case studies show the creativity and strategic thinking required to make such a PE investment a success, and also highlight some of the pitfalls to be avoided.

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EX-CEO’S ENTER BUYOUT BUSINESS The FT reports that Clayton, Dubilier & Rice’s appointment of former Tesco-CEO Sir Terry Leahy is the PE firm’s second such move, as it also works with Jack Welch, the former General Electric chief executive on board. It is a growing trend of corporate bosses semi-retiring into the private equity space as firms aim to bolster their operational expertise in the wake of the economic crisis, says PEI. Another recent example was Bridgepoint’s hiring for its advisory board Sir Stuart Rose, the former CEO of Marks and Spencer.

Appointing heavy-hitters, like former prime ministers and vice presidents, to senior advisory roles has long been a trend at some of the bigger and internationally active PE firms. And in the venture capital world, it is common to recruit

GPs that have had great success as entrepreneurs.

But in PE that has not been as prevalent, until now, so it is not really proven. The FT addresses that point. It says that hiring corporate stars is not necessarily risk-free. There’s a danger of having a team with too many chiefs. “The last thing you need is five CEOs all trying to be alpha,” says one expert quoted in the text.

Another suggested the topshots might be too far removed in time from production and operations, says another person quoted, “[They] won’t have been at the coalface for a long time.

Moreover, they’re not used to working for someone else and not necessarily used to the purely financial focus.”

M&A DEALFLOW FLAT IN 1ST QUARTER Growth was flat in quarter to quarter for global M&A transactions, but it is still greater than the same period last year, according to Intralinks’ Deal Flow Indicators latest report. The causes for a tempered growth rate were listed by Intralinks. On the one hand, improved valuations for stock market equity keeps the M&A levels high, and on the other hand, uncertainties caused by debt concerns, high prices in commodities market and consumer growth rates keeps dealmaking moving at an accelerated pace.

- North America: 12% increase in Q1 2011 from Q4 2010.

- Latin America: 1% decrease in Q1 2011 from Q4 2010.

- EMEA: 8% decrease in Q1 2011 from Q4 2010.

- Asia Pacific: 22% decrease in Q1 2011 from Q4 2010.

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PE REACHING NEW HIGHS As the graphic here illustrates, PEbacked IPOs reached a record dollar amount in the first quarter. It was due to increasing public equity investor appetite and the growing number of private equity firms that hope to exit investments made during the 2005-2007 period. This is just one of several metrics referred to in PEGC’s latest PE Index report, which points out that the sector is reaching new highs, but uncalled capital remains a concern.

EASTERN EUROPEAN PE RECOVERS The FT has an update on private equity in central and eastern Europe, reporting that confidence is again close to pre-crisis levels for PE dealmaking. The market is emerging from low levels of activity following the crisis, but terms are tougher and funds are more cautious, says the report. There was a noticeable increase in deal newsflow with USD 1.2bn in volume in the first quarter of 2011, compared with USD 2.4bn in the whole of 2010, the Emerging Markets Private Equity Association.

The article highlights some recent large deals in Poland, a PE hotspot. It is in contrast to Russia which so far has not attracted PE at the same rate and how the government is attempting to remedy the situation. It is an informative article to learn more about the variance between these two large Easter European economies.

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QUOTE OF THE WEEK

Quote of the week: "You're always going to get some haters for our business but I'd invite any critics to come to our clubs, talk to our staff and see for themselves what we're about.“ Who said it: John Specht, UK VP of lap-dancing chain Spearmint Rhino Context: After several years of losses in the UK market, Spearmint Rhino, an American-owned lapdancing chain, is expanding its UK business. At least one of the reason for optimism among managers of such clubs is that spending is on the up again by financiers and bankers, according to this article in the Guardian in February. Specht’s quote above was published in a Scottish newspaper where it is currently fighting for a license in Glasgow, Scotland. He has been profiled in several other business titles as part of his company’s latest public relations efforts.

Where we found it: The Herald Scotland

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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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