Dealmarket Digest 20

DIGEST

20

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 20

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VC Veteran Perkins On Value Creation

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EY Reveals Exit Trends in 2010

• Return to the roots

GP Fees Exceed Carry • Research reveals why LPs request reduced fees

PE Surges in Latin America • Brazil’s rapid growth draws PE

SEB Neutral on Private Equity • Returns not what they used to be

PE Firms Feel Fallout of Arab Spring • Turmoil slowed fundraising

Carlyle IPO Attracts Analysis • Observers discuss timing

• IPOs and Secondaries were favorite exit strategy

Quote of the Week • Buyout strategies for Yahoo

September 15, 2011

PERKINS SPEAKS OUT ON VC STYLES VC industry pioneer, Tom Perkins, co-founder of Kleiner Perkins Caufield & Byers, who is well-known for early investments in tech giants such as Genentech, Google, Tandem, and AOL, is quoted as saying that to make outsized returns VCs should shun cleantech, because of its dependency on government policies, and instead scour universities for technology that can be commercialized, according to Wall Street & Technology. This is the original style of investing that made KPCB’s name in the industry. The retired Silicon Valley icon states a common point of view amongst the top VC firms, that is, that there is too much money chasing too few companies and that only the strongly branded and established VC firms will survive in tough, highly competitive times.

GP FEES EXCEED CARRY In research exclusive to PE Manager magazine, private equity scholar Oliver Gottschalg and Bernd Kreuter, head of alternatives at Feri Institutional Advisors, found that management fees do in fact account for a significant portion of GPs total compensation. The problem with that is that GPs will be more concerned about their ability to raise a next fund than with extracting the highest returns on investment, namely earning carried interest. It is not news to some prominent LPs who no longer accept uniform fees, says the report. For example, New Jersey’s pension fund and the California Public Employees’ Retirement System have won fee concessions from GPs that will save them tens of millions in fees.

PE SURGES IN LATIN AMERICA According to the latest data from Latin America’s PE association, fundraising is breaking historical records, and exits are surging ahead. Funds raised grew by 59 per cent in the first half of the year compared to last year, to USD 4.9 billion. Exits also surged in 1H 2011, surpassing all of 2010, with 33 PE-backed exits valued at $8.9bln. Strategic sales dominated the exit market. Capital committed is heavily weighted towards Brazil with 67 percent of the total raised for funds dedicated to that market. The growth rates in the Brazilian economy, shown in the two graphs above, from another source, show why interest in that country is on the rise. It is an investor’s dream: decreasing unemployment and increasing GDP. Image Source : PineBridge

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EQUITY INVESTING NOT WHAT IT USED TO BE, SAYS SEB A refreshingly frank Investment Outlook report for the month of September from SEB private banking this week said that equities and PE still have the best potential for returns with one to two year perspective, but the “risk level is rising”. For that reason, the bank has a neutral call on both types of equity investment. The report goes on to say that the old "buy and hold" strategy is no longer valid.

Today’s volatile stock markets and associated risk are should give investors cause to pause. SEB said that so-called truths, for example that global equities always return 7 to 8 per cent annually, are “gross simplifications and to some extent pure lies” and “unreasonably” long periods of time for such adages to prove correct. Image Source: SEB Investment Outlook Sept 2011

PE FIRMS MULL FALLOUT OF ARAB SPRING The Arabellion is not necessarily good news for PE investment in Gulf States, according to a report in Financial News. Middle Eastern private equity executives were not very optimistic at a conference in Dubai this week, saying that fundraising is at a low and so is investor confidence due to political upheavals across the Middle East and North Africa region. The Middle East private equity industry had hoped that the impact of the global financial crisis would swing back this year, but regional political upheavals, including the toppling of former regimes in Tunisia and Egypt, served to delay the improved investment conditions. Only eight private equity and venture capital deals were closed in the Middle East during the first seven months this year, according to Al Masah Capital in the FN report.

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DISSECTING THE CARLYLE IPO In the first week of September, Carlyle Group announced its IPO. Since then some of the world’s leading financial papers have been dissecting it. The latest to do so is The Economist. The report points out that timing is not that great, PE stocks are down by a whopping 41 percent on average, from their highs earlier this year (see table). So why would Carlyle push for an IPO now? The Economist suggests there could be a method in its madness.

Blackstone went public at the top of the market, only to see its shares languish afterwards. If Carlyle goes public at a low its shares could rebound with the market and it would benefit from that seeming achievement. Furthermore, Carlyle could be pushing the IPO at this time so that changes to the tax treatment of private-equity firms, which could be off putting to shareholders in a publicly traded partnership. Image Source: Seeking Alpha

EY REVEALS PE EXIT TRENDS IN 2010 Strong IPO flow and secondary buyouts drove the recovery of PE asset class in 2010, according to a report out this week from Ernst and Young.

The study examined exit activity in 2010, finding that overall exits increased sharply over the volumes recorded for 2008 and 2009. It showed that activity almost doubled, with 57 exits last year, compared with thirty or so in each of the previous two years. The graph here shows exit strategy comparisons and the recent growth in IPOs and secondaries compared to other exit strategies. Image Source: EY

QUOTE OF THE WEEK “Despite having virtually no enterprise value, Yahoo maintains a $17 billion market cap due to its Asian assets and cash...”

Who said it: J.P. Morgan analyst Doug Anmuth Context: Earlier this year there were reports that PE firms might make a bid for digital media giant Yahoo. Now talks of M&A and even a PE buyout are in the news again. Anmuth discussed the arguments from the private equity view, saying that they would have to find a strategic party for the Asian assets.

Where we found it : Marketwatch

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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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