DealMarket Digest 27

DIGEST

27

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 27

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IPOs Swing Back To The West Cleantech Investment Still Strong

World’s Largest M&A Deals in October How PE Funds Adapt to Fundraising Challenges • Survey by SEI reveals trends and solutions

Mixed Signals About European PE • Survey by BDO UK reveals investment bankers’ view

Rebound in Australian PE Market • Strong buyouts but VC weakening

PE Exits: Global Trends Regional Variance • Grant Thornton’s latest PE survey

Quote of the Week • Venture Philanthropy

November 10, 2011

IPO ACTIVITY PICKS UP IN THE WEST A handful of IPOs, including a successful floatation for Internet startup Groupon is still no cause to expect the IPO window to open again say industry observers in article in The Fiscal Times. Dealogic reported there are 31 technology companies hoping to raise USD4.5 billion in the next six months, and 200 companies in total waiting for their cue.

Dealogic’s chart of the week is showing a global swing back to the West for equity fund-raising and away from emerging markets, as reported in Beyond Brics, an FT blog.

RECORD QUARTER FOR M&A AND INVESTMENTS IN CLEAN ENERGY Despite Europe’s troubles with Greece and a slump in clean energy share prices, the third quarter exhibited a surge in financing for wind farm and solar power plants, as well as M&A activity, according to BNEF. Asset finance of utility‐scale renewable energy projects, such as wind farms and solar parks, jumped to a record USD 41.8bn. Most notable was the asset finance figure for offshore wind, with investment secured for three large offshore wind farms in the North Sea, totaling more than 1GW in capacity and USD6.3bn in investment. There were also big financings for photovoltaic, solar thermal and biofuel projects in the US, for a geothermal installation in Indonesia, and for onshore wind projects in Brazil and China. Overall financial new investment in clean energy – including equity raisings on public markets and from venture capital and private equity funds was UDS 45.4bn, up 9% on the second quarter of this year and 16% ahead of Q3 2010. The record quarter for financial new investment remains Q4 2010, at USD51.5bn. BNEF said the investment of this sort contrasted “vividly” with the performance of clean energy share prices, which fell by some 35% during the quarter.

BIGGEST M&A DEALS IN OCTOBER 1) Kinder Morgan-El Paso 37.9 billion* 2) Takeover of Dexia by Belgium USD5.35 billion 3) Statoil-Brigham Exploration 4.67 billion 4) Universal Cargo Logistics-First Freight Co. (Russia) 4.1 billion 5) Cigna-HealthSpring 3.9 billion All figures in US Dollars. Source: Dealogic via Deal Journal WSJ blog

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PE FUNDS ADAPT TO CHALLENGES

There is a trend among PE firms to increase transparency and decrease fees to attract and retain skeptical investors, according to the latest survey by SEI Private Equity Part III, which surveyed 411 institutional investors, consultants, and fund managers. Several obstacles face fund managers, so they are making changes to better serve clients and attract capital.

Before reading on, here is a bit of background on how representative the survey was. Just under half of the survey participants are based in the United States. Another 30% are domiciled in Europe while Asia, Latin America, Australia, and Africa represent the remaining 21% of the survey universe.

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Key takeaways • Outside of investment performance, getting investors comfortable with their infrastructure was named the single biggest challenge • Providing satisfactory attribution data and effectively educating clients also pose challenges to many managers.

• A third of those with USD 5 billion or more in assets, chose “other” when asked to name their greatest challenge in satisfying clients. Some examples of “other” include, convincing investors that a portfolio is making progress despite relatively few exits, trying to convince investors that large funds are not necessarily superior to smaller ones, and persuading investors that professional management of private equity investments has value and is worth the cost.

• More than 60% of fund managers have increased transparency in their reporting, while almost half have introduced graduated fees based on the amount of capital committed • Reducing the length of lock-up periods is less popular, even 28% of investors identify it as the factor most likely to appeal to them as they consider increasing the size of their allocation.

• Graduated fees are highly attractive as a tradeoff for larger allocations by public pension plans, FOFs, and corporate investors, while foundations and endowments favor transparency. Family offices are split between graduated fees and shorter lock-up periods.

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MIXED SIGNALS ABOUT EUROPEAN PE Reuters says that Apollo Global Management is eyeing opportunities in Europe after posting losses, particularly in the assets of cash-strapped European banks. That might be a future opportunity. In the meantime, Europe has the dubious distinction of having a “record number” of M&A deals withdrawn in the year to date, according to data provider Dealogic, representing USD 130 bn in deal volume and 293 deals, reports efinancialnews. “Europe is now the leading target region for withdrawn M&A, accounting for almost a third of the total number of pulled deals globally, again a record high.”

When it comes to M&A, one aspect that has kept the market somewhat active has been cash-rich Japanese companies looking to do expansion acquisitions, despite the financial crisis. Japanese companies have boosted M&A interest in Europe, according to the FT. Four out of the 10 largest outbound acquisitions by Japanese companies from January 2011 to October 2011, were of private equity portfolio companies.

Elsewhere the WSJ sees cause for concern about the Eurozone because buyout fund manager Vestar, which manages USD7 billion, is “rationalizing” its business by closing offices in Munich and Paris. Over the past two years, the New York-based reduced staff by almost 50 percent by reductions in offices outside the U.S.

AUSTRALIAN PE GROWING QUICKLY

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Private equity and venture capital fundraisings in Australia, as well as investments and divestments have grown over the past year. The latest analysis of annual industry data from the Australian Private Equity and Venture Capital Association (AVCAL) Yearbook is reporting that the amount invested by PE and VC fund managers in Australian companies is the highest in the past three years at AUS 3.6 billion dollars.

Mind you. over 40 percent of the amount invested went into one deal (Healthscope). The number of companies acquired in the current fiscal year is at 150, which is the lowest in recent years. More capital was raised but by fewer fund managers, which AVCAL describes as signifying a period of “consolidation” within the industry. At the same time there has been an increase in the number of exits and many of them have generated “excellent” returns. The importance of foreign capital is increasing what with half of all new commitments to Australian fund managers sourced from overseas. After three years of consecutive declines in PE and VC fundraising, total commitments increased by 72% year on year. Source Graphics: AVCAL Yearbook 2011

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PE EXIT ACTIVITY GLOBAL TRENDS

Grant Thornton LLP’s latest Global PE trends study shows that IPOs remain a viable option in parts of Asia. However, this channel has been all but closed for some time in Europe and the USA. Overall public investor sentiment and desire to invest might be the issue in some regions, but the perception of private equity has also acted as a particular brake on the IPO option in some countries largely due to perceived pricing issues, according to the report. The return of strategic buyers has boosted exit activity even if it is a bit of a double-edged sword because it increases competition for buyout funds.

Secondary buyouts will remain popular, says the survey. Practitioners are aware of the need to provide a clear rationale for such deals in order to convince investors that “they are not just fuelling an internal market” in private equity assets, but they have become an established feature of the developed markets. And even in the more growth-oriented emerging markets they are also gaining significance. Image source: Grant Thornton, A Force For Growth 2011

QUOTE OF THE WEEK “Even a sewer grid could be sexy with the right billionaire's name attached…”

Who said it: Charles Landow, Associate Director, American Council on Foreign Relations Context: Venture philanthropy is gaining ground in Europe and N. America. So it is not surprising to read an opinion piece in the WSJ, titled How Billionaires Can Build Bridges to the Middle Class. Two directors of the American Council on Foreign Relations make the pitch that America’s superwealthy should consider a new target for their philanthropy: public works, instead of libraries or university research labs with their names on them. The readers’ comments published in blog form, more than 60 of them, summarily slammed the idea, which probably says more about the type of reader more likely to write a comment on a blog than the soundness of the idea itself, we’re guessing.

Where we found it: WSJ

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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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