DealMarket Digest Issue 29

DIGEST

29

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 29

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Credit Crunch for PE-backed Companies • Data shows upcoming trends

Top Five M&A Deals in 2011 in MENA • Industry association reports growth despite political unrest in the region

KKR Poised for Mega LBO • Co-investment with Itochu for oil industry target

It’s All in The Branding: New Study • Dealmaking and branding ability required

LPs More Open to PE • Improvements in 2011 and 2012, Says Preqin

Harvard Sell Off Quote of the Week • Profit with a purpose fund’s quick fundraising

November 24, 2011

DATA REVEALS POTENTIAL CREDIT CRUNCH PE-BACKED COMPANIES PE owned companies have USD 270 billion in loans due by the end of 2015, according to an article in Reuters, citing data from Thomson Reuters LPC/DealScan. The result could be more IPOs as companies seek to refinance debt. But PE-backed floats are not necessarily going through due to the gap between sponsors expectations of the value of assets and what investors were willing. Only a handful, including 3i's Norma Group, have succeeded, says Reuters. It is particular tough for companies that are seen by investors as “overleveraged.”

TOP FIVE M&A DEALS IN 2011 IN MENA M&A activity in the MENA region has seen some large sized transactions this year, despite the political unrest in the area, according to the latest issue of the Zawya Monthly Private Equity Insight, which covers the PE industry in the region. The largest deal was an oil industry transaction at USD5.7 billion. It is large but not as large as this week’s giant US pharmaceutical industry M&A transaction, the USD 11 billion price that Gilead is offering for control of Pharmasset, which several Hep-C drugs in its pipeline, according to the WSJ. .

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KKR POISED FOR MEGA LBO The largest deal of the week is an oil industry buyout involving KKR and Japanese multi-industry conglomerate Itochu, according to Reuters, which cites unnamed sources for the news. At a value of about USD 7 billion, the deal would involve the purchase of Samson, which operates a large number of oil wells in the US. Itochu, which deals in a range of industries from energy to insurance, and it would take 25 percent stake in the consortium, with KKR holding 60 percent. Other PE investors that might be involved in smaller stakes are NGP Energy Capital Management and Crestview Partners.

NEW STUDY REVEALS GROWING IMPORTANCE OF PE’S BRAND IMAGE The chief executive of one of the UK’s largest pension schemes is quoted in an article published on FN this week, saying that “PE works because of brand”. It sensitized us to a new report about branding trends in PE published by BackBay Communications and Pitchbook. The FN article said that established or well-branded PE firms attract rich dealflow and investors try to get into those funds. As for the study, it surveyed 256 private equity professionals, limited partners, investment bankers, intermediaries, lawyers and consultants in the PE industry in the US and Europe to discover their attitude and approach to branding.

It found that almost all, 99%, viewed a PE firms brand as “directly linked” to success. Insiders say that the model has evolved from being all about to dealmaking to one where a strong brand is “absolutely essential”. As a result, the money spent on branding is on the rise. Over half (52%) of those questioned said they had increased their investment in marketing materials, including their website, in the preceding 12 months. Some 26% had increased their investment in public relations and 37% in investor relations in the same period. In the next 12 months, this is set to increase further, with 54% planning to invest more in their marketing materials and website, 53% to invest more in investor relations, and 41% to invest more in public relations. The most important audiences are LPs and target portfolio companies at 78% and 68% respectively. The media is the least important audience at 19%.

One interesting point to note, the same one that PEI’s editors picked up on in their weekly Comments section, which reviewed the study, is that unlike other industries, such as consumer electronics and leisure, when it comes to PE, social media does not play a role at all in branding. A full 69% of those surveyed don’t use it at all.

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PREQIN SAYS INVESTOR SENTIMENT IMPROVING TOWARDS PE

Preqin published an extensive report on first half 20011 PE activities. The report surveyed 100 LPs and it says that investors are “gradually regaining confidence in the asset class”. It may not necessarily mean a return to the same pace as years prior to the downturn, but fund managers “should be encouraged” that the number of investors looking to make commitments is steadily improving. Although the market remains challenging in 2011, says Preqin, signs are good that fundraising is picking up. Indicators are as follows, by the end of Q2 2011, 311 funds had closed during the year so far, raising an aggregate of USD 141.8bn, which represents over half the overall USD265.7bn raised by funds that closed in over the course of 2010.

Slightly more than half of LPs surveyed expect to make additional new commitments before the end of the year (see Fig. 1). A further 15% of LPs planning to make their next commitment at some point in 2012. Another good sized number will make investments on an opportunistic basis if an attractive opportunity arises.

Preqin asked the group of LPs planning to make new fund commitments how much capital they plan to commit to new opportunities in 2011 compared to 2010. Almost 50% said they plan to commit more capital to funds this year than they did in 2010 and an additional 39% plan to commit the same amount of capital (see Fig. 2.)

Reasons for increasing the pace of new commitments in 2011 were varied, says Preqin. A number of LPs replied that it is about the quality of funds coming to market in the next few months. They have seen an increase in the number of “good funds available” in the market, particularly in the form of re-up opportunities. And one UK-based pension fund manager told the researchers : “The number and quality of funds on offer are much better than in 2010.”

Image source: Preqin

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HARVARD PE ASSETS SELL OFF Harvard University is in the market to sell about USD1.5 billion of PE holdings in order to cut investments that contributed to record losses three years ago, reports BW. The US university has a USD 32 billion endowment. The stakes that are for sale are mainly in US buyout funds through UBS AG. It is already taking bids on about USD500 million in energy investments through Cogent Partners, according to the article. The management’s goal is to free up cash and exit funds the school no longer wants. All of the holdings sales are expected to be launched by December.

QUOTE OF THE WEEK

“There are a lot of investors that are in interested profit-with-a-purpose. But there are not a lot of such qualified private equity funds.”

Who said it: Jim Roth, Partner and Co-Founder of LeapFrog Investments, which just raised USD137 million fund to invest in insurance funds in Africa and Asia.

Context: Roth and his partners have has done a rare feat. They raised a new PE fund, a first time fund, during one of the toughest economic situations we’ve faced in years, and it was a socially oriented fund to boot. Leapfrog belongs to a new “social-purpose asset class” that aims to generate profits for investors but also to lift millions of people out of poverty, no small task. His investment vehicle is said to be the largest investor in microinsurance worldwide. When Roth made the above statement, he was speaking to Bloomberg about Leapfrog’s fundraising effort and how he was able to achieve it. Some of those investors that are interested in profit with a purpose are J.P. Morgan, TIAA-CREF, Proparco, and Waterloo Foundation Where we found it : Bloomberg

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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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