PEI March 2009

INTERNATIONAL www.peimedia.com / march 2009 / issue 73

Will the biggest GPs be cut down to size? – p.26

funds of funds Answering the critics

Over-commitment strategies Too much of a good thing

Plugging the gaps Mezzanine reaches Central America

Ambition in Milan Clessidra targets top spot

Strategic shift PIPE deals in the Middle East

Going down under Global woes reach Australia

And now for the bad news Why GPs shouldn’t hide the truth

Our voice will be heard LPs get organised

Looking for bolt-ons Q&A with Chris Watt, ECI

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editor’s letter

Commitment issues

march 2009 ISSUE 73 ISSN 1474–8800

It seems appropriate, measured against the descent of the global economy, that limited partner liquidity constraints have deteriorated from “we can’t invest as much as we would like to” (denominator effect) to “can we please invest less than we agreed to?” (over-commitment strategy). As we report in the following pages, over-commitment is a talking point: perhaps it may now even be hailed as private equity’s latest buzz-phrase.

The issue came to the fore with the travails of SVG Capital, the London-listed funds of funds manager which invests primarily in funds managed by buyout house Permira.

Following negotiations between the two firms, Permira agreed to release SVG from 40 percent of its agreed commitments to the Permira IV fund.

As it transpired, SVG was far from the only listed private equity vehicle to have to wrestle with this kind of issue – as Toby Mitchenall reports in the In Europe column on page 20, Candover Investments and others have had to confront similar difficulties. Nor is it necessarily the fault of these groups that they had such strategies in the first place. True, not all over-commitment strategies looked exactly alike and some may have been a little racier than others. Nonetheless, the reasons for implementing them appeared sound at the time: few could have predicted the set of circumstances within which their viability is now in shreds.

For all listed funds of funds, the renewed focus on the certainty of their capital commitments may have been uncomfortable. Arguably even more so were the strongly worded remarks about funds of funds attributed to acclaimed Yale endowment chief investment officer David Swensen (see page 50). In this month’s cover story (see our series of features beginning on page 49), we explore whether the rationale for investing through funds of funds remains as compelling – or even more so – in today’s environment.

This issue of PEI also features a fascinating comparison of the top ten global private equity firms in 1998 and 2008 respectively (see page 26). The survey reveals that, while it is possible to retain your place in the top ten over a decade, it is also possible to take a franchise from a position of strength and – most likely through a number of misjudged investment decisions – end up destroying it. Food for thought for today’s GPs. Enjoy the issue Andy Thomson andy.t@peimedia.com

Funds of funds cover story page 49

Are funds of funds still in demand?

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COVER STORY

FUNDS OF FUNDS Intelligent or ignorant?

50 Do funds of funds represent ‘ignorant capital’ or do they still have a key role to play in the private equity industry?

54 When bundles collapse With their exposure to high-net-worth individuals, how much of a default risk is represented by feeder funds?

Having second thoughts 57 Funds of funds are eyeing the undoubted potential of the secondaries market, but appear to be holding back for the time being. We examine the reasons why

26 Special report: Which empires are crumbling?

In periods of uncertainty, private equity empires might fall.

We look back over a ten-year timeframe and discover that some GPs lose their shine – and their place at the top table

Contents features

42 Privately Speaking Clessidra chairman and chief executive Claudio Sposito has a new-found passion for toys – as well as making his Milan-based private equity firm the number one GP in Italy. Andy Thomson catches up with the former chief executive of Silvio Berlusconi’s holding company 59 The Peracs Private Equity Barometer The Barometer, which measures the current attractiveness of private equity investment, finds better prospects for returns today than halfway through last year

North America Europe Asia MENA Sub-Saharan Africa Latin America

13 21 29 32 34 36

6 First Round Could baseball be the key to it all?; Stephen’s sartorial advice; Buffalo, sold ya; A Terrible idea; PEI’s highly subjective top ten (fund marketing jargon); Private equity haiku of the month

news

regulars

63

PEO: Behind the headlines Commentary on the month’s hottest stories from PrivateEquityOnline.com

64

Head of Business Development Jeff Gendel Tel: +1 212 633 1452 jeff.g@peimedia.com

Kevin Ley kevin.l@peimedia.com

Cezary Podkul cezary.p@peimedia.com

Christopher Witkowsky christopher.w@peimedia.com Editor in chief Philip Borel Tel: +44 20 7566 5434 philip.b@peimedia.com Head of Marketing Paul McLean Tel: +44 20 7566 5456 Paul.m@peimedia.com Head of Design and Production Tian Mullarkey Tel: +44 20 7566 5436 tian.m@peimedia.com Group Managing Director Tim McLoughlin Tel: +44 20 7566 4276 tim.m@peimedia.com

Asset Class 40 How limited partners are making their voices heard; Why some US pensions are staying with private equity through thick and thin

On the Record Chris Watt, ECI

Contributors Matilda Battersby matilda.b@peimedia.com

Suzanne Weinstock suzanne.w@peimedia.com

Venturescope 38 Venture capitalists get touchy-feely; a firm finding better ways to treat a serious disease; pessimism rules in the fundraising game

62

Head of Advertising Alistair Robinson Tel: +44 20 7566 5454 alistair.r@peimedia.com

Toby Mitchenall toby.m@peimedia.com

Asia Monitor 28 Australian GPs have benefitted from a long run of economic success. How will they cope now darker clouds are gathering?

LP Profile Quartilium

Executive Editor David Snow Tel: +1 212 633 1455 david.s@peimedia.com

Amanda Janis amanda.j@peimedia.com

In Europe 20 Over-commitment strategies are currently mired in controversy – but it’s worth remembering that criticism comes with the benefit of hindsight

60

Co-founder Richard O’Donohoe Tel: +44 20 7566 5430 richard.o@peimedia.com

Jennifer Harris jennifer.h@peimedia.com

12 Stateside It’s time for a bad news day: why GPs that come clean may further their reputations at the expense of those that don’t

Open and Closed

Editor Andy Thomson Tel: +44 20 7566 5435 andy.t@peimedia.com

Published by PEI Media Ltd. LONDON Second floor, Sycamore House, Sycamore Street London ECIY 0SG NEW YORK 3 East 28th Street, 7th Floor New York, NY 10016 SINGAPORE 11 Stamford Road, #02-07 Capitol Building Singapore 178884 Subscriptions London: +44 20 7566 5444 New York: +1 212 645 1919 Singapore: +65 6838 4563 subscriptions@peimedia.com Reprints Fran Hobson +44 20 7566 5444 fran.h@peimedia.com Annual subscription UK £645 US/RoW $1290 EU €970 Subscribe online www.PrivateEquityOnline.com/pei PEI is published 10 times a year.

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© PEI Media Ltd 2009 No statement in this magazine is to be construed as a recommendation to buy or sell securities. Neither this publication nor any part of it may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system, without the prior permission of the publisher. Whilst every effort has been made to ensure its accuracy, the publisher and contributors accept no responsibility for the accuracy of the content in this magazine. Readers should also be aware that external contributors may represent firms that may have an interest in companies and/or their securities mentioned in their contributions herein.

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in this issue . . .

Companies 3i 24 ACG Private Equity 23 37 Advent International 52 Adveq Albion Ventures 39 36 Alta Growth Capital 58 Altium Capital Gestion AMP Capital Investors 17 Apollo Global 8,13,26,40,64 Management 45 Arca Impresa Gestioni Atlas Venture 17 Australia Venture Capital 28 Association Avista Capital Partners 14 23 AXA Private Equity Bain Capital 47 Bank of America Capital Investors17 23,24 Barclays Bank Blackstone Group 6,13,16 Bridgepoint 22 British Venture Capital Association39 California Public Employee's Retirement System 33,52 Canaan Partners 38 Candover Investments 20,22,23 Capital Dynamics 50 Carlyle Group 8,13,22,40,64 Carmel Ventures 33 Catalyst Investment Managers 30 CDC Group 30 Cerberus Capital Management 30,64 CHAMP 29,30 Citadel Capital 32 Citi Private Equity 16,64 Clayton Dubilier & Rice 27 Clessidra 42,44,45,47 Close Brothers 39 Coal Pension Scheme 40 Coller Capital 22 Credit Suisse 30,54 CVC Capital Partners 13 Deloitte 33 Development Partners International 35 DFG Investimentos 36 Dubai International Capital 32 ECI 63 EFG-Hermes 32 EMAlternatives 52 EMP Latin America 36 EMPEA 6,29 Ethos Private Equity 34 Evercore Partners 37 Evergreen Venture Partners 38 F&C Private Equity 20 FINAMA Private Equity 62

Fininvest 44 37 FIR Capital 14 First Equity Capital Fondinvest Capital 52 17 Forsyth Capital Investors 26,27 Frostmann Little GĂĄvea Investimentos 36 Global Investment House 32 22,35 Goldman Sachs 16 Graham Group Greenpark Capital 57 64 Gresham Private Equity 33 GSC Group HarbourVest 64 Hermes 40 64 HgCapital Hicks, Muse, Tate & Furst 26 Hilco Consumer Capital 8 Houston Firefighter's Relief and Retirement Fund 41 30 HSBC 37 Intel Capital Inter-American Development Bank36 International Finance Corporation36 16 JC Flowers JLA Ventures 38 JPMorgan Cazenove 20 Kayne Anderson Capital Advisors 14 Kentucky Retirement System 41 Keynote Ventures 38 Kingdom Zephyr 34 Kingsbridge Capital 22 Kleiner Perkins Caulfield & Byers 38 Kohlberg Kravis Roberts 6,13,14,26 Leapfrog Investments 35 Lion Capital 27 Lloyds TSB Development Capital 30 Loughlin Meghji 18 McLeodUSA 26,27 Morgan Stanley 16,44,57 NBGI Ventures 39 NBK Capital 33 Old Mutual Private Equity 34 One Equity Partners 14 Onex Corporation 14 Oregon Public Employee's Retirement Fund 33 Pantheon Ventures 20,58 Permira 20,22,53 Probitas Partners 18,58 RMB Ventures 34 Shuaa Capital 33 Silverfleet Capital 23 Squadron Capital 52 Standard Bank Private Equity 35,36 Standard Life European Private Equity 20 StepStone Group 13,17 STIC Investments 30 Sun Capital Partners 30

SVG Capital 20,53 30 Temasek Holdings 23 Terra Firma TPG 6,14,64 14 TPZ Group 50 Triago UBS 54 Unigestion 24,57,58 14 Vector Capital 14,26,27 Warburg Pincus Wellcome Trust 40 Welsh, Carson, Anderson 26,27 & Stowe Whitesmith Private Equity 23 WL Ross & Co 17

People Agnew, Ronan Alexander, Sarah Alfaro, Alfredo Asgeir, Jon Avidor, Itzik Bader, Hanspeter Barber, John Bennett, Jeff Black, Leon Bonderman, David Brolan, Kevin Brookout, John Brown, Chris Bryson, Bill Catalano, Manuel Centola, Eduardo Chan, Trevor Chang, Justin Chapman, Kyle Ching, Ho Coke, Robert Constantinide, Aris de Beer, Anthonie Deni, Sylvian DePonte, Kelly Dinte, Boaz DrĂŠan, Antoine El Khazindar, Hisham El Quqa, Omar Etlin, Patrice Fisher, George Flowers, Christopher Gallagher, Joseph Gonzales, Christopher Goodyear, Chip Grimaldi, Alessandro Groen, Marleen Hahn, Jeffrey Hands, Guy

30 6,29 37 6 33 57 16,64 30 8,13,40 6 41 14 20 14 45,48 36 30 64 17 30 40 39 34 32 18 38 50 32 32 37 6 16 30 41 30 45,48 57,58 16 23

Heikal, Ahmed Henebery, Mike Hicks, Thomas Huffington, Ariana Hyslop, Alan Jeramaz-Larson, Kathy Johnstone, Clint Kassamali, Reyaz Kato, Haru Kravis, Henry Kump, Eric Laib, Peter Lerner, Josh Lichtner, Katharina Livingstone, Elly Lorenzotti, Lorenzo Loughlin, Jim MacKenzie, Stuart Marmer, Craig Maurer, Klaus Mirani, Hemal Moriss, Nick Morland, Miles Moseley, Steve Nir, Ronen Onaghimon, Lloyd Papetti, Alessandro Peters, Michael Pierce, David Queen, Michael Ricatti, Matteo Rubenstein, David Sakai, Hirosuke Schoeter, Johannes Schwarzman, Stephen Segal, Rick Shay, Izhar Simons, David Singh, Vik Smoot, David Soulignac, Charles Sposito, Claudio Swensen, David Taleb, Nassim Thomas, Graham Turri, Giuseppe von Bismarck, Max Walker, Chet Wang, Kevin Watt, Chris Wolak, John Yea, Philip Yu, Xiayang

32 64 27 6 32 40 14 8 38 6 32 52,53 13,21 50 58 58 18 34 58 23 64 52 35 13 33 35 45,48 6 52 24 45,48 8,40,64 30 30 6 38 38 30 40 32 52 42 50 21 34 45,48 21 17 64 63 57 24 30

This announcement appears as a matter of record only.

January 2009

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A fund formed to invest in senior debt securities issued by media and communications companies.

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This advertisement has been approved solely for the purposes of Section 21 of the Financial Services and Markets Act 2000 by Credit Suisse Securities (Europe) Limited of One Cabot Square, London E14 4QJ. Š2009 CREDIT SUISSE GROUP and/or its affiliates. All rights reserved.

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quotables

first round

“Forty percent of the world’s wealth was destroyed in the last five quarters. It is an almost incomprehensible number.”

Stephen Schwarzman, chairman of The Blackstone Group, speaking at the latest World Economic Forum gathering in Davos, Switzerland

‘Bondo’: back on form after a dismal year

Could baseball be the key to it all?

Could it be that Bonderman is a leading indicator for Bonderman? A Google search reveals there are two notable Bondermans in the world: one is David Bonderman, the co-founder of private equity firm TPG; the other is Jeremy Bonderman, starting pitcher for baseball team the Detroit Tigers. No relation. Both are called “Bondo” by friends. The private equity Bonderman hasn’t exactly enjoyed a winning streak of late; the baseball Bonderman seems poised for a rebound after a season of hobbled performance.

Jeremy Bonderman had surgery last June to correct a circulatory problem that prevented him from fully controlling the ball. “My fingers were numb all the time,” he said of the 2008 season. Several months after the pitcher’s surgery, the private equity Bonderman would enter his own period of diminished velocity, with the collapse of portfolio companies Washington Mutual and Aleris International destroying some $2.13 billion in equity, while some LPs requested a downsized fund.

There is high hope among Tigers fans that Bondo’s recovery will be complete, allowing him to pitch the team to victory again this spring. His return may portend a TPG recovery. TPG fans are hoping that their own highly motivated Bondo will unleash his still-impressive equity firepower and return the firm to its former glory. I

Stephen’s sartorial advice

Schwarzman: upbeat

While attending the most recent World Economic Forum in Davos, Switzerland, blogger Arianna Huffington bumped into what she described as a markedly “upbeat” Stephen Schwarzman – a standout amid the mostly fearful financial types.

“You are walking with your head high,” she remarked. Schwarzman quipped: “I’m walking with my head still on. That’s the good news.” Huffington then asked when the recession would end. “Don’t hold your breath,” said Schwarzman.“And don’t buy new clothes.” I

“Will private equity get pulled in to some extent? No doubt. Will it go too far? That remains to be seen.

The pendulum usually swings too far one way and then comes back a bit.”

Also speaking at Davos, Kohlberg Kravis Roberts (KKR) co-founder Henry Kravis says regulation for financial institutions is “coming in a major way”

“People have at best a neutral and at worst a negative impression of what we do. We have a massive PR problem.”

KKR adviser George Fisher, speaking at the Columbia Business School Private Equity & Venture Capital conference in New York, says the industry has an image crisis and needs to do a better job of explaining the benefits it brings to the business world

“Private equity-owned businesses are a timebomb ticking under Britain’s economy and banking system. In good times, deals like these pick the pockets of British taxpayers because taxable profits are washed out by loan interest. In bad times…they put jobs in jeopardy because they have stripped away the safety net of assets and reserves built up over many years.”

Treasury spokesman Matthew Oakeshott of Britain’s Liberal Democrat party unwittingly backs up Fisher’s claims in an interview in the Guardian newspaper

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march 2009

quotables

“I analogise it to sex. You realise there were certain things you shouldn’t do, but the urge is there and you can’t resist.”

The Carlyle Group’s David Rubenstein admits to the Dow Jones Private Equity Analyst that the private equity industry got carried away during the buyout bubble years

Buffalo, sold ya US private equity firm Hilco Consumer Capital has teamed up with the family of musical legend and icon Bob Marley. Hilco stumped up $20 million, according to the Wall Street Journal, to buy half of House of Marley, a joint venture with Marley’s family to handle the singer’s licensing and retail ventures.

Marley’s image, which has been slapped on unauthorised merchandise all over the world since his death in 1981, will be fully licensed and attached to everything from footwear to food and video games to hotels.

It will be “a full consumer programme”, the firm said.

Marley: the new face of Stir It Up “The formalisation of approved and offiinstant coffee? cial Bob Marley merchandise will be supported with strong brand guidelines, managed by an internal Bob Marley brand team,” says Reyaz Kassamali, Hilco managing director and president of the House of Marley. “Our goal is to protect and enforce Bob Marley’s images and properties.”

The PEI branding team has formed a few ideas of its own. How about Could You Be Loved? dating agency, Jammin’ doughnuts or Stir It Up instant coffee?

I Shot the Sherriff branded prison-wear went on the ‘maybe’ list. I

A Terrible idea Design guru Michael Peters, the man who redesigned the UK Conservative Party logo in the 1980s, has gathered £10 million (€11 million; $14 million) for a private equity fund with a bit of swagger. Creative Capital Ventures only invests in business for which Peters is providing brand consultancy. If a company can’t afford Peters’s fees, they can sell him a slice of equity. Peters then works his magic, and reaps the rewards when the company grows. His first investment?

Russia’s Ivan the Terrible vodka. Perhaps having the words ‘terrible’ and ‘vodka’ next to each other on the label may need some careful handling… I

“The big public-to-privates are gone in the way of the dodo.”

At the Super Returns conference in Berlin, Leon Black, co-founder of Apollo Global Management, says his firm will use at least half of its recently closed $14.8 billion fund to purchase distressed credit products like senior loans

“Jon Asgeir was one of the few individuals who really tried to replicate the private equity model. He had joint ventures, he had shares, he had businesses, he had it all.”

An ‘associate’ of Baugur chief executive Jon Asgeir Johannesson quoted in a Sunday Times article following the collapse of the Icelandic group’s UK arm into administration. It had acquired a string of stakes in UK high street retail chains

“The bad news is that fundraising in 2009 will be much more challenging. Western institutional investors are grappling with their own asset allocation issues, and the globalization of the financial crisis will impact expansion plans into new markets.”

Sarah Alexander, president of the Emerging Markets Private Equity Association, speaking after the publication of figures showing that emerging markets private equity funds raised a record amount in 2008

Unlock the capital in your real estate Kronos Foods, Inc. IL

$32,500,000 January 2009

Frontier Spinning Mills, Inc. NC

$38,900,000 December 2008

LifePort, Inc. TX, WA

$8,000,000 December 2008

Nordic Cold Storage LLC GA

$6,800,000 December 2008

Actebis AG Germany

â‚Ź36,800,000 July 2008

Schoeller Arca Systems Germany, France

â‚Ź19,100,000 April and June 2008

W. P. Carey can provide the key Today, capital is scarce and credit sources are limited. With more than $500 million available for new acquisitions and over 35 years of sale-leaseback financing experience, we have the combination that works. W. P. Carey continues to make capital available to companies and private equity firms enabling them to maintain and grow their businesses.

For more information about W. P. Carey, please contact: Edward V. LaPuma s President, W. P. Carey International s T: 1-212-492-1119 s E: elapuma@wpcarey.com s www.wpcarey.com

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pei ’s highly subjective top ten: fund marketing jargon

I can’t believe you just said that Today’s limited partner is likely to take a highly sceptical view of the unreconstructed fundraising sales pitch. Below are ten unsophisticated lines that GPs might deliver carelessly, accompanied by the mental notes they ought to provoke in a world-weary LP 1. “We’re in the top quartile.”

It is hard to find a GP not in the top quartile, and this may be because getting there can be accomplished through statistical sleights of hand, such as excluding deals done by a departed partner, or tailoring the statistical sample to maximise relative performance (i.e., the top quartile for sub-$200 million growth equity funds based in Arkansas).

2. “We add value.”

The only thing rarer than a bottom-quartile private equity fund is a GP which claims to only pursue returns through financial engineering. A GP which thinks that the attempt to add value is some sort of differentiating factor has clearly not spent any time with other GPs. 3. “We have sector expertise.”

Guys – you’re supposed to have sector expertise. This is a prerequisite, not a badge of distinction. Should I be impressed that you don’t buy companies in industries you’ve never heard of? And by the way, having done one deal in the pipeline services space isn’t sector expertise. It’s on-the-job training paid for by the partnership.

6. “We’ve sized the fund to match the opportunity.”

That’s interesting – the size of the market opportunity seems to match exactly the soft-circled investor demand you measured during fund pre-marketing. It’s also notable that the investment opportunity has seemed to increase by 75 percent with each successive fundraising.

7.“There’s less competition at our end of the market.”

You either mean you’re so small that you pay lower multiples for your portfolio companies, or you’re so large that very few other players can write the kinds of cheques you do, or you’re so in the middle that the giants and Lilliputians never tread in your space. Whatever it is, may I ask: if your space is so great, why are you the only one in it?

8. “Unlike others, we avoided the excesses of the last bubble.”

Okay fine – you didn’t back Pets.com, start a CLEC or bundle Alt-A mortgages. But let’s go further. Did you do a dividend recap? Did you cease deal-making when purchase multiples rose above 7 times EBITDA? Did you turn away capital from LPs because you thought it would place you outside the space in which you built your track record? Did you not make hay when the sun shone?

4. “We have proprietary deal flow.”

Why am I suppressing the urge to make the four-finger “air quote” when you say “proprietary”? Do you buy companies from entrepreneurs who would prefer not to prioritise value?

Do you define “limited auctions” as proprietary? Does anyone actually participate in auctions?

9. “We’re targeting a paradigm shift.”

Should you be charging a management fee, since the paradigm shift is going to be doing all the work for you? Are you going to tell the seller about the coming paradigm shift or would that ruin the deal?

5. “We’re not smart enough to time the market.”

Finally - some humility. And yet this raises some important issues. You’re not smart enough to time the market, but have you been lucky enough? Your last investment cycle benefited from a massive swell in the stock market and an historic orgy of debt issuance. Please remind me again how you’ve added value? I also take it that any suggestion that it’s not the right time for a massive new fundraising will be quashed.

10.“We have a stable of operating partners.”

If I come to your office at 9am on a Monday, will the 70-year old retired CEO of ABC Industrial Corporation be at his desk banging through a P&L spreadsheet and then off to an afternoon flight to Kalamazoo, Michigan to recruit a regional sales manager? Or is this a guy with an excellent golf game who convinces his buddy at DEF Industrial Corporation to sell his ball-bearings division to you?

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Private equity haiku* of the month In the second of a series, PEI applies an ancient art form to a modern (private equity-related) setting: Here comes a large bus Filled with lawmakers, angry Push the hedge fund guy! *Haiku is a short, naturalistic form of Japanese poetry, which first began as a form of humorous light verse, known alternatively as haikai or hokku. It has three lines with 5, 7 and 5 syllables, respectively. I

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stateside

Licence to be bad These exceptional times allow GPs and LPs alike to make startling admissions and ask for unusual concessions. Those who withhold bad news do so at great peril david snow

GPs have what amounts to a get-outof-jail-free card in their hands – they get to write down the value of their portfolio investments to sickening levels and not be blamed for incompetence by their limited partners

david snow

Public relations experts will tell you (for a fee) that the best way to deal with bad news is to spill it all at once. Tell the full truth, blush and stammer, say how you’ve grown from the mistake, and then move on. Think Hugh Grant.

Of course, most doers of bad or stupid deeds never take this advice. Instead they pursue a communications strategy that gradually drags them down into the sludge, from which they find it hard to emerge. They stall and deny. They admit to a fraction of the mistakes and then watch in horror as the whole awful truth comes dribbling out with the aid of innuendo and rumour and in a manner that is beyond their control. A story that could have been a one-day headline becomes a monthslong feeding frenzy. Think Bill Clinton.

What better time to disclose bad news than the present? We are in the midst of a recession so bad that Wall Street veterans in their 60s claim to have seen nothing like it in their lives. People understand that bad news is supposed to happen in bad recessions. In this environment, they are willing to forgive most failures if the story is delivered with apparent candour and alacrity. But they will not forgive a cover-up.

In private equity, this expectation of the ugly truth applies most directly to reporting. Today GPs have what amounts to a get-out-of-jail-free card in their hands – they get to write down the value of their portfolio investments to sickening levels and not be blamed for incompetence by their limited partners. GPs that maintain Pollyanna views on their unrealised performance, meanwhile, will appear to be bluffing or worse.

But valuations are only a formalised piece of the overall LP-GP relationship. A number of LPs and their advisers have noticed a disconcerting “everything’s fine” reflex from some GPs, especially those managing the largest funds. It is one thing to express confidence in the future. It is quite another thing to appear to be in denial, as if decisions taken under your leadership in better times can’t possibly have gone sour. After all, those with preternatural faith in their own abilities eventually make disastrous investment decisions, exposed when the facts on the ground do not conform to the assumptions baked in the mind of the hubristic investor.

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The ongoing crisis allows PR cover for more proactive manouevres than telling bad news. Strategic GPs and LPs are asking partners for unusual changes or concessions that in any other environment would be considered embarrassing, even reputationdestroying. Take the phenomenon of the cash-constrained LP, for example.

It is well known that certain LPs are going to GPs and asking that commitments be reduced, or that capital calls be kept to a minimum. Less known is the degree to which cash-constrained LPs are favouring some GPs over others. After all, if you have a finite amount of cash to invest, rather than tell all your GPs that you need a 10 percent commitment downsizing, it is wise to instead tell your least-favourite GPs that you need a 50 percent downsizing, while maintaining full liquidity for the managers in whom you have the most confidence.

Likewise, GPs now have an opportunity to valiantly change economic terms that appear to be huge concessions to LPs, while in fact they keep the franchise alive. In particular, GPs are offering (or insisting on) fee-free life support to existing portfolio companies.

If history repeats itself, a major buyout firm will eventually announce that its current fund will free LPs of the remainder of their commitments, citing unfavorable market conditions. This is what venture capital firms did in the aftermath of the technology implosion.

It was on the face of it an exercise in high-touch investor relations. But in most cases it made economic sense for the GP. These were funds that were never going to generate carry. Better to give back the remainder of the dry powder and start afresh with a new, smaller fund than to continue investing from a hopeless pool of capital.

The bad news is that we’re in a severe recession. The good news is that bad news is easier to digest, and can often cloak changes that you wanted to make anyway. I

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A hard act to follow Why three large fund closings may say more about the past than the future While the recent closings of three buyout funds at around $14 billion each may seem to contradict the notion that the era of the mega-fund is over, managers raising funds in 2009 may well be disappointed if they think such numbers can be replicated.

The good news began on the last day of 2008 when Washington-based Carlyle Group closed its fifth buyout fund on $13.7 billion. London-based CVC Capital Partners followed in January with the announcement that its European Equity Partners V fund raised $14.4 billion, while New York’s Apollo Global Management (Apollo) scored the largest total of all with $14.9 billion for Apollo Investment Fund VII. Apollo founder Leon While such numbers look impressive, especially in the Black: in the money current market, they come with a few caveats. For one, both Carlyle and Apollo started fundraising in 2007 before markets collapsed last autumn, and while CVC began in 2008, fundraising numbers in Europe were bolstered by the weaker dollar. At the same time, all three funds fell short of their initial targets of over $15 billion.

“I would not attach a lot of significance to the fact that these funds have all closed recently, because it doesn’t reflect the reality that it’s a very tough fundraising market,” says Steve Moseley, president of California-based private equity adviser StepStone Group. “Well-known franchises with strong LP relationships and significant momentum prior to the meltdown are still able to raise the money, but others will have to work a lot harder to get smaller numbers.”

With that in mind GPs may have to reduce targets from previous fund sizes or else plan for a long road trip. “I think that small will be increasingly beautiful for groups and I suspect this will be a quasi-permanent change,” says Josh Lerner, professor of investment banking at the Harvard Business School.

New York buyout firm Kohlberg Kravis Roberts is currently seeking up to $10 billion for its new fund, half the total of its previous one, while alternative assets giant The Blackstone Group told investors that a $20 billion target for Blackstone Capital Partners VI is unrealistic according to media reports. I

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north america in brief cfos in fear of lp default A third of the roughly 200 private equity chief financial officers and chief operation officers at the Private Equity International CFO and COO forum in New York said they expected to see limited partner defaults in future, while 9 percent have recently experienced defaults by their LPs. According to the survey, 33 percent of respondents expected to see more LP defaults in the future; 38 percent did not; and 29 percent were not sure. tzp completes debut deal New York-based private equity firm TZP Group, founded in 2007, has executed its maiden transaction, investing $20 million in online marketing and production services company avVenta Worldwide. The firm, which looked at around 150 transactions last year, is raising an undisclosed amount for its first fund. warburg readies technology firm for add-ons Global private equity firm Warburg Pincus has made a $175 million investment in speech and image technology company Nuance Communications that will be used for future acquisitions. Warburg, which has a long

history of investing in technology companies, took a large stake in the company in 2005. onex cuts fund target Publicly listed Canadian alternative asset manager Onex Corporation is cutting the final target for its latest private equity fund, Onex Partners III, to $4 billion from $4.5 billion. The reduction is a result of the firm cutting its balance sheet commitment to the fund by $500 million from $1 billion, although it can increase its commitment in the future. vector capital buys software company San Francisco-based Vector Capital has agreed to take software maker Aladdin Knowledge Systems private for roughly $160 million at $11.50 per share.

Aladdin had previously rejected Vector’s unsolicited offer of $13 per share in August on the basis that it “significantly undervalue[d] the company and its prospects for the future”. kkr targets $4bn for infrastructure New York-based buyout firm Kohlberg Kravis Roberts (KKR) is reportedly targeting $4 billion for its debut infrastructure fund. Last May KKR made

tpg and gs capital make historic exit US private equity firms TPG and GS Capital Partners closed the largest-ever private equity exit with the $28 billion sale of wireless carrier Alltel to Verizon in January. The two firms, which purchased Alltel in June 2007, will make $1.3 billion from the deal.

Meanwhile, TPG announced it is cutting the size of its financial services-focused fund, TPG Financial Partners, which closed on $6 billion in 2008, by roughly $1.5 billion. The move was made in part to give some relief to capital-constrained limited partners.

Alltel: largest exit

public plans to launch a global infrastructure initiative, and has been building up its infrastructure team by adding, among others, Bill Bryson, John Brookout and Clint Johnstone as advisers. jpmorgan group invests in rural internet JPMorgan private equity unit One Equity Partners has invested $100 million in broadband company Open Range Communications, allowing the company to access $267 million in loans from the US Department of Agriculture’s Rural Development Utilities Program. One Equity recently saw an agreed deal to purchase TV Guide Network and TV Guide Online for $300 million fall through. avista-backed paper files for bankruptcy Avista Capital Partners-backed Star Tribune Co., which owns the Minneapolis Star Tribune newspaper, has collapsed into bankruptcy under a heavy debt load and dwindling sales.

Avista bought the Star Tribune, which at the time was the largest newspaper in the Twin Cities area of Minneapolis, for $530 million in March 2007. kayne holds initial close for fifth energy fund Alternative investment firm Kayne Anderson Capital Advisors has raised $700 million towards its $1.6 billion Kayne Anderson Energy Fund V, with a second close scheduled for the first half of the year. first equity to buy mortgages US private equity firm First Equity Capital is set to close its debut fund on $100 million in the next three months.

The fund, established in 2008 by First Equity Mortgage and home insurance firm new Vision Title, will buy pools of badly performing mortgages.

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north america

Run off the road Will US President Barack Obama’s proposed federal infrastructure reinvestment bank risk sidelining private investors?

While Barack Obama has said that his proposal to increase public funding for US infrastructure projects such as road construction could help stimulate the economy and create up to two million jobs, there are fears that his plans could also crowd out private investment.

Obama has backed a measure initially proposed by senators Chuck Hagel and Christopher Dodd in 2007 to create a National Infrastructure Reinvestment Bank that would use $60 billion in federal funds over the next 10 years to lend to government entities for investment in projects such as roads, bridges, power plants and schools. A recent report by industrial market research firm SBI estiObama: betting big mates that up to 29 percent of the $60 billion will go on infrastructure towards paving roads throughout the country.

This could result in a profound effect on infrastructure investing in the near term, says Jeffrey Hahn, managing director and chief financial officer of Morgan Stanley Capital Partners and Morgan Stanley Infrastructure Partners. “There are certain asset classes within the infrastructure sector where the government provides a much cheaper source of capital, so why would some borrowers come to an infrastructure fund if they could go to this bank?” asks Hahn.

One of the areas where the impact is likely to be most evident is public domain assets such as roads that are owned and controlled by governments, which in many cases will be looking for cheaper financing. However, for privately held assets such as utilities and pipelines whose owners will not have similar access to government funding, private infrastructure investment funds will likely see better opportunities.

Morgan Stanley insists Obama’s proposal will not alter its investment plans this year. The firm closed its latest infrastructure fund on $4 billion in 2008 and won a $1.2 billion deal to operate Chicago’s metered parking system for the next 75 years. Hahn says infrastructure is still an attractive sector in the current environment, with pensions continuing to express interest due to steady returns in the mid-teens. “There’s a lot of infrastructure opportunities out there, so I don’t think there is a market concern about finding deal flow and places and assets to invest in,” he adds. I

flowers targets troubled banks J Christopher Flowers, the head of eponymous private equity firm JC Flowers, said at a conference in New York the firm was targeting troubled financial institutions in line to receive assistance from the US government.

Flowers has already been part of a consortium that completed one such deal – the $13.9 billion buyout of mortgage lender IndyMac. z capital collects $100m Z Capital Partners, a Chicago-based alternative asset manager, held a first close on $100 million for its debut private equity fund to invest in midmarket distressed and turnaround situations. The firm is targeting $500 million in total and hopes to reach that goal by year’s end. Z Capital was founded by James Zenni, co-founder of Black Diamond Capital Management. blackstone, hicks agree to deal termination provision The Blackstone Group and Hicks Acquisition, a special purpose acquisitions company, have changed an agreement to take Graham Packaging Holdings public in order to make it easier for either side to terminate the deal. Hicks agreed to purchase Graham in partnership with Blackstone and the Graham Group, the Graham family’s private equity firm, for $3.2 billion in July 2008. barber leaves citi private equity John Barber, head of Citi Private Equity, has decided to leave the firm after nine years leading the private equity unit. The unit deploys capital from Citi’s balance sheet as well as third parties to make private equity fund commitments, mezzanine and non-control direct private equity investments.

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north america in brief $283 million, short of its $400 million target. The firm, which closed its seventh fund on $385 million in 2006, initially went to market with a $500 million target early last year. louisiana sheriffs backs off from private equity The $1.5 billion Louisiana Sheriffs’ Pension and Relief Fund has decided to avoid committing to private equity until the markets show signs of improvement. The pension had been considering making a foray into the asset class, along with an allocation to real estate, but appears to have lost interest for the time being.

Ross: opened bank account

wl ross targets banking assets Buyout firm WL Ross & Co. has agreed to purchase more than 68 percent of First Bank & Trust Co, a Florida-based bank with $83 million in assets. Chairman Wilbur Ross has said he will look at other possible banking acquisitions once the deal receives regulatory approval.

amp capital hires stepstone Australian investment manager AMP Capital Investors has hired Californian private equity adviser StepStone Group to manage and advise its Future Directions Private Equity Funds to help the firm take advantage of opportunities to buy discounted assets. The fund offers investors a “single access point” to a combination of global investment managers and a diverse mix of asset classes.

atlas closes fund viii on $283m Atlas Venture, an international earlystage investor in technology and life sciences, has closed its eighth fund on

boa vets launch $100m fund Forsyth Capital Investors, led by former Bank of America private equity veterans, has launched a $100 million debut fund focused on investments in manufacturing, business services and distressed and turnaround opportunities. The firm is led by Chet Walker, founder of Banc of America Capital Investors, and Kyle Chapman, another Capital Investors veteran. calstrs loses desrochers The head of private equity for the $119 billion California State Teachers’ Retirement System, Réal Desrochers, has retired. Two of the pension's four alternative investments portfolio managers, Margot Wirth and Seth Hall, have been named interim co-directors until CalSTRS finds a permanent replacement, a spokeswoman confirmed. Hall joined the US public pension in 1999, while Wirth was hired in 2000. Executive search firm Korn/Ferry will conduct a global search for a new head of private equity. I

the decline of debt

Debt to Equity Multiple at Purchase

In the first half of last year, debt multiples in buyouts had tumbled back to their 2003 levels after reaching a peak in 2007 8 6.9

7 6

5.7

6.2 5.4 4.7

5

4.6

4.2

4.1

4.0

1999

2000

2001

4

5.3

5.4

2004

2005

4.9

4.8

3 2 1 0 1996

Source: Standard & Poor’s

1997

1998

2002

2003

2006

2007

As of June 30, 2008

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north america

Fast forward to liquidation Portfolio companies hoping for Chapter 11 protection are increasingly being thwarted. Christopher Witkowsky reports require what’s known as a debtor-in-possession (DIP) loan to help fund operations while under the shelter of Chapter 11 protection. But DIP lenders have pulled in their horns, according to Kelly DePonte, a partner with San Franciscobased placement agency Probitas Partners.

“DIP is very hard to get and some companies that tried to do a Chapter 11 had to change to a Chapter 7 [liquidation] because they couldn’t get DIP,” DePonte says.

Recent legislation hasn’t helped. Rules added to the US bankruptcy code in 2005 force companies to make decisions about leases 210 days after filing for bankruptcy, which many experts say is not enough time for a company to decide what stores it wants to keep and which to close down.

Distressed investors expect to see many more bankruptcies in 2009 as lenders apply greater pressure on underperforming companies. Industries especially prone to distress in the US, such as retail and automotive, will see many companies fall into Chapter 11. The International Council of Shopping Centers is predicting that as many as a further 73,000 retailers in the US may close in the first half of this year on the back of 148,000 store closings in 2008.

Private equity firms are now looking for ways to help portfolio companies restructure heavy debt loads without going into bankruptcy, or at the very least helping them prepare for a bankruptcy filing, according to Jim Loughlin, principal and managing director defaults set to soar of restructuring firm Loughlin Meghji.

Over the past year, more private equity At best, S&P is predicting that the US corporate default rate will rise to the highest firms have reached out to restructuring level since 2002 – at worst, it could be substantially higher than the 1991 level advisers for assistance on positioning their 20 Pessimistic 18.5% --companies for the downturn, Loughlin says.

(278 defaults) He adds that the company works with Forecast for Fall 2009 firms on cutting costs and streamlining oper15 Baseline 13.9% ations but also helps them identify attractive (209 defaults) add-on investment opportunities.

10 Optimistic 10%--“To the extent that firms are comfortable (150 defaults) with their liquidity, they can bolt on some Long-term average 4.34% acquisitions and add value in an otherwise 5 depressed marketplace,” Loughlin says. “If they have capital to deploy and feel good 0 about the long-term prospects of the 1/31/1982 1/31/1985 1/31/1988 1/31/1991 1/31/1994 1/31/1997 1/31/2000 1/31/2003 1/31/2006 1/31/2009 industry, there’s a lot of opportunity availSource: Standard & Poor’s Global Fixed Income Research; Standard & Poor’s able.” I CreditPro

Bankruptcy will become, if it hasn’t already, a constantly nagging thought in the minds of private equity general partners as distressed portfolio companies find it harder to meet their debt obligations in an increasingly harsh trading environment.

Ratings agency Standard & Poor’s latest default outlook report is predicting a corporate default rate among speculative-grade companies in the US of 13.9 percent by December 2009 – an all-time high. The current highest level of such defaults was 12.5 percent in 1991.

“Funding will be rationed towards more creditworthy borrowers at the expense of those at the lowest end of the credit spectrum,” this year, S&P said in its outlook report.

“The continued high stress level in the financial system …is expected to ripple through more broadly, materially affecting the number of defaults. Although aggressive government intervention in the US and elsewhere has somewhat countered the turmoil, we now expect it to take its toll on already vulnerable corporations and the economy in general.”

There are times when bankruptcy can be a useful tool to restructure the debt of a struggling portfolio company.

However, since the economic collapse of last year, firms have found significant obstacles in the way of re-organisations that have sent portfolio companies straight to liquidation instead. Factors include a lack of bankruptcy financing in the market today. Companies in bankruptcy

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in europe

It’s not over yet The over-commitment strategy used by many listed private equity vehicles has gone from being a virtue to a vice, but it will survive

The parameters of overcommitment have been shown to be out of line with reality. They were formulated in better times, based on assumptions of future cash distributions

Two recent events have highlighted the delicately balanced predicament of listed private equity vehicles in the UK. Drastic action from both SVG Capital and Candover Investments – two Londontoby mitchenall listed investment vehicles feeding capital into buyout houses Permira and Candover respectively – showed that when the over-commitment strategies they employ come unstuck, the consequences can be serious.

Put simply, an over-commitment strategy involves a fund making capital commitments in excess of its asset base and relying on cash distributions to meet capital calls as they come in. This lets the fund put as much capital to work as possible and minimises the negative impact of cash drag on returns. This works, provided the distributions keep rolling in.

When distributions dry up, however, as they have done as a result of the market meltdown, the strategy hits a wall.

Candover Investments, the London-listed entity that owns Candover and invests in its funds, recently had to slash its €1 billion commitment to the firm’s €3 billion 2008 buyout fund.

A couple of months earlier SVG Capital, a listed vehicle that invests most of its capital in funds managed by Permira, confirmed it had taken several steps to shore up its balance sheet, one of which involved cutting its €2.8 billion commitment to Permira IV by 40 percent.

Over-stretched over-commitment strategies have been cited by industry analysts as a cause for concern for several London-listed private equity investment trusts (PEITs), including F&C Private Equity, Standard Life European Private Equity and Partners Group’s Princess Private Equity. “Funding calls could become a challenge and we have already seen some companies effectively forced to sell fund interests at discounts in order to improve their balance sheets,” said JPMorgan Cazenove analyst Chris Brown in a research note back in November.

Combined with other analyst bugbears, such as high leverage at both company or portfolio level and scepticism about the real value of underlying portfolio companies, the over-commitment issue has led to record-breaking discounting among listed PEITs. At the time of writing Candover was trading at a discount to net asset value of over 81 percent. F&C Private Equity Trust – a PEIT with a net asset value of £178 million – was trading at a 79 percent discount, while Pantheon International Participations – a trust managed by fund of funds manager Pantheon Ventures – was 83 percent down. These examples are at the larger end of the scale: the average discount to NAV is nearer 64 percent.

With the unprecedented slowdown in distributions last year, the vulnerability of over-

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commitment strategies has been exposed and what was previously accepted as a fundamental element of private equity fund of funds management has become a dirty word. “It has gone from being a virtue to a vice,” says one PEIT manager.

But before critics inside and outside the industry round on this latest “vice”, it is worth considering why it has for a long time been considered essential.

Managers with a given pool of uninvested cash are obliged to use it as efficiently as possible. Sitting on a pile of cash is not efficient: the cash drag will kill returns.

Even if a manager immediately commits 100 percent of his capital to underlying funds, it will still take up to five years to get the money ‘into the ground’, and even then the GPs probably won’t draw down the full 100 percent. Then there are the cash distributions: they can’t just sit on the balance sheet either, they need reinvesting. Over-commitment, if employed wisely, is the right tool to deal with these issues.

So has the strategy now been exposed as bunk? No. Recently the parameters of over-commitment have been shown to be out of line with reality. They were formulated in better times, based on assumptions of future cash distributions. If managers before the credit crunch foresaw distributions continuing apace – and unless they were Nostradamus or Nassim Taleb (of Black Swan fame) they probably would have done – they would have upped their commitment levels or risked sitting on unused capital.

As a result, the ebbing tide has exposed a few bathers with no trunks on. Like many strategies in all lines of business, over-commitment in private equity will have to be adjusted in light of the Black Swan events of the past 18 months. It will not, however, be scrapped altogether. Investors in private equity funds, whose aim is to manage their capital efficiently, will continue to rely on it. I

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Well done, private equity The World Economic Forum has given the asset class a pat on the back An examination of more than 4,000 private equityowned and comparable businesses in 12 countries across Asia, Europe and the US has found private equity-backed businesses are, on average, “significantly better managed across a wide range of management practices” than their government-, family- or privately owned counterparts.

Commissioned by the World Economic Forum and conducted by a team of academics including Josh Lerner of Harvard Business School, the study found that firms acquired by private equity groups experience 2 percent greater productivity growth in the two-year period folLerner: private equity lowing a buyout than their comparables. even better in times The researchers attributed this to 72 percent more of stress effective management of existing facilities by private equity-backed groups, while about 36 percent of the differential gains reflect increased demand. However, this assessment is put into perspective by the fact that, on average, firms acquired by private equity have higher production rates than their peers at the time of acquisition. They also outperform during economic downturns, the researchers found.

“When doing the research, we didn’t really know what we would find in terms of productivity over time. We found that the gap between private equity-backed firms and their comparables actively widened during times of financial stress, with private equity coming out on top,” Lerner said in an interview.

The study was released as an addendum to a report published in January 2008, following a year-long examination of 5,000 US private equity transactions from 1980 to 2005. Last year’s report was primarily focused on the US, but this edition sought to examine the influence of private equity on a global scale.

“At our annual meeting 2009 in Davos, heads of state, central bankers and finance ministers from over 60 countries, as well as chairmen and chief executive officers from over 200 of the world’s leading financial institutions discussed how to revive economic growth and promote long-term financial stability. In the context of these efforts [the study] provides further insight into the role of private equity in the global economy,” Max von Bismarck, director and head of investor industries, World Economic Forum, said in a statement. I

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europe

Out of steam In Germany, an iconic maker of model trains has gone bust They were the favourite childhood toys of German males now over 30, many of whom are still keeping a set in their basements – miniature trains made by Märklin, a once proud, family-owned Mittelstand company with a 150-year history and more than 1,000 employees.

Under private equity ownership since 2006, Märklin filed for bankruptcy protection in February after its Märklin train: on the lenders refused to extend a €50 million loan. Owing to wrong track the company’s iconic status, its collapse is big news in Germany, and commentators are critical of private equity owners Kingsbridge Capital and Goldman Sachs.

Never mind that Märklin was already close to insolvency when Kingsbridge and Goldman first invested in the business – the popularity of its products is not what it once was. But now that efforts to restore the company’s long-term viability have ostensibly failed, some blame Kingsbridge, a London-based private equity fund affiliated with Vienna-based alternative investment firm Hardt Group. This is despite a source close to Kingsbridge saying it was keen to continue funding the business had its credit line not been pulled.

In addition to high management turnover, part of the controversy is that in the three years since the takeover, according to media reports, Märklin was charged over €40 million in advisory fees – including management fees payable to Kingsbridge. In 2007, when €13 million in fees were allegedly charged, the company had revenues of €126 million.

The same Kingsbridge source, however, disputed the claims in conversation with PEI - claiming that only €4.5 million including interest had been charged to Märklin in advisory fees over the three years.

In mid-February, according to influential news magazine Der Spiegel, a state prosecutor was considering an investigation into the legality of the payments. Also in mid-February, business daily Financial Times Deutschland published an article about Kingsbridge’s ownership of the company entitled “Märklin - the great train robbery”.

The episode highlights a broader concern for financial sponsors active in Germany. Märklin is not the only private equity-backed company to have failed in the country recently. Carlyle-owned automotive supplier Edscha went bust in early February; Stankiewicz, an auto supplier owned by Dutch sponsor Gilde, has also filed for insolvency protection; TDM Friction, which was owned by Montagu Private Equity, went under last December.

As the economic crisis intensifies, other private equity-owned bankruptcies may follow. When they happen, some headline writers at German newspapers will be quick to use the word ‘locusts’ to denounce sponsors’ ownership style. For the industry as a whole, the reputational risk in Germany is as acute as it has ever been.

Firms with assets at risk must be alive to this – and ready to defend their record publicly when the need arises. I

coller takes slice of svg Coller Capital has built a 24 percent stake in SVG Capital, the listed fund of funds which invests primarily in funds managed by buyout house Permira. Coller has picked up 50 million shares at £1 each in SVG’s recent 70 million share rights issue. SVG, which is listed on the London Stock Exchange, revealed in December that it would seek to raise fresh capital as part of a number of measures to shore up its balance sheet and ensure it can meet future commitments. bridgepoint seals finnish deal UK-headquartered private equity firm Bridgepoint has sealed the first deal from its €4.8 billion fourth fund with the €312 million take-private of Finnish healthcare business Terveystalo Healthcare. The tender offer of €2 per share in cash, which represented a 203 percent premium to the company’s closing price on January 16, was accepted by holders of 95.7 percent of the company’s share capital. carlyle and tpg prop up uk portfolios Washington DC-based The Carlyle Group plans to boost beleaguered portfolio company IMO Carwash with £25 million (€25 million; $35 million) in equity if creditors will accept write-downs on its debt. The UK firm breached its banking covenants on a £355 million loan and has negotiated a standstill arrangement with its debtors. A decision has not yet been reached on the agreement and talks are ongoing, according to sources. Fellow US private equity firm TPG has also moved to reduce a UK portfolio company’s debt, proposing a €60 million cash injection into UK chemicals company Vita in exchange for a reduction in its debt claim from €633 million to just €100 million.

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europe in brief

axa sets up renewables joint venture Paris-based AXA Private Equity is pushing further into Italian renewable energy investments, having established a joint venture with Ravennes, Italybased industrial company Tozzi Group.

The firms have set up a holding company called TRE& Partners, of which AXA holds a 45 percent stake and Tozzi holds the majority 55 percent stake, which will invest in wind farms, hydroelectric plants and solar projects. acg fund of funds launched ACG Private Equity, formerly known as Altium Capital Gestion, has begun marketing its fifth European fund of funds. The Paris-headquartered firm aims to raise between €250 million and €300 million for ACG Europe V, one-third of which will be allocated to special situations funds. The balance of the fund’s capital will be divided between Central and Eastern European and growth capital funds. silverfleet adds to munich team European mid-market private equity firm Silverfleet Capital has hired Klaus Maurer, bringing to six the number of investment professionals on its Munich-based team. Maurer

how deal volume and value have fallen The chart below shows European private equity deal volume and value declining markedly last year

1600

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UK buyout house Candover is to shrink the size of its 2008 fund, which has raised €3 billion of its initial €5 billion target. Candover Investments, the London-listed entity that owns Candover and makes majority commitments to its funds, said its €1 billion commitment would be reduced “significantly”. As well as reducing the fund’s size, Candover is in talks with its limited partners to revise the fund’s investment strategy “in light of both a smaller fund and the significant changes in the global economy in the last six months”, said the firm.

Number

candover to downsize fund

Value (€m)

Source: CMBOR/Barclays Private Equity

was previously an analyst in Terra Firma’s Frankfurt office, prior to which he worked in leveraged finance at Société General and BHF-Bank. vedder gets active in private equity Clemens Vedder, the investor whose activist shareholder group Cobra made a killing on a stake in Germany’s Commerzbank in 2000, is marketing his first private equity vehicle. Whitesmith Private Equity Investors, for which Vedder hopes to raise €1 billion, will target retail and

financial services businesses in German-speaking Europe. Vedder launched his alternative investment firm, Cayman Islands-based Goldsmith Capital Partners, in 2007.

The firm’s first vehicle, an activist shareholder hedge fund named Blacksmith, was launched last year. barclays loan book weighted to two deals The £10.4 billion (€11.9 billion; $15.5 billion) leveraged loan book of Barclays Bank, the UK’s secondlargest bank, is dominated by two

hands to buy his own lps’ interests Terra Firma, the UK buyout house run by Guy Hands, has bought three limited partners out of its 2007 fund at “a small premium” to the face value, according to a source familiar with the matter. The three fund interests, which between them are liable for €25 million in uncalled commitments, were bought by the fund’s management company. Guy Hands, who was already one of the four largest investors in the fund, had been in discussion with each of its 170 LPs to ask if they have the liquidity to meet future capital calls.

The sellers comprised two large institutions and one family-owned group.

Hands: buying out LPs

¬

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private equity deals, both done at the ¬ height of the credit bubble. Loans connected to the buyout of Alliance Boots and the AA-Saga merger account for 47 percent of Barclays’ leveraged finance exposure. Barclays’ European leveraged loan “portfolio is well spread by industry and region, however, 47 percent of the overall portfolio now relates to Alliance Boots and AA Saga”, Robert Le Blanc, Barclays group risk director, said in the banking group’s annual results presentation. unigestion in double launch European hedge fund and private equity fund of funds manager Unigestion has committed to raising two new private equity funds in the first half of 2009, hoping to capitalise on bargains in the secondary and global sustainability sectors.

Unigestion Secondary Opportunity Fund II will launch in the first quarter of this year, targeting assets from distressed and over-exposed private equity sellers in the small to mid-market sphere, hoping to exploit recent discounts of 50 percent or more on portfolio valuations. Unigestion Environmental Sustainability Fund of Funds will launch in the second quarter of this year, targeting growth capital, infrastructure and venture capital investment in alternative energies, efficient use of resources, and pollution control. shipping fund sets sail for $400m M2M, a specialist shipping investment firm based in London and Athens, is raising a $400 million private equity fund to take advantage of what it describes as “the most attractive vessel acquisition environment in a generation”. M2M was established in 2005 and currently manages more than $600 million in assets across two hedge funds. I

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march 2009

europe

The outsider departs Philip Yea brought many changes to 3i – to mixed reviews In an organisation that had previously been viewed as somewhat staid, the appointment of Philip Yea as chief executive of London-listed private equity firm 3i in May 2005 was – according to one former employee – a breath of fresh air: “It needed an outsider to come in and brush away the cobwebs”.

The fact that Yea was viewed as an “outsider” was indicative of the conservatism which had previously dictated senior management transitions at 3i. Having Yea: saw debt levels rise only appointed chief executives from within its own ranks, the firm was by its own standards going out on a limb when it lured Yea from rival private equity firm Investcorp.

He brought urgency to the role: favouring buyouts at the expense of venture investment, launching infrastructure and listed private equity activities, and expanding the firm’s operations in the US and Asia. All the while, Yea was popular with shareholders – the group returned £2.2 billion to investors via share buy-backs in 2006 and 2007.

Unfortunately, these bold moves didn’t appear quite so impressive once the credit crunch had tightened its grip. The payouts suddenly seemed a little excessive and the timing questionable. In addition, 3i’s debt levels had been mounting and began to have a highly deleterious effect on the firm’s share price. In the year prior to Yea’s departure, the value of the shares had tumbled by around three-quarters.

The appointment of new chief executive Michael Queen sees 3i revert to type by appointing an insider to the top job – Queen being a 20-year veteran of the firm who was most recently head of its infrastructure business. One task lying ahead will be to chisel away at the firm’s debt burden – a task he has already made progress on through the acquisition of assets belonging to its listed Quoted Private Equity fund, delivering a £110 million net cash inflow.

Despite some media reports to the contrary, the source quoted earlier believes Yea left 3i in good shape. “It’s a robust business, which will consolidate and continue to grow. It ain’t broke. It’s taken a drubbing because the world economy has taken a drubbing.” I

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special report

Which empires are crumbling?

A look back at the largest private equity firms of 1998 provides a reminder that today’s titans are not guaranteed to hold their positions forever. By David Snow Looking at a list of the largest private equity firms, circa 1998, one is impressed by two things. The first is that eight of the ten endured and thrived over the subsequent decade.

The second is that two of the largest three blew up.

The two tables (opposite page) were created using the methodology of the PEI 50, Private Equity International’s annual proprietary ranking of private equity firms by size.

The PEI 50 defines “size” as the amount of capital raised for direct private equity investment over a roughly five-year window. This method allows for the most consistent size comparison of private equity programmes. It captures capital raised for different funds targeting different geographies and closed at different times. In an industry in which every GP seems to have a different marker for denoting heft in the market, the five-year fundraising methodology provides an elegant, apples-to-apples measuring solution because it takes into account the buying power of recent years as well as capital commitments recently bestowed on GPs. It’s also information that we can get usually get our hands on.

The top ten firms of 2008 were taken from the 2008 PEI 50, which appeared in last May’s issue of Private Equity International. The creation of the 1998 rankings was done using the same method but with a different five-year window, in this case ending 31 December 1998. So, for example, this five-year window captured three Warburg

Pincus private equity funds – the $5 billion Warburg Pincus Equity Partners closed in 1998; the $800 million Warburg Pincus Ventures International closed in 1997; and the $2 billion Warburg Pincus Ventures closed in 1994. That remarkable string of fundraising successes made Warburg Pincus the largest private equity firm in the world in 1998, based on the PEI 50 methodology. Forstmann Little’s position was bolstered by the inclusion of two large mezzanine funds alongside its core private equity fund.

For the most part, the top ten firms of 1998 either continued investing in a similar deal space over the subsequent ten years (Welsh, Carson, Anderson & Stowe; Clayton, Dubilier & Rice) or greatly increased the size of their capital under management through larger funds and a proliferation of strategies (Kohlberg Kravis Roberts; Apollo Management). Two firms, however, saw their franchises atrophy following disastrous investments made near the top of the technology and telecommunications bubble.

The most spectacular fall, of course, was that of Forstmann Little, the otherwise highly respected private equity investor that placed enormous bets on two “competitive local exchange carriers” (CLECs) called XO Communications and McLeodUSA. The investments came in the form of securities convertible into common equity, but as the market for CLEC stocks collapsed, it became clear that Forstmann Little was not going to be able to convert into common equity, or even get back its principal investment. Both XO and McLeodUSA filed for bankruptcy, causing among the largest private equity losses in history. The firm has been winding down operations for several years.

By 1998, Hicks, Muse, Tate & Furst had grown its funds and its business lines. It managed a significant Latin America fund in addition to its major US buyout fund, and

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private equity international

was in the process of launching a European platform. But, like Forstmann Little and many other large buyout firms at the time, Hicks Muse made a series of PIPE investments in telecom companies that went awry. The firm did not survive the aftermath in its current form. Co-founder Thomas Hicks left to focus on family office investments, and the European arm split to become Lion Capital. The remaining partners renamed the Dallas firm HM Capital and are now managing a $780 million fund with a strategy that takes the firm back to its pre-bubble sweet-spot in the mid-market.

Most of the firms in the top ten of 2008 were serious contenders in 1998, as well. However they grew their funds and platforms at an aggressive pace over the next 10 years. All have global operations and most offer limited partners a range of fund products, such as Asian vehicles, alongside core buyout funds. None of the firms are focused on any one industry, such as energy.

Considering the headwinds that private equity faces and will face over the next several years, one can’t help but wonder how many of today’s firms will go the way of Forstmann Little. Once formed, private equity firms tend to tenaciously cling to life with each new fund-raise. It usually takes not one, but several deal catastrophes to kill a buyout franchise. Unlike during the tech bubble, private equity firms investing through the most recent boom times were for the most part buying equity stakes in solid, proven companies, albeit with great helpings of leverage. But the recession that followed the bursting of the Internet bubble in 2002 was a cakewalk compared to what the economy is going through now. There will certainly be firms that have higher concentrations of portfolio bankruptcies than others. Significant losses tend to cause partners to seek careers under different roofs and limited partners to say no to the next fund. What’s more, losses do not necessarily destroy firms, but they do allow nimble-footed rivals with cleaner records to gain greater momentum in the fundraising market. energy funds will grow What will the top ten list look like in 2018? It is impossible to predict, other than to say it will be different. Among the largest firms will certainly be some of today’s largest franchises, as well as some new names. One can find in the current fundraising market certain momentums that may aid the growth of certain franchises. For example, among the firms to raise the most capital over the next 10 years may be those focused on the energy industry, such is the level of LP interest in the sector. In addition, firms with substantial Asian operations may draw the lion’s share of capital commitments as institutional investors increase their allocations to the region. What is hardest to deter-

page 27

mine at this point is what it will take to crack the top ten in 2018. Last year, a firm needed to have raised $23.3 billion or more to make it on the list, a huge leap up from the $4.7 billion needed to be number ten in 1998. Given an expected fundraising drought over the next few years, can the largest firms work their way back to a level of capital under management such that they meet or exceed the haul of the dearly departed “golden era”?

If you believe that limited partners will maintain their increased allocations to private equity through the crucible of the meltdown, and if you believe that at some point during the next five years, world markets will stabilise and embark on a sustained recovery, then the answer is yes. In other words, the biggest in 2018 will be bigger than the biggest in 2008. But you can bet your bottom dollar that the names will be different. I The updated 2009 PEI 50 will be released in the May issue of Private Equity International. It will be greatly expanded beyond the top 50 firms to rank a broader set of GPs.

the ten largest private equity firms in the world in 1998 Firm 1. Warburg Pincus 2. Hicks Muse Tate & Furst** 3. Forstmann Little & Co.** 4. Kohlberg Kravis Roberts 5. Welsh, Carson, Anderson & Stowe 6. Goldman Sachs 7. Apollo Management 8. The Blackstone Group 9. Clayton Dubilier & Rice 10. Thomas H. Lee Partners

5-year fundraising total* $7.80 billion $7.52 billion $6.53 billion $6.01 billion $5.70 billion $5.63 billion $5.10 billion $5.05 billion $5.00 billion $4.70 billion

* The methodology for determining a firm’s size is the same as the methodology for the PEI 50. Firms are ranked by the amount of direct investment private equity raised over a five-year period to the end of 1998. ** Not among the PEI 50 ten years later Source: Private Equity International

the ten largest private equity firms in the world in 2008 Firm 1. The Carlyle Group 2. Goldman Sachs* 3. TPG 4. Kohlberg Kravis Roberts* 5. CVC Capital Partners 6. Apollo Management* 7. Bain Capital 8. Permira 9. Apax Partners 10. The Blackstone Group* * In the top ten in 1998 Source: Private Equity International

5-year fundraising total $52.00 billion $49.05 billion $48.75 billion $39.67 billion $36.84 billion $32.82 billion $31.71 billion $25.43 billion $25.23 billion $23.30 billion

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asia monitor

Where they’ve only known good times As an economy and as a private equity market, Australia could do little wrong. How will the country’s GPs cope with the rude intervention of global recession?

Australia may be a modestly sized private equity market, but it’s also one that limited partners have often expressed great enthusiasm for – citing its average level of outperformance compared with other developed markets. This track record surely cannot be entirely detached from the fact that the country’s economy has remained buoyant for an impressive length of time. Reference is often made to Japan’s “lost decade” of economic stagnation – at more or less the opposite end of the spectrum in Asia-Pacific is the 16 consecutive years of economic growth delivered by Australia up to and including 2008. But, with this record now under threat from the global slowdown, the country’s private equity firms find themselves facing a whole new operating environment.

Because of the benign context within which they have invested and managed their portfolios for the best part of two decades, the challenge for private equity firms in Australia is arguably starker than elsewhere in the region where various types of economic, political and currency-related crises have been commonplace over the years. To refer back to Japan: distressed turnaround investing is effectively the normal modus operandi. For many Australian private equity firms, it’s a whole new ball game.

As the Australian economy deteriorates (as surely it will – only the speed and duration is up for debate), limited partners will be speculating on how their capital will be effectively managed through a downturn by professionals who have only ever known an upturn.

It wasn’t meant to be like this. One by-product of a long run of economic success is a hardening belief that the good times will last forever. The optimism at last year’s Australian Venture Capital Association gathering on the Gold Coast was striking. It wasn’t strident, noholds-barred optimism, admittedly, but the tone appeared notably more upbeat than it seemed to be in Europe at the same time.

Underpinning delegates’ confidence in the Australian market’s resilience was the belief that demand for commodities in Asia might drop off a little but would remain essentially strong.

A professional at an Asia-focused fund of funds manager recently commented to PEI: “There was shock at the speed with which China, in particular, adjusted. There was an assumption among exporters that the good times would continue and that’s been shattered.”

There are other reasons why Australian GPs might be feeling a little dazed, aside from the sudden deterioration in Australia’s trading prospects with the outside world. Of more immediate relevance to them may be the lack of leverage that has more or less brought an end to andy thomson

Limited partners will be speculating on how their capital will be effectively managed through a downturn by professionals who have only ever known an upturn

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march 2009

the larger deal market – a part of the market that took off during the twoyear bubble.

In addition, concerns are being expressed about over-leverage within portfolios. Plus, the retail and mining sectors seemed to act as magnets to private equity firms in Australia in recent years and these sectors are, let’s say, not without their problems.

Some portfolio firms are already sending out distress signals. It was to be hoped that the recent collapse of Australian Discount Retail, backed by private equity firms CHAMP and Catalyst Investment Managers, was not a sign of things to come.

In addition, there are difficulties for those already on the fundraising trail or planning to hit it sometime soon. The Australian fundraising market has traditionally been domin at e d b y t h e l a r g e d o m e s t i c Superannuation funds. Now, these funds are facing some pretty severe liquidity issues. As with institutional investors elsewhere in the world, these issues are being partially eased by secondary sales and also by the benign effect of write-downs on the denominator. Nonetheless, there is still a net effect of less capital for new commitments. And that’s even before you take into account the stated ambition of the Super funds to diversify their private equity portfolios internationally – leaving less capital for local funds to scrap over.

Now for the post-script: that famous Aussie optimism is not without foundation, even today. A recent forecast from the country’s Reserve Bank suggests that – although the economy may suffer its worst year since the Second World War – it is still set to “perform better than its international counterparts in the difficult period that lies ahead”.

And who’s to say that private equity practitioners in the country won’t also demonstrate that they can outperform in bad times as well as good? Here comes the acid test. I

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asia

Dry powder stockpiles Private equity funds in emerging Asia had a successful fundraising year, and are aiming to exploit ‘ripe’ conditions Emerging market funds raised nearly $67 billion last year, a 12 percent rise from 2007 that is due largely to substantial growth in Asia-focused funds.

Private equity funds focused on developing countries in Asia raised $40 billion in 2008. This is a 39 percent increase from the $29 billion they raised in 2007, according to the Emerging Markets Private Equity Association (EMPEA).

China-focused funds contributed largely to the rise in 2008 fundraising levels, raising $14.5 billion in 2008, compared to $3.9 billion in 2007.

The second-most active category was India-focused funds, which saw an increase from $4.6 billion raised in 2007 to $7.7 billion in 2008.

Middle East- and Africa-focused funds respectively saw year-over-year fundraising increases of 17 percent and 37 percent.

In contrast, capital raised by Central and Eastern European funds experienced a sharp decline, from $14.6 billion in 2007 to $5.6 billion in 2008. These funds accounted for 8 percent of total emerging markets capital raised in 2008, down from 25 percent in 2007.

This year, EMPEA estimates 371 emerging markets funds are seeking about $144 billion, or nearly double the capital raised last year. “[This] will be a difficult year for fund managers seeking to raise capital, but funds with dry powder to invest are in a very good position right now,” EMPEA president Sarah Alexander said in a statement.

“We’re entering a period of potentially very ripe conditions for private equity in these markets: lower entry prices, less competition for deals and very attractive deal flow from entrepreneurs with few alternative options for raising capital.”

She added: “The real challenge is convincing Western investors to maintain exposure to what are considered riskier markets.” I how emerging markets funds are still rising 2008

66,517

2007

59,161 33,193

2006 2005

25,765

2004

6,454 0

Source: EMPEA

20,000

40,000 $m

60,000

80,000

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asia in brief cerberus quits hong kong New York-based investment group Cerberus Capital Management is close to shutting down its office in Hong Kong, less than two years after it was established, people familiar with the matter told the Financial Times. Cerberus opened its Hong Kong and Beijing offices to lead its push into China following the hire of John Snow, the former Treasury secretary, as chairman of the firm in 2006. korean firm doubles money Seoul-based private equity firm STIC Investments has sold its stake in M e d y - To x , a K o r e a n b i o t e c h company, which was listed on the Korean Stock Exchange. The firm has divested its entire holding in the company, generating a net internal rate of return of 33.2 percent and returning a 2x multiple on its investment. STIC acquired a stake of about 10 percent in Medy-Tox in the last quarter of 2006, Trevor Chan, a director of the firm, said. new asia leveraged finance head for hsbc HSBC has named Jeff Bennett, a managing director within the bank’s leveraged and acquisition finance unit, as head of the same division for Asia Pacific. This follows the recent departure of David Simons, confirmed an HSBC spokeswoman who declined to comment on the reason for his leaving. Bennett will spearhead the bank’s Asian efforts to extend and expand its lending capabilities. reshuffle at credit suisse financial sponsor group Ronan Agnew has resigned from Credit Suisse as the bank’s head of financial sponsors coverage in the Asia Pacific region, according to a source. Agnew relocated to Hong Kong in May 2008. He was previ-

economy cited as sun leaves tokyo Sun Capital Partners has closed its Tokyo office following a decision by the firm to move away from platform opportunities in Asia. “This decision was driven by the challenging economic conditions in Tokyo: Sun won’t shine here Japan and across Asia, and we regret the impact on our former colleagues,” the firm said in a statement. All eight investment professionals based in Tokyo have been made redundant as a result of the closure.

ously based in London as co-head of Credit Suisse’s European financial sponsors group, alongside Didier Denat. Credit Suisse directors Toby Groser and Ben Ngai will replace Agnew as co-heads. They will report to Joseph Gallagher, the bank’s head of M&A in Asia Pacific. bhp chief to take reins at temasek Ho Ching will step down as chief executive of Singaporean sovereign wealth fund Temasek Holdings in October.

She will be replaced by Chip Goodyear, the former chief executive of mining company BHP Billiton. Ho has been an executive director and chief executive of Temasek since January 2004. She joined Temasek as a director in January 2002 and became an executive director in May 2002. uk firm backs china fund The UK’s Lloyds TSB Development Capital has committed $30 million to China New Enterprise Investment Fund II (CNEI), marking its first investment in China. CNEI invests in established Chinese growth companies and is managed by New Enterprise Management partners Xiaoyang Yu, Johannes Schoeter and Hirosuke Sakai.

It is targeting a final close of $250 million to $300 million, according to PRE Management’s website.

kotak gets cdc support UK government-backed funds of funds manager CDC Group has committed $40 million to the Kotak India Private Equity Fund, which will target investments in small- to medium-sized enterprises (SMEs) on the subcontinent. The second fund to be raised by Kotak Mahindra Bank’s private equity division, the vehicle is targeting $200 million, with a hard cap of $250 million. It will invest between $15 million and $40 million for minority stakes in SMEs focused on domestic consumption and consumer spending, infrastructure and infrastructure-led services. australian retailer into receivership Australian Discount Retail (ADR), a portfolio company of Australian private equity firms CHAMP Private Equity and Catalyst Investment Managers, has gone into receivership. With 402 stores in Australia, ADR is the country’s largest discount variety retailer. Its three core retail chains are discount stores Sam’s Warehouse; convenient stores Crazy Clark’s and Go-Lo; and bargain stores Chickenfeed.

Chickenfeed, a standalone operation, is not in receivership or voluntary administration. I

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mena

Fighting talk

dic switches management duo Dubai-based investment firm Dubai International Capital has reshuffled the senior management of its private equity division as it shifts its focus from dealmaking to portfolio monitoring amid the current economic crisis. Sylvain Denis and Alan Hyslop are leaving to be replaced by Dubai-based David Smoot, who will take the role of chief executive officer, private equity, and Eric Kump, managing director, who will lead DIC’s European private equity operations from London.

Cairo-based Citadel Capital says now is a good time to invest as it launches a $500m fund “One of the paradoxes of raising money is that it is very difficult to raise money when the time is exactly right,” says Ahmed Heikal, chairman and chief executive of Cairo-based private equity firm Citadel Capital. “No doubt about it, this is an extremely, extremely difficult time to raise money, which should also tell you something about why it is exactly the right time to be investing.”

Citadel is currently branching out from its traditional business model and raising its first fund with third-party institutional capital.

The firm is targeting a $500 million final close for the Citadel Capital Joint Investment Fund, which, according to online documents from the International Finance Corporation (IFC), will likely make up to 10 investments in industrial consolidations, distressed and turnaround companies, buyouts and selective greenfield companies. The IFC board is currently deciding on a proposed $25 million commitment to the fund.

The fund, for which the firm aims to hold a first close in the second quarter of this year, will continue Citadel’s geographic focus on Egypt and MENA countries including Algeria and Libya. Raising a traditional private equity fund, however, is a departure from Citadel’s previous investment strategy.

In the past, Citadel deployed its own permanent capital of EGY£2.75 billion (€400 million; $500 million) in its platform investments alongside regional coinvestors. Deals were financed individually through sector-specific or opportunity-specific vehicles. The GP’s investments in its deal vehicles has typically been between $30 million and $50 million, with most ranging in equity size from $100 million to $300 million in total, co-founder Hisham El Khazindar told PEI last year.

Citadel changed tack last year and decided to raise its debut institutional fund in order to increase international institutional participation in its investments and to have capital ready to deploy at all times, says Heikal.

The firm has grown exponentially since being founded five years ago by El Khazindar and Heikal, both former senior executives at regional investment bank EFG-Hermes. It has added an office in Algeria and plans to do the same over the next three years in other core countries in which it invests, including Libya and Syria. It has also mulled the prospect of being the first regional private equity firm to publicly list its management company. I

JTS: a big lift for Kuwaiti buyouts

global sets kuwaiti buyout record Global Investment House, the Kuwaitbased investment bank, has acquired a controlling stake in logistics company Jassim Transport & Stevedoring.

Financial details of the transaction were not disclosed, but a source close to the situation pegged the deal value at around $150 million. As well as providing a broad variety of logistics services, JTS operates the region’s largest fuel distribution operation and counts the US military among its clients. Omar El Quqa, executive vice president at Global Investment House, described the buyout as Kuwait’s largest.

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shuaa goes off-market Shares in SHUAA Capital have stopped trading on the Kuwait Stock Exchange in line with a shareholder decision made in June 2008. The investment bank, which has a number of private equity and real estate funds, had been listed on both the Kuwait and Dubai exchanges, since 1984 and 2000 respectively. The de-listing in Kuwait was in response to regulatory conflicts for dual-listed companies and the firm expects it to boost SHUAA’s liquidity and trading volume on the Dubai Financial Market. mezzanine joint venture targets $200m The NBK Capital GSC Mezzanine Fund has held a first close on $150 million. A joint venture between NBK Capital, a division of the National Bank of Kuwait, and US alternative asset manager GSC Group, the fund intends to profit from the lack of available debt for private equity deals in the Middle East. NBK is aiming to increase the size of the fund, which will invest in businesses with enterprise values between $10 million and $20 million, to $200 million by the end of the first quarter of 2009. carmel ventures promotes two Israeli venture capital firm Carmel Ventures has promoted Ronen Nir, a former director at software company Verint who joined Carmel in 2008, and Itzik Avidor, the firm’s chief financial officer since 2000, to partner level. In February 2008, Carmel held a final close on $235 million for its third fund, focused on global information technology-related sectors, such as semiconductors and software. The fund attracted commitments from returning investors JPMorgan, the California Public Employees’ Retirement System and the Oregon Public Employees Retirement Fund. I

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Public revelation PIPE deals are expected to increase in the MENA region Growth capital deals are expected to dominate private equity activity in the MENA region, according to a study carried out by consultancy Deloitte.

However, the MENA Private Equity Confidence Survey, which canvassed the opinions of 30 global buyout firms, showed that the industry is predicting a small swing towards PIPE deals – private investments in public equity – venture capital deals and pre-IPO investment activity, following the escalation of the financial crisis.

Some 47 percent of respondents to the survey, undertaken in November and December last year, expected investment activity in the MENA region to increase over the next 12 months, while 40 percent foresaw a decrease. That contrasts sharply to the previous study, which was conducted six months earlier, in which no one anticipated a decrease in activity and 94 percent of respondents predicted an increase.

In the most recent survey, lower confidence and greater caution in view of the market downturn, high valuation expectations on the part of sellers, and a tougher fundraising environment were among reasons cited by those anticipating reduced activity levels.

“Whilst 60 percent of respondents noted that they expect investment activity to either increase or stay the same, 53 percent expect returns to decrease, reflecting reduced valuations of existing investments. Private equity firms are likely to hold onto their investments until multiples improve, but those with capital to deploy will be looking to pick up what they see as bargains,” says Chris Ward, chief executive of Deloitte Middle East’s financial advisory services practice, in a statement. I

what the deal market will look like Asked what will be the most popular type of transaction in the MENA market over the next 12 months, private investments in public equity are predicted to grow Development Capital

64% 60% 17%

Buyout

12% 13%

Pre-IPO Venture PIPE Secondary Sales

15% 2% 5%

July 2008 survey responses

2% 8%

December 2008 survey responses

2% 0%

0%

10%

20%

30%

Source: Deloitte MENA Private Equity Confidence Survey

40%

50%

60%

70%

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sub-saharan africa

A brief history of lime It liked it so much, it backed it twice.

Toby Mitchenall finds out why South African private equity firm Ethos has invested for a second time in calcium carbonate producer Idwala Johannesburg-based Ethos Private Equity has joined forces with compatriot Old Mutual Private Equity to take a 44 percent stake in Idwala Industrial, a producer of industrial minerals and chemicals. For Ethos partners Stuart MacKenzie and Anthonie de Beer, the acquisition has a sense of déjà vu; both were involved when Ethos invested in the business the first time round.

Idwala was established in 1998 as a result of an Ethos-led management buyout of the lime and industrial minerals division of listed conglomerate Alpha Limited, now known as AfriSam. The Idwala management team that led the buyout, Piet Ferreira and Trevor Wagner, are now retiring to be replaced by James Welsh and Wayne Brown, both from within the organisation, as managing director and deputy managing director respectively.

Ethos exited its first investment in Idwala, which was made from the firm’s fourth fund, after six years. It was bought out

by Tiso Group, a black empowerment investment company, and RMB Ventures, the private equity arm of South African financial services group FirstRand.

Idwala – the Zulu word for “rock” or “stone” – is a vertically integrated supplier of processed lime, calcium carbonate and other industrial minerals.

The lime operation is based in South Africa’s Northern

Idwala: Ethos back for more

Cape region and produces burnt and hydrated lime for the gold, base metals, chemical and pulp and other industries.

The carbonates business is located in Port Shepstone, near Durban, and produces a fine white calcium carbonate powder used in the production of paper, plastic, paint and numerous other products.

When Ethos first invested in the business, the main driver for growth was the calcium carbonates side. A decade on and it’s the lime processing and production capability which is providing the most exciting growth prospects. Lime is a vital component in the extraction process for gold and base metals – a vibrant sector in Southern Africa – and is also used in the treatment of emissions, something which Stuart MacKenzie describes as a “blue sky opportunity”.

As well as sitting on significant lime deposits, Idwala offers its investors stability, says MacKenzie. “It is a good cash generator, grows through the business cycle and is diversified across both businesses,” he says.

Following the latest investment, Ethos’s and Old Mutual’s share of the equity is reportedly split 27 percent and 17 percent respectively – constituting the largest block of shares.

Tiso Group has reduced its position in the business to 30 percent, but remains the largest single shareholder, while RMB Ventures has exited completely. Tiso’s Nkululeko Sowazi continues as chairman of the Idwala board of directors.

Ethos made the latest investment from Ethos Fund V, while Old Mutual Private Equity committed through its current fund, Old Mutual Private Equity Fund II. Finance was arranged and underwritten by Nedbank Capital and Rand Merchant Bank, which continue to be the main lenders in Idwala together with Mezzanine Partners. I

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sub-saharan africa

leapfrog hits $50m Micro-insurance-focused Leapfrog Investments has reached the halfway mark of its $100 million debut fundraising. The firm hopes to hold its first close in mid-March, having already garnered $50 million from limited partners such as the European Investment Bank and Dutch development finance company FMO. Leapfrog will make investments across developing nations in Sub-Saharan Africa and Asia. goldman remains cool on region Goldman Sachs’s private equity group is taking a cautious view of emerging markets, says managing director Marc Boheim, and is yet to be tempted by Sub-Saharan Africa.

“We have been looking at SubSaharan Africa quite closely for a number of years. The question is, ‘is there a great enough depth of manager?’” he told conference delegates in London, adding: “Historically returns have been somewhat volatile, particularly when you consider currency fluctuations.” dpi starts to deploy capital Africa-focused private equity firm Development Partners International (DPI) has backed South Africa-based telecom company Q-Venture with an undisclosed investment. DPI was founded by Miles Morland, formerly of London-based fund management business Blakeney Management, and Runa Alam, ex chief executive of New York-based private equity firm Kingdom Zephyr, in 2007. It has raised €272 million toward its debut fund, which it aims to close on €400 million in 2009. I

Looking to Lagos A Nigerian presence is the next logical step for Standard Bank’s captive private equity team Standard Bank Private Equity, the captive direct investment business of South Africa-based Standard Bank Group, has established an investment team in Lagos, Nigeria, with the appointment of Lloyd Onaghimon as its head.

Standard Bank Group has had a retail and investment banking presence in Lagos since March 2008, when it acquired 51 percent of IBTC Lagos: Standard joins the fray Chartered and subsequently rebranded it as Stanbic IBTC Bank.

The appointment of Onaghimon, who has been given a mandate to build a six-strong team of private equity professionals in the Nigerian capital, represents the banking captive’s first move in the country. Onaghimon is an eight-year veteran of IBTC who was investing the bank’s money in small- and medium-sized businesses as part of a Nigerian government-led scheme.

The move into Nigeria is a logical progression for Standard Bank Private Equity, which has so far concentrated its efforts on South Africa, says Graham Thomas, global head of the operation. “South Africa and Nigeria between them represent more than 50 percent of Sub-Saharan Africa’s GDP,” he says, adding: “We will look at deals in other African nations, but the bulk will come from these two countries.”

Standard Bank Private Equity targets investments in consumer-related industries, such as branded goods, retail, media and telecoms. These are sectors that in Nigeria are benefiting from a secular trend of increased wealth, urbanisation and consumer spending, says Thomas. Emerging markets fund of funds manager CDC predicts that Nigeria’s economic growth will remain at around 6 percent in 2009, in line with that achieved in recent years.

As well as consumer-related assets, Standard Bank Private Equity will also invest in infrastructure and natural resources, a process which will be overseen by specialist global teams, likely to be based in London, and executed in conjunction with Standard’s local deal teams.

Standard Bank Group operates in emerging markets throughout the world.

Its private equity arm, which invests off the bank’s balance sheet, has funds under management of around $1 billion. I

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latin america

Making inroads The Central American Mezzanine Infrastructure Fund, the first of its kind in the region, will help plug financing gaps in infrastructure-starved Central America After fundraising since 2006, the Central American Mezzanine Infrastructure Fund has held a first close on $82.5 million. The fund has had commitments of more than $155 million approved by institutional investors, slightly more than a $150 million target. However, only a portion of the capital has been activated at this point.

The fund’s investors are largely development organisations including: the InterAmerican Development Bank (IADF); World Bank unit the International Finance Corporation (IFC); the Netherlands Development Finance Company; the Central American Bank for Economic Integration; and Corporación Mexicana de Inversiones de Capital.

Primary investors are the Washington, DC-based IADF and the IFC, which made commitments of up to $60 million and $50 million respectively.

In their capacity as development organisations, the fund’s limited partners hope to demonstrate the viability of mezzanine lending in Central America and encourage the development of similar vehicles in an attempt to assist the development of infrastructure projects.

“Infrastructure investment remains among the most important challenges facing Central America,” the IFC says on its website. “The region’s ability to grow, compete and reduce poverty is constrained by the bottlenecks in the power, water, road, ports and rail sectors.”

The Central American Mezzanine Infrastructure Fund is designed to address one of the key challenges to private and public-private partnership infrastructure projects, which is the scarcity of subordinated debt and equity capital available to developers.

The main geographic investment focus is on projects in Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama and the Dominican Republic.

The fund will also have a limited allocation to Mexico and Colombia.

Roughly 10 to 15 projects will be backed in a range of infrastructure sub-sectors including but not limited to energy, transport, water and sanitation and telecommunications. Opportunistic investments in infrastructure-related sectors such as natural resources, housing, agribusiness and tourism will also be considered.

The fund’s manager, EMP Latin America, was selected in a competitive bidding process. EMP Latin America is a joint venture between EMP Global and four members of infrastructure specialist EMP Global’s Latin American team. The group is headquartered in Washington, DC with an office in Buenos Aires, Argentina.

The group is currently divesting EMP Global’s AIG-GE Capital Latin America Infrastructure Fund for which it was the principal adviser. The fully invested fund closed on $1.1 billion in 1996 and targeted equity investments in South America, Mexico, Central America and the Caribbean. I

standard bank moves americas office to brazil South Africa-based bank Standard Bank Group has relocated its headquarters for the Americas from New York to São Paulo. Standard is currently raising a private equity fund to invest $250 million of the bank’s money in Brazilian companies. The former co-head of Latin America for Goldman Sachs, Eduardo Centola, was hired to head the Americas operation. ethanol fund launched Brazilian private equity and venture capital firm DGF Investimentos has launched its FIP Terra Viva Fund, which has $140 million in committed capital. The fund will target a wide range of opportunities within the ethanol industry in Brazil, including consolidation projects, greenfields, services and equipment. alta growth capital invests in amerimed Mexico City-based private equity firm Alta Growth Capital has made an undisclosed investment in Amerimed, a Mexican provider of healthcare services in tourist destinations. Amerimed currently operates four hospitals and one clinic and will use the investment to strengthen its new facilities and support expansion. gávea ramps up private equity Brazil-based alternative asset manager Gávea Investimentos reportedly plans to increase its holdings of private equity to offset losses at its flagship hedge fund.

Gávea is now considering the launch of its fourth private equity fund. Fund III closed on $1.2 billion last August and is currently half invested.

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latin america in brief fir capital invests in samba tech Brazilian venture firm FIR Capital has invested an undisclosed amount in Belo Horizonte, Brazil-based Samba Tech from its FundoTec II Fund. Samba Tech is a start-up focused on providing infrastructure and related services linked to digital logistics.

brazilian developer closes $30m housing fund Brazilian developer Construtora Altana has closed a $30 million fund aimed at the country’s affordable housing market with New Yorkbased Provident Capital acting as placement agent. The A-Pima fund Minas Gerais: in need of will help Altana expand into the affordable housing suburban areas of São Paulo and Minas Gerais states. Provident said investors were keen to take advantage of Brazil’s residential opportunities by investing with local developers.

Intel Capital in 2006 created a $50 million venture capital fund to promote technology growth in Brazil.

Etlin: now managing partner advent promotes two Global private equity firm Advent International has promoted Alfredo Alfaro and Patrice Etlin to managing partner in Latin America. Alfaro is a founding partner of the firm’s Mexico City office. He previously spent 14 years at Mexican bank Grupo Financiero Probursa, where he became a senior investment officer in the bank’s private equity group. Etlin launched Advent’s investment activities in Brazil in 1997, before which he was a partner at International Venture Partners in São Paulo. intel capital backs video firm Intel Capital, the venture arm of US semiconductor giant Intel, has purchased a minority stake in Brazilbased online video distributor Truetech for an undisclosed amount.

evercore raises second mexico fund US investment firm Evercore Partners has closed Evercore Mexico Capital Partners II on $126 million in capital commitments after 18 months of fundraising. Investors in the fund include US and Mexican limited partners. The fund has made one investment to date in More Pharma, a prescription pharmaceutical company focused on the Mexican market.

poll finds latam private equity relatively upbeat Private equity investors in Latin America don’t expect the region’s deal market to begin recovery until 2010, but say it continues to offer greater investment opportunities than many other areas, according to the 2009 Annual Latin America Private Equity Survey of private equity stakeholders by KPMG, the financial services firm. All respondents to the poll said the global economic crisis had affected Latin America, but 67 percent said it had only a moderate negative impact on the region. I

2008 latin america fundraising holds steady Despite a difficult market for global fundraising, the emerging markets raised a total of $66.5 billion in 2008, up from $59.1 billion in 2007, according to the Emerging Markets Private Equity Association. Fundraising for Latin American and the Caribbean remained more or less steady at $4.46 billion across 22 funds, up roughly $40 million year-over-year. Brazil dominated fundraising in the region with 10 funds gathering $3.6 billion Geographic focus Argentina Brazil Colombia Mexico Peru Regional Total

Funds raised in 2008 $22 million $3,600 million $36 million $209 million $216 million $389 million $4,460 million

Source: Emerging Markets Private Equity Association

Number of funds 1 10 1 3 4 3 22

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venturescope

Touch hype Matilda Batttersby asks VCs about the revolutionary potential of touch-screen technology The typewriter was invented in the 1830s to make word processing available for the first time outside of print production. The typewriter model evolved over the next 100 years from heavy steel contraptions to smaller and lighter plastic and electrical versions, but by the 1980s a new generation of typewriter had arrived: the personal computer or PC. This machine revolutionised the way people stored data, introduced the idea of “software” and gave rise to the worldwide web. The only thing that was not revolutionary about the PC was its keyboard, which remained the same in style and principle as that of a typewriter, but had the addition of a hand held “mouse”. In the last 30 years computer users have typed, clicked and pressed buttons. But that is all changing according to some venture capitalists, who say a revolution of touch-screen technology is now within reach.

“We believe that the world of interaction between humans and machines is undergoing a fundamental change,” says Izhar Shay, a general partner at Israel-based venture firm Canaan Partners. Canaan and other venture capital investors including Evergreen Venture Partners recently participated in a $24 million financing round for a touch-screen technology company called N-trig. Significantly, Microsoft Corporation was lead investor. technology spreading N-trig’s DuoSense technology allows users to navigate their PCs by sliding their fingers across the computer screen or using a pen-like device to point or sketch. Microsoft and other major computing brands have endorsed DuoSense, and its technology can be found in recently released products such as Dell’s Latitude laptops and Hewlett-Packard’s TouchSmart screens.

F-Origin, another touch-screen provider, received $5 million in venture capital funding from California-based Keynote Ventures in June last year, while Kleiner Perkins Caufield & Byers and Apple launched a $100 million “iFund”, which only backs companies developing applications and services for the Apple iPhone and iPod touch platforms.

The technology has, in fact, been available in one form or another for several years - so why is it only just coming to market on this scale? “The Apple iPhone is the first

Touch-screen: a new age of interaction

time a product has come out without a keyboard and been a huge success,” says Bouz Dinte, a general partner at Evergreen Venture Partners. The entirely touch-screen Apple iPhone has taken both the mobile phone industry and the computing industry by storm, selling more than 11 million handsets in the last two quarters of 2008. It has all the functions of a computer including internet access, data storage and email access and has been hailed as part of a new generation of technology by media, investors and technological whizz-kids alike.

Research by Rubicon Consulting Group published last year reveals that more than half of iPhone users are under 30 years old. Venture capitalists and technology providers are hoping to capitalise on this next generation of users who value a system more intuitive and interactive than the old-school mouse and keyboard.

Rick Segal, a partner at Toronto-based JLA Ventures, which is co-managing a $150 million fund for developing BlackBerry mobile device applications, says a touchscreen mechanism is interesting only as part of an interface and not as an end in itself. “On a Blackberry or iPhone device a touch screen is an exciting feature but the touch screen alone is not something that would make or break a successful company. In fact it could be a trap or distraction with developers getting all hung up on that part of the device versus the focus being on the full application,” he says.

This is a good point, but investors like Haru Kato, a general partner at Menlo Park-based Keynote Ventures say the technology will not be limited to PCs and handheld devices. It is already being used in ticket machines and there are predictions that ATMs, vending machines – and maybe newspapers - will be operated by touch in the future. I

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Detecting profits DySIS has been developed to replace the coloposcope, an element of the normal diagnostic procedure for cervical cancer which is similar to a microscope and is used to examine abnormal cells after they have been detected by routine tests.

“The coloposcope is a very crude diagnostic device with low cancer detection accuracy. This means it refers more women than necessary to There are more than 273,000 deaths have full biopsies, and a biopsy is an invasive globally from cervical cancer each year, procedure,” says co-founder of NBGI, Aris accounting for 9 percent of female Constantinides. cancer deaths. It’s a stark statistic, The DySIS technology works in a similar way which Edinburgh-based Forth to a coloposcope but has the added ability to Photonics is seeking to address. The create digital images of cells, which can then be firm has just received £6.0 million analysed using special software – resulting in (€6.9 million; $8.8 million) to fund a increased accuracy when it comes to identifying new diagnostic device for cervical abnormalities. cancer, called the Dynamic Spectral The device is already being sold within the Imaging System (DySIS), which has European Union, and is currently being considbeen proved in trials to be 63 percent DiSYS: increased accuracy ered for approval by the US Food and Drug more effective at early diagnosis than Administration so it can be marketed in the US. The diagthe most commonly used procedure. nostic market for cervical cancer is estimated to be worth The series B funding round was led by London-based some £500 million a year. I Albion Ventures, which was formerly known as Close Ventures and spun out of UK merchant bank Close Brothers forth photonics at a glance in January 2009. The firm’s debut investment as an independent outfit saw it commit £2.5 million of the total capital.

Founded: 2002 Headquarters: Edinburgh, UK Fellow London-based venture capital firm NBGI Ventures Funding round (Series B): £6 million provided seed capital for Forth Photonics in 2002 and was Investors: Albion Ventures, NBGI Venture Capital, also involved in the latest funding round, committing £2 Scottish Venture Fund million.

A Scottish diagnostics firm is marketing new technology to identify cervical cancer – with the help of venture capitalists

statshot

pessimism’s grip tightens Industry figures were asked what impact will the credit crisis have on the ability of UK venture capital firms to raise additional funds from investors?

A significantly adverse impact A modestly adverse impact

81% 16%

No impact

0%

A modestly positive impact A significantly positive impact

3% 0%

Adverse: 97 %

Positive: 3%

The British Venture Capital Association and Populus interviewed 80 venture capitalists in the UK to gauge their sentiment on current market activities including investments, exits, operations and fundraising. The results were far from optimistic as you can see from the above figures, which found that 98 percent of British venture capitalists assume the credit crisis will have an adverse impact on their ability to raise additional funds from investors – with over 80 percent expecting that effect to be “significant”.

Source: BVCA / Populus

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asset class

Time to get pushy Two limited partner associations are beefing up their activities in response to the downturn. Kevin Ley reports Amid the current recession several chief financial officers at private equity firms have said they are getting a greater number of calls from limited partners demanding detailed information on issues such as distributions and portfolio performance. As more investors seek this kind of reassurance, LP representatives in Europe and North America are increasing their efforts to be an effective voice for members.

For instance, the UK-based Private Equity Investors Association (PEIA), which represents pension funds, endowments and family offices across Europe, recently said it was “open for business in 2009”.

Since becoming a formal organisation in 2002, it has largely eschewed publicity and relied on word of mouth, but has decided to raise its profile due to what it sees as under-representation of LPs in the last few years on a number of issues. During the 2007 House of Commons enquiries into the significance of the private equity industry in the UK, for example, GPs were called on to testify but not LPs. “I think LPs will need to monitor their funds much more closely as key-man issues come up, as portfolios suffer significant problems and as strategy drifts,” says

PEIA chair Robert Coke. “All of this means that LPs, particularly on the advisory boards, need to start asking more questions and push GPs a bit harder.”

While the organisation does not publish research, it is planning several events this year including a “speeddating” seminar that puts LPs together with a lot of GPs in the same room.

P E I A’s c o u n t e r p a r t i n N o r t h A m e r i c a , t h e Institutional Limited Partners Association (ILPA), is also planning events such a conference in Atlanta that will explore areas such as secondary markets and distressed debt. The global organisation also held its annual GP Summit back in November with panelists including Apollo Management founder Leon Black and Carlyle Group co-founder David Rubenstein.

Executive director Kathy Jeramaz-Larson said the group, after a six-month search, recently brought in director of research Vik Singh from financial services group PricewaterhouseCoopers to conduct studies and provide data that would be vital for members’ operations - especially in light of current debates in Washington.

“One thing that is a problem is that even with all the regulation and discussion going on at the capital there is not a lot of data to support any one position, so we are looking to gather as much information as possible so we can take a position on some of these issues based on fact as opposed to what may happen,” she says. I

the big players in lp representation Organisation

Headquarters

Private Equity Investors Association (PEIA)

London

Number of members 20

Institutional Limited Partners Association (ILPA)

Toronto

200+

Notable members

Dollar figures

Wellcome Trust, Hermes, Coal Pension Schemes

PEIA’s members have made more than $11 billion in private equity investments

CALPERS, Canada Pension Scheme, OMERS

ILPA members manage more than $850 billion in private equity assets

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Pensions refuse to jump ship LPs are keeping faith in private equity, despite falling valuations. By Christopher Witkowsky US public pensions have felt a lot of pain during the economic turmoil of the past year but some are still happy with their private equity allocations despite the plunging asset values of their funds.

One such pension, the $2.3 billion Houston Firefighters’ Relief and Retirement Fund, says it is still strongly committed to private equity.

“We’re not planning any changes. We realise this is a cycle,” says Christopher Gonzales, Houston Firefighters’ chief investment officer.

The pension has not yet experienced default pressure and is not bumping against limits on its private equity allocation, which ranges between 11 percent and 18 percent.

Houston’s actual commitment to private equity is currently about 11.1 percent.

“We don’t feel that pressure yet, we’re able to closely manage our cash,” Gonzales says.

Still, Houston Firefighters is holding steady with its current relationships and is not actively looking for new relationships at the moment, he adds.

“We’re managing our allocations and our cash flow,” Gonzales says.

Houston Firefighters is an experienced private equity investor, having entered the asset class in the 1980s. “The fund always had a higher [alternatives] allocation than other public pensions, it’s always been above 10 percent”, he says.

The pension’s portfolio was built to “weather down markets and be poised to benefit handily on the upswing”, the pension’s chairman Kevin Brolan wrote in a letter to members last October. The pension staff also had to weather Mother Nature when Hurricane Ike roared through the Houston area on 12 September, causing about $20 billion in damage. The pension opened for business the day after, Brolan said in the letter.

“We had no electric but were open to facilitate any needed transactions,” Brolan wrote. “We are maintaining stability and ‘rolling with the punches’.”

Houston is in a similar position to many other US pensions in not looking for new partners given the floundering economy. The Oregon Public Employees Retirement Fund announced last October that it would “likely” forego new relationships this year.

Oregon, unlike Houston, is over-weighted in alterna-

tives. Its allocation to private equity jumped from 17.4 percent last August to 19.2 percent in September, and eventually surpassed the 20 percent threshold. The $54.4 billion fund’s target allocation is 16 percent, with a target range of 12 percent to 20 percent. holding steady The $11.5 billion Kentucky Retirement System is holding its position on private equity as well, despite a recent decline in its assets. Kentucky committed $50 million to Bay Hills Capital emerging managers’ plan in February this year, with the potential for another $50 million in 2010.

“We’ll remain in the space and if we need to make a change, we’ll cross that bridge,” Adam Tosh, the pension’s chief investment officer, says.

Kentucky is actively looking for investment opportunities in the market and has interest in distressed and secondaries, though Tosh stressed that he hadn’t yet seen steep enough discounts for his liking.

“We won’t do anything until we see better discounts,” Tosh said. “We haven’t seen a lot of things that justify the prices yet.” I

houston firefighters investment portfolio as at june 30, 2008

Domestic Equity 23.6% Fixed Income 33%

In-House Cash Equivalents 1.2% Real Estate 5.5%

Private Equity 11.1%

International Equity 21% Alternative 4.7%

Source: hfrrf.org

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Time to play

privately speaking

By 2002, after four years in charge of Silvio Berlusconi’s holding company, Claudio Sposito had had his fill of the media spotlight.

Since then, he has been attempting to make Milan-based Clessidra the leading private equity firm in Italy. Andy Thomson discovers he has developed a new interest in toys photography by simone casetta

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private equity international

e may have spent 15 years as an investment banker at Morgan Stanley but Claudio Sposito, now chairman and chief executive of Milanbased private equity firm Clessidra, is probably no fan of “masters of the universe”. On the other hand, he is greatly enthused by the “invincible lords of nature” – otherwise known as Gormiti.

To explain: Gormiti are collectable toy figures whose rights are owned by Clessidra portfolio company Giochi Preziosi, Italy’s largest toy maker, while the “masters of the universe” – a phrase sometimes used to describe gods of the financial world – is also the name given to a media franchise created by rival toy firm Mattel. Sposito is confident that the grisly-looking Gormiti can justify their “invincible” tag by defying the economic headwinds.

“They’re quite recessionproof,” he says. “We are confident that people will still buy toys, even in this environment.”

Sposito is seated opposite me in the boardroom of his firm’s inconspicuous office in Via del Lauro, a narrow, winding street that’s also surprisingly quiet given its central location just a short Sposito: refocused Fininvest d i s t a n c e f r o m M i l a n ’s world-famous La Scala opera house. When Clessidra was launched in 2003, the tranquillity of the surroundings may have come as a relief to Sposito given the relentless media noise associated with his prior role as chief executive of Fininvest, Italian Prime Minister Silvio Berlusconi’s holding company, which Berlusconi founded in the 1960s.

Reflecting on the four years he spent at the industrial giant, from 1998 to 2002, Sposito describes the role as having been “very active and visible”. This may be code for “controversial”. Those four years saw a lot of restructuring within Fininvest’s portfolio. In Sposito’s own words: “We refocused the group and that meant some significant restructuring and several divestitures.” As part

march 2009

H

of a strategy to focus Fininvest on its core entertainment and media interests such as television network Mediaset and football club AC Milan [Sposito, incidentally, is a “big supporter” of rival AS Roma], the likes of department store chain Standa and real estate group Edilnord were sold off during Sposito’s spell in charge.

Sposito reflects that by the time he left Fininvest he had added operational accomplishments to the financial wizardry he had honed at Morgan Stanley. “There’s a big difference going from being an adviser to being a principal,” he says, comparing the two roles. “I developed technical skills at Morgan Stanley but at Fininvest I had more independence when it came to decision making and I had more responsibilities. I was involved in some very active portfolio management.”

It was in 2003 that Sposito set out to apply his experi-

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to adorn every nook and cranny at Clessidra HQ, from the small and delicate to the large and imposing.

However, the name was probably not the most important step in building a credible private equity firm. More crucial was how Sposito went about demonstrating his firm’s local credentials. It was helped by having a strong team of Italian professionals. Sposito brought with him three men he had worked with both at Morgan Stanley and then on the Fininvest restructuring - Alessandro Grimaldi, Manuel Catalano and Matteo Ricatti. They were supplemented by Giuseppe Turri and Alessandro Papetti, formerly chief executive and partner respectively at Italian private equity firm Arca Impresa Gestioni.

A less newsworthy development “I developed technical but one which Sposito believes was also highly significant was regisskills in investment tering Clessidra with the Bank of banking but at Fininvest Italy as a joint stock company known as an S.p.A (Società per I had more independence Azioni). This was something which when it came to decision few private equity funds had done in Italy at the time because it was a making and I had more more complicated structure than responsibilities” those normally used and required a higher level of transparency towards the Italian regulators.

Sposito’s positioning of Clessidra faced its acid test when it went out ence to the private equity world. to raise its first fund. Vindication He recalls: “I thought the Italian came in January 2005, when its [private equity] market was not €820 million final close made it the fully developed and that there was largest Italy-focused fund that had room for a different player – an been raised at that date. Local support was forthcoming, entity that would be very Italian in its approach and with €500 million being committed by Italian institutions. mentality but with the capacity and the capability to These included Italian banks such as Mediobanca, execute larger deals. Such a player would be institutional, Unicredit and Intesa Sao Paolo. “We were perceived as like a global private equity firm, but with a country part of the Italian financial establishment,” says Sposito, focus.” “in a country where, at the time, private equity was seen as a marginal phenomenon.” all in a name And, no, Berlusconi was (and is) not an investor in Clessidra – either as an LP or in the management Clessidra ,which means “hourglass” in Italian, was company. Asked the question, Sposito replies that the firm formed in February 2003. Asked about the origins of the is a totally independent management company owned by name, Sposito says he wanted to avoid resorting to an the nine partners. acronym and consulted a friend and business adviser with He says the first fund was “never going to be easy to a marketing background to devise something more raise, especially outside Italy”. This seems modest, compelling. The hourglass, says Sposito, represents however. After all, some €300 million was raised from an “human creativity, time and value”. It is clear that the impressive line-up of international LPs including the concept has now been embraced fully as hourglasses seem

¬

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Italian firms ‘mentally inclined to growth’

California Public Employees Retirement System (Calpers) and the N e w Yo r k S t a t e C o m m o n Retirement Fund. Calpers, which committed €50 million to Clessidra’s first fund, revealed in minutes of its October 2008 investment committee meeting that it would be re-upping to the tune of €150 million in the second fund (of which more later). huge economy Sposito says there were a couple of basic but important messages to convey to wavering overseas investors about the Italian market.

First: the size of the opportunity. It can be too easily forgotten, Sposito contends, that Italy has a huge economy comparable in size to those of the UK and France. Second, Italian companies are “mentally inclined to growth”. In a country with a vast

“We were perceived as part of the Italian financial establishment in a country where, at the time, private equity was seen as a marginal phenomenon”

swathe of medium-sized, often familyowned, companies with big ambitions, the opportunity for “buy-andbuild” strategies is compelling.

As an example of a company Clessidra has helped to grow, Sposito points to Moby, a shipping company operating ferries between the Italian mainland and the islands of Elba, Sardinia and Corsica. Under Clessidra’s ownership the firm has acquired two ferries and a competitor on the Sardinian route, Lloyd Sardegna, for a reported €50 million – bringing another five ferries into Moby’s ownership in the process. It now has a fleet of 21 boats in total.

But while Moby was arguably a straightforward growth opportunity – in concept if not necessarily in execution – the Clessidra team has sought to apply creative imagination to other opportunities. In the case of

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gas transportation business Società Gasdotti Italia (SGI), this involved creating a whole new company.

Sposito says of the deal, which was struck in 2004: “SGI was a division within [the Italian power company] Edison that we turned into Italy’s first independent gas transmission business, totally focused on the open market opportunities.”

The deal evidenced Sposito’s theory that there was an opportunity to develop nascent infrastructure projects to the point where specialist infrastructure funds would become interested. “We like infrastructure deals where there remains a lot of work to do to get to the point where there is a level of managerial transparency and operational efficiency needed for infrastructure funds to invest.

This ensures that we create the appropriate value added for our LPs,” he says. In the case of SGI, that’s precisely what happened: ABN AMRO Global Infrastructure was persuaded to part with €300 million for the business in January 2007.

The deals mentioned above are all examples of Clessidra taking sound businesses and then applying innovation to grow them further. Nor is this a coincidence: Sposito is quite clear that, in spite of past experience, restructuring is not his favoured strategy today. He

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says: “We will look selectively at restructuring angles but we believe that the market disruptions favour strong companies in consolidating their leadership position and that’s why, first and foremost, we seek to identify consolidators.”

Talk of growth may be hard to reconcile with the Bank of Italy’s recent forecast that the Italian economy will shrink by 2 percent in 2009. But Sposito does not believe that conditions are particularly adverse. “The financial system in Italy is relatively well positioned as the banks were less aggressive during the boom and there has been no major disruption in the Italian banking system on the scale that we have seen elsewhere. In addition, Italian families have a very low level of indebtedness. They are high net savers, so the impact will be less on consumer spending.”

Optimism appears to be one of Sposito’s personal traits.

“I do not believe the world is coming to an end,” he says with a reassuring smile. “In the next two years there will be attractive opportunities for private equity. It’s a world with less debt, but you still get to look at some very credible opportunities.”

On the subject of debt, he says it is possible to get €200 million to €300 million in today’s environment rather than the €2 billion to €3 billion of the recent past.

“Banking based on relationships is very important,” he adds, “because they [the banks] come to know client companies inside out.” successful tie-ups Sposito claims that the decline in the debt market has not been much of a hindrance to his firm, pointing out that the last two deals it has completed – one of which was the pre-Christmas buyout of business information provider Cerved alongside US private equity firm Bain Capital – featured a 50/50 debt to equity ratio. Incidentally, the tieup with Bain was cited by one local Milan-based professional as evidence of how Sposito “successfully leverages his contacts”. The firm appears happy to invest alongside partners in deals where appropriate.

There has been much recent speculation about which GPs would suffer most from any industry shakeout.

Sposito believes that Clessidra is well positioned as a

¬

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country-focused fund. “Local players will do better,” he ¬ says.

“The idea of the pan-European fund is very complex to execute successfully because the individual markets within Europe are so different. For LPs, a mixture of global funds and key country players is probably a good strategy.”

Furthermore, Sposito openly admits that he wants Clessidra to be viewed as the number one fund in Italy.

Whether that ends up being the case or not, the firm certainly appears to be winning the support of investors.

At the time of writing, market sources report that it has so far gathered between €1.3 billion to €1.4 billion for its second fund, which has a target of €1.5 billion. This may have something to do with figures from the Washington State Investment Board showing that Clessidra’s debut fund was registering an IRR in excess of 100 percent on June 30 2008.

As I get up to leave, I’m invited to peruse a collection of Gormiti warriors gathered together in a small, warriorlike huddle. It’s hard not to be a little unsettled by their ugliness and apparent ferocity. Sposito reflects that the designer who created them was greeted with scepticism by his bosses when he claimed that one day they would sell

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by the million. He turned out to be right, says a smiling Sposito, as we head off to turn our attention to a rather more aesthetically-pleasing object: the largest hourglass on the premises. I

clessidra at a glance Founded: 2003 Senior professionals include: Claudio Sposito (chairman and chief executive); Alessandro Grimaldi (senior partner); Giuseppe Turri (senior partner); Maurizio Bottinelli (partner); Manuel Catalano (partner); Alessandro Papetti (partner); Matteo Ricatti (partner); Ugo Belardi (partner and chief operating officer) Investment targets: Corporate restructuring; privatisation; family-owned business; buy-and-build; going-private Portfolio includes: Giochi Preziosi (toys); Global Wood Holding (renewable energy); Metalcam (steel components); Moby (ferry transportation) Source: www.clessidrasgr.it

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cover story:

Funds of funds Intelligent or ignorant?

When bundles collapse Having second thoughts

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A placement agent quoted in the following pages estimates that there are around 250 private equity funds of funds around the world today. Can all of these vehicles differentiate themselves and effectively make the case that they deserve to be recipients of capital in a tougher fundraising climate? Some would say that the answer is ‘no’ and that the crowd of funds currently in the market will thin out in the months and years ahead.

However, the demand to access private equity is still strong – and, for certain types of investor, committing to funds of funds continues to make sense.

And, within the funds of funds industry, there are interesting geographic and strategic niches.

We explore some of these in the pages that follow.

©

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funds of funds

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Intelligent or ignorant?

In the wake of an influential limited partner’s claim that funds of funds represent ‘ignorant capital’, Andy Thomson investigates whether they still have a key role to play in the private equity industry For funds of funds, the words of legendary investor David Swensen were not exactly a ringing endorsement. As a reminder, his recent interview with the Wall Street Journal included the following reflection: “Fund[s] of funds are a cancer on the institutional investor world. They facilitate the flow of ignorant capital.

If an investor can’t make an intelligent decision about picking managers, how can he make an intelligent decision about picking a funds of funds manager…?”

It was reported that the influential head of Yale University’s endowment was aiming his criticism primarily at hedge funds of funds rather than their private equity-focused counterparts. Nonetheless, the timing of the criticism raised a few eyebrows – it came shortly after the announcement that Yale endowment, noted for its outstanding performance over the years, had lost 25 percent of its value between June and December last year.

Some private equity professionals think the market downturn will indeed expose some “ignorant capital” – and that, as a result, the funds of funds sector will be forced to slim down. Says Antoine Dréan, founder of Paris-based placement agent Triago: “There are around 250

march 2009

funds of funds around the world today, and a lot of them are of the “me-too” variety. They sold access, small tickets and manager selection and now people don’t want to pay for that – a lot more LPs are doing it for themselves.”

“If you want to get into European turnarounds, for example, that’s difficult to do if you’re based in Montana. There are no brand names in European turnarounds, you can’t flick through a book to select your managers – you need to be on the ground” Dréan believes that the way forward for funds of funds is greater specialisation. “There will be a market contraction and people will have to focus on specific segments. If you want to get into European turnarounds, for example, that’s difficult to do if you’re based in Montana.

There are no brand names in European turnarounds, you can’t flick through a book to select your managers – you need to be on the ground.”

This goes to the heart of a powerful argument put forward by those who reject Swensen’s notion that you should take responsibility for your own investment decisions – namely, some investors simply can’t invest in private equity in the way that Yale can with its hefty in-house team of specialists. For certain types of investor, funds of funds remain an obvious choice – arguably, the only sensible choice. good way to diversify “The basic raison d’etre for funds of funds has not necessarily changed,” says Katharina Lichtner, managing director and head of research at Swiss alternative asset adviser and manager Capital Dynamics. “It’s a good way to diversify if you lack geographic reach, selection skills and you do not have a large allocation to make.” She adds that funds of funds can also be a useful entry point to the asset class for investors keen to build knowledge of the asset class and “participate in knowledge transfer” before switching to an in-house programme at some point in the future.

Those who believe funds of funds still have an important role to play point to the unnerving volatility that prevails at present. “There will be a significant shake-out in the [private equity] industry,” says Peter Laib,

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managing director at Zurich-based ¬ funds of funds manager Adveq.

“Not all the buyout funds that are in the market this year will be able to raise money. There will be team instability and some will have to scale down. Some younger members of teams, who can’t get carry, will try and spin out.”

In Laib’s view, this unpredictability is a reason for immature private equity investors to entrust their capital to experienced custodians. It is not, in his view, a reason simply to steer clear of the asset class – such a course of action would risk missing some potentially outstanding vintage years. “By the end of this year, prices should have bottomed,” he says. “At the end of 2009 and into 2010 there should be massive, extraordinary equity opportunities with very good, inexpensive companies up for grabs.”

He continues: “As an investor, you should be prepared to commit to the asset class today to take advantage of this prospect. Most LPs do understand this – the ones that are not committing are those with liquidity issues or difficult supervisory boards.

But if they understand it, and they can invest, then they do.” commit when its tough Charles Soulignac, chairman and chief executive of Paris-based funds of funds manager Fondinvest Capital, underlines the point that LPs must commit in tough times to benefit when the upcycle commences: “You might be interested in investing in 2009 to 2010, but it will be difficult to gain access to the best funds if you haven’t built a relationship with them already.”

Aside from GP selection and relationship-building, geographic diversification is another compelling reason for investors to turn to funds of funds.

And, in this context, emerging markets continue to be an increasing priority.

David Pierce, chief executive of Hong Kong-based funds of funds manager

Laib: massive opportunities on horizon

Squadron Capital, believes there are at least two compelling reasons why demand for Asia-focused funds of funds remains strong even in today’s more challenging fundraising market.

First: the diversity of the region’s individual markets. Says Pierce: “Funds of funds are a good choice in Asia because it is a geographic expression rather than a single market. And Asia is a huge geography at that, remote from most investors, very complicated to understand and difficult to resource in terms of language skills and cultural understanding.”

Second: the need to be in close contact with the region’s managers.

“Investing directly from outside the region is a risky way to proceed because of the brevity of a lot of track records here. It’s difficult to assess GPs unless you’re close to them. The valueadd we offer is our longevity on the ground and ability to assess what’s really going on.”

Continuing support for Asia-focused funds may also reflect a widespread

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belief that, while the region did not prove immune to global recession, the case for investing there remains strong.

Pierce notes some interesting developments: “The dramatic correction in public market valuations has had some big knock-on effects. One of these is that some of the competition to private equity has been eliminated. For example, hedge funds did a lot of preIPO investing in China and India.”

He continues: “I believe the opportunity in emerging Asia is becoming broader and deeper. And in developed markets such as Japan, pressure on corporates is all the greater. Exports have been squeezed dramatically and companies need to focus on their core competencies. We’re optimistic about the future of private equity in Japan.”

Nick Morriss is co-founder of EMAlternatives, which manages separate account mandates for institutional investors from its offices in Washington DC, Amsterdam and Shanghai. The firm adds an emerging markets component to existing private equity programmes and its clients include California Public Employees Retirement System, which in 2007 gave it a discretionary mandate to focus on emerging managers in global emerging markets with fund sizes of less than about $1.2 billion.

He maintains that “the rhetoric had run ahead of the reality” in terms of emerging markets’ ability to withstand global economic turmoil, pointing out that “domestic demand has not made up for the loss of exports”. While he sees plenty of opportunity ahead, he believes that “it takes a sophisticated investor to recognise that now is not the time to pull out and is the time to get in”. He adds: “Ask institutions today whether they plan to make increased allocations to emerging markets this year and it’s as likely as not that the answer will be no.

Understandably, a lot of investors are running round like headless chickens because their core portfolios are suffering.”

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default concerns In developed markets, where investment in funds of funds is well established, there are concerns over the prospect of defaults. This was brought into the spotlight when SVG Capital, the London-listed funds of funds manager which invests most of its capital with buyout firm Permira, recently renegotiated credit facilities and sought up to £200 million in fresh capital to shore up its balance sheet and ensure it could meet future commitments. The firm also took up an offer from Permira to reduce its commitment to the Permira IV fund to 60 percent of the originally agreed level.

Asked about prospects for more default issues and whether this may end up damaging the reputation of funds of funds, Laib says: “With traditional funds of funds that have simple, transparent structures, you

Dréan: more specialisation needed

wouldn’t expect many problems.

There could be issues for those with big high-net-worth bases and several distribution vehicles, including listed vehicles, where you’re distributing to investors you don’t know.” However, there is also a view that, relatively speaking, funds of funds are in a

position to enhance their reputation with GPs. Says Laib: “The ‘quality pyramid’ of LPs is in transition. At the top you had US endowments which were seen as long term, stable and good representatives to have on the advisory board. But now they have liquidity issues and are dropping out of funds – so there is a window for other LPs, like funds of funds, to expand those top quality relationships.”

This would arguably be an ironic outcome in light of Swensen’s remarks. At the very least, appetite for private equity remains strong and investors still need the assistance of an intermediary to execute certain strategies. Inevitably in times like these the onus is on funds of funds managers to go the extra mile to demonstrate their ability to add value. The long-term viability of the most persuasive should not be in question. I

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funds of funds

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Feeder funds, typically offered by private banks, have the highest exposure to high-net-worth individuals, and therefore to potential defaults.

David Snow investigates the scale of the problem

When bundles collapse When the topic of limited partner defaults comes up, the term “highnet-worth individual” is usually not far behind.

Funds of funds are widely assumed to have the greatest exposure to capital from wealthy people, who are attracted to multi-manager funds due to their diversification and lower minimum commitments. But there is a distinct breed of limited partner built exclusively with high-net-worth and family money – the feeder fund.

The term “feeder fund” is an indistinct bit of jargon referring to the hugely diverse set of investment vehicles affiliated with private banks and wealth management boutiques. In general, feeder funds bundle high-networth individual commitments into compelling blocks of capital dedicated to single private equity funds.

Especially in cases where the “bundler” is a major private bank, some feeder funds are today among the largest single LPs within the investor bases of major private equity funds.

If individuals are indeed the first among LPs to seek liquidity for their private equity fund interests, and also among the first to default or threaten to default, feeder funds could see a disproportionate amount of this activity, say fundraising and fund formation experts.

The decline of individual net worth levels, as well as the decline in pres-

Bundled capital: private banks made a mint on feeder funds

tige of alternative investment strategies in the eyes of the broader public, has also meant a drying up of capital that once flowed strongly from private banking clients to private equity funds. It also doesn’t help that much of the capital in the collapsed Ponzi scheme run by Bernard Madoff came through feeder funds. All this will further impact private equity fundraising, especially for wellknown firms. According to a New

York-based fund formation lawyer with major private equity GP clients, big private banks such as those controlled by UBS, Credit Suisse, JPMorgan, Citi and Morgan Stanley were, until a year ago, “pretty significant in the fundraising market”.

Today these groups have seen a “significant drop-off” in the amount of capital they can contribute to private equity fundraisings. The lawyer attributes this decline to the fact that “one of the most stressed out categories of investors is the individual. They are struggling to meet existing capital calls and [are] savaging their private equity portfolios.”

The lawyer says he has seen an “uptick” in defaults coming out of feeder funds. However, on a capitalweighted basis, he expects a few key institutional liquidity constraints to have a greater impact on the industry. But individual and feederfund liquidity issues will cause headaches thanks to their sheer numbers, he says.

Feeder funds grew and proliferated along with all other aspects of the private equity industry, in part because of huge demand for access to famous private equity names, and – according to several private equity fundraising market insiders – in part because the fees associated with feeder funds were very good business for the private banks. Clients were

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willing to pay hefty fees for access to the firms they read about in the financial headlines.

“Most clients of private banks would only get excited about a fund they’d heard of,” says a New York placement agent. “They’d be teeing off at the country club and saying, ‘I’m in Bain VII,’ and their golfing companion is saying, ‘Wow, you must be a big hitter.’”

During the boom years of the financial markets in general and private equity in particular, feeder funds met a need for private clients, who wanted access to private equity funds, and for general partners, who wanted large capital commitments. Being the middle man between such twin demand usually spells a fine opportunity to make money. While private clients are always charged to varying degrees for access to feeder funds, some private banks “were just happy to be able to access quality product and wouldn’t ask GPs for fees”, says an independent European placement agent. placement-style fees Some notable Wall Street banks, however, saw an opportunity to charge placement-style fees to GPs for large bundles of high-net-worth capital. For example, one European placement agent says that JPMorgan’s private banking unit, among the largest feeder fund bundlers in the private equity market, will charge upwards of 2 percent of capital “placed”. JP Morgan has been known to often place between $500 million and $750 million in large private equity funds, the placement agent said. JP Morgan did not return multiple calls on the subject.

Given the huge diversity of fees and terms within the feeder fund market, GPs will experience an equally diverse range of issues when dealing with defaults from within

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“Most clients of private banks would only get excited about a fund they’d heard of. They’d be teeing off at the country club and saying, ‘I’m in Bain VII,’ and their golfing companion is saying, ‘Wow, you must be a big hitter’”

feeder funds. In today’s uncertain market, the feeder fund term of greatest interest to GPs has to do with who is on the hook in the event of an underlying individual default – the private bank or the individual?

General partners would prefer an arrangement whereby the “bundler” is responsible for the full amount of the capital call, whether or not the underlying investors are sending in the cash. However, according to the fund formation lawyer, the largest feeder fund bundlers are usually able to negotiate pass-through treatment with regard to the default clauses, effectively meaning that GPs must chase down delinquent individual LPs within the feeder fund and, if necessary, enforce default provisions against them. “If you don’t get the pass-through, that would show that you’re not a significant amount of capital,” says the lawyer, commenting on a feeder fund’s ability to secure this term.

Where the pass-through treatment is not agreed to, the feeder fund managers must cover for a defaulter, or allocate any punitive action down

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to the offending client capital accounts.

More frequently, however, private banks can use their significant resources to offer liquidity tools to private clients in a feeder fund, offering to buy out or transfer interests for clients who no longer wish to participate in given funds (the prices paid for these interests are of course set by the bank).

According to the New York placement agent, some feeder funds have managed the capital call issues sometimes faced by private clients by calling a large amount of capital up front in anticipation of actual GP draw-downs.

The European placement agent says that when he secures feeder fund capital for a GP client, he requires the private bank to verify that certain client account management procedures are firmly in place. “We ask them, do they meet a quality test? Do they meet accredited investor rules?

Are they labeled in the bank system as sophisticated? Do you hold their assets? How much of the assets?

Does the bank have the authority to make the capital call on behalf of the client?”

The placement agent put this rather stringent set of requirements in place after being shouted at by a GP who had called capital from a feeder fund only to have some of the capital come in late – two of the major participants in the feeder fund were on extended vacations and unreachable by the private bank.

“My GP was furious,” says the agent, who had placed the feeder fund in the partnership.

Over the next year or two, defaults from within feeder funds are more likely to be the result of individual net worth collapses than of misplaced holiday Blackberrys. In these situations, general partners may find themselves with plenty of better things to do than chase down an errant private bank client. I

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Having second thoughts

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funds of funds

A $30 billion avalanche of potential secondary deal flow awaits. So why are funds of funds putting deals on ice? Amanda Janis and Philip Borel investigate Anecdotal evidence suggests the secondary market is heating up.

Around the world, crisis-stricken investors are hurting in many parts of their investment portfolios.

Commitments made to boom-time funds, including those still undrawn, are weighing heavily on some investors’ finances.

There are even rumblings about a few so-called “walk-away” deals – largely unfunded stakes in limited partnerships essentially given away by investors at risk of default – akin to what was seen with some venture funds post-dotcom meltdown.

Insiders say discounts on LP interests are averaging between 40 percent and 60 percent of net asset value. And, unlike a decade ago when secondary sales were largely initiated by financial services firms, the crowd of sellers is an ever-expanding group including big pension funds, endowments, foundations, individuals and family offices.

“In fact, three of our last four deals have been with family offices,” says John Wolak, head of the secondaries fund of funds group at Pennsylvaniabased Morgan Stanley Alternative Investment Partners. patience for profits But don’t be fooled: despite an uptick of interested buyers and sellers, few transactions are closing

Livingstone: a long, broad-based sell-off

“Is it worthwhile to buy a 2007 vintage that’s 70 percent invested? Even if you give it to me at an 80 percent discount, the portfolio still might be worthless”

at the moment. Vendors may feel that asset prices currently on offer under-value their holdings; potential buyers on the other hand will look at the same assets and describe the pricing as still expensive.

“If you’re pricing off the June or September 2008 numbers, you have to take into account that there’s going to be mark-downs at year end,” says Wolak. “The question is what the real discount is once you have a true mark.”

Clarity on the “real” discount will enable buyers to adapt their pricing – and ultimately pay less for funds.

“We believe that absolute pricing, not discounts, will get even cheaper over the next 12 months,” says Hanspeter Bader, managing director of Geneva-based asset management firm Unigestion’s private equity funds.

Somewhat paradoxically, vendors are also expected to feel better about doing deals once the 2008 NAV adjustments are fully priced in. Explains Marleen Groen, chief executive of London-headquartered secondaries firm Greenpark Capital: “Sellers are very much inclined to wait until valuations have been adjusted at least somewhat to then be able to sell at a perceived smaller discount. The absolute pricing might be the same, but the discount will look smaller a n d h e n c e m o r e a c c e p t a b l e .”

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Market participants estimate this year’s amount of closable deal flow will range from $30 billion to $50 billion, an increase from the $12 billion to $30 billion believed to have closed in 2008. “There’s an avalanche of holdings in funds waiting to be sold,” agrees Groen.

“Deal flow has been building up s i n c e 2 0 0 7 ,” c o n c u r s E l l y Livingstone, London-based head of Pantheon Ventures’ global secondaries team. “This is a broader-based sell-off [than what was seen following the dotcom bust], and it’s got some way to run. It’s still early.

This is not a six-month phenomenon.”

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Market participants estimate this year’s amount of closable deal flow will range from $30 billion to $50 billion, an increase from the $12 billion to $30 billion believed to have closed in 2008

well placed to pounce Funds of funds are one segment of the asset class well placed to pounce on the glut of interests expected to come to market. Groen points out that most established funds of funds have long had secondary allocations, which would typically be used to target interests in funds they’re already invested in on the primary side.

But some of those funds of funds have inverted their typical secondary versus primary allocation matrix to capitalise on opportunities arising from distressed or highly motivated sellers, says Craig Marmer, head of San Franciscobased placement agent Probitas Partners’ liquidity management business.

And, unlike most pure secondary houses, some funds of funds may be more willing to purchase newer vintages that are less drawn down.

“Historically, it usually took at least four to five years” into the life of a fund before LP interests would go up for sale, “because otherwise you’re just selling at the bottom of the Jcurve,” Marmer says. But in this environment, he adds, purchasing funds with large amounts of capital left to

invest presents an interesting “primary-oriented” opportunity for funds of funds to realise more potential upside.

Groen agrees: “That is very much a consequence of the current market conditions on the one side and of diverging secondary strategies having been developed over time, the latter being very comparable to developments in the primary market in its earlier years,” she says.

If a buyer picks up one of these fund interests – dubbed “late primaries” or “early secondaries” – at a significant discount, they will essentially be buying exposure to investments made over the next three years, which many people believe could be among the best vintages ever given historical returns data for funds invested during downturns.

march 2009

“For a fund of funds these holdings could be quite attractive,” says Groen. assorted sweet spots Unigestion has just hit the fundraising trail with its second, secondariesfocused fund of funds, having raised the first to capitalise on the dotcomboom fallout. “The opportunities over the next two to three years are huge,” Bader says.

The firm is raising €150 million for investments mostly in mature portfolios more than 50 percent drawn.

However, Bader notes: “For other mandates that we are managing we are also looking at little-drawn funds from GPs that are on our ‘preferred GP list’.”

Lorenzo Lorenzotti, managing director at boutique European funds of funds manager Altium Capital Gestion, also invests in secondaries on an opportunistic basis – though he is less interested in recent vintages heavily invested in deals done at high multiples. “Is it worthwhile to buy a 2007 vintage that’s 70 percent invested?” he asks.“Even if you give it to me at an 80 percent discount, the portfolio still might be worthless.”

Late primaries with little capital drawn, however, should be more attractive, Lorenzotti concedes.

Morgan Stanley’s Wolak also avoids buying interests in funds invested in frothy deals, though his group targets funds that are on average about 70 percent drawn.“We’re really focused in on 2002 to 2005 vintage funds,” he explains. “They are more mature. The money was put to work in a more reasonable environment and maybe there’s some investor fatigue as well if they haven’t gotten distributions or are worried about their exposure right now.”

Whatever the particular strategy, funds of funds are poised to play an increasingly integral role as a growing number private equity fund assets change hands. I

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The Peracs Private Equity Barometer Q1 2009 The Barometer. which measures the current attractiveness of private equity investment, finds better prospects for returns today than halfway through last year US Finance 29%

US Services 40.2%

US Industrial 41.6%

US Household 28.5% US Leisure 22.8% ba rom ete rI RR %

2Q08 barometer IRR%

EU Household 13.3%

US Retail 48.4%

1Q 09

EU Health 14.7%

EU Finance 43.1%

EU Leisure 50.2% EU Industrial 10.7%

US Health 3.6%

IR R%

EU Services 50.3%

Worldwide Q2 08 24.7%

The Peracs Private Equity Barometer1 provides a measure of attractiveness for private equity investments worldwide. The Barometer analyses private equity across a variety of industry categories for both the US and EU. It is based on broad and representative data on private equity performance and an empirically validated set of macroeconomic indicators of investment attractiveness.

Peracs’ Barometer provides insights as to the relative opportunities in private equity as indicated by these macroeconomic indicators.

EU Retail 56.7%

Worldwide Q1 09 38.9%

For Q1 2009 the Barometer IRR points to the countercyclical nature of private equity. Setting aside the possible difficulties in executing private equity deals in the current climate, the opportunities are extremely attractive in many sectors. The average Barometer IRR for all sectors worldwide in Q1 2009 is 38.9 percent, against a Barometer IRR of 24.7 percent in Q2 2008. www.pebarometer.com oliver.gottschalg@peracs.com

1This material has been prepared on the basis of publicly available information, internally developed data and other third party sources believed to be reliable, however, Peracs, LLC has not sought to independently verify information obtained from these sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. This material is for information and illustrative purposes only, is not investment advice and is no assurance of actual future performance or results of any private equity segment or fund. Peracs does not represent, warrant or guarantee that this information is suitable for any investment purpose and it should not be used as a basis for investment decisions. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.

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private equity international

march 2009

open & closed funds opened fund ACG Europe V Ant Bridge Asia IV N/A Blackstone Infrastructure Partners N/A Citadel Capital Joint Investment Fund First Equity Capital Whitesmith Private Equity Investors Khosla Ventures Expansion Fund Kotak India Private Equity Fund N/A

manager ACG Private Equity Ant Global Partners Ant Global Partners The Blackstone Group The Carlyle Group Citadel Capital First Equity Mortgage and New Vision Title Goldsmith Capital Partners Khosla Ventures Kotak India Private Equity Leopard Capital

fund no.

5 4 1 1 1 1 1

geographic focus

fund of funds secondaries private equity infrastructure private equity private equity distressed debt

Europe Japan and Taiwan Indonesia Global N/A Middle East and North Africa North America German-speaking Europe N/A India Cambodia Global Global Global India Global with a bias for Australasia Global Vietnam

Lone Star Funds Lone Star Funds M2M N/A Origo Sino-India Unigestion

7 2 1 1 1 2

private equity venture capital private equity private equity & real estate distressed debt commercial real estate private equity private equity private equity secondaries

VinaCapital

1

private equity

name of fund

name of firm

fund

type of fund

geographic focus

N/A

Atlas Venture

8

venture capital

N/A

Private Equity Partners IV N/A

Danske Private Equity Forsyth Capital Investors

4 1

fund of funds private equity

Europe and North America US

N/A Milestone Partners III Champion Small Cap Fund II

Leapfrog Investments Milestone Partners NextStage

1 3 2

private equity private equity growth capital

Asia and Sub Saharan Africa North America France

PINOVA Fund I

PINOVA Capital

1

private equity

German-speaking Europe

Global Innovation Partners I

Siemens Venture Capital

1

venture capital fund of funds

TIME Investors

TIME Equity Partners

1

growth capital

North America, Europe, Israel and Asia Europe

Vision Capital Partners VII

Vision Capital

7

private equity

Global

Z Capital Special Situations Fund

Z Capital Partners

1

private equity

N/A

Lone Star Fund VII Lone Star Real Estate Fund II Global Maritime Assets India Rizing Fund N/A Unigestion Secondary Opportunity Fund II The Vietnam Energy Fund

1 1 2 1

type of fund

funds closed

Note: although every reasonable effort has been used to verify the information included here, it is often the case that not all facts and figures are made available to us and at times third party sources have provided such information. None of the material herein should be construed as a solicitation to invest in any of the funds or firms listed and readers are advised to undertake their own verification of all information provided.

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private equity international

Raising a fund? Just closed one?

Send details to research@peimedia.com sector focus N/A N/A cleantech N/A financial services N/A residential mortgages

target final total €300m $400m $250m $5bn $3bn $500m $100m

retail and financial services cleantech and information technology N/A N/A

€1bn $1bn $200m $100m

N/A N/A maritime defence agriculture N/A

$10bn $10bn $400m INR7.5bn $300m €150m

energy

N/A

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Each month Private Equity International, and its sister online publication PrivateEquityOnline.com, monitor private equity firms that are raising new funds. Here we track those funds that have recently launched their most recent fund(s) as well as those firms that have announced a recent close for a fund they have been raising.

sector focus

1st/2nd/final

target final

amount closed

closed

LPs committed

technology and life sciences

Final

$400m

$283m

Jan-09

N/A manufacturing, business services, turnaround microinsurance N/A N/A

Second Final

€600m $100m

€600m $100m

Feb-09 Jan-09

The Kresge Foundation, Paul Capital, Franklin Park, Industriens Pensionsforsikring, Meketa Investment Group N/A The Barry-Wehmiller Companies

First Final First

$100m $200m €120m

$50m $230m €61m

Mar-09 Feb-09 Feb-09

N/A

First

€50m

€150m

Dec-08

N/A

First

$200m

$100m

Feb-09

European Investment Bank, FMO N/A Groupe Artémis, Caisse des Depots et Consignations, OFI Asset Management Commerzbank, European Investment Fund, BIP Investment Partners, KfW Bankengruppe Siemens pension fund

telecoms, media and entertainment N/A

First

€50m

€50m

Feb-09

Yam Invest

Final

N/A

€680m

Feb-09

financial services, gaming and consumer products

First

$500m

$100m

Jan-09

Goldman Sachs Asset Management, HarbourVest, CV Starr, GIC Special Investments N/A

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private equity international

march 2009

lp profile: quartilium

Straddling the Atlantic Paris-based Quartilium is the funds of funds team of FINAMA Private Equity, a management company affiliated to Groupama, the French mutual insurance company with €90 billion of assets under management. Quartilium oversees assets worth more than €1.7 billion through its specialised private equity funds of funds investment programmes in Europe and the US. The funds of funds target investments in buyout, venture/technology, mezzanine, secondaries, distressed and infrastructure funds.

Quartilium manages a stable of funds of funds including: Gan Fonds d’Investissement Trust, a secondary fund of funds launched in 1998, which closed in 2004 on €73 million; FCPR Quartilium I (formerly FCPR FINAMA Private Equity Global), which closed in 2002 on €130 million and is currently committed to 35 investment funds; and FCPR Quartilium II, which launched in 2003 and closed at €284 million in December 2005. The latter vehicle has a primary and secondary component and invested in venture (33.3 percent) and LBO funds (66.7 percent) in both North America (33.3 percent) and Europe (66.7 percent), and is committed to 30 investment funds.

In December 2006, Quartilium announced the close of its first specialised mezzanine fund of funds on €126 million. This vehicle, one of the first of its kind, will invest in some 15 top-tier mezzanine funds in Europe and the US. In the same year, the group also launched Quartilium III, with a target size of €400 million. It had its final closing in July 2007 on €339 million, and is following the same investment strategy as FCPR Quartilium II.

assets / funds under management €1.7 billion as of 31 Dec 2008 allocation to private equity 100% year first invested in private equity 1988 geography North America Western Europe Central & Eastern Europe Middle East / Africa Asia Pacific Latin America

50% 50%

fund type Generalist Buyout / Later Stage

40%

Venture

20%

Mezzanine / Subordinated Debt

15%

Fund of Funds Mid-Market Infrastructure

15%

Turnaround / Distressed

10%

Secondary Fund Interests Other

contacts

private equity investment appetite North America Generalist Buyout / Later Stage Venture Mezzanine / Subordinated Debt Fund of Funds Mid-Market Infrastructure Turnaround Secondary Fund Interests

G G G G G G G

Western Europe

CEE

G G G G

G G G G

G G G

G G G

MENA

Asia Pacific

Latin America

Mr. Didier Levy-Rueff Head of Quartilium dlevyrueff@finama-pe.fr Mr. Richard Clarke-Jervoise Director rclarkejervoise@finama-pe.fr Mr. Alexis Meffre Investment Director ameffre@finama-pe.fr

selected funds fund name

manager

fund size

year

fund type

region

Index Ventures V

Index Ventures

€350m

2009

Venture Capital

North America / Europe

Summit Private Equity Fund I

Summit Partners

€1000m

2009

Venture Capital

Europe

Halder GIMV II

Halder

€325m

2009

Buyout

Europe

Kennet III

Kennet

€201m

2008

Venture Capital

North America / Europe

PAI Europe V

PAI Partners

€5400m

2008

Buyout

Europe

InvestIndustrial IV

InvestIndustrial

€1000m

2008

Buyout

Europe

ICG Minority Partners Fund 2008

ICG

€1000m

2008

Mezzanine

Europe

Dover Street VII Fund

HarbourVest

$2900m

2008

Secondary

Global

TowerBrook Investors III

TowerBrook Investors

$2750m

2008

Buyout

North America / Europe

Mangrove III

Mangrove Capital Partners

€180m

2008

Venture Capital

Europe

This profile is an abbreviated version of the one available at www.PrivateEquityConnect.com, published by PEI Data, the online database that tracks investors in private equity and venture capital funds globally. To arrange a demo, please call Steven Randell on +44 20 7566 5460.

The profile also appear in print format in The Global Limited Partners Directory, published by PEI Books. The book profiles over 1400 different institutions who invest in the asset class. It retails for £1100 (UK); e1625 (Europe); $2065 (USA & RoW). Call +44 20 7566 5444 to order a copy.

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‘I don’t think we’re too exposed’ ECI, one of the UK’s oldest private equity firms, closed its ninth fund on £430 million in December.

Against a backdrop of tough fundraising conditions, ECI whipped round investors in just three months, overshooting its original target by £30 million. PEI caught up with ECI director Chris Watt to find out more about the firm’s plans What key trends are you seeing in the market?

One of the areas that there’s been a bit more focus around is portfolio company acquisitions. We’ve just completed a deal that’s gone through with one of our portfolio companies, Axell Wireless, acquiring some assets from Dekolink and there’s one or two other things we’re looking at across the portfolio as well.

Bolt-ons are, in many respects, manageable transactions in that many of them are quite small. Banks are more prepared I think to lend to existing customers provided things are going well, and even if they’re not you’ve got a leverage structure in there already that you can utilise to make the acquisition.

ties is public-to-private deals. We’ve done a couple of those recently, like the [healthcare IT provider] Ascribe deal which was announced this year. Values have come off in the equities markets as we’re all aware. And I think there’s certainly more of a willingness on the part of institutional investors to look positively on opportunities to generate some cash.

Watt: keen on public-to-privates

on the record

So the Axell add-on might be the chris watt template for deals going forward? director It’s a different type of deal in that we eci were acquiring selected assets from that business and it was a bit of distressed purchase. I think one of the things we’re generally looking for in the market at the moment are situations where there’s opportunities to acquire smaller businesses that are struggling a bit in the current environment - and hopefully do some good deals at some sensible prices.

Does that mean distressed assets will be an area of focus for 2009?

No, I think it will be one of a number of elements. Some transactions may be born from distressed situations, but most of them will be ordinary growth opportunities.

Aside from bolt-ons, what opportunities do you anticipate will characterise this year?

One key area where we’re likely to be finding opportuni-

Where else do you see potential deal flow?

The other area where we think we might find opportunity in 2009 is where perhaps larger corporates have got a level of … not distress, but a bit of pressure, a requirement to repatriate some value back to their shareholders. That might be large corporates or even larger private equity-backed businesses, but for whatever reason they need to divest of these non-core businesses to generate some cash. We see that as an opportunity as a smaller mid-market investor looking for deals of £20 million to £150 million of enterprise value.

That will fit quite neatly into our sweet-spot.

How is your portfolio’s health? Are you taking measures to brace for further economic decline?

Inevitably we’re seeing a bit of stress and strain, but nothing too concerning at this point and there’s a number of businesses that are actually trading ahead of plan. In the current environment, you want to make sure you’re doing everything possible to equip your portfolio as best as you can to weather the storm. We’re doing that, but I would say that we’re quite comfortable with the sectors we’ve got into and don’t feel that we are overly exposed to the downturn. But having said that, there are no sectors really that are completely immune and even if it’s just the generics of the changes in corporate behaviour that you get at these times – customers paying a bit more slowly, suppliers looking to be paid more quickly – these sorts of things do weigh on all businesses across all sectors. But by and large the portfolio is looking in good shape. I

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peo: behind the headlines Commentary on the month’s hottest private equity stories by Amanda Janis, editor of PrivateEquityOnline

Show me the money, show me the door amanda janis

peo top stories For the 30 days ended 22 February 1. KKR fund to charge 1% management fee, 10% carry 2. Rubenstein: LP-GP pendulum to shift 3. PSERS cancels hundreds of millions in commitments 4. DIC parts company with dealmakers 5. Robert Wages quits ADIC 6. TPG loses $830m on Aleris bankruptcy 7. Kravis, Black tout non-LBO strategies 8. Citi Private Equity loses Barber 9. Hemal Mirani leaves HarbourVest 10. BofA veterans launch $100m private equity fund 11. Private equity write-downs plague Credit Suisse 12. TPG partner departs 13. Candover-backed yacht maker defaults 14. Yea resigns from beleaguered 3i 15. Kravis: ‘Important need’ for private equity

There were two resounding themes that resonated with PEO readers throughout February: limited partner developments and high-profile departures.

At the end of the month, PEO was first among media outlets to break news of the resignation of Réal Desrochers, director of alternative investments for the $119 billion California State Teachers’ Retirement System. His resignation ended an 11-year run managing CalSTRS’ powerful private equity portfolio, and 22 years of private equity investing on behalf of public pensions.

“I’m not sure Réal will ever truly retire, he has investments in his blood,” Christopher Ailman, CalSTRS’ chief investment officer, wrote in an internal email obtained by PEO. While we weren’t yet able to report where Desrochers might be headed next, it would be surprising not to see him pop up in a powerful private equity position in the not-so-distant future.

The same can be said for Robert Wages, who after just two years left his role as director of private equity for the Abu Dhabi Investment Company; and for John Barber, who ended a 14-year career with Citi, the last nine of which were spent steering Citi Private Equity.

Others who have recently parted ways with firms to “pursue other interests” include 16-year TPG veteran Justin Chang; Kevin Wang, a China-focused GP at the Asian Natixis affiliate; and the head of Gresham Private Equity’s London office, Mike Henebery. And let’s not forget the departure of the Dubai International Capital deal-makers Sylvain Denis and Alan Hyslop as the state-backed investor shifts its focus to managing its existing portfolio rather than finding fresh deals.

So far, only HarbourVest’s Hemal Mirani has quickly re-emerged from a resignation, taking an investor relations position at CVC Asia Pacific. But expect PEO to follow all of these industry figures as their careers – and in some cases, market turbulence – lead them down different paths.

Likewise, PEO is closely watching limited partners as their relationships with private equity firms evolve. While we don’t report on institutional investors’ every move, we do cherry pick the most salient ones in a private equity context, such as the $45.4 billion Pennsylvania Public School Employees’ Retirement System’s cancellation of hundreds of millions in commitments to firms including Cerberus Capital, HgCapital and Apollo Management.

Such stories are indicative of a possible power shift between LPs and GPs, which Carlyle Group co-founder David Rubenstein addressed last month. The private equity landscape at present is characterised by LPs plagued by over-weighted private equity programmes and backfiring over-commitment strategies. These issues, and particularly GPs’ need for LPs with liquidity, will no doubt continue to be a hot topic on PEO in the months to come. I

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