Private Equity KeyTrends
May 21, 2013
A concise fortnightly distillation of key private equity news, with links to noteworthy PE articles and studies, edited by Palico – The Online Marketplace for Private Equity LPs, GPs and Advisers
MEGA-FIRMS: ARE THEY 21st CENTURY MODELS, OR CONFLICTED MODELS? Detailing and comparing the diverse business lines of private equity’s biggest general partners, and discussing the apparent imperative for them to list, Privcap founder David Snow says they are “increasingly coming to define the Wall Street of the 21st century.” He notes that “of the largest eight firms, only Bain and TPG are not publicly traded” and asks how long it will take the pair to seek a listing. Meanwhile, Reuters’ Greg Roumeliotis reports that with shares at an all-time high at listed mega-GP Apollo Global Management, two of the firm’s co-founders and two cornerstone investors are selling portions of their stakes while keeping most of their stock. “Cashing out, even in part, can be a sensitive issue,” writes Roumeliotis. When “ownership is reduced significantly,” private equity general partners “get less of the profits when deals work out for their investors,” raising questions about whether “interests are best aligned.” Debates about whether the mega model is the future, or whether it is too conflicted, are likely to continue for years, if not decades.
PRIVATE EQUITY’S PUSH TO CATER TO INDIVIDUAL INVESTORS is picking up steam. Pantheon Ventures, the “private equity fund investor overseeing $24 billion,” hired Michael Riak “as the firm seeks to expand its reach to investors saving for retirement,” Bloomberg reports. Pantheon named Riak, previously director of savings and affiliate plans at Verizon Communications, to a newly created position as head of U.S. defined contribution pension plans. “Private equity firms including Carlyle Group, Blackstone Group and KKR & Co, are looking for ways to reach ordinary investors as a growing number of workers are pushed out of public and corporate pension funds to so-called defined contribution plans such as 401(k)s. Americans held $3.57 trillion in 401(k) plans as of December 31.” Private equity may start tapping individual investors sooner than many think.
“JUNK BONDS NOW YIELD LESS THAN TREASURIES DID 6 YEARS AGO,” observes MarketWatch. Leveraged finance markets for private equity borrowers are in robust health, fueled in part by a junk bond boom. “In the latest sign that the historic era of junk bond yields shows no signs of slowing, the Barclays U.S. High Yield index fell to 4.97% for the first time in its 30 year history. The yields have some worried about a bubble. But it is important to note that while yields are at their lows, option-adjusted spreads are not. Junk bonds still yield 4.06% more than Treasurys, compared to a historic low of 2.33% in 2007.”
U.S. AND EUROPEAN IPO WINDOWS REMAIN OPEN, FOR NOW. The prospective £250 million ($380 million) initial public offering of British life insurer, Partnership Assurance, owned by private equity firm Cinven, “comes as European companies scramble to take advantage of a strong rebound in the Continent’s financial markets this year,” notes Mark Scott of The New York Times DealBook. “Despite the recovery in Europe’s financial markets, investors are still wary that fresh problems could be just around the corner,” stifling a European IPO market that has “raised $6.8 billion through new offerings as of May 2, a 70 percent increase compared with figures in the period a year earlier. Almost 60 percent of a group of investors polled by Fitch Ratings thought that the resurgent European financial markets did not reflect the underlying problems still facing many local economies,” Scott writes. The Wall Street Journal reports that “U.S. companies are on track to raise the most money through IPOs since before the financial crisis. Behind this year’s pace is an ebbing of the wild price swings that had been a dominant feature of the stock market since the financial crisis. A return of stock market volatility could quickly slam shut the IPO window.”
CPPIB ADDS TO THE CHORUS, SAYING IT’S A SELLERS MARKET in private equity. Echoing the statements of several prominent GPs in recent weeks, including Apollo Global Management founder Leon Black, Mark Wiseman, CEO of the Canada Pension Plan Investment Board, Canada’s largest pension manager with $180 billion in assets, tells Reuters that this year “is going to be a period of time when PE firms are selling assets, either by IPOs or to strategic buyers, or to other private equity firms. On the buyside there will be “selective opportunities,” he says. “But the reality is today there is a lot of capital, and assets are fairly priced, and so we’re being patient.”
“PRIVATE EQUITY IS ON THE PROWL” IN THE MINING SECTOR. Mining companies led by BHP Billiton are holding the biggest ever sale of assets this year, just as commodity prices head into a bear market,” writes Bloomberg. “What’s bad timing for the miners might be the opposite for private equity. About $48 billion of mines and assets are on the block, almost double last year’s $23 billion of completed and pending deals. BHP and Rio Tinto are leading the global asset disposal and may sell businesses or stakes in mines for as much as $35 billion. Private equity firms are finding that tempting, raising almost $9 billion in 16 months for mine investment, more than the previous four years combined.” With “companies selling or halting projects to cut debt and boost dividends” after a “decade-long takeover binge of more than $1.1 trillion,” private equity firms will be looking for bargains.
“PRIVATE EQUITY IN CHINA IN 2013: THE OPPORTUNITY AND THE CRISIS.” China First Capital’s detailed 18-page state-of-play report paints a picture of painful transition to a Chinese private equity model dependent on operational expertise, from one that is both overly dependent on investing in companies pre-initial public offering, and excessively reliant on the fading efficacy of political connections.
“CHINA PRIVATE EQUITY” IS “BITTEN AGAIN BY FANG,” proclaims the Financial Times. That’s Fang Fenglei, who built Goldman Sachs’ flourishing Chinese investment banking business before raising a $2.5 billion fund in 2007 for his then newly founded Hopu Investment Management, today one of China’s most successful private equity firms. Fang’s “abrupt decision in 2010 to start winding down Hopu was impeccably well timed,” writes the FT. “Since he left the scene, the private equity industry, once booming alongside the country’s turbocharged economy has gone cold.” Now the financier is raising a new $2bn-2.5bn investment fund, “betting that China’s beleaguered private equity industry will recover.” Among the “glimmers of hope” Fang apparently sees: “the weak stock market, while complicating exits, has made entries more feasible.” Remarking that “whichever way Fang goes, the market tends to follow,” the FT concludes that “for all its woes, the base case for private equity in China remains compelling.”
“MEXICO IS A PE MARKET PRIMED FOR SIGNIFICANT GROWTH.” That is the conclusion of Bain & Company’s handy, 32-page guide to North America’s least known private equity market. “Encouraged by steady economic growth and favorable regulatory changes, annual fundraising increased nearly six-fold between 2008 and 2012, as the number of active general partners more than doubled to 71. The four key factors that affect PE penetration in a given market – economic foundation, deal flow, policy environment and commercial maturity – all suggest that Mexico is on a pronounced upward trajectory.”
A CAUTIONARY TALE: THE PERILS OF FINANCIAL ENGINEERING. The New York Times DealBook delivers the story of Fred Eckert, founder of now bankrupt private equity fund manager GSC Capital. “At the top in 2007, GSC managed $28 billion and Mr. Eckert’s 25 percent stake was worth as much as $250 million on paper. But GSC had borrowed $250 million by February 2007, primarily to finance growth, but also to make cash payouts to its top executives. Its timing could not have been worse, as the subprime crisis was beginning to freeze the credit markets. The firm filed for bankruptcy in 2010, as did Mr. Eckert in 2011. ‘I wanted to be as big as we could be. I wanted to be a major financial engineering company,’” the former high-flyer tells DealBook. It was the financial engineering of the firm’s own assets that seemingly led to GSC’s bankruptcy and its founder’s woes.
PALICO MARKS ITS FIRST BIRTHDAY WITH OVER 1,000 ACTIVE LPS & GPS as members. “After nearly 12 months in operation, over 400 limited partner firms and more than 600 general partner firms, from 60-plus countries, actively use Palico. LPs, GPs and advisers have connected on more than 500 investment opportunities posted on Palico in the past year,” notes the press release. In addition to discussing the services of the first regulated online marketplace for the private equity fund community and the platform’s progress, the release includes Palico’s membership breakdown by geography and investor type.
1000+ LPs, GPs and Advisers, from over 60 countries, have joined our network during its first 11 months in operation. They are regularly finding new LP and GP opportunities via this innovative online network.
Palico is the first online private funds marketplace where Limited Partners, General Partners, Funds-of-Funds and Advisers meet and engage with qualified counterparts for fundraisings, secondaries, co-investments and deal-by-deal structures in a secure, regulated environment.
— The Palico Team