Private Equity KeyTrends
May 7, 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
THE CONSENSUS AMONG TOP “PRIVATE EQUITY TITANS” IS “SELL,” CNBC reports, after covering two flagship private equity panels at the annual Milken Institute Global Conference in Los Angeles. “We have div recapped, refied, repriced or sold just about everything we can,” noted Jonathan Sokoloff, managing partner at retail investor Leonard Green Partners and a participant in the “New Directions in Private Equity” panel. Fellow participant Leon Black, founder of distressed investor Apollo Global Management, observed: “markets are pricey for conventional buyouts” with purchase prices averaging “9 times EBITDA in the U.S.” and “9.5 to 10 times in Europe. There’s a time to reap and a time to sow and right now we are harvesting.” On the “Alternative Investments” panel Wilbur Ross, founder of turnaround investor WL Ross & Co, said easy credit is building a “time bomb” for companies and economies that “probably does not go off” until “2018 to 2020” when a record average of “$500 billion” in leveraged loans will expire annually, based on the latest S&P Capital IQ statistics. Among panel participants, David Bonderman, founder of TPG Capital, proved the most optimistic on the appeal of acquiring versus selling: “it is a very good time to be a seller, but it’s not a terrible time to be a buyer either – you’ve just got to be cautious.” Some areas where private equity investors should be acquiring, according to Ross, include European banks and their assets; marine transport, and U.S. chemical, plastics and fertilizer companies that will benefit from America’s shale energy revolution.
IF BIG CLUB DEALS ARE LIKELY TO BE RARE IN PE, HERE’S AN EXCEPTION. Bain Capital and Golden Gate Capital “agreed to acquire BMC Software, a struggling technology provider, for $6.9 billion, in the third-largest private equity deal of 2013,” writes Bloomberg. The buyout group, including Government of Singapore Investment Corporation and Insight Venture Partners, will pay about nine times BMC’s projected 2014 cash flow. “The acquisition would be Bain’s biggest since 2007, when it teamed up with firms including Carlyle Group to buy construction supply business HD Supply Holdings from Home Depot for $8.5 billion. Bain struck its largest deal in 2006 with the $33 billion takeover of hospital operator HCA.”
IT’S A TIME OF SELF-EXAMINATION IN PE. “We’ve had to look hard at ourselves and figure out what we were good at,” Kurt Bjorklund, co-head of London-based buyout house Permira, tells the Financial Times’ Anne-Sylvaine Chassany. Bjorklund and fellow co-head, Tom Lister, discuss how the firm refocused its strategy, amid efforts to attract investors to its latest, ongoing fundraising, after “investments were dragged down by high debt loads and the value of its 2006 fund was slashed by 60 percent.” It’s a frank look at the kind of restructuring that many GPs face when zeroing in on what can help them successfully fundraise in today’s tough market. Another FT story shows the potential importance of the secondary market for GP restructuring. “Duke Street Capital is looking for backers to buy out its existing investors, as it attempts to prepare the ground for a new fundraising,” Chassany writes. A so-called direct secondary, where existing investors have the option sell their stakes en-masse, or roll them over individually, “can provide a new start” for a fund, “notably by resetting financial incentives” for GPs.
IN Q1, APOLLO ACHIEVED “ITS BEST QUARTERLY RESULTS” ever as a publicly listed private equity firm, writes Reuters, reporting a 72 percent increase in profit. “Economic net income after taxes – a measure of profitability that takes into account the mark-to-market value of funds – was $792.4 million, compared with $462 million for the same period in 2012.” Bloomberg reports: “The value of Apollo’s private equity holdings increased 14 percent” in the first three months of 2013, outpacing listed rivals Blackstone and KKR, which saw respective gains of 7.9 percent and 5.9 percent in the first quarter. Oaktree, a smaller listed rival with a distressed debt strategy similar to Apollo’s, said today that first quarter ENI profit rose 93 percent to $335.8 million over the same period in 2012. Apollo’s only other major listed competitor, Carlyle Group, reports Q1 results on Thursday, May 9.
“BUYOUT GROUP ARES PREPARES” AN “IPO,” reveals the Financial Times. Ares Management, with almost $60 billion under management, and known as a debt specialist, “is preparing for a potential U.S. listing” that “would come on the back of a rally in the shares of the big listed private equity groups. The four largest public buyout groups by market value, Blackstone, KKR, Apollo Global Management and Carlyle, have outperformed the broad market and risen an average of 38.8 percent over the past six months,” compared to an S&P 500 increase of 13 percent. “A lot of people have been asking who is next” among PE firms listing and Ares “‘have always been the logical answer to that question,’ says one competitor. ‘They have done very well.’ Like most titans of debt finance, whether Bennet Goodman of GSO or Leon Black of Apollo, Ares’ founder, Tony Ressler, was part of Michael Milken’s group that pioneered the junk market at Drexel Burnham Lambert.”
COLOMBIA & PERU HAVE NEW ALLURE FOR PE. “Private equity firms Carlyle Group, Pantheon Ventures and Victoria Capital Partners are opening offices in Colombia and Peru” to take advantage of rapidly expanding economies and more stable societies, writes Bloomberg. “Peru’s economy expanded 6.3 percent last year, after tripling in the past decade, and Colombia grew 4 percent, led by housing, retailing and mining.” This compares with 2012 growth of “0.9 percent in Brazil, the biggest recipient of private equity investments” in Latin America with a 62 percent share of fundraising last year, versus 11 percent for Colombia and Peru. “Colombia received an investment-grade rating in 2011 for the first time in a decade as improved security bolstered economic growth. Standard & Poor’s raised its debt assessment one step to BBB on April 24, citing increased tax revenue and peace talks with rebels.”
Q1 EMERGING MARKET PE FUNDRAISING AND DEALMAKING IS SLUMPING, according to the latest statistics from the Emerging Markets Private Equity Association. The first quarter of 2013 set a new four-year-low for emerging market private equity dealmaking, with dollar value dropping 45 percent quarter-on-quarter to just $3.2 billion. One factor that may have played a role in boosting the number of transactions 11 percent to 171 deals in 2013’s first three months while quarter-on-quarter value fell, is growing activity in less developed private equity markets. Emerging market fundraising came in at $6 billion in Q1, representing only 15 percent of the $40 billion raised during all of last year.
PEI’S ANNUAL RANKING OF THE WORLD’S LARGEST PRIVATE EQUITY FIRMS IS OUT. Private Equity International bases its ranking of the world’s 50 largest general partners on “the amount of private equity direct investment capital raised by each firm in the preceding five years.” This year’s ranking is the first to leave out the all-time record fundraising year of 2007 and so should be more revealing of post-financial crisis trends than PEI’s previous annual rankings. Some highlights: TPG tops the table with $35.7 billion raised during the period, 34 of the top 50 firms are American, nine are from Europe, four are Chinese, two are Canadian and one is from the Middle East. The smallest firm is Short Hills New Jersey-based Energy Capital Partners, with $5.7 billion raised in five years.
EVCA’S 2012 YEARBOOK ON EUROPEAN PRIVATE EQUITY IS SOBERING READING. The European Venture Capital Association’s 76-page annual report is chock-full of useful statistics on private equity fundraising, investment and divestment. It clearly demonstrates that 2012 was a tough year for European private equity. In terms of value, fundraising fell 43 percent, investments dropped 19 percent, and divestments were off 29 percent.
“HOW WILL AIFMD AFFECT GPs AND LPs BASED OUTSIDE OF EUROPE?” That is the key question this 11-page memorandum from the European Venture Capital Association sets out to answer. It is a useful guide for general partners and limited partners struggling to understand what they will need to do to adapt to the European Union’s Alternative Investment Fund Managers Directive and the new pan-European regulatory regime the directive establishes for private equity fund managers and investors starting on July 22.
THE SEC’S NEW FORM PF IS “FUNDAMENTALLY CHANGING” PE FIRM MANAGEMENT, according to this 17-minute Privcap video. Three compliance experts, Adam Weinstein and Paula Bosco of private equity firm New Mountain Capital, and Gary Kaminsky, a former SEC attorney and now managing partner at reporting specialist ConceptONE, discuss the intricacies of filling out form PF’s 2000 separate fields of disclosure.