Private Equity KeyTrends
June 4, 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
BAUSCH & LOMB TRANSACTION: A HARBINGER OF A MERGERS REVIVAL? That is the question posed in two interlinked New York Times DealBook stories covering Warburg Pincus’ agreement to sell eye care company Bausch & Lomb to Canada’s Valeant Pharmaceuticals for $8.7 billion. “If completed, a sale may signal that the mergers industry is set to revive after months of fits and starts,” notes DealBook. Within the health care sector, “the agreement continues a flurry of deal-making as companies seek to buy the growth they are hard-pressed to generate on their own.” Bloomberg reports that the deal would value Bausch & Lomb at a lofty 14 times 2012 earnings, before interest, taxes, depreciation and amortization, generating a threefold return for Warburg Pincus.
MAY 2013 SAW A “SUDDEN RESURGENCE” IN PE-BACKED TRADE SALES, statistics from Preqin show. In May private equity firms notched “62 trade sale exits globally, valued at a total of $23.2 billion – the highest aggregate value and also the third highest number” of private equity-backed sales to corporate buyers since May 2011. This followed a “poor first quarter,” with the “lowest total value of trade sale exits since Q3 2010.”
M&A COULD TAKE OFF WITH A SMALL NUDGE. That’s the thesis of Goldman Sachs president Gary Cohn. Speaking at the Bernstein Strategic Decisions Conference in New York City, Cohn told the audience: “Global M&A volumes in 2013 represent approximately 4% of global market cap relative to the 20-year average of closer to 7%. To the extent the operating environment stabilizes and our clients feel more confident, we believe activity could revert to more normalized levels. If half the gap was closed relative to 20-year average activity levels, M&A volumes could increase by approximately $700 billion.” Cohn also believes a small improvement in investor confidence could boost global initial public offering volume by roughly $50 billion this year.
QUESTIONS CLOUD TWO POTENTIAL MULTI-BILLION DOLLAR PE DEALS. “Who knew that pork could be a national security problem,” writes The New York Times Dealbook in reference to China-based Shuanghui International’s $7.1 billion cash-and-debt offer for Smithfield Foods. The deal, arranged by Shuanghui’s principle Chinese private equity backer, one-third owner CDH Investments, “will be subject to a national security review by the Committee on Foreign Investment in the United States. It is hard to see “risk” for the United States in what would be “the largest Chinese acquisition of an American company” in history, observes DealBook. “The biggest danger boils down to ‘uproar risk.’ In other words, will there be a public outcry that leads the committee to act as something other than a neutral regulator?” Meanwhile the Wall Street Journal reports that department store group “Neiman Marcus spurned” a multi-billion dollar “proposal in which buyout firm KKR would invest in Saks Inc and the two luxury retailers would merge.” It is not clear if that rejection will scotch an investment that Bloomberg reported KKR was “weighing” in Saks.
“AN INTRIGUING NEW ANGLE FOR INVESTORS TO FIND EXPOSURE” TO CHINA, is how Shanghai investment consultancy Z-Ben Advisors describes the E541 million offer for global resort group Club Mediterranee by AXA Private Equity and Chinese investment group Fosun International. “The acquisition of a foreign company that intends to expand in China can give foreign PE firms the diversity they crave, without worrying about exit difficulties and other problems associated with making investments directly into the mainland,” notes Z-Ben. Reuter’s quotes an un-named source saying Fosun’s involvement should help Club Med “achieve its aim to make China its second-biggest market after France.”
SUB SAHARAN PE OPPORTUNITY OVERSHADOWS THE REGION’S RISKS. That’s the main takeaway from a 3,800-word overview of African private equity in Institutional Investor magazine’s current issue: “Larger investors are being drawn to Africa by appealing returns and the maturing of the private equity industry” with “as many as 500 potential new investors eyeing” the continent, writes II’s Simon Meads. Yet while Sub-Saharan Africa now offers a range of “second-and-third generation funds” committed capital remains thin on the ground. “On a GDP-adjusted basis, there is 7 times as much capital chasing deals in China, 4.5 times as much in India and 3.5 times as much in Brazil.” Perhaps the biggest question is how long that untapped potential will last. Meads notes that Palico statistics show funds “with an Africa focus raised $1.6 billion in the first quarter of 2013, $300 million more than emerging Asia funds.”
MIDDLE EASTERN SWFs PREFER PE, BUT ARE INCREASINGLY BYPASSING FUNDS. That is the key conclusion of the Invesco Middle East Asset Management Study 2013. A handy Financial Times story on the 29-page report notes: Sovereign Wealth Funds falling into the “development” category, “which focus on generating local employment and economic growth, will allocate a third of their new money to PE this year, up from 10 percent in 2012. ‘Investment’ sovereign funds, which aim to preserve and expand a country’s assets, will raise allocations from 9% to 13%. The investment SWFs are favoring co-investment alongside PE funds,” while “development funds are increasingly opting to make direct investments.” Abu Dhabi Investment Authority’s just-released Annual Review confirms the tendency. ADIA invested 25% of its assets directly in 2012 versus 20% the previous year. ADIA assets under management are estimated at some $350 billion by outside sources.
“THE 10 WAYS PRIVATE EQUITY HAS CHANGED POST-RECESSION” range from “increased regulatory and public scrutiny” to the “emergence of the individual investor,” according to Carlyle Group co-founder David Rubenstein. For Rubenstein’s take on the new realities of the private equity business, either listen to Carlyle’s 9-minute podcast or read an abridged version of his comments published by The Washington Post.
DIFFERING INTERPRETATIONS OF AIFMD ARE INCREASING PRESSURE ON GPs to hold first closes for fundraisings before July 22, when the European Union’s Alternative Investment Fund Managers Directive takes effect, writes Bloomberg’s Kiel Porter. Porter reports that CVC Capital Partners “bases much of its funds administration in the Channel Islands, which though part of the U.K., are outside the European Union.” AIFMD gives regulators “the right to limit access by PE firms based outside the EU to investors inside the bloc. By meeting the deadline, CVC will be able to continue to sell the fund to EU investors largely as before.” Notes Samuel Kay, head of investment funds at London law firm Travers Smith, “The U.K. guidance indicates that if you are already marketing your fund prior to” the date when AIFMD becomes effective “you can continue to do so” afterwards. “In other jurisdictions, different views are being taken – in particular non-EU PE fund managers may need” to hold a first close before July “to qualify for grandfathering.” Private equity professionals should be braced for contradictions and confusion on the eve of AIFMD’s implementation.
WHEN U.S. PE FIRMS START RECRUITING IN APRIL, “FIERCE COMPETITION” BEGINS for top young bank analysts, observes the New York Times DealBook. Almost every year, there is “a rush to recruit young analysts, only months on the job. ‘There’s a progression that people go through,’ said one analyst. ‘You’re two months in, you start getting calls from recruiters, and you feel left out if you’re not participating. It’s a very enticing concept to lock up a job and your ticket out of banking a year and a half” away from the end of the standard two-year analyst’s contract. Buyout funds that have tried to recruit only analysts with at least a year of work under their belts “felt they lost top employees to hedge funds and middle-market shops that aggressively recruited first-year analysts,” one private equity executive noted. He added: “It’s back to a knife fight in an alley. We should just be recruiting these kids out of middle school. Forget high school, college and Goldman Sachs.”