Private Equity KeyTrends #12 – July 2, 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


Q2 PRIVATE EQUITY FUNDRAISING REGISTERS A POST-FINANCIAL CRISIS HIGH, according to Preqin. Funds closed in 2013’s second quarter “secured $122 billion, the highest value since $171 billion was raised” in Q4 2008. Countering that positive news, the number of funds hitting a final close fell to 155, a ten-year low on a quarterly basis, while the average size of closed funds rose to a ten-year quarterly high of $800 million. The figures come in a period when U.S. pension funds are increasing their allocations to private equity and in a calendar year when a number of industry observers expect a record level of un-invested private equity commitments to expire, freeing up capital for new investment. The falling number of funds achieving a final close, coupled with rising average fund size, continues a multi-year trend seen in the figures of a range of data providers. Post-financial crisis, limited partners increasingly prize efficiency and are apparently investing more money with fewer managers, while frequently avoiding funds whose small size makes large investment difficult, or due diligence challenging.



BUYOUT FUNDS NOTCH THEIR SECOND BUSIEST EXIT QUARTER EVER from investments, according to Preqin. “There were “324 private equity-backed buyout exits in Q2 2013, valued at $92 billion, second only to Q2 2011 when 364 exits were valued at $128 billion.” Those figures lend support to recent comments, from the likes of Apollo Global Management founder Leon Black and Canadian Pension Plan Investment Board CEO Mark Wiseman, that conditions are particularly propitious for private equity-backed sales, thanks to strong pricing and readily available finance. Preqin notes a quarter-on-quarter drop in buyout-backed purchases of 28 percent in terms of value, following a relatively busy first quarter, when a pair of $20 billion-plus private equity-backed acquisitions were announced, one for computer maker Dell and the other for leading ketchup producer Heinz.



INITIAL PUBLIC OFFERINGS WILL OVERCOME CURRENT MARKET TURBULENCE, helping private equity funds exit from investments. That’s the consensus view in a Reuters piece that takes the measure of the global share-issue market. After listed equity issuance “rose 36 percent year-on-year in the first six months of 2013,” driven in large measure by “PE exits,” “volatility has spiked, triggered by concerns the Federal Reserve may trim back its stimulus policies and worries about a weaker Chinese economy.” This is “prompting some companies to scrap stock market debuts or cut offer prices.” But with “the quieter summer period approaching, bankers said preparations are continuing for businesses planning to come to market later in the year. ‘We have to wait and see whether market volatility settles down or if this is the start of a more negative period. I think it is more likely to be the former,’” said Ken Brown, Nomura’s Global head of Equity Capital Markets.



STARTING A NEW PE FUND MANAGEMENT FIRM IS DAUNTING, as The Wall Street Journal’s Ryan Dezember makes clear in a story zeroing in on a new start-up, Bridge Growth Partners. “The number of new buyout firms emerging has generally declined in recent years amid ballooning start-up costs and a challenging fund raising environment,” writes Dezember. “So far this year there have been three first-time buyout funds completed with a combined value of about $1 billion, down from the 28 totaling $10.8 billion in 2007.” Meanwhile, a New York Times magazine profile of Privateer Holdings, a PE firm that aims to create “clean American brands” in the legal “cannabis space,” implies that to successfully raise capital for a new private equity fund manager, it helps to have a fund strategy focused on virgin territory.



DUKE STREET’S NEW MODEL FOR DEAL-BY-DEAL STRUCTURES aims to recycle – for use in multiple transactions – the core long-term capital commitment from Tikehau Group, its cornerstone investor, permitting participation in competitive bidding processes such as auctions, while accelerating the return of capital through shorter duration investments like secondary directs, whereby entire portfolios of companies already owned by private equity investors change hands. Duke Street will also recycle capital through post-deal syndication, raising money from co-investors attracted by particular opportunities it’s already closed on. Duke Street Partner Buchan Scott touches on these topics in a brief but revealing Q&A with Unquote’s Alice Murray.



DESPITE GP ENTHUSIASM, PRIVATE EQUITY MAY PROVE A TOUGH SELL FOR 401Ks and other types of defined contribution retirement plans, notes Pensions & Investments. Unlike defined benefit pension funds, sponsors of defined contribution plans “are concerned about fees, the illiquidity of PE investments and the lack of daily valuations.” There is also a “need to educate both plan participants and plan executives.” That’s too bad, according to investment consultant Ross Bremen. He tells P&I: “Studies show Defined Benefit outperforms Defined Contribution. Private equity is a major contributor” to that outperformance.



SUB-SAHARAN AFRICA TOPS THE LIST OF THE WORLD’S MOST APPEALING EMERGING MARKETS, according to the Emerging Markets Private Equity Association’s 2013 annual survey of limited partners. “For the first time in the Global Limited Partners Survey’s nine-year history, none of the BRIC markets (Brazil, Russia, India and China) broke into the top three most attractive markets” for investment, the 16-page report notes. The EMPEA polled 112 investors from more than 30 countries for the report, which covers average return expectations, average allocations, emerging market attractions and deterrents, and popular means of investment.



“EVIDENCE, FINALLY, THAT VCs ARE MORE IMPORTANT THAN THEIR FIRMS.” That’s the title of a peHub story summarizing the findings of two academics from Harvard and Carnegie Mellon who found that “when it comes to predicting which startups will be successful, individual venture capitalists are roughly five times more powerful as leading indicators than the firms for which they work.” One of the study’s authors, Harvard Business School associate professor Matthew Rhodes-Kropf, tells peHub, “The guys who know how to get big exits get big exits no matter where they’re employed. The guys who fail are pretty consistent about that, too.”



THOMSON REUTERS’ EUROPEAN PRIVATE EQUITY PERFORMANCE INDEX shows average returns for venture capital, buyout and mezzanine funds, with subcategories based on size and investment stage. Given oft-voiced industry skepticism regarding the performance of mega funds, it is worth noting that this category – defined by Reuters as funds worth $5 billion or more – tops the one, three and five-year return columns.



IF YOU’VE GOT A HOT PE FUND STRATEGY, WHY NOT LIST IT? In an increasingly have and have-not fundraising environment, energy funds definitely seem to be among the haves. An example of this is private equity firm Riverstone Holdings’ plan, reported by Bloomberg, “to seek £1 billion for a listed vehicle that will provide permanent capital for deals.” Riverstone “raised this year’s largest energy fund” a $7.7 billion vehicle which held a final close in June. “Riverstone Energy Ltd., to be traded on the London Stock Exchange, will invest alongside” this recently closed fund. Riverstone’s specialties are “buyout and growth capital investments in the exploration and production, midstream, oilfield services, power and renewable segments of the energy industry.” Bloomberg observes: “Energy-focused firms are attracting cash amid the U.S. shale boom and increased demand for natural resources from emerging markets.”



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