PE Key Trends Blog

Private Equity KeyTrends #16 – September 10, 2013

Sep 11, 2013 10:14:37 AM

Tags: keytrends, newsletter, Palico, PE KeyTrends, private equity, V2

NEIMAN MARCUS’ SALE: THE NEW MODEL FOR CLUB DEALS IN PRIVATE EQUITY? In one of the biggest buyouts of the year, “Ares Management LLC and the Canada Pension Plan Investment Board agreed to buy the U.S. department store company” Neiman Marcus for $6 billion, writes Bloomberg. The New York Times DealBook adds that the buyers “will hold equal stakes in the company.” This is just the latest in a string of private equity deals characterized by fund managers teaming up with major limited partners intent on increasing direct investment. Interestingly, Ares/CPPIB is replacing a team that might be said to typify the old club model: Neiman Marcus’ sellers are two general partners, TPG Capital and Warburg Pincus, who paid $5.1 billion for the group in 2005. Meanwhile, the Financial Times reports that the Government of Singapore Investment Corporation, one of Asia’s biggest limited partners, “is poised” to equally divide a 60 percent stake in Rothesay Life, a manager of defined benefit plans, with private equity fund manager Blackstone.


IF YOU WANT TO LEARN MORE ABOUT CPPIB AND OTHER LARGE LPs, check out Private Equity International’s ranking of the 50 most active PE fund investors and Privcap’s video interview with Jim Fasano, head of funds and co-investments at the Canadian pension system. CPPIB is the most active limited partner in the world after “committing $3.99 billion” to PE funds in the “year to March,” writes PEI. Moreover, CPPIB “put an additional $2.9 billion to work in direct deals and follow-ons during the period.” The 11-minute Privcap video explains “why the enormous size of CPPIB,” which has a rapidly growing asset base of $183 billion, “makes it difficult to move to a direct-only PE program.” It also “details the innovative ‘GP restructurings’ of Berman Capital and Kainos Capital,” fund managers CPPIB recently backed via so-called secondary direct deals, which involve the sale, or rollover, of all existing limited partner stakes in a PE fund.


SMALLER LPs SHOULD CONSOLIDATE TO IMPROVE SKILLS AND LOWER FEES. That’s the implication of an opinion piece by Real Deals editor Amy Carroll, focusing on the 89 Local Government Pension Schemes in England and Wales, collectively managing $236 billion. These funds, “with a small handful of notable exceptions, are woefully under-skilled in alternatives, routinely channeling their token allocations through funds-of-funds, ceding all strategic control and taking a major hit on fees,” writes Carroll. “Proposals to merge these schemes into half-a-dozen ‘Super Pools’ “ could create “the economies of scale required to improve efficiency, recruit talent, build bargaining power” and “improve returns.” “When combined with a lifting of the cap on limited partnership investing from 15 to 30 percent earlier this year, the UK’s Super Pools could - in theory, at least - become a meaningful force in PE.” LPs elsewhere, notably in Sweden’s AP system, are publicly “contemplating the consolidation path.” The case for consolidation may gain momentum as a means of closing the advantage gap between small and large investors.


DEBT RATIOS ON LARGE EUROPEAN BUYOUTS ARE AT A FIVE-YEAR HIGH, according to Thomson Reuters LPC data. “The recent wobble in the high yield bond market in June and July due to fears of a slowdown in the U.S. Federal Reserve Bank’s quantitative easing program has done little to cool the European leveraged loan market,” writes Reuters. “Total leverage ratios averaged 5.75 times” EBITDA “on large private equity buyouts with loans of more than €500 million in Q2.” That’s the highest level since Q1 2008, when debt averaged 6.08 times EBITDA. Amid high asking prices for companies, the number of leveraged buyouts in Europe in H1 dropped 35 percent versus the same period in 2012. “ ‘The bond market and U.S. liquidity, coupled with a load of leveraged loan repayments and a lack of new deals, means that investors are accepting more aggressive leverage multiples than expected on European loans,’ ” a leveraged finance partner at a law firm tells Reuters. A senior leveraged finance banker adds that without change “ ‘in the wider macroeconomic and political market, rising leverage will be supported in Q4.’ ”


BOOM-ERA MEGA DEALS ARE OUTPERFORMING STOCK MARKET INDEXES, notes a Reuters story, citing analysis from Hamilton Lane Advisors and its own review of deals done from 2005 to 2008. The Hamilton Lane study of 19 leveraged buyouts from the three-year period, each with an enterprise value of over $10 billion, “found that the average deal was up 1.17 times as of the end of December. A similar investment in MSCI’s world equity index would have been worth just 1.01 times more” than initial value “by the end of December.” The outperformance is the result “of many cleanup acts that have been quietly going on in the world of private equity as the industry atones for a debt binge in the years before the financial crisis,” writes Reuters, which details many of those efforts.


LEXINGTON IS AIMING TO RAISE A RECORD $8 BILLION FOR A SECONDARY FUND. Citing Lexington Capital Partner documents, The Wall Street Journal says the target for the group’s eighth fund “represents a roughly 13 percent increase over the $7.1 billion Lexington collected for the fund’s predecessor in 2011,” currently the record amount raised for this strategy. The Lexington fundraising is occurring in a market that many industry observers say is bifurcating between secondary specialists who are spending aggressively and others who are balking at the market’s narrow average discount to fund net asset value, which currently stands at around 7 percent. The ambitious fundraising effort also comes at a time when un-invested capital committed to the purchase of existing private equity fund stakes is believed by a number of industry observers to be in excess of $60 billion, held both by secondary funds and the secondary pockets of funds-of-funds.


ROHATYN IS BUILDING ONE OF THE LARGEST EMERGING MARKETS GPs THROUGH ACQUISITION. The Rohatyn Group, a rapidly growing emerging markets PE fund manager, “will substantially expand its presence in emerging markets by acquiring Citi Venture Capital international, one of” Citigroup’s “few remaining in-house private equity divisions,” observes Private Equity International. The acquisition from the bank continues TRG’s "strategy of expanding its presence in emerging markets, specifically in Asia and Latin America. Last year, TRG acquired a 60 percent stake in CapAsia, an infrastructure PE firm that focuses exclusively on non-BRIC emerging Asia, while in 2011 it purchased 50 percent of ARCH Capital, a PE real estate firm focused on Asia. In addition to driving growth through acquisition, TRG is targeting at least $670 million for three funds focusing on Africa, Asia and Mexico. TRG’s founder, Nick Rohatyn, built JP Morgan’s emerging markets business and is a son of legendary investment banker, Felix Rohatyn. In a Bloomberg story, Rohatyn notes that TRG benefitted from regulatory-driven bank sales of private equity operations. CVCI manages about $4.3 billion, giving TRG more than $7 billion in assets.


FOR AN IDEA OF WHAT AILS SOME PUBLIC PENSION FUNDS, READ THIS PROFILE. New York City’s chief investment officer Larry Schloss, called by the Financial Times “the understated private equity expert who safeguards the pension money for New York City’s police officers, firefighters and teachers,” is having a hard time finding a successor. After three and a half years in his current job, the founder of PE general partner Diamond Castle, notes that “it’s amazing how many people don’t want to work in government.” The profile details improvements Schloss has made, but it enumerates a range of continuing frustrations. Assets have grown 40 percent under Schloss, to $140 billion, but there are five distinct funds and investment committees, “even though the groups share about 90 percent of investments.” Other shortcomings: despite the city pension group’s size, “it outsources all investments to BlackRock and 324 other financial managers,” doing no low-cost in-house management, and the average salary in the bureau of investment management, whose employees must be resident in high-cost New York City, is a low $100,000.