PE Key Trends Blog

Private Equity KeyTrends #20 – November 06, 2013

Nov 6, 2013 3:12:30 PM

Tags: KeyTrens, News, Palico, PE KeyTrends, private equity, V2

In This Issue:

- Earnings Soar at Distressed Investor Oaktree
- KKR Raises More Money via Frequent Fund Launches
- There’s No Shortage of Secondary Fund Sellers
- China IPO Freeze Seen Lasting, with Benefits for PE
- Emerging Markets Fundraising Drops
- Investec Reflects on GP Survival
- Crowdfunding: No Threat to VCs
- Over 200 Private Placements Slated for Ads

Since Palico was founded in 2012, it has been dedicated to helping GPs and LPs meet each other and start productive conversations, both on and offline. In that spirit, we are proud to sponsor the ILPA General Partner Summit this week in New York. We’ll be on site so we can get to know our members better and introduce non-members to the Palico PE Marketplace. Stop by so we can say hi.


Q3 EARNINGS SOAR 70 PERCENT AT DISTRESSED PE INVESTOR OAKTREE, “as incentive income” earned “for exceeding the performance thresholds it sets with clients,” more than doubled to $122.4 million versus a year ago, reports Bloomberg. Oaktree Capital Group reported net income of $42.9 million in the third quarter, compared to $25.2 million in the same period last year. The firm’s quarterly earnings gain is the greatest reported by the five major publicly-quoted private equity firms.


What’s your opinion: Is the distressed investing opportunity as big as many say it is?

KKR “IS NOT PLANNING TO EASE UP ON EFFORTS TO RAISE FRESH CAPITAL,” peHUB writes. Leading a trend among the biggest general partners, KKR is using more frequent launches of smaller but more specialized PE funds to raise more money than during the industry’s 2005 to 2008 fundraising boom. “When you look at the buying power of our Asia II, NAXI, China Growth, and Europe III funds, it equates to a $21 billion global private equity fund,” Scott Nutall, global head of capital and asset management at Kohlberg Kravis Roberts & Co, said during the firm’s third quarter earnings call. The New York Times DealBook notes KKR Q3 profit rose 23 percent from the same period in 2012; not as big a jump as Oaktree’s, but more than the single-digit gains at Blackstone and Fortress. Carlyle, the last of the five major listed PE firms to post Q3 results, earlier today reported a 21 percent fall in quarterly profit, as it earned less in performance fees and realized fewer investments than a year ago.

PEHUB, The New York Times DealBook

What’s your opinion: Are listed mega-firms satisfying stock market investors at the expense of their private equity limited partners by emphasizing asset gathering?

THE SECONDARY MARKET FOR PE FUNDS HAS LOTS OF POTENTIAL SELLERS, even as volume is falling, a Reuters story and an Unquote interview make clear. As distributions from maturing private equity portfolios rise, sellers’ power to accept or reject offers for their existing fund stakes is increasing, yet annual secondary market volume is likely to decline a fifth this year to $20 billion. Reuters writes that PE firm Ardian has “spent $4.3 billion acquiring stakes in buyout funds” since September 2012, “defying suggestions there is a shortage of sellers in the secondary market.” Meanwhile, Ivan Vercoutere, LGT Capital managing partner and secondary specialist, says in Unquote that LGT has “experienced an increase in the number” of secondary “opportunities reviewed compared to” 2012. “We expect to continue seeing attractive opportunities, even if overall transaction volume for 2013 ends up below that of 2012.” The volume log-jam will probably break when more specialists, eager to deploy a record $63 billion in dry powder, pay closer to par.


What’s your opinion: For a potential PE fund buyer, are there factors that are more important than the discount or premium to net asset value that a seller is willing to accept?

THE FREEZE ON MAINLAND CHINA IPOs IS LIKELY TO LAST SIX MONTHS MORE, the Financial Times reports, while Reuters says that the ban is leading to reasonably priced acquisitions for private equity funds. Faced with a “fragile” stock market, China’s “regulators are trying to pick a perfect moment” in China’s economic cycle for a re-opening of initial public offerings. Six months out is the best estimate for when the stars will be aligned. Depriving PE firms of a favorite exit channel, the year-old IPO freeze is negatively affecting fund performance. But Reuters writes that “a potential deal for CVC Capital Partners to buy a majority stake” for $300 million in South Beauty Investment, a high-end Chinese restaurant group, “highlights a growing willingness by smaller China firms to cede control to foreign private equity amid unfavorable IPO prospects.” CVC’s prospective price for a 69 percent South Beauty stake is 8.5 times EBITDA. The Reuters article follows several similar stories in recent weeks.


What’s your opinion: Is there a silver lining for private equity firms in China’s IPO freeze?

EMERGING MARKETS’ SHARE OF FUNDRAISING HAS DROPPED SHARPLY IN 2013, according to the Emerging Markets Private Equity Association’s Q3 2013 Industry Statistics. Emerging market PE funds attracted $21 billion, or 12 percent of global fundraising in the first nine months of this year, compared with $40 billion, or a record 20 percent of global fundraising, for all of 2012. But if slowing economies, currency woes, and a perceived lack of proven general partners in the developing world are taking their toll on emerging markets as an investment destination, Grant Thornton’s annual survey of 156 general partners shows a flip side. While slightly more than a third of GPs believe North America and Europe will be the most significant source of new capital for PE in the next two to three years, 56 percent believe the largest source of new capital will be the emerging market regions of Asia, the Middle East and North Africa.


What’s your opinion: Will emerging markets ever be a greater source of private equity capital than developed markets?

INVESTEC REFLECTS ON GENERAL PARTNER SURVIVAL in this idiosyncratic 18-page report on the post-financial crisis environment for private equity. Based on interviews with 15 prominent European private equity professionals, ranging from Apax founder Sir Ronald Cohen to Mark Redman, the European operations chief for the Ontario Municipal Employees Retirement System, Investec Private Equity Insights warns that “any assumption that the current raft of regulations is ‘it’ for PE is potentially dangerous.” In addition to possible future regulatory challenges, the Investec report includes thoughts on what GPs must do to improve their public image and discusses what the group considers a priority for fund managers: GPs must tap retail-managed defined contribution retirement plans now that traditional PE investors are cutting back on GP relationships.


What’s your opinion: How severe is the post-financial crisis shakeout in private equity likely to be?

CROWDFUNDING IS UNLIKELY TO POSE A COMPETITIVE THREAT TO VC FUNDS. That’s the implication of a column by New York Times DealBook columnist Steven Davidoff. Davidoff observes that apart from the danger of falling victim to fraud via crowdfunding, investors “are likely to lack the diversification of venture capitalists, meaning that crowdfunding investors will not have the successes to even out” failures. “Moreover, the crowd’s ability to pick winners may not be as good as the venture capitalists’.” All of this is likely to prevent crowdfunding from becoming a major source of capital for entrepreneurs and businesses. Davidoff’s column provides a link to the U.S. Securities and Exchange Commission’s proposed crowdfunding rules, a mammoth 568-page release, issued two weeks ago, that is subject to a 90-day comment period prior to final modification and implementation.

The New York Times DealBook

What’s your opinion: Are there capital sources that pose a serious competitive threat to venture capital funds?

MORE THAN 200 PRIVATE PLACEMENTS MAY USE INTERNET AND TV ADs, taking advantage of the recent elimination in the U.S. of the 80-year-old mass solicitation ban, reports peHUB. Since the mass solicitation ban on private placements was lifted on September 23, “170 new offerings have indicated in filings with the Securities and Exchange Commission that advertising is planned,” while 44 offerings sent to the SEC prior to the reform’s implementation “have filed amended paperwork suggesting they will be advertised.” So far, 26 ads have been submitted for SEC review. Mass solicitation is helping to boost transparency for private equity fund offerings, but private placement rules still limit freedom to promote PE funds to anyone who has not been verified as an accredited investor.


What’s your opinion: Will many private equity general partners take advantage of U.S. mass solicitation?