PRIVATE EQUITY’S STOCK OF UNSPENT CAPITAL “HAS SURGED TO $789 BILLION – an increase of 12 percent since December 2012, after four years of decline,” reports the Financial Times. “Buyout groups’ rising cash piles reflect” strong fundraising this year, plus “the fact that they have taken longer to invest their funds since” the 2008 financial crisis. Although PE funds may feel pressure to invest unused capital before five-year commitment periods expire, Mario Giannini, CEO of fund-of-fund giant Hamilton Lane, discounts this possibility. Citing the relatively weak volume of private equity-backed purchases this year, he notes “there is overcapacity, but there’s also discipline today on using that capacity.” A number of industry professionals expect dry powder statistics to fall substantially next year, once a record estimated annual bulge of $145 billion in unspent capital, expiring in 2013, is taken into account.
IT’S OFFICIAL, CHINA’S ENDING ITS IPO BAN. The China Securities Regulatory Commission “said on November 30 that 50 companies will be ready for initial public offerings by the end of January,” Bloomberg writes. The news follows recent reports claiming that the ban – a major barrier to realizing private equity investments – would be in place until at least May. “The IPO freeze will be lifted following new rules that pave the way for a switch to a U.S.-style registration system” permitting “investor demand to determine pricing.” “China, the world’s largest IPO market in 2010, hasn’t had a new listing since October 2012, amid a crackdown on fraud and misconduct.” “It will take about a year to review more than 760 companies that are seeking first time share sales.” The end of the freeze “builds on reform pledges made in a 60-point document released by the Communist Party on November 15.” After signs of more reasonable valuations in PE-backed China purchases in recent weeks, the lifting of the ban is another piece of good news for the country’s private equity investors.
PE FUND MANAGER SPINOUTS COMBINED WITH SECONDARIES ARE TEMPTING. For confirmation, just consider the blue-chip limited partners and secondary specialists negotiating to put some $5.5 billion into deals done by One Equity Partners, the buyout unit whose spinout was announced by parent JPMorgan Chase in June. Bloomberg reports that Ardian, Canada Pension Plan Investment Board, Coller Capital, Goldman Sachs, HarbourVest Partners and Lexington Partners are all considering backing an independent One Equity with more than $1.5 billion in fresh capital as part of a stapled deal that would see them buy the general partner’s $4 billion existing investment portfolio. For limited partners, such deals tend to lower the fee paid on assets and committed capital, while yielding a more rapid return on investment. For GP teams spinning out of a larger PE fund manager, or out of a larger financial group, such deals build valuable fundraising momentum. At the size being discussed, the potential One Equity transaction would constitute the largest PE direct secondary deal ever done.
“SPAIN AND ITALY, TWO COUNTRIES THE PE INDUSTRY HAD FORGOTTEN, could soon become a deal playground for European and U.S. buyout firms,” writes The Wall Street Journal. “At least 15 private equity groups focused on the countries are looking to raise funds with a combined value of more than €4 billion. That is way more than the €1 billion raised since the start of 2010. Although few deals are being completed, fundraising in Spain and Italy is attracting some of Europe’s biggest investors, including AlpInvest Partners, Unigestion and Adveq Management, many of which believe the region offers bargains for buyout firms. Maarten Vervoort, a partner at AlpInvest said: ‘It’s definitely a good time to be investing in southern Europe. In adverse economic conditions, history proves that time and time again that’s probably the best time to invest.’ ”
WILL “AMEND AND EXTEND” DEBT GIVE WAY TO DISTRESSED DEALS IN EUROPE? It’s already happening, according to Mubashir Mukadam, head of European special situations for KKR. “Banks in Europe are less willing to amend and extend, they want new money,” Mukadam told the Financial Times, after “KKR seized control of French steel abrasives maker Winoa in a debt restructuring of the company.” KKR took control of Winoa in a negotiated deal with its owner, PE fund manager LBO France. In Mukadam’s view the transaction “is an indication of more restructurings in Europe as lenders become less accommodating after years of extending the loans of struggling leveraged buyouts in the aftermath of the financial crisis.” “KKR bought more than 50 percent” of Winoa’s “debt at a discount from banks ready to take on losses.” “Winoa is a very good business,” but it has “an unbearable capital structure. It needs capital now when Europe is showing signs of recovery.” Winoa’s debt is being cut by 45 percent to €188 million and it will get €60 million in cash post-transaction.
THE WORLD’S LARGEST PENSION FUND INCHES TOWARDS A PE ALLOCATION. To increase returns, a government advisory panel recommended last month that Japan’s $1.2 trillion Government Pension Investment Fund invest in private equity and commodities for the first time. In an interview with Private Equity International’s Drew Wilson, GPIF president Takahiro Mitani explains that both primary PE fund investing and secondaries hold appeal for GPIF, but that the fund is likely to move into the asset class slowly: “GPIF does not have accumulated expertise in alternative investments,” so the fund will need “to bring experts into the institution,” says Mitani. “GPIF needs due caution when moving forward.” GPIF is the latest huge state-associated pool of capital to consider PE fund investments. Norway’s $760 billion Government Pension Fund Global, the world’s largest sovereign wealth fund, is also currently mulling a move into private equity.
INSURERS ARE INCREASING THEIR INVESTMENT IN PE, Risk.net reports in a story inspired by a BlackRock survey of 206 insurance firms. BlackRock’s annual insurance survey shows that 54 percent of respondents “are either moderately or very likely to increase investment in private equity.” Risk.net recognizes that faced with”regulatory pressures,” like the higher private equity reserve requirements that will come into effect with Solvency II, some insurance groups are selling their private equity interests – a finding in line with many media stories that have claimed insurers are reducing exposure to PE. But quoting a range of insurance industry professionals, the trade publication notes that despite these sales “the trend seems to be for insurers to increase allocations” to PE. “It is not only investment alpha that recommends PE to insurers.” Wim Vermeir, chief investment officer at Ageas in Brussels tells the publication: “in terms of balance sheet volatility you don’t have the same kind of swings as with assets listed on exchanges.”
“PRIVATE EQUITY FIRMS BRACE FOR ‘MAFIA’ STYLE SCRUTINY,” declares a Financial Times headline. The FT writes, “U.S. financial regulators are turning their sights on PE firms after winning a string of legal cases against hedge funds, according to law firms working with the buyout industry.” Timothy Spangler, a partner at law firm Sidley Austin, tells the FT: “although PE firms rarely trade in publicly listed stocks, which is where insider dealing typically takes place, there could be failings around fraud, competition, antitrust, bid rigging and collusion.” While the FT article mentions no actual or potential investigations, a story from Crain’s New York Business claims that “a whistle blower,” who is “a senior private equity insider,” filed a complaint “earlier this year with the Securities and Exchange Commission in which he contends that PE firms are violating federal securities law because they are acting as unlicensed brokers when they collect transaction fees.” Mafia style scrutiny or not, greater regulatory attention of the PE industry is apparently very much part of today’s zeitgeist.