PE Key Trends Blog

Private Equity KeyTrends #23 – December 17, 2013

Dec 18, 2013 6:44:11 PM

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

Bloomberg Businessweek uses last week’s initial public offering of Blackstone-owned Hilton, generator of the biggest PE profit of all time - on paper - as a chance to explore the state of some of the largest private equity deals ever, many of which were acquired at the height of the credit bubble between 2006 and 2008. Over the years, these transactions have frequently been held up as examples of why PE mega deals perform poorly. Yet Bloomberg notes that several huge transactions from the credit bubble years have turned out to be highly profitable. Hilton and another PE mega deal, Apollo Global Management’s purchase of chemical manufacturer LyondellBasell Industries, have each yielded more than $10 billion in profit for their owners. Mike Kirby, chairman of Green Street Advisors, a property research firm, tells Bloomberg Businessweek, with Hilton, Blackstone “demonstrated the best attributes of what PE advertises itself to be, which is finding and improving companies with an intensive dose of new and better management.”


COLLER’S GLOBAL PRIVATE EQUITY BAROMETER SHOWS THAT LPs ARE OPTIMISTIC. Among the findings of this highly regarded survey of limited partners: “86 percent of limited partners anticipate annual returns of 11 percent-plus over the next 3 to 5 years; on balance, LPs expect the rate of general partners’ capital calls and distributions to accelerate over the next 12 to 18 months; a quarter of global LPs plan increased exposure to African PE; just over half of LPs have co-invested with GPs in the last two years; and most investors are comfortable with the current level of dividend recaps.” Arguably, the survey’s least surprising finding: “the majority of North American and European LPs believe the financing of futuristic technology ventures – such as asteroid mining – by billionaires are largely ‘rich men’s vanity projects’.”


FIRST TIME VCs HAVE HAD MORE FUNDRAISING SUCCESS IN RECENT YEARS, notes this story from Thomson Reuters’ Venture Capital Journal. Unlike buyout funds, where the number of successful new fund launches has been in decline, “demand for new venture funds has been strong for the past four years. The average number of new [VC funds] raised annually from 2003 to 2009 was about 28, but since that time it has been 42,” writes VCJ. “As of late November, 38 new funds had been raised in 2013.” The VCJ story also has advice from successful first-time VC managers for those thinking about striking out on their own. Perhaps the best tip: “It is no longer enough to be an experienced manager with a decent track record. You need to convince potential LPs that you have some sort of special sauce.”


NON-U.S. TECH VENTURE CAPITAL CENTERS ARE THRIVING, as a trio of stories from the New York Times DealBook, The Wall Street Journal and The Economist explain. In a piece documenting Britain’s growing startup culture, the New York Times DealBook writes that over the past three years Shoreditch has been transformed into “the center of London’s technology community,” as “rundown cafes have morphed into high-priced pubs, and multilingual 20-somethings fill trendy coffee house.” Meanwhile, the WSJ observes that Beijing’s Zhongguancun district, “China’s answer to Silicon Valley,” is “a crowded mass of electronic malls, fast-food joints and office buildings” housing “a growing class of tech entrepreneurs and VCs.” Moving back to Europe, The Economist says “a new group of European VC firms is emerging,” based in cities like Helsinki and Berlin. Citing the success of Criteo, a French advertising company, that went public on NASDAQ, the magazine notes “it certainly seems a good time to start investing in European startups.”


“PRIVATE EQUITY INTEREST IN JAPAN PICKS UP,” declares The Wall Street Journal in a report on the country’s most recently closed PE deal, PAG Capital’s $250 million investment in theme park operator Universal Studios Japan. In its first Japanese investment, PAG joins existing Universal Studios Japan investors and private equity peers Goldman Sachs and MBK Partners. But the Financial Times reports that despite growing private equity enthusiasm for the country, there have only been “10 deals in Japan this year. Only one of them, KKR’s $1.7 billion buyout of Panasonic Healthcare, was valued above $500 million.” The difficulty of private equity investment in Japan is underlined by a Reuters story detailing the rejection of Lone Star’s $755 million bid to buy Osaka Prefectural Urban Development Company, a train and warehouse operator. Despite a bid “16 percent higher than the target price set by the local government, and outbidding its closest rivals,” Lone Star’s takeover was blocked by an Osaka municipal government vote. “In Japan PE is treated like a second class citizen,” observes Yasushi Ando, CEO of Japanese PE group New Horizon Capital.


CANADA’S PENSION FUNDS ARE OUTGUNNING MEGAFIRMS AS PE ACQUIRERS, notes Bloomberg Businessweek. In the first 10 months of 2013, “the six largest Canadian pension funds have participated directly in $18.4 billion of mergers and acquisitions.” “That’s more than double the $7.4 billion of the three biggest U.S. buyout out shops, Blackstone Group, Carlyle Group and Apollo Global Management,” with more Canadian deals “on the way.” Competition is putting the pension plans at odds with general partners. Ontario Teachers’ Pension Plan, Canada’s third largest fund, “bought a majority stake in Illinois-based Heartland Dental Care last year, outbidding KKR and Madison Dearborn Partners.” “ ‘We’re competing against every other investor in the world,’ says Gordon Fyfe, CEO of PSP Investments, the fourth-largest fund manager in Canada.” If “ ‘you’re going to earn returns, you’re taking them from someone else.’ ” “The private investing arms of the four largest Canadian pension funds returned an average of 12 percent in 2012, including direct and passive investments,” while “the five largest publicly traded buyout firms” that report annual PE performance posted “an average gain of 19 percent.”


CAN OTHER NATIONS OFFER THE SAME STELLAR SHALE RETURNS AS THE U.S? In this Real Deals column, Epi-V energy fund partner Glynn Williams “walks investors through the ins and outs” of the international “shale gas opportunity.” Private equity investors, according to Williams, should prioritize places like Argentina, which has “vast supply,” Lithuania, which aims “to curb” energy dependence on Russia, and the United Kingdom, where foreign direct investment in shale gas exploration and production has been welcomed. “Given the global shale industry’s growth potential, investors would be wise not to ignore it,” Williams concludes.


IN 2013, THREE PE FIRMS ARE AMONG THE 25 BEST PLACES TO WORK in finance, according to an annual Pensions & Investments survey of industry employees and employers. In the Alternatives Managers category, Blackstone captured the top spot followed by second place Hamilton Lane and third place Abbott Capital Management. Opportunities for career advancement and effective work-life balance are major pluses cited by PE employees. “My firm has supported me and afforded me work-life balance that allows me to pursue my career and continue to advance within the company, while also building a meaningful, full life outside the office,” a Hamilton Lane employee says. And a Blackstone employee notes, “I feel I have opportunities to advance as far as I’d want, as long as I don’t stop improving upon my skills and knowledge. This is my final place of employment.” In a video linked to P&I’s story, Blackstone CEO Stephen Schwarzman explains how formal processes encouraging “feedback, education and career advancement” helped the firm win this year’s honor.