Private Equity KeyTrends #27 – February 19, 2014

PE EXITS ARE AT A NEAR-RECORD PACE THIS YEAR, driven by a string of $1 billion-plus trade sales, notes The Wall Street Journal. The overall number of exits has dropped – 80 versus 109 – but private equity-backed sales worth $30.4 billion were announced through February 12, more than double the $14.1 billion tallied in 2013’s first 43 days, and just shy of the $31.4 billion high set in 2007. Corporate acquirers account for 90 percent of this year’s proceeds, “the highest share since the same period in 2000, when corporations accounted for 98 percent of all sale volume.” Complementing a global wave of PE-backed initial public offerings that began last year, the pick up in trade sales is a positive sign for exits in 2014, given the world’s bulging corporate treasuries.



IN CALPERS’ LATEST PE QUARTERLY REPORT, DIRECT & CO-INVESTMENTS SHINE. The report from the largest public pension fund in the U.S. reveals that its direct and co-investments outperformed all other types of private equity investments, including classic funds, funds-of-funds and secondary funds. On a one, five and ten-year basis, CalPERS direct and co-investments posted annual returns of 58.8 percent, 20.1 percent and 21.1 percent respectively. Those non-fund investments account for just 4 percent of CalPERS $31.3 billion PE portfolio. Another report highlight – benefitting from a particularly positive exit market, CalPERS collected an annual record of $6.9 billion in net cash from realized PE investments in 2013, generating a 19.1 percent yearly return for the overall private equity portfolio. Faced with the daunting task of reinvesting that capital, an agenda item reveals that CalPERS’ investment committee will consider cutting its annual target allocation for PE investments to 12 percent from 14 percent. Meanwhile, a Harvard-INSEAD study of returns from seven large LPs over two decades shows direct and co-investments underperforming fund investments, lending credence to the thesis that non-fund investment succeeds best when it is selective.



IF THE ESSENCE OF PE IS BEING CONTRARIAN, THEN THE PLACE TO BE IS BRAZIL. That’s the gist of what Canadian Pension Plan Investment Board chief executive Mark Wiseman says in a Reuters story announcing that CPPIB is opening an office in Sao Paulo as it increases investment in Brazil and Latin America. Brazil’s economic growth has slowed and the country’s interest rates have risen amid a general pullback in emerging market private equity investing, spurred in part by the prospect of rising U.S. interest rates and worries about the stability of local currencies. “When other people are exiting the market, it is perhaps the best time to be entering,” says Wiseman, who runs Canada’s largest pension fund. CPPIB’s move comes as a report from Brazilian business school Insper and Spectra Investments sheds light on long-term private equity and venture capital returns in Brazil. Between 1990 and 2008, Brazil’s PE funds produced an average annual return of 22 percent before fees, or a multiple of 3.6 times investment.



“WE’RE IN THE MIDST OF A VC-BACKED IPO RENAISSANCE, not only for big Internet companies, but also for small biotech and enterprise software companies,” proclaims Fortune’s Dan Primack. He notes 9 VC-backed IPOs in just the first 12 days of February. Another Fortune story is devoted to the bullish views of celebrated VC investor Marc Andreessen. Andreessen believes “the Internet is following the same trajectory that older technologies like cars, railroads and steam engines followed.” Says Andreessen: “First the new technology is not taken seriously at all. Then it’s taken way too seriously way too quickly. Everybody gets too excited. Then there’s a gigantic catastrophe” – like the bursting of the internet bubble in the early 2000s – “and then stuff actually starts happening.” Andreessen is putting his money where his mouth is: in a Wall Street Journal ranking of the top ten most active VC investors in 2013, his firm Andreessen Horowitz is second with 56 new investments, just behind the 57 new investments of 500 Startups.



CREDIT STRATEGIES HOLD POWERFUL APPEAL FOR BUYOUT SPECIALISTS and their investors, notes an exhaustive Bloomberg story on the evolution of private equity debt investment since the 2008 financial crisis. A case in point: assets held by Apollo Global Management’s credit unit have “swelled to $103 billion from about $4 billion in seven years.” The growth, driven initially “by buying loans from banks hurt by the 2008 financial crisis,” is now being fueled by “regulations designed to prevent a repeat of that event.” Apollo is “at the forefront of PE firms from Blackstone Group to KKR & Co. scooping up debt as banks unload.” The firms “see an opportunity to offset a buyout market that has shrunk 80 percent in six years,” dropping to $141 billion in 2013 from a peak of $696 billion in 2007. Credit as a key private equity investment strategy is here to stay, says Apollo credit unit chief James Zelter: “It’s not cyclical, it’s a secular change.”



HERE ARE FIVE TIPS FOR FOR GETTING AHEAD IN PRIVATE EQUITY from David Rubenstein, co-founder of private equity mega firm Carlyle Group, as picked up by The Wall Street Journal. Tip 1: “If you’re a genius, you might create a great company, but you’re probably not going to work out at an existing PE firm.” Tip 2: “Work hard” but “not obsessively so. You have to have some other things you like” apart from private equity. Tip 3: To “gradually expand your power base in an organization, find one area and make it your own. The word will spread that you’re an expert and people will come to you.” Tip 4: “All of life is really about persuading other people to do what you want. You have to be able to communicate in more than 140 characters on Twitter.” Tip 5: “If you’re not good at at team sport, you’re probably not going to do well” in private equity.





  • 89% of KeyTrends respondents expect private equity to deliver higher returns than listed stocks in 2014

  • 52% of KeyTrends respondents believe IPO markets will lose “significant steam” this year

  • 40% of GP KeyTrends respondents in fundraising mode are using a placement agent


  • LPs are showing renewed interest in Spanish managers, pointing out that Spain – unlike its troubled Southern European neighbors – seems to have definitively turned the corner to recovery


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