A SEEMINGLY BULLISH MILESTONE FOR IPOS COMES AMID A SOFTENING MARKET.
By May 2, 140 companies had filed for U.S. initial public offerings in 2014, “which equals the number of U.S. IPO filings for all of 2012 (there were 256 last year),” writes Fortune magazine columnist Dan Primack. But the milestone coincides with “an overall IPO slowdown, not only for new filings, but also for pricings,” based on a chart of weekly activity in 2014. “This may ultimately look like just a bottoming blip,” but on certain measures “post-offering IPO performance has been pretty lousy for months – particularly when compared to opening trade prices.” Primack adds, “I’ve also heard arguments that a lot of the ‘best’ private companies funded or taken private between 2007 and 2012 already have gone out, and there is less interest in lower-quality issuers (something that even bankers have begun to acknowledge).” If the trends Primack identifies translate into a genuine IPO slowdown, it will make private equity exits from investments tougher and not just in the U.S.
2014 TAKEOVERS HIT $1 TRILLION MARK AT THE FASTEST PACE IN SEVEN YEARS.
That threshold was crossed April 28, “54 days earlier than in 2013,” after more than $300 billion in purchases were announced by companies last month, writes Bloomberg. If recent dealmaking momentum holds steady, 2014 will see “almost $4 trillion of deals announced, making it the second most active year for mergers and acquisitions ever, behind 2007.” CEOs, “with more than $4 trillion in cash on company balance sheets globally, have gone from being wary of making big deals to facing pressure to strike deals or be beat to opportunities.” The pick-up in corporate M&A is a good sign for private equity-backed purchases, which have been in a slump relative to PE-backed asset sales for well over a year. Corporate M&A is often followed by restructurings where the priority is to get non-core assets off company books and not necessarily at the highest price.
LACK OF CONSENSUS ON EMERGING MARKET PROMISE IS GROWING,
though less developed markets remain popular. That’s a key takeaway from the Emerging Markets Private Equity Association’s latest annual Global Limited Partners Survey of 106 LPs from 30 countries. While the number of LPs planning to increase emerging markets investment rose 9 percentage points from 2013 to 41 percent, the number planning to decrease exposure shot up 10 percentage points to 13 percent. Between 2011 and 2013 an annual average of less than 4 percent of LPs said they intended to decrease emerging market exposure. LP return expectations also took a hit this year, with 57 percent expecting annual gains of 16 percent or more from emerging market PE portfolios, down from 72 percent in 2013 expecting 16 percent or more. Latin America, excluding Brazil, is judged the most attractive emerging market for general partner investment over the next 12 months, followed by Southeast Asia and Sub-Saharan Africa, which ranked top last year. As for BRIC appeal, China leads at 4, with Brazil 5, India 8 and Russia 9. Turkey rounds out the attractiveness ranking at 10.
“A NICE PROBLEM TO HAVE IS RECORD AMOUNTS OF CAPITAL”
flowing back from PE investments. The Wall Street Journal reports “private equity firms are sitting on a mountain of cash to invest” with unused capital amounting to more than $1 trillion, as record net distributions from investments spark a sharp rise in fundraising. Some investors are now “worried that adding to the private equity stockpile will lead to rash investing and overspending.” David Fann, president and CEO of consultancy TorreyCove Capital Partners tells the paper: “The biggest concern is that we may be at the very beginning of a horror story, where the good times are rolling but eventually we may see limbs get chopped off.” Michael Forestner, a partner at another consultant, Mercer Investment Management, says: “the strong distributions are a little bit of the market’s way to say, ‘Take some money off the table.”
THE SEC’S REAL PRIORITY IN EXAMINING PE IS “SPREADING THE SUNSHINE.”
For a laundry list of the problems the U.S. Securities and Exchange Commission has found in private equity and for insight into its attitude toward the industry, read this speech by Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations. Bowden, who delivered it last week at Private Equity International’s Private Fund Compliance Forum, explains that his intention in listing transgressions is to help the industry “self-correct.” “I share it not to embarrass or to wag a finger, but to educate so all the good people in attendance (or reading this speech) can test for, and, if necessary address within their organizations the types of problems we have seen across the industry,” says Bowden. “We believe that most people in the industry are trying to do the right thing; to help their clients, to grow their business, and to provide for their owners and employees. We are not engaged in a game of ‘gotcha.’ ” Though the SEC recently announced that it had found in its first wave of PE firm controls “violations of the law or material weaknesses over 50 percent of the time,” in the context of Bowden’s speech that sounds like a wake-up call for PE to get its house in order, rather than the announcement of a scorched earth policy.
THE TOP PRIVATE EQUITY FUNDRAISERS OF THE POST-LEHMAN WORLD
are ranked by Private Equity International. PEI’s annual ranking of fund managers, based on the amount of capital raised over the last five years, gives a particularly clear idea of who’s done well in the wake of the financial crisis. For the first time it excludes 2008, the year Lehman Brothers collapsed, as well as all pre-crisis years. While Carlyle Group, with a five-year fundraising total of $30.6 billion has more than held it’s own, rising to the top spot this year from second place last year, others have fallen, notably 2013’s top firm, TPG, which ranked fifth this year, with $18.8 billion raised in the last five years. The only non-U.S. firm in the top ten, London-based CVC Capital Partners, rose four places this year to 6, with $18.1 billion raised. Ranked at 43, the top Asian-based firm is Hong Kong-headquartered RRJ Capital with a half-decade fundraising total of $5.8 billion. The highest ranked Latin American fund manager is Patria Investimentos, with a fundraising total of $2.6 billion. All together, the top 300 firms raised $1.03 trillion since 2009, 10 percent below last year’s five-year fundraising total and 20 percent below the 2012 figure, which includes the record fundraising periods of 2007 and 2008.
- Within five years, 44 percent of readers believe more private equity capital will go to emerging markets than to developed markets.
- 85 percent of readers say stock market listings for private equity fund managers will result in lower returns for investors.
- 57 percent of readers believe we will see a significant rise in the number of listed private equity fund managers, now that Ares Management has listed.