Private Equity KeyTrends #36 – June 24, 2014

– Signs of a Junk Bond Market Correction
Booming Secondary Market for Fund Stakes
– Does the U.S. Offer the Best VC Opportunities?
– Surprises in Coller Capital’s Summer Survey
– Oil & Gas Seen as the Best PE Investments
Fundraising: The Importance of Premarketing
– PE KeyTrends Quick Question Results

SIGNS OF A CORRECTION IN A BUBBLY JUNK BOND MARKET ARE GROWING, Bloomberg notes in its story on Blackstone Group’s investor day. “We would describe the public markets for high-yield bonds as frothy,” Bennett Goodman, the head of Blackstone’s credit business, told investors. His comments “coincide with a decision by Oaktree Capital Group” to cut the size of a distressed-debt PE fund as the firm “struggles to find deals,” and they “add to concerns that the U.S. Federal Reserve’s stimulus policies have left bonds overvalued.” Yields on speculative-grade debt fell from 7 percent a year ago to a record low of 5.78 percent on June 11, “about what it cost the U.S. government to borrow for 10 years as recently as 2000.” Meanwhile, asset manager Blackrock’s High Yield Complacency Gauge is at a record high “as returns bunch together with little separation between winners and losers.” “Imagine a raft where all the passengers are sitting on one side. It only takes a small wave to capsize the contraption,” warns Blackrock. One possible benefit of more expensive debt would be lower prices for private equity-backed acquisitions.


THE SECONDARY MARKET FOR PE FUND STAKES IS BOOMING, Palico’s founder Antoine Drean writes in Forbes. As investors “struggle” to invest “as much as they can” in private equity, they are finding that buying existing stakes “in mature PE funds on the secondary market” is particularly attractive. “Secondary volume has hit unprecedented highs in 2014, with $13.75 billion of existing PE funds changing hands in the first five months of the year and more than three times that amount parked in specialist funds that buy on the secondary market.” Rather than invest 2013’s record annual distributions from private equity investments “disproportionately” in the 2014 fund vintage, which is challenged “by intense competition for assets as funds seek to invest a record $1.1 trillion” of un-invested but committed capital, investors are diversifying via the secondary market. “Buying in the secondary market can turn a risk factor – today’s exceptionally high purchase prices for companies – into a return enhancer. Those prices mean an exit market where assets already held for several years by PE funds are sold quickly and at levels that are frequently above carrying values.”


IS THE U.S. VC ENVIRONMENT THE BEST, HANDS DOWN? That’s certainly the takeaway from both a Wall Street Journal story and a China First Capital blog posting. Commenting on an Oxford Economics forecast that London’s tech sector will create $20.4 billion in revenue and 46,000 jobs over 10 years, and a South Mountain Economics claim that Britain’s tech industry is growing faster than Silicon Valley’s, the WSJ “used its own data to get a pulse on tech sector growth.” The result: “Yes, London tech investment is growing faster” than Silicon Valley’s, but it’s “dwarfed” by the range of U.S. opportunities. Tech investment in London “grew 41 percent, from $558 million in 2010 to $788 million in 2013,” while “venture investment in San Francisco rose 32 percent over the same period, but on a much larger scale, with $9.91 billion invested last year. Warning about the “current mania” for Chinese tech investing, China First writes: In China “there are far too many ‘me too’ ” tech businesses, with models “copy-catted from the U.S., pouring out PE and VC cash.” Betting on the U.S. “to win the World Cup offers more attractive odds” than Chinese VC.


THE LATEST COLLER CAPITAL GLOBAL PRIVATE EQUITY BAROMETER IS HERE. The much-anticipated bi-annual survey of 115 limited partners from around the world confirms trends and holds surprises. As “investor appetite for private equity continues to increase,” “family offices and insurance companies lead growth in target PE allocations.” A majority of global PE investors now expect to back first-time funds, indicating that fundraising is easier than it’s been in years. Two thirds of LPs “intend to use the secondaries market, either to buy or sell PE assets, over the next 2-3 years.” The proportion of PE investors “making annual net returns of 16 percent or more has almost doubled from a year ago” to one out of four, as the world’s equity markets have soared. Roughly half of “PE investors would accept lower hurdle rates in return for lower fund management fees.” Nearly a fourth of investors have invested with “GPs on a deal-by-deal basis since the onset of the global financial crisis.” Finally, “if given a choice” between managing a U.S. or a Canadian pension plan, “two thirds of all LPs would choose the Canadian plan,” with 50 percent of Americans and 100 percent of Canadians going the northern route.


OIL & GAS IS THE MOST POPULAR INVESTMENT SECTOR IN U.S. PRIVATE EQUITY, according to the Private Equity Growth Capital Council’s survey of 119 mid-to-senior level American PE professionals. The Private Equity Decision Makers Survey shows that 34 percent of professionals think oil & gas “provides the greatest investment opportunities in the U.S. over the next 12 months,” a result driven by the fracking revolution. Just 5 percent think the consumer goods sector offers the best opportunity, while no one believes top returns will be in telecoms or utilities. A majority of PE professionals say the U.S. stock market will decline over the next six months.


TODAY’S FUNDRAISING MANTRA IS “PREMARKETING, PREMARKETING” and more premarketing, observes an LBO Wire story. KPS Capital and CVC Capital Partners explain that successful campaigns are not easy. “It was important to us that we really got ahead of the game,” says Emily Vavricheck, head of investor relations at special situations fund manager KPS. “Premarketing began the day after we closed our prior fund.” Adds Marc St. John, head of CVC’s investor relations, “anyone saying they held a six-month close from end to end is probably fibbing you.” KPS Special Situations fund IV closed on $3.5 billion “in about three months,” while CVC closed on $14.3 billion after six months of formal fundraising. “During KPS’s premarketing push, executives spent a significant amount of time travelling and meeting with their existing investor base, while also courting new investors.” That “allowed KPS to focus on LP due diligence visits during the actual marketing period.” Prior to its formal fundraising, CVC “gauged investor interest in various fee terms, including ways to get investors to commit early to the fund.”




  • 84 percent of GP poll respondents say they are increasingly soliciting capital from investors outside of North America.
  • Only 29 percent of poll respondents believe LPs will cut target allocations to private equity this year.
  • Just 18 percent of poll respondents think Chinese VC will produce particularly strong returns.

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