– The M&A Boom Isn’t Helping PE Purchases
– Funds with Extra-Long Lives Have a Competitive Edge
– African Pension Funds are Becoming Important PE Investors
– SWFs Increase PE Investment for the Third Year in a Row
– CPPIB Leads the World’s 50 Biggest PE Investors
– Investment Banks are Losing Talent to PE Firms
– PE Quick Question Results
LEFT OUT OF THE M&A BOOM, PE STILL HOPES TO TAKE ADVANTAGE OF IT, but competition for assets may frustrate that aspiration. The New York Times DealBook reports that with mergers and acquisitions up nearly 73 percent to $1.77 trillion in the first half of 2014 versus 2013’s first six months, PE’s share of purchases has halved to 7 percent. PE firms aren’t able “to compete with corporate rivals” whose potential cost savings “justify higher prices.” Some predict more PE-backed acquisitions as newly merged companies engage in spin-offs that prioritize rapid restructuring rather than high price. But the large number of PE firms looking to spend recently raised capital looks increasingly likely to nullify pricing advantages dictated by seller expediency. Consider the possible bidding war shaping up for assets earmarked for sale by cement makers Lafarge and Holcim as they seek regulatory approval for their announced $40 billion merger: According to the Financial Times, a consortium of Blackstone, Cinven and the Canadian Pension Plan Investment Board is likely to face competition from rivals Apollo, Carlyle, TPG, CVC, KKR and BC Partners and offers from “competing cement makers.”
MORE PE FIRMS ARE BANKING ON THE APPEAL OF EXTRA-LONG FUNDS, where the investment cycle goes beyond the industry’s standard 10 years. After just three months of fundraising, highly respected Nordic private equity investment specialist Altor has announced the final close on a $2.7 billion fund with a 15-year investment cycle, according to Real Deals. And while Reuters reports that the newest fund from Hong Kong-based Capital Today – “a private equity firm which has made huge profits off investments in China’s technology sector” – has a 28-year life, the Financial Times announces that the Edmond de Rothschild Group “has amassed $530 million” for an African PE fund with an evergreen structure. “Time counts in Africa,” says Johnny El Hachem, a senior EdRG executive. “You can get much better returns if you stay longer.” In a crowded private equity marketplace, investors are particularly receptive to structures that promise a competitive edge.
AFRICAN PENSION FUNDS ARE SET TO BECOME “IMPORTANT” INVESTORS IN PE, writes Institutional Investor magazine in a lengthy overview of the rapidly changing sector. “Nigeria offers a hint of the potential for the region’s growing pension industry.” Assets under management have tripled in five years to $25 billion, “even though less than 10 percent of Nigeria’s workforce is enrolled in a pension plan. What’s more, the government is in the process of liberalizing regulations to allow pension funds to put more money” into private equity both at home and abroad. Other countries seeing rapid growth in pension fund assets and greater investment in private equity are Botswana, Ghana, Kenya, South Africa and Uganda. Estimates show pensions funds in Sub-Saharan Africa’s six largest markets doubling in size to $622 billion by 2020 and rising to $7.3 trillion by 2050. Africa’s small but rapidly growing importance as an investment destination for private equity funds is likely to be matched or exceeded by its importance as a source of capital.
INVESCO’S SURVEY REPORTS SWFs ARE INCREASING PRIVATE EQUITY EXPOSURE. The annual 36-page Invesco Global Asset Management Study notes that the world’s sovereign wealth funds intend to boost 2014 capital earmarked for global private equity by 39 percent compared to 2013 allocations, continuing a three-year trend of increased exposure to alternative investments. After polling 52 sovereign wealth funds managing $5.7 trillion in assets, Invesco observes that what’s driving the greater investment in private equity and other alternatives is “the volatility of equities, yield compression in treasuries and greater correlation between equities and corporate bonds due to quantitative easing.” SWFs achieved an average annual return of 7 percent from alternatives in 2013 compared to a target of 8 percent.
PEI RANKS AND PROFILES THE WORLD’S 50 LARGEST PE INVESTORS. The “LP50” ranking of limited partners tracks the amount of capital they’ve invested in private equity over the last five years, including “all primary fund commitments, co-investments, separate accounts, joint ventures and direct deals.” Topping Private Equity International’s list is the Canada Pension Plan Investment Board, widely regarded as one of the most innovative investors in PE. CPPIB’s $26.2 billion in PE investments since 2009 is 34 percent more than the amount deployed by second-place AlpInvest, the Dutch fund-of-funds group owned by Carlyle, and almost 80 percent more than the investments of third-place Hamilton Lane, the U.S.-based fund-of-funds group. The rest of the top ten in descending order are HarbourVest Partners, Washington State Investment Board, La Caisse de dépôt et placement du Québec, the California Public Employees’ Retirement System, Pathway Capital Management, the Teacher Retirement System of Texas and the Oregon Public Employees Retirement System. The LP50 have invested a total of $313 billion in PE since 2009, with 64 percent of that coming from U.S.-based investors and the lion’s share, or 45 percent, sourced from pension funds.
IN THE BATTLE FOR TALENTED ANALYSTS, BANKS ARE LOSING TO PE FIRMS. That’s the inevitable conclusion drawn from a New York Times story on private equity’s aggressive, early recruitment of newly minted investment banking analysts. In the wake of the financial crisis, “burdened by new regulations and haunted by negative publicity,” banks have reduced risky but highly remunerative proprietary trading activities, becoming less attractive places to work for many top university graduates. “PE firms, meanwhile, have grown stronger, benefiting from low interest rates and a buoyant stock market,” raising “huge new funds” and expanding into “new businesses, requiring additional workers.” “For aspiring Masters of the Universe, PE seems more attractive than ever.” Daniel Sheyner, a former associate at Bain Capital, “has turned this tricky situation into a business opportunity,” writes the Times, completing “an exhaustive” ebook guide to the PE recruiting process – the “Private Equity Prep Pack” – released in late May by Wall Street Oasis.