– 2014’s Biggest Deal Illustrates a New ‘Take Private’ Trend
– Coller Capital’s PE Barometer: Investors Want More PE
– Searching for a Better PE Performance Benchmark
– Egypt is Once Again on PE’s Shopping List
– Carlyle’s Holiday Rap
THIS YEAR’S BIGGEST PE DEAL ILLUSTRATES A NEW ‘TAKE-PRIVATE’ TREND. The classic strategy of “using debt to acquire an entire public company to take it private is missing in action” in 2014, declares The New York Times DealBook. “Take-private deals were 15.2 percent of leverage buyouts this year through late November.” But “take-private deals were 60.5 percent of leveraged buyouts” in 2007. The problem in an era of relative caution is “it’s hard to make the math work on the public-to-private deals,” Joseph Baratta, global head of private equity at Blackstone tells Bloomberg TV. The deals that do work often involve activist investment firms buying minority stakes in undervalued companies and wearing down management resistance to a sale before a PE manager steps in with an offer. Another New York Times DealBook article – peppered with examples of such deals – implies that this is the case behind PetSmart’s $8.7 billion sale to a group led by buyout specialist BC Partners in 2014’s largest PE transaction. Watch for deals like this to further boost take-private volume.
THE COLLER CAPITAL GLOBAL PE BAROMETER IS HERE. The much anticipated, twice-yearly survey of 114 investors from around the world shows that appetite for private equity continues to grow. “Almost two in five PE investors – 39 percent – plan increased target allocations to private equity” over the next year, while 7 percent prepare cuts. Compared with 55 percent of investors who currently have 10 percent or more of their PE capital in direct or co-investment, 79 percent believe that they will be in this position in five years. Nearly all investors – 93 percent – expect 11 percent-plus annual returns over three to five years. Half of investors think greater PE fund manager specialization would “have a significant positive impact” on returns. Finally, almost half of North American investors “are having to boost their pay scales to attract new recruits,” versus 30 percent in Europe and 19 percent in Asia.
IN SEARCH OF A NEW PRIVATE EQUITY BENCHMARK. If it follows the example of CalSTRS, the second largest pension fund in the United States, CalPERS, the biggest, may replace its internal PE performance benchmark with a more standardized external one. CalPERS – The California Public Employees’ Retirement System – currently uses an annual PE benchmark designed by staff and based on global and U.S. public equity plus 300 basis points. Bloomberg writes that CalPERS “may change the benchmark” since officials have determined it is “imprecise in measuring PE performance and encourages riskier investments to meet the goal.” CalPERS’ 10-year annualized return of 13.3 percent on PE investments was 2.1 percentage points short of its benchmark. It also missed its one, three and five-year targets. CalSTRS – The California State Teachers’ Retirement System – switched in August from a similar internal benchmark to State Street’s GX Private Equity Index, citing its “mass” of data as a reason for the switch. GX tracks performance at some 2,300 funds representing $2 trillion in investments. If CalPERS also adopts a broad third-party benchmark, other investors won’t be far behind.
EGYPT IS ONCE AGAIN ON PRIVATE EQUITY’S SHOPPING LIST, as a high profile investment from emerging markets’ specialist Actis demonstrates. Private Equity International reports that Actis is acquiring “a 21 percent stake in IDH, one of the largest private sector diagnostics businesses in Egypt.” Meanwhile, The New York Times reports that the Egyptian economy is “experiencing a remarkable revival under its autocratic president Abdel Fattah el-Sisi” after years of turmoil following Egypt’s “convulsive revolution in 2011.” Demographically attractive Egypt had been an increasingly popular destination for private equity in the years prior to the revolution. Egypt’s economy “grew 6.8 percent in the first quarter of 2014, a six-year high, and economists expect growth to hit 4 percent this year – a level that would outpace former growth stars Brazil and Turkey.” Sisi has promised “to overhaul the country’s economy by cutting energy subsidies, increasing private sector investment and reducing the budget deficit.”
DAVID RUBENSTEIN’S TALENTS AS A RAPPER DON’T EXPLAIN CARLYLE’S SUCCESS. Inspired by emcee Dr. Dre, founder of headphone maker Beats which returned 80 percent to Carlyle in less than a year, Co-CEO David Rubenstein does his hip-hop best in the private equity firm’s holiday video. We can’t say he’s particularly “money” when bustin’ a rhyme, but for private equity investors his hook hits the spot: “Only goal in mind, LPs, LPs, serve our LPs.”