September 23, 2015
– Q4 PE-Backed IPOs Forecast at Highest Level Since Early 2013
– PE Investors Call “a Bottom” to “Brazil’s Plummeting Markets”
– “Deeeeeals, Deeeeeals,” Zombie VC Funds May “Proliferate”
– Co-Investment May “Come Back to Haunt Private Equity”
– The 15 PE Fundraisings Attracting the Most Interest
EXPECT A BUSY PE-BACKED U.S. IPO MARKET IN THE FOURTH QUARTER, says the Wall Street Journal. If all of the likely deals go through, “the fourth quarter would be the busiest three months for initial public offerings of private equity-backed companies “since at least the beginning of 2013.” Meanwhile, “the share of U.S. IPOs for technology companies – typical drivers of IPO volume – is on pace to hit a seven-year low” in 2015. “More of these companies are opting to stay private longer,” amid concern “that venture investors who have backed them at relatively high prices wouldn’t fetch enough for their shares in the public markets right now.” Leveraged “buyout firms are in a different position,” looking to unload companies that “have been sitting on their books for a long time.” Moving now could help buyout firms “avoid the possibility of market conditions souring,” following “the recent volatility in stocks.” “It typically takes at least a year for PE owners to sell down their stakes through additional stock offerings,” hence the pronounced rush to list.
HOW CONTRARIAN IS PE? FOR A CLUE, CHECK OUT BRAZIL. “Value investors with strong stomachs are calling a bottom to Brazil’s plummeting markets, despite an economic and political crisis which could see the President impeached” and which recently led “to the country’s credit rating being downgraded to junk,” states the Financial Times. Among those noticeably “stepping up their commitments” are private equity investors. “In the first half of the year, they invested $2.3 billion, 20 percent more than in 2014. ‘There’s never been a better time to invest,’ ” declares Cate Ambrose, president of the Latin American Private Equity and Venture Capital Association. “ ‘You’re going to do really well on the exchange rate and business owners are more incentivised to work with private equity groups and valuations have clearly come down.’ The last time the Brazilian real, down by a third this year, approached current levels of close to 3.9 to the dollar was in 2002, a moment often seen later as a once-in-a-lifetime buying opportunity.” Time will tell if that should be revised to a twice-in-a-generation opportunity.
“DEEEEEALS, DEEEEEALS,” ZOMBIE VC FUNDS MAY “PROLIFERATE,” according to the Wall Street Journal. “The talk among tech investors and entrepreneurs” these days is all about “the coming rise” of venture capital zombies. These are VC teams “that deployed investors’ capital at peak valuations, but can’t sell off at a profit,” and which are unlikely to attract capital for new vehicles due to poor performance. “Given the hype surrounding early-stage tech companies and the hordes of fund managers without the necessary backgrounds, operational skills or networks to identify and create winners," many VCs will wind up with “portfolios delivering subpar returns.” One bright spot amid the doom and gloom may be Europe, where the WSJ says investing has slowed as prices have increased – likely to limit zombie numbers – in contrast to the U.S. where VC investment “is still increasing.”
CO-INVESTMENT “MAY COME BACK TO HAUNT” PRIVATE EQUITY, writes Private Equity International. Some firms are “only looking at the economic benefits” of co-investment and “ignoring the potential for things to go wrong,” Andreas Beroutsos, executive vice president of PE and infrastructure at Caisse de depot et placement du Quebec – one of the world’s largest PE investors – notes. “He adds: “some people doing co-investments are doing so without the relevant teams. They often see that a big PE firm has already underwritten the deal, so they say ‘it must be safe.’ ” The degree to which this may harm returns will only be evident when “the water recedes. We are already high in the current cycle,” notes Beroutsos. The article underlines the idea that the successful deployment of co-investment dollars has a logical ceiling that varies according to investor resources and experience. Says Beroutsos: “If direct investing has done better than fund investing there is the temptation to do more of it and stretch a lot further. But you have to have the wisdom and clarity of mind not go too far.”
THE 15 PE FUNDRAISINGS THAT INTEREST INVESTORS THE MOST are listed in Palico’s latest Data Snapshot. There are “over 2,600 private equity vehicles raising capital for classic funds, co-investments and deal-by-deal structures,” but “out of the 57 high-profile vehicles each currently seeking more than $2.5 billion from investors,” only one makes Palico’s 15 most-viewed list: Warburg Pincus Private Equity Fund XII, “the second biggest vehicle in fundraising mode today, with a target of $12 billion.” Warburg Pincus takes top spot out of the fundraisings that nearly 5,000 LPs have consulted over the three months through September 15 in some 14,850 searches of Palico’s marketplace. “The corollary of the absence of mega-funds from the most-viewed list is the large number of funds with strategies focused on investing in lower middle market companies.” Over a fifth of the 15 funds listed “are explicitly dedicated” to the lower mid-market, a sector “populated with companies that are off many investor radars” – therefore “a promising hunting ground for reasonably priced acquisitions,” at a time when average prices are at historic highs.