March 21, 2014
This Year’s Top Six Challenges Facing the
Global PE Industry
Billion Dollar Digital Payments Buyout
Attracts Big Name PE Funds
PE Writes Cheques to Tap EM’s Emerging
More LPs Want the Right to Co-invest
Bain’s Takeaways on Dealmaking Trends for
Quote of the Week: Yale’s Alpha Team
THIS YEAR’S TOP SIX CHALLENGES
FACING THE GLOBAL PE INDUSTRY
Regulation is the least sexy part of private equity but it is top of mind this year, as GPs face uncertainty
about the burden of compliance, according to Grant Thornton’s latest survey of General Partners (GPs)
as summarized in its Global Private Equity Report for the year. Dealflow, particularly heated competi-
tion for deals, and fundraising challenges are also seen as key trends this year.
The study found that fundraising has seen a “marked improvement” in sentiment across all geogra-
phies since last year’s survey. It has particularly improved for North America; where the percentage of
respondents stating that fundraising environment is positive more than doubled, up from 20% to 45%.
However, the challenge remains for fundraising in terms of cost and time required to raise a fund. New
trends in fundraising include a tougher due diligence process with potential investors asking for more
information than before, plus forward pipeline visibility, portfolio visits, and dataroom strategies. More
GPs than ever (22%) expect their funds to be dominated by new LP relationships, in other words, churn
is becoming more common for each new fund a GP raises.
The economic environment remains one of the top five challenges facing the PE industry, but optimism
is higher, especially in the core private equity markets of North America and Western Europe. In North
America, 58% of respondents expect an increase in activity, and 72% feel positive or very positive about
the outlook for their own portfolio (compared to 61% globally). (Image source: Grant Thornton)
MORE LPS WANT THE RIGHT TO
PE WRITES CHEQUES TO TAP EM’S
EMERGING MIDDLE CLASS
BILLION DOLLAR DIGITAL PAYMENTS
BUYOUT ATTRACTS BIG NAME PE FUNDS
This week’s buyout of the week is a USED 2.8 billion acquisition by Advent International and Bain Capi-
tal, which was reported first by Reuters. The two are in a consortium set to buy a Danish card payment
company Nets Holding. They already own a stake in ePayment company WorldPay. They outbid Permi-
ra (in partnership with Canada Pension Plan, French IT services company Atos)and a consortium led by
Swedish private equity firm Nordic Capital. Nets is currently owned by a consortium of Nordic banks.
The interest in luxury labels and businesses continues to be attractive for certain PE groups. This
week the WSJ reported that L Capital Asia, one of the private equity arms of LVMH Moët Hennessy
Louis Vuitton is buying a stake in an upcoming nightclub chain called Ku Dé Ta. It only has a couple
of locations in Singapore, Bangkok, Paris, and Hong Kong at the moment but aims to set up business
in some of the world’s fastest growing cities, such as Dubai, Rome, Miami and Beijing. It is more of a
growth capital injection than a classic buyout.
The report recaps similar deals in the region, for example, Carlyle also has been targeting Asian
luxury properties, such as a Chinese designer hotel operator. In Europe, Blackstone opted for a luxury
fashion label when it bought a minority stake in Versace recently, according to an WSJ article.
Status symbols and upscale brands can be good businesses for PE firms if they are managed well.
Just this week the FT is reporting that the PE backers of Blue Buffalo, an upscale dog food company
that sells gluten free and beef based menus, are poised for high performing USD 2 billion exit in its
IPO. Blue Buffalo is backed by Invus, an evergreen PE fund that belongs to several wealthy European
The latest research note from Preqin confirms the
trend that limited partners (LP’s) are increasingly
aiming to co-invest alongside General Partners (GPs).
The survey said that 52% of investors plan to increase
their co-investment activity in 2014, and 91% of GPs
surveyed stated that up to half of the investors in their
latest vehicle requested co-investment rights. Driving
the trend is a desire to tap potential higher returns
and lower costs that co-investments can offer. Fund
managers are not opposed and apparently see it as
a way to build deeper relationships with LPs, despite
the potential to slow down the closing of a transaction.
BAIN’S TAKEAWAYS ON DEALMAKING
TRENDS FOR 2014
of a transaction. “While on the whole fund managers expect to offer more co-investment opportuni-
ties in the year ahead, they will carefully select the investors that are offered such investments,” said
Ignatius Fogarty, Head of Private Equity Products, and Preqin in a statement. (Image source: Preqin)
The new Private Equity Report from Bain & Co (not to be confused with Bain Capital) was released
this month and we have digested it here with five takeaways about PE and dealmaking trends activity
worldwide in 2013, and some of Bain’s thoughtful notes on the PE market in 2014.
Key Takeaways on Activity in 2013
• Overall deal making in 2013 was up 22% in value, driven by two mega buyouts (Dell and Heinz) but
deal count dropped by 11% compared to 2012. The reason deal making was slower than usual is that
valuations often exceeded what GPs were willing to pay. In addition, an open IPO window slowed
public auction activities as the preferred exit route. Furthermore, the dearth of deals was driven by
the ability for companies to undertake dividend recapitalizations, which enabled GPs to realize gains
on an asset without selling it to other PE investors or strategic investors.
• Asia and Brazil experienced a slowdown in investment activity, particularly in volume. Investors also
had difficulty exiting due to slower IPO markets in the emerging market regions. Slower economic
growth contributed to the decrease in deals.
• Exit activity in other parts of the world was strong in 2013, up 9% by count. The mix of exits across
channels shifted in favor of IPOs. GPs took advantage of high valuations across public and private
markets to sell assets.
• Global PE fundraising climbed 21% in 2013. A flight to quality or brand names was seen as nine
mega-funds were able to close. The most popular PE segment was buyout funds, which raised 89%
more capital last year compared to 2012.
• Short- and long-term PE returns rebounded in 2013. They were helped by the profitable sales of
many assets, including once-troubled deals from the pre-financial crisis boom years, as well as by
the upward revaluation of unsold portfolio holdings.
Forecast for Dealmaking in 2014
• Increased competition and high valuations for deals will continue this year. As a result dealflow will
likely come from three sources: sponsor-to-sponsor transactions as the current installed base of
PE-fund portfolio companies comes up for sale, minority-stake and partnership deals as GPs look
beyond buyouts, and acquisitions of small and medium-sized businesses as GPs.
• Strong exit channels will enable the liquidation of these ripe assets, assuming the equity markets
stabilize, while fund-raising is poised to gather momentum in 2014.
• There is LP appetite but GPs on the fund-raising trail will confront the reality of persistent oversup
ply. Beyond a track record of solid performance, a stable leadership team, a compelling strategy
and differentiated capabilities, GPs that hope to break through the crowd will elevate fund-raising
and investor relations to a core competence.
• Alpha-generating skills are more important than ever to achieve superior PE returns, says Bain. For
the foreseeable future, the key sources of market beta (GDP growth, multiple expansion and lever
age) will not supply the boost they did in the past. The more complex and volatile macro environment
will require a change in due diligence procedures and the “alpha skills” to read the economic signs
and find less obvious opportunities. (Image source: Bain & Co)
QUOTE OF THE WEEK - YALE’S ALPHA
“While alpha is not dead, opportunities to access it may not be available
to all investors. Yale has consistently demonstrated its ability to identify
high-quality active managers. For the past twenty years … 57 percent of
Yale’s outperformance relative to the median Cambridge Associates en-
dowment was attributable to the value added by Yale’s active managers.”
Who said it: David F. Swensen, CIO of the USD 20 billion Yale Endowment
In Context: The quote above is from the recently published annual report
of the Yale Endowment. Swensen’s team is a smart money investor
in alternative assets, as attested to by its widely published performance figures. He makes the case for
his team’s acumen which has delivered above average returns for two decades. The fund performance
is “unrivalled”, he said, due to several factors that are hard to copy. The endowment is large enough to
be a desirable LP. It enjoys the benefit of “access”, being able to invest in top tier venture and private
equity funds, based on relationships built over time. Anyone can have the same asset allocation strat-
egy as his team, but not everyone has the ability to select managers well, nor is it easy to get access to
top quartile performers -- and that is where the alpha (outperforming returns) lie. The report provides
the data and charts to back up his claim. So where is this team’s smart money going this year? Yale
says it will allocate 31% of its portfolio to private equity, the largest proportion for a single asset class.
Real estate and Absolute Return strategies are also in favor.
Where we found it: Yale Endowment Annual Report (via Bloomberg)
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Editor: Valerie Thompson, Zurich
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