DealMarket Digest Issue139 - 2 May 2014
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DealMarket Digest Issue139 - 2 May 2014

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SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 139 - May 2nd, 2014: ...

SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 139 - May 2nd, 2014:
- M&A Mega Deals Bounce Back to Hit 7 Year High
- Nordic IT Champion Attracts Cinven
- Is There a Role for Family Offices in Cleantech Success Stories?
- European Carry Model Dominant Now
- GPs Claim Operational Improvement Strategy
- Quote of the Week: Uncorrelated Returns

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    DealMarket Digest Issue139 - 2 May 2014 DealMarket Digest Issue139 - 2 May 2014 Document Transcript

    • DIGEST139 May 02, 2014 1 2 4 M&A Mega Deals Bounce Back to Hit 7 Year High Nordic IT Champion Attracts Cinven Is There a Role for Family Offices in Cleantech Success Stories? European Carry Model Dominant Now GPs Claim Operational Improvement Strategy Quote of the Week: Uncorrelated Returns - Draft 3
    • 2 www.DealMarket.com/digest M&A MEGA DEALS BOUNCE BACK TO HIT 7 YEAR HIGH Large sized M&A transactions (> USD 10 billion) volume has hit USD 319 billion this year, a 75% jump on the same period last year when USD 182.1 billion of such deals were done. It is the highest M&A volume of deals of this size since 2007 when USD 505.6bn was passed through 19 deals, according to dealogic. In contrast, global M&A volume for deals of less than USD 500 million fell to USD 245 bil- lion, which is the lowest since the same period in 2009. In EMEA, however, dealmakers are only seeing some evidence of this trend. The Americas is home to 60% market share, while Europe only has 32%, which leaves only 18% for the rest of the world. Healthcare and telecommunications are the hot sec- tors. Elsewhere, Merrill DataSite reports that global M&A could be “due a notable uptick”. Compared to the same period last year, Q1 has seen overall deal value rise 39%, average transaction size in- crease 36% and PE exit value soar 211%. NORDIC IT CHAMPION ATTRACTS CINVEN This week’s deal of the week is a Nordic buyout that sees Cinven acquire one-third of Visma, a Norwe- gian software and service company expanding its base of PE owners, according to the company. The deal, which includes co-investments from institutional investors, is worth about one billion dol- lars. Visma, is an IT services, software company with a huge cloud-based hosting business that has completed a remarkable 75 acquisitions in recent years.
    • 3 www.DealMarket.com/digest It is the Nordic region’s leading provider of busi- ness management software and is now owned by Kohlberg Kravis Roberts, HgCapital and Cin- ven, and a small stake held by management. With PE backers, the company is achieving a compound annual growth rate of 16%. Further- more, the number of employees increased from 2,512 to 5,648 during this period of high growth. (Image source: Visma) IS THERE A ROLE FOR FAMILY OFFICES IN CLEANTECH SUCCESS STORIES? As cleantech comes back into favor, it is expected that family offices and high net worth investors will once again return to the sector but their role will likely remain as a later stage passive investor, follow- ing trusted VCs, speculates Rob Day, a Partner with Black Coral Capital, in an article in Greentech Me- dia. Cleantech sector investing is indeed coming back online, growing by 38 percent year to year with USD 563 million in first quarter investments, according to CB Insights. Elsewhere, Bloomberg New Energy Finance reports that investment in clean energy segments, including project financing, climbed 10% in the first quarter of 2014 compared to the same period a year earlier, reaching USD 47.7 billion, according to. The “traditional” role family office in cleantech success stories is to follow brand name VCs for later stage rounds because they have the VC has the reputation and track record to inspire trust in family office decision-makers. There also has to be an affinity to cleantech as well as trust in the segment
    • 4 www.DealMarket.com/digest potential, factors that been lacking of late as the number of cleantech success stories is still not that high. As a result family office driven follow-up capital has dried up. Only a few VCs can go tap this co- investment segment, argues Day by understanding each FO’s tastes, its capacity for due diligence, and its willingness explore the types of financing that could benefit cleantech companies on the growth path, such as early project finance, or debt. (Image source: CB Insights) EUROPEAN CARRY MODEL DOMINANT NOW A GPs reputation and its track record are still the most important criteria in the minds of LPs selecting a fund manager, but private equity terms and conditions are tipping in favor of LPs, if the latest research from PEI and Schulte Roth & Zabel is anything to go by. The survey found that 80% of funds now use the “European style” whole-of-fund carry model over the “American-style” deal-by-deal model. This European-style model, seen as more investor-friendly, is now dominant. Manager com- mitments are also important in attracting LPs. Skin in the game, as it is informally referred to, ensures alignment of interests with their investors and to keep staff incentivized, there is no industry-wide agreement on the size of contribution that firms should make to their own funds. The largest propor- tion of survey respondents said that their firm contributes between 1 and 2.5% of the total fund size. The majority of GPs contribute 2.5% or less of total capital commitments. The survey also revealed that there is a discrepancy between what GPs think the industry standard should be and the size of their current contribution. Twice as many GPs commit more than 5% than those who think that they should, which shows that GPs would prefer to make a smaller commitment than they currently do. (Image source: Fund Formation and Incentives Report PEI)
    • 5 www.DealMarket.com/digest GPS CLAIM OPERATIONAL IMPROVEMENT STRATEGY Survey Says Majority of GPs Focus on Operational Improve- ment Poorly run companies will eventually meet their destiny, and only then will PE investors learn that the unreliability of financial engineering and turn to operational improvement ac- cording to a special report released this week by The Deal and Pepper Hamilton. The report entitled, *Strengthening Compa- nies: Operational Improvement Trends”, is based on a survey of 120 private equity executives. The survey demonstrated the importance of operational improvement and the thought that private equity firms put into the process. When asked to think back to pre-crisis and not how strongly they agreed with the statement that operational improvement is more important now than pre-crisis, a strong majority said they believe it is more important now than it was before the financial crisis. As the graphic here shows, nearly 80% of the respondents either somewhat or strongly agreed with that sentiment. Some re- spondents argued that operational improvement has always been important. The fallacy was that it wasn’t as critical pre- recession, so investors relied on financial engineering in lieu of operational improvement to generate returns. Other Findings • 48.4% of those surveyed said they begin focusing on operational improvements before signing a letter of intent while only 11.6% said they begin after reaching a definitive agreement and 11.6% said they do so after closing. • Asked how they plan for operational improvements after closing, 47.5% said they use a 100-day pro gram, while just 16.8% said they use a three- to five-year plan. • Nearly 80% of respondents said they believe operational improvements are more important now than it was before the financial crisis. • Respondents agreed that former CEOs and senior executives are most effective at identifying prob lematic operational issues at every stage: during due diligence, after a definitive agreement and after one year. (Image source: The Deal) QUOTE OF THE WEEK - UNCORRELATED RETURNS “GDP growth is uncorrelated to return on equity…” Who said it: Jonathan Nelson Providence Equity Partners in Context: At the recent Milken Institute global conference, four PE executives spoke positively about
    • 4 www.DealMarket.com/digest investing in US companies, despite economic uncertainty and a slow- ing GDP growth rate. It is the asset they consider when buying, not external factors or even economic trends, that determine whether a leading PE firm will make the purchase, agreed panelists. While there are some countries where the fund managers won’t invest, it usually matters little where the company or the asset is located and it was in that context that Jonathan Nelson, made the above statement. The notion promulgated from the podium is that PE invests in com- panies, not countries. That may be true for the four that spoke at the conference, but a recent Bain Insights article suggests that some GPs have been relying on momentum to generate returns and that they will have to “shift gears” to succeed, particularly in emerging markets, because they are not getting the returns they were expecting. After surveying another year of disappointing results from their emerging market investments in 2013, many private equity investors in Brazil, Russia, India and China are rethinking their emerging market strate- gies. Returns of emerging market PE funds have been trending lower for nearly a decade. Even the best performers’ results have dropped steadily from their vintage peak, said the report. Bain offered some key ways to turnaround their returns with greater focus on operations, smarter deal terms, and better due diligence. (Image source: Milken Institute) Where we found it: The Tell
    • www.DealMarket.com/digest The DealMarket Digest empowers members of DealMarket by providing up-to-date and high-quality content. Each week our in-house editor sifts throughscoresofindustryandacademicsourcestofindthemostnotewor- thynewsitems,scopingtrendsandcurrentseventsintheglobalprivateeq- uitysector.Thelinkstothesourcesareprovided,aswellasaneditorialized abstract that discusses the significance of the articles selected. It is a free servicethatembodiesthevaluesoftheDealmarketplatformdelivers: Pro- fessional, Accessible, Transparent, Simple, Efficient, Effective, and Global. To receive the weekly digest by email register on www.dealmarket.com. Editor: Valerie Thompson, Zurich DealMarket DealMarket launched in 2011 and is growing fast. Just one year after launch, DealMarket counts more than 61,000 recurring users from 154 countries, over 3,000 deals & service providers promoted or listed on the platform. DealMarket is an online platform en- abling private equity buyers, sellers and advisors to maximize op- portunities around the world – a one-stop shop for Private Equity professionals. Designed by Private Equity professionals for Private Eq- uity professionals, the platform is easy to use, cost effective and se- cure, providing access, choice and control across the investment cycle. DealMarket’s offering includes • DealMarketPLACE , brings together buyers, sellers, and PE advisors from around the world. PLACE gives access to deals (direct invest ments, funds, and secondaries), investors, and PE service providers. Searching and postingis free. (no commissions). PLACE PRO is the exclusive deal exchange platform made for engaged professionals and companies with a truly unique value added proposition. • DealMarketSTORE offers affordable access to industry-leading third- party information and services on demand; and • DealMarketOFFICE is a state-of-the-art deal flow management tool, helping Private Equity investors to capture, store, manage and share their deal flow more efficiently. DealMarket was voted the “Best Global Private Equity Platform for 2012 and 2013” by Corporate LiveWire.