DealMarket DIGEST Issue 108 // 13 September 2013


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Our weekly pick of Private Equity News and Trends

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DealMarket DIGEST Issue 108 // 13 September 2013

  1. 1. DIGEST108 September 13, 2013 1 2 3 Why Digital Sports Startups Are Magnets for VCs M&A Trends: US Continues to Shine Japan’s Next Billion Dollar Buyout Which Limited Partners Really Matter in PE? Adaptation and Trends in PE Five Years After Lehman Collapse Quote of the Week: Disintermediation in PE 4
  2. 2. 2 WHY DIGITAL SPORTS STARTUPS ARE MAGNETS FOR VCS M&A TRENDS: US CONTINUES TO SHINE from new media “channels” to fantasy sports. Investment in this niche is driven by the health, size, and potential of the general sports market. Sports consumers are “broad, diverse, and loyal”. The article says that 75 of the top 100 TV programs were sporting events in 2012. Such market demand is reflected in record-setting team valuations and TV-rights deals, like the USD 2 billion paid for the Los Angeles Dodgers which was then followed by a USD 6 billion TV rights deal with Time Warner Cable, according to the report. (Image Source: Nike+ Website) Merger and acquisition activity has been concen- trated in five sectors in the rebounding US market this year, according to SeekingAlpha. The sectors are real estate, health care, telecom, energy and consumer products. According to Thomson Re- uters data, quoted in the article, activity in the US through September 9 of this year has grown over 50% from the same period a year ago. The total stands at USD 755 bln. To put that in perspective, US activity is about half (47.2%) of global merg- ers and acquisitions total so far this year. Outside of the US, global M&A activity, as we have been reporting here in this Digest, is down. Venture Capitalists, as well as large companies like Fox Sports, Nike, and ESPN are seeking to invest in startups whose goal is to reshape sports verticals, according to the Huffington Post. The article gives some recent M&A deals as evidence. Fox Sports Digital acquired social network startup Fanhood in August. Earlier, GolfNow was acquired by Comcast for USD 40 million, which spawned a wave of startups like Game Golf, Swing By Swing, and DiabloGolf. These startups aim to change golfer’s experi- ence before, after, and even during rounds. Elsewhere, Nike has sponsored an accelerator with TechStars to find and fund companies who will better assimilate its Nike+ sensor prod- ucts into the marketplace. The article says that investment dollars will “quickly help establish new distribution channels and create entirely new content”. The range of applications goes
  3. 3. 3 JAPAN’S NEXT BILLION DOLLAR BUYOUT The Thomson Reuters data says it is off by a fifth. The activity in Germany and France had a slight increase in M&A, but the UK is off by 40% (to USD 60 bln). Emerging market data is mixed. China do- mestic M&A activity has increased by 22% but domestic M&A activity in Brazil is off 60%. In the same article, there is news about PE deals based on data from Linklaters, which shows deals increased by nearly 30% to USD 171 bln in H1 2013 compared with H1 2012. (Image Source: Thomson Reuters) This week’s deal of the week is a rumored buy- out by KKR & Co. and Japan’s state-backed In- novation Network Corp, according to Bloomberg. The target is a majority stake in Panasonic’s health-care unit which develops digital medical record systems and diagnostic tools for human healthcare. The bidding process is at an early stage, but the article said that bidders are valu- ing the healthcare unit at USD 1.5 billion. Pana- sonic plans to keep a stake in the unit. Another much larger transaction is also close to coming to an end this week. It is a secondary deal that sees Ares Management and the Canada Pen- sion Plan Investment Board in advanced talks to acquire the American retailer Neiman Marcus from TPG Capital LP, Warburg Pincus LLC and Leonard Green Partners LP, according to Reuters. The high-end retail chain is being valued at about USD 6 billion. If the secondary deal goes through, Nei- man Marcus will not go public, according to Reuters. WHICH LIMITED PARTNERS REALLY MATTER IN PE? Private Equity International has launched a new ranking to identify which LPs are the most active backers of PE funds. PEI says its research answers the question, which LPs from the multitudes of institutional investors really matter? The ranking provides the answer. It is based on the amount of money LPs committed to private equity funds in the year to March. It does not include capital allocated to direct investing, separate accounts, secondaries and co-investments. It is traditional fund invest- ment. Leading the ranking is Canada Pension Plan Investment Board, which dispels the notion that Canadian pension plans are no longer interested in traditional fund structures, says PEI. CPPIB made number of large commitments to the tune of USD 4 billion – during the 12-month period. Six US pension plans, including well know LPs, like CalPERS and Washington State, also made the top ten, as did fund of funds manager Hamilton Lane, European group APG and China’s SAFE. In total, the LP50 committed more than USD 75 billion to private equity funds during the period – with the top 10 responsible for about a third of that. Getting any of these big LPs on board, especially if other investors know they’ve taken a stake means that the fundraising will go rather quickly.
  4. 4. 4 Overall, the research conveys good news for private equity, says PEI, because the research show that capital is out there, in abundance. And it’s still being actively committed to private equity funds. “De- spite the heightened LP interest in novel funding structures and direct investing, there are still big institutions out there willing to write sizeable cheques to get into traditional private equity funds.” However, there is a real division between the funds able to attract the large LPs and funds that do not. Some GPs are hitting their fundraising targets in a matter of weeks while others limp on for months, even years, says PEI. ADAPTATION AND TRENDS IN PE FIVE YEARS AFTER LEHMAN COLLAPSE There is a good analysis over on Financial News about trends in private equity as it goes through a recovery period following the financial crisis that began back in 2008. At that time, fundraising and the ability to complete buyouts, the key drivers of the industry’s strength, according to the article, suffered “dramatic falls” in the immediate aftermath of Bank Lehman’s demise and have only recently started to improve. Around USD 680 billion was raised in 2008 for private equity funds in the first six months of the year, and then less than USD 5 billion in the next six months following the crisis. According to Preqin, just USD 317.5 billion was raised in the following year by 932 funds. The figures have yet to significantly increase, as the above graphic from E&Y shows. Last year, USD 365.4 bil- lion was raised for 954 funds and so far this year USD 284.3 billion has been raised for 503 funds. On average, fundraising now takes 50% to 100% longer than it did before 2008, significantly longer than before. The reasons for the slow recovery are that investors are being more selective. They are acting under the understanding that making money using leverage was not going to work going forward, especially in places where leverage is difficult to get, other than in the US, UK, Germany and France. Trust be- tween firms and investors was shaken when it came to valuation adjustments post-financial crisis when portfolios were marked down in value by 40% to 60%.
  5. 5. 5 QUOTE OF THE WEEK: DISINTERMEDIA- TION IN PE “We’re at a new stage where pension funds and sovereign wealth funds are saying, wait a second, if we bundle our resources, we can get di- versification by sharing the opportunities. Just like any other industry, models have to change. We don’t make cars like we did 20 years ago, or computers like we did 20 years ago, so why should we do finance the way we did it 20 years ago?” Who said it: Leo De Bever, chief executive of Alberta Investment Man- agement in the Financial Times The good news is that private equity teams are adapting and are now focused on acquiring only the best assets, despite fierce competition. Another positive to note is that there hasn’t been as much of a reduction in the number of private equity players as predicted at the beginning of 2009, nor have di- vestments of fund allocations in secondary transactions been as high and sizable as expected, which shows that hope remains high among LPs. Context: In this feature article, the FT describes direct investment by LPs, in particular Canada’s pen- sion funds, which have been moving “aggressively” into dealmaking and other businesses that they used to outsource to private equity firms and hedge funds. The reporter says that disintermediation, a trend that has already hit several other segments in the financial sector, is now starting to happen in PE. The evidence presented includes an account of how the larger pension funds and sovereign wealth funds have staffed up internal investment teams to find PE deals on their own. It is suggested that the trend poses a threat to the PE status quo although the volume of deals in question is small. Private equity-backed transactions involving sovereign wealth funds, for example, have reached USD 11.5bn this year, or 6 per cent of total volume, and the bulk is passive co-investments alongside fund manag- ers. Yet it is ten times the amount five years ago, according to Thomson Reuters. The risks of direct in- vestments for pension and sovereign wealth funds are clearly outlined: pension plans would be “hard pressed” to recreate the performance of established private equity groups such as Blackstone or KKR, according to sources quoted in the article, and are “not equipped to find and analyze deals”, therefore they are prone to “overpaying for assets”. The skeptics say it is not in the culture of pension funds to take control of companies and make tough business decisions. . “Few public pension funds would be willing to face the political repercussions of cutting jobs at a company they have acquired or deal with bankruptcy,” says the FT. This topic is starting to get more attention in the press and we will continue to highlight it, as we have here and here. (Image Source: AIMCO) Where we found it:
  6. 6. 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 Editor: Valerie Thompson, Zurich DealMarket DealMarketlaunchedin2011andisgrowingfast.Justone yearafterlaunch, DealMarket counts more than 61,000 recurring users from 154 countries, andover3,000dealsandserviceproviderspromotedorlistedontheplatform. DealMarketisanonlineplatformenablingprivateequitybuyers,sellersand advisors to maximize opportunities around the world – a one-stop shop for Private Equity professionals. Designed by Private Equity professionals for Private Equity professionals, the platform is easy to use, cost effective and secure, providing access, choice and control across the investment cycle. DealMarket’s offering includes • DealMarketPLACE , an unfiltered view of the global deal and advice mar ketplace, where searching is free and postings are the price of a cap puccino a day (with no commission). • 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.