DIGEST 102SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 102
July 04, 2013
Global PE Pops but M&A Drops
Apollo’s Distressed Strategy puts it Ahead
of the Pack
Are Fund of Funds Out
How C-Level Exec Can Work Together with
Billion Dollar Digital Banking Buyout
Quote of the Week: Deal by Deal Model
APOLLO’S DISTRESSED STRATEGY PUTS IT
AHEAD OF THE PACK
PE POPS BUT GLOBAL M&A DROPS
Global private equity investment was up in the first half of this year, according to Zephyr’s latest research.
“The results went some way to making up for the disappointing M&A figures,” say its analysts pointing to a
14 per cent increase in value to USD 200 billion. That is an increase of USD 175 billion over the same
period last year. The figure is the highest recorded since the first half of 2008, said Zephyr.
The figures for M&A were less thrilling, with total value falling compared to the same period last year by
15 per cent from USD 1,762 billion to USD 1,498 billion. The figure is down 24 per cent on the post
financial crisis half-year period of 2009, when USD 1,960 billion was recorded, and comes to less than half
the USD 3,145 billion recorded in H1 2007. Volume totals did not fare any better, said Zephyr. The US
continues to be the most favored target country both by number of deals done and value.
Apollo, the third-largest U.S.-based private-
equity firm, with USD 114 billion under
management, has outshone its peers,
reports Bloomberg. The article features rare
details on how the US private equity giant
made a USD 9.6 billion profit on USD 2
billion it invested in the debt of the world’s
third largest chemicals maker LyondellBasell
Industries (see image). It says the profit on
that deal propelled a turnaround in Apollo’s
fortunes, along with the ongoing rally in
asset lifting returns across most alternative
ARE FUND OF FUNDS OUT?
New research shows funds of funds underperform direct investment in private equity funds. It has experts
questioning the need for PE fund of fund vehicles, reports PI Online. A growing number of consultants
consider the “plain-vanilla” private equity funds of funds a quaint relic of days gone, says the PI Online.
PEHub also reported on the study, explaining that the sample compared returns on 567 funds of funds,
vintages ranging from 2000 to 2009, compiled by Preqin, discovering that more than half of the funds
(59.8 percent) had yet to clear an 8 percent rate of return (in some cases using a total value multiple of 1.1
times as a proxy).
Even first-quartile performance was not that high, coming in at 9.9 percent IRR and 1.35 times total value
multiple. One in ten fund of funds have actually lost money. Both articles suggest a cautious approach to
FoF investment. The good news is that the probability of actually losing money in a FoF is low, but returns
are also lower and there’s the issue of the fee costs. In fairness, the PI Online report pointed out at least
three studies found there are indeed FoFs that actually outperformed. (Image source: TorreyCove)
Details about how Apollo followed a strategy of buying up debt post-financial crisis and how that risk
netted significant returns. About 40 percent of Apollo’s private-equity bets have involved distressed
targets, basically “buying good companies with bad balance sheets.” (Image source: LyondellBasell)
HOW C-LEVEL EXEC CAN WORK
TOGETHER WITH PE BACKERS
One of the stumbling blocks to
dealmaking in private equity in
recent times is that boards and
c-level executives are wary of
leveraged buyouts, according to
recent research. To give some
more insight into that
sentiment, the pros and the
cons, we offer a list about
working with PE firms that was
published by a leading US-based
executive search firm, DHR.
It is a headhunter that has a VC and PE practice that runs an annual Private Equity conference.
(Download most recent DHR conference report here.)
• Decision-making is accelerated and more effective.
• Decision-making is more efficient based on alignment amongst the parties. Everyone is clear that
they are part of an “investment” scenario where the goal is return on investment.
• Accountability is a priority and that mentality at the top typically pervades the organization.
Accountability drives fact-based decision-making. Rigor of process is emphasized.
• PE investors have experience that leads to effective brainstorming on key initiatives. PE resources
can be effectively harnessed to make better business decisions.
• Alignment is not perfect. PE firms can apply shorter-term thinking that might not make sense if the
CEO were running an entity with a longer horizon for results to occur.
• The PE firm is very focused on ROI, but the CEO also has to deal with other stakeholders. PE firms do
not always prioritize these other constituencies as much as they should (or the CEO needs to).
• More focused on financial performance, the PE firm’s definition of success is metric-oriented when
more balanced and qualitative measurements, like organizational health, are also important.
• The CEO needs to “manage up” when PE staff members are deployed to set boundaries, establish
clear timelines tied to objectives and make sure everyone wins.
A BILLION DOLLAR DIGITAL BANKING
This week’s deal of the week is Thoma Bravo’s
buyout of the US software company Intuit’s
Financial Services division, a unit offering digital
banking software and services. According to a
press announcement, the cash transaction is
valued at approximately USD 1.025 billion and is
subject to regulatory review and other customary
closing conditions. The PE company said that it is
acquiring a “richly talented team that has created
an enviable integrated digital banking platform
and innovative mobile solution”. Bravo’s is a buy
and build strategy. (Image source: investor junkie)
“It has been a tough market for the deal-by-deal model. All
of the deals we have done so far with this model have been
in the UK. France isn't an easy marketplace at the moment.”
Who said it: Buchan Scott, partner in charge of investor relations at Duke Street
In Context: The quote above came in response to a question in an interview with unquote
about its experience in France and the fact that Duke Street, a recent convert to the deal by deal
model, has now teamed up with Paris-based investment firm Tikehau Group by selling a 35% stake
of the UK based company. Scott said Duke Street has been pursuing the deal-by-deal model for
some time now and the team found that the issue isn't raising finance - the difficulty is with
execution. “Without committed capital it is tough to move quickly enough in competitive
processes,” said Scott. It will be interesting to see if some of the other deal by deal teams that we
have written about here also follow this pattern.
Where we found it: unquote
QUOTE OF THE WEEK
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Editor: Valerie Thompson, Zurich