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Deal market digest issue 102_05july 2013


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Deal market digest issue 102_05july 2013

  1. 1. DIGEST 102SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 102 July 04, 2013 1 2 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 PE Backers Billion Dollar Digital Banking Buyout Quote of the Week: Deal by Deal Model Evolves 3 4
  2. 2. 1 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 classes.
  3. 3. 2 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)
  4. 4. 3 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.) The Pros • 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. The Cons • 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.
  5. 5. 4 A BILLION DOLLAR DIGITAL BANKING BUYOUT 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
  6. 6. 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, and over 3,000 deals and service providers promoted or listed on the platform. DealMarket is an online platform enabling private equity buyers, sellers and 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 marketplace, where searching is free and postings are the price of a cappuccino 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 2013” by Corporate LiveWire. The Dealmarket Digest empowers members of Dealmarket by providing up-to-date and high-quality content. Each week our in-house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global. To receive the weekly digest by email register on Editor: Valerie Thompson, Zurich