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  1. 1. e-BOOKPrivate Equity RoundupConsumer Plays, Bonus Pay & Problems In The U.K.
  2. 2. PRIVATE EQUITY ROUNDUP: CONSUMER PLAYS, BONUS PAY & PROBLEMS IN THE U.K.CONTENTS FROM PRIVATE EQUITY ANALYST DESPITE SLUGGISH ECONOMY, PE FIRMS STILL SHOPPING FOR CONSUMER DEALS............................................................... 4 PE BONUSES RISE IN 2011 AMID LONG-TERM PRESSURE ON PAY................................................................................................ 10 PATIENCE PAYS OFF FOR FRIEDMAN FLEISCHER & LOWE’S MASTO.............................................................................................12 FROM PRIVATE EQUITY NEWS CEE BUYOUT EXECS HOLD THEIR BREATH...................................................................................................................................... 14 GIC MULLS SALE OF $1B SECONDARIES INTERESTS......................................................................................................................17 UK INNOVATION FUND BECOMES A JUMBO FLOP.......................................................................................................................... 182 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  3. 3. INTRODUCTION Exclusive Global Fund News & Industry Insights No matter which side of the fund negotiating table you’re on, you must have a clear picture of what’s going on across the market - where GPs are finding the best returns, trends in terms, pay and compliance, which firms are prospering or struggling and who’s behind landmark deals. Only Dow Jones provides a comprehensive – and critical – perspective of the global fund-raising environment with exclusive reporting, accurate research and unbiased analysis and commentary. This Private Equity Roundup features a collection of hand-selected articles from Private Equity Analyst and Private Equity News that detail some of the latest trends and troubles affecting the asset class in the U.S. and Europe. Sincerely, Robert Dunn Director, Product Management, Dow Jones Private Equity & Venture Capital Dow Jones & CompanyPrivate Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 3
  4. 4. From Private Equity AnalystDESPITE SLUGGISH ECONOMY, PE FIRMS STILL SHOPPINGFOR CONSUMER DEALSPrivate equity increasingly sees TSG Consumer Partners’ fund raising for its complex amid ongoing economic uncertaintya pot of gold at the end of the sixth vehicle appeared to be over before it even and sluggish consumer demand. Firms thatconsumer rainbow, but it remains began. In less than 60 days, the fund garnered are banking on the consumer sector increas-to be seen if the slew of new over $2 billion of interest for TSG 6 LP, which ingly seek companies they believe have theconsumer funds can translate is hard capped at $1.2 billion and will undoubt- power to thrive in a slow-growth environment.into high-end returns. edly leave some investors out of the fray. “In a world where growth is 1% to 2%, it basi- Yet TSG isn’t the only private equity firm seek- cally comes down to a market share gameBy Beina Xu ing capital for a consumer-focused fund this – either you’re going to take it, or lose it,”December 2011 year. Roughly a dozen private equity firms spe- Kayvan Heravi, managing director at LNK cializing in different corners of the consumer Partners, said at a recent retail conference. space have either launched marketing efforts An LP House Divided for new funds or plan to do so in the next 12 Before they can focus on deals, consumer- months (see chart on page 16). Add to that focused private equity firms first must raise capital raised by firms such as Leonard Green capital, which requires wooing a community of & Partners and Berkshire Partners, which investors with varying degrees of skepticism include consumer products as one of a hand- toward a dedicated consumer strategy. ful of industry targets within their latest funds, The head of private equity at one large U.S. and buyout firms should be well capitalized endowment said that many investors don’t to snap up consumer brands over the next have a specialized interest in consumer- few years. focused funds. Instead, those investors However, the landscape in which these firms prefer to back firms that target several sec- look to put their money to work has grown more tors beyond the consumer space, to spread4 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  5. 5. From Private Equity Analystthe risk of potentially being overexposed to a them turn out to be zeros,” this fund-of-funds quarter of last year saw 31 acquisitions done atsingle sector. Still other investors welcome a manager said. a dollar volume of $14.6 billion.dedicated consumer-focused fund. Marc der Restaurant operator Buffets Inc., which Although the pace slowed during the third quar-Kinderen, co-founder of 747 Capital, a fund-of- Sentinel Capital Partners and CI Capital ter with 26 deals, investors say that demandfunds manager focused exclusively on small Partners bought in 2000 for $643 million, ran for healthy growth-oriented companies stillbuyout and growth funds, said that his firm pre- into troubles and eventually filed for Chapter outstrips supply, pushing up valuations. “Cleanfers to back a consumer-focused vehicle over a 11 protection in early 2008. Other bankrupt- companies, where there’s no obvious prob-generalist fund that invests in the space. cies include the Black Angus Steakhouse lem, are trading for prices I’ve never seen,”“We’ve noticed that everyone thinks they can chain, backed by Versa Capital Management, said consumer deals, but it’s not as easy as it which filed for bankruptcy in 2009, and Castle A quality business can command valuationsseems,” he said. “Distribution is complicated. Harlan’s Perkins & Marie Callender’s Inc., which ranging to as much as eight- to 10-times earn-How do you get the product into Walmart? plans to exit Chapter 11 with backing from ings before interest, taxes, depreciation andHow do you make sure you deliver on time? Wayzata Investment Partners. amortization, according to Glenn Gurtcheff,It sounds so easy, but so much can go wrong.” A Pricey Sector head of Harris Williams & Co.’s consumer group.Plenty of firms took their share of hits in the Private equity firms continue to put money to “We’re not surprised by a double-digit to low-space during the recent recession, and LPs work into consumer and retail deals, driving up teens multiple for a great company; however,haven’t forgotten. Investors are starting to valuations for quality assets, even if the pace of six- to eight-times adjusted Ebitda is morelook at how much of the portfolio is staples new deals has slowed more recently. Financial the norm,” said Ramsey Goodrich, manag-and is defensible, said one fund-of-funds man- sponsor-backed acquisitions of consumer and ing director at investment banking firm Carterager. Restaurants seemed to be one niche that retail companies numbered 33 in the second Morse & Mathias.concerns LPs. “If you look at the mortality rate quarter, totaling $4.2 billion, according to data Valuations are strong for companies target-for restaurant deals in general, about half of provider Dealogic. A rush of deals in the fourth ing either discount brands or what are termedPrivate Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 5
  6. 6. From Private Equity Analyst“aspirational” brands, which carry a higher been food and beverage, followed by retail and strategy, getting pricing right, and trade promo-price point but aren’t quite defined as luxury. restaurants, said Gurtcheff. “People never used tion spend management in order to drive value.The market hasn’t been so friendly to com- to think it was high growth, but the demand side On the growth side, some companies havepanies in the middle of the pricing spectrum, doesn’t change either,” he said. “All of a sudden, taken chances to ensure they net market sharesaid Goodrich. what didn’t look so sexy might look a little from competitors. In 2009, in the midst of theAspirational brands have net plenty of atten- more sexy.” recession, Hudson Clothing LLC, a premiumtion from private equity of late; premium denim Occupy Wallet denim brand backed by Fireman Capital, camejeans company J Brand Inc. sold a majority With niches that are indeed still active, private out with a $1,000 jean called Resurrection,stake to Star Avenue Capital LLC, a consumer equity portfolio companies will need to fight hard made from scraps of old denim. It was part ofgrowth-equity vehicle launched with Creative for those consumer dollars that are being spent. the launch of a higher price-point collectionArtists Agency and Irving Place Capital, last “People think of the 1% and the 99%, but I really and sold out at Barneys New York, said Danyear. Sun Capital Partners-backed Kellwood look at the 9% and the 91%,” said Jeff Edelman, Fireman, managing partner at the firm.Co. added Scotch & Soda BV, a Dutch apparel director of retail and consumer advisory ser- “All the other denim businesses were comingbusiness, this summer. vices at McGladrey & Pullen LLP. up with their ‘recession collection,’ going to aAt the opposite end of the spectrum, Ares Private equity’s battle for consumer dollars has lower price point, but Hudson decided to buildManagement and the Canada Pension Plan pushed firms to take a hard look at how to drive up its brand,” he said. Hudson experienced anInvestment Board agreed to acquire 99¢ Only growth. At a recent conference, AJ Brohinsky, increase of 45% to 50% in sales over the courseStores Inc. in an October deal valuing the com- senior director at KKR Capstone, said that two- of this past year.pany’s equity at roughly $1.6 billion. Lincolnshire thirds of his firm’s work with consumer portfolio But firms must also take care not to grow tooManagement picked up Phoenix Brands, a roll- companies involves the addressing of pricing. quickly, investors say. It’s not just stretchingup of budget household-care brands, in March. The firm tends to invest in mature brands, and supply chains, but some companies end upCurrently, the most active subsectors have will “bring a playbook” to things like product overdoing channel growth – suddenly, earlier6 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  7. 7. From Private Equity Analyst Top Five Buyout Deals for US Targetsthan expected, loyal customers are dissatis- about how long that opportunity will last. conference. She added that its Global Nutritionfied with the product’s presence at Walmart or Strategic acquirers have been ideal targets for Group is looking to invest in fruits, vegetables,Target. “People forget that there’s good growth private equity exits with companies such as grains and dairy.and bad growth,” said John Kenney, a TSG Nestle SA and Sara Lee Corp. all stepping up Starbucks Corp., meanwhile, has recently putmanaging director. to buy private equity-backed consumer busi- itself on the map as a potential acquirer of pri-Strategics Step Up nesses over the past 12 months. vate equity-backed properties. The coffee giantOnce they’ve garnered that all-too-precious “Even though the environment is uncer- bought Evolution Fresh, a natural juice busi-market share, private equity firms expect to tain, we are extremely active in M&A, and are ness backed by Fireman Capital, for $30 millionturn to a community of strategic buyers to exit entering into new categories,” Melissa Bailey, as part of its efforts to market healthier prod-their deals, although there’s some question head of M&A at PepsiCo Inc., said at a recent ucts. The move has some industry observersPrivate Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 7
  8. 8. From Private Equity Analyst Select Consumer-Focused Firms Raising Funds in 2011/20128 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  9. 9. From Private Equity Analystwondering if similar private equity-backed next year to 18 months remains to be seen. Anconsumer goods products will be of interest uncertain housing market and slow job growthto Starbucks, including VMG Partners-backed makes it tough to say exactly when consumerKIND LLC, the fruit-and-nut granola bar already confidence will stage a significant comeback.distributed in its stores. In some cases, however, But private equity investors contend that thesestrategic acquirers are acting as competitors to macroeconomic drivers don’t necessarily dic-PE firms by investing directly in small, high- tate where they will invest next.growth consumer product and food and “We’ve always been more micro than macro,”beverage companies. said Josh Lutzker, managing director at Boston-PepsiCo, for example, acquired a minor- based Berkshire Partners, which early last yearity stake in coconut water drink One Natural sold makeup company Bare Escentuals Inc. toExperience, alongside Catterton Partners, in Japanese cosmetics giant Shiseido Inc.. “You2009. It increased its stake to a majority inter- can invest in a category that has pretty modestest through a follow-on investment, buying part overall category growth, but if you identify lead-of Catterton’s interest. “More recently we have ers and the emerging players, you can generatehad some more venture-like investments – we really exciting returns.”are trying to find the ‘wow’ brands, and havehad discussions about setting up our corporate –With reporting by Laura Kreutzerventure cap group,” said PepsiCo’s Bailey.The Consumer’s Cloudy Crystal BallExactly how all of the private equity inter-est in the consumer space plays out over thePrivate Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 9
  10. 10. From Private Equity AnalystGP MANAGEMENT UPDATEPE Bonuses Rise in 2011 Amid Bonus season is just around the corner “The turbulence in the public markets isn’tLong-Term Pressure on Pay and unlike some other corners of the finance causing trepidation among limited partners” industry, many private equity professionals who are investing in private equity funds, KorbBy Mohammed Aly Sergie have reason to celebrate. said, which is driving compensation higher.December 2011 Most private equity firms award bonuses, which Korb added that he expects compensation to make up more than half of annual compensa- continue to improve for another two years until tion for associates and principals, in December pay reaches 2007 levels, after which he expects and January, according to the 2012 edition of it to then taper off and mirror the inflation rate the Dow Jones Private Equity Analyst-Glocap or growth in the gross domestic product. Compensation Study, a research report jointly “Something really big needs to happen” to sur- produced by Dow Jones & Co. and New York- pass the 2007 equilibrium point, such as large based executive recruiter Glocap Search LLC. flows of new capital from sovereign wealth This year buyout executives can expect to see funds or outstanding performance from exist- average bonuses rise by half a percentage ing investments, Korb said. point for senior ranking partners to anywhere The average base pay is expected to remain between 1% and 3% for junior and mid-level steady in 2011, according to the report, with professionals, according to the report. the increase in compensation coming almost Improvement in overall private equity fund- entirely from bonuses. Principals expect to raising has given bonuses a lift and marks an earn an average bonus of $345,000 this year, ongoing turnaround from 2008 and 2009 when up $10,000 from a year earlier. Senior associ- “bonuses took a hit,” according to Brian Korb, ates, meanwhile, will bring in an average bonus of partner and head of strategy at Glocap. $165,000 in 2011, a $3,000 increase compared10 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  11. 11. From Private Equity Analystto last year’s bonus. private equity practice at recruiting firm Korn/ Bonus GainsAlthough private equity’s compensation model Ferry International. Average anticipated bonus payouts for 2011/12 by individual positionsat buyout and growth-equity firmstends to be steadier than Wall Street’s more Healy said a few “factors will lower remunera-volatile bonus system, some firms have tried tion in the private equity business” in the longto borrow an investment banking formula that term, including a reduction of management fee ASSOCIATES $105,000helps differentiate between star performers income from smaller fund sizes; a shift in howwhile keeping pay comparable for employees in firms share fees with limited partners, which SEN. $165,000 ASSOCIATESthe same class. affects bonus pools; and pressure on manage- ment fee percentages, especially as funds move VICE $249,000Under this structure, base salaries are uniform PRESIDENTSacross a class of associates or vice presidents, past their investment periods. PRINCIPALS $345,000but a variable bonus takes into account indi- Dealmakers at firms that haven’t been able to 50-74%vidual or team performance. This rewards raise a new fund will start to see steep declines PARTNERS $1.01 MILLIONexecutives that work in certain hot sectors pro- in compensation soon, Healy said, as the firmsducing outsize returns, Korb said. slowly close down shop. “The industry isn’t 1-10 Source: Glocap Search LLCThe slow, steady growth in private equity com- going away, but it’s a story of some firms win-pensation contrasts starkly to the volatile ning and some firms losing, so it’s hard to makeswings in investment banking bonuses, which a broad generalization,” he added.are expected to shrink by 30% this year, accord-ing to The Wall Street Journal. But recovery inprivate equity’s compensation model facespressure and won’t last for long, said Joseph T.Healy, senior client partner and co-head of thePrivate Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 11
  12. 12. From Private Equity AnalystRISING STARPatience Pays Off For Friedman Friedman Fleischer & Lowe’s Chris Masto is not Only 29-years old when he helped co-foundFleischer & Lowe’s Masto a man who gets easily riled. Friedman Fleischer back in 1997, Masto’s easy But in May 2010, the young partner’s patience going manner and persistence have beenBy Laura Kreutzer was put the test while negotiating an add-on helpful both in landing deals and in recruitingDecember 2011 acquisition in Canada for Speedy Cash Holdings management talent to portfolio companies, Inc., a Wichita, Kan.-based specialty lender the according to Friedman. Perhaps the deal that firm bought back in 2008. has defined Masto’s career thus far has been the one for mattress company Tempur-Pedic “The company had an eccentric entrepreneur- International Inc. Back in 2002, when the com- ial owner and some complex family dynamics. pany’s Swedish entrepreneurs wanted to sell It literally took Chris a year to get that deal down some of their roughly 80% ownership done and even [he] showed some exasperation stake, Friedman Fleischer saw an opportunity. from time to time,” said Friedman Fleischer co- founder Tully Friedman. However, a month into the negotiations, a co- investor got cold feet, leaving Masto with the Nonetheless, Speedy Cash Holdings ultimately task of convincing the sellers his firm could still closed the deal in May 2011, thanks partly to get the deal done. Masto’s patience and persistence, two char- acteristics that his colleagues and Friedman Friedman Fleischer quickly brought in Boston- Fleischer’s limited partners say the 44-year old based TA Associates and together the two partner possesses in abundance. “Unlike me, firms invested some $150 million in equity into he never gets irritated or [at least] never shows the $350 million deal. They also recruited a new it,” said Friedman. “It’s nice to have someone management team and helped the mattress around who’s completely unflappable.” manufacturer alter its distribution model.12 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  13. 13. From Private Equity Analyst“The company was sold mainly through info- of the potential of Tempur-Pedic,” Sarvary said. CHRIS MASTOmercials and specialty stores like Brookstone,” “He’s a very eloquent and compelling presenter.”said Masto, “and we felt that if they wanted The same combination of enthusiasm andto be successful, they needed to sell through intelligence has also helped Masto earnmainstream mattress retailers.” Friedman’s trust.Between 2002 and late 2005, Tempur-Pedic “My basic standard for evaluating everyone [is]grew its sales from $260 million to $837 million. ‘Could they run a corner grocery store?’ whichFriedman Fleischer took the company public is actually very hard if you think of all the thingsin December 2003 and over time sold down you have to do,” said Friedman. “And the other Career Pathits stake, completely exiting the business in thing is, ‘Would you trust your kids with him?’ Masto helped launch Friedman Fleischer &2006 and returning around 10-times the firm’s He would pass with flying colors on both those Lowe in 1997 at age 29, after working as aoriginal investment. tests, and most politicians would fail to pass on management consultant for Bain & Co. HeBut that wasn’t the end of the relationship. one or both of those.” started his investment career as a financial ana- lyst in the corporate finance departmentMasto remained on the company’s board of Morgan Stanley & Co.and in March 2008 when stock prices began Educationto languish, convinced his firm to reinvest in Sc.B. in electrical engineering from Brownthe now-public Tempur-Pedic via a common University, M.B.A from Harvard Business Schoolstock purchase. Board SeatsIn June 2008, Masto once again recruited a new Tempur-Pedic International Inc., Speedy Cashmanagement team, bringing Mark Sarvary on Holdings Corp. and TriTech Holdings Inc.board as Tempur-Pedic’s new chief executive.“He was the one that painted the picture for mePrivate Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 13
  14. 14. From Private Equity NewsCEE BUYOUT EXECS HOLD THEIR BREATHFears about the eurozone crisis As the festive season approaches, executives with western Europe which has been the hall-are rising in neighbouring central focused on central and eastern Europe are mark of the region as part of its catch-up withand eastern Europe cheery about their market, citing growth, a high core Europe. That is good news.” level of interest in the region and even some Dawid Sukacz, a managing partner at PolishBy Jennifer Bollen “good news”. But the outlook for the New Year private equity firm Concordia 21, added the12 December 2011 looks less bright, with fears rising that the euro- macroeconomic factors in Poland were largely zone crisis will further damage deal activity. positive. He said: “For Poland, no major changes The confidence in CEE comes despite the grow- have happened. There are still a lot of players ing pressure of the eurozone crisis in the region’s looking for transactions.” neighbouring west. Last week, reports said the Poland’s GDP rise is forecast as 3% next year, European Central Bank was preparing a €1 tril- down slightly from 3.8% this year, according to lion rescue package, which a research note from the International Monetary Fund. Meanwhile, Deutsche Bank said would pave the way for a Russia’s is forecast as 4.1% next year, Romania’s “colossal market intervention” in the European 3.5% and Lithuania’s 3.4%, although its GDP sovereign bond market. for this year was forecast as 6%. The forecasts Thierry Baudon, managing partner of Mid compare favourably with more pessimistic out- Europa Partners, said there was hope for some looks for western European economies – the of the key countries in the region, which he UK’s GDP is forecast as 1.6% next year, France’s identified as Poland, the Czech Republic and 1.4% and Italy’s 0.3%. Slovakia. He said: “Despite all of this uncertainty Baudon said one of the main factors contribut- and chaos, the region is still growing and has ing to economic strength in CEE was the region’s maintained the structural growth differential manufacturing sector, which he said continued14 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  15. 15. From Private Equity Newsto create jobs and attract foreign investment. He with 10 in the previous quarter and 11 in the first. executives remain concerned about the impactadded companies increasingly transferred man- In the third quarter of last year, firms agreed of the eurozone crisis.ufacturing from western to eastern Europe while 17 deals. Marcus Svedberg, chief economist at invest-Asian businesses were moving plants from local Deals completed in the third quarter include ment manager East Capital, said in a statementoperations to central Europe for logistic reasons. buyout firm Advent International’s acquisitions last week that eastern Europe could grow as longHope for steady deal flow of manufacturers TES Vsetin and MezServis a there was no deep recession in the eurozone.At the same time some firms are expecting to from Czech firm Penta Investments, both agreed He said: “We do not believe in decoupling in gen-take advantage of low prices on offer. Sukacz in May. The terms were undisclosed but Advent’s eral and particularly not in eastern Europe.”said firms were increasingly on the lookout for €1bn central and eastern Europe-focused fund He outlined three broad risks facing the regiontake-privates following significant falls in valu- typically invests between €35m to €100m of next year – dependence on external sources ofations. He said: “More and more people are equity per deal. growth, substantial economic imbalances andlooking for potential public-to-private transac- Also in the third quarter, listed private equity domestic political turmoil – and said easterntions, especially in Poland. The market has been house CapMan and Belgian-based investment Europe would be characterised by an economichistorically quieter and a large number of com- company Gimv completed their joint invest- slowdown and market recovery next year.panies have been listed. The valuations are going ment in photo services provider Expert Photo, a Last month the IMF said in a statement it haddown and in the future there is some potential in growth capital deal they agreed in July. received a request from the Hungarian authori-that space.” In October, Mid Europa completed its acquisition ties for possible financial assistance andDeal valuations in the region are largely unknown of a 65% stake in hospital operator Kent Hospital Christine Lagarde, managing director of thein the third quarter but deal volume has been Group. The firm also agreed to increase its stake IMF, outlined priorities for Russia after meet-more or less in line with recent quarterly trends. to up to 90% over time. ing Russian officials including President DmitryAccording to data provider Dealogic, firms Medvedev to discuss the challenges facing Fears over neighboursagreed 15 deals in the third quarter, compared emerging Europe. However, despite confidence in the region itself,Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 15
  16. 16. From Private Equity NewsBaudon said his main concern was local banks’ the lowest raised in the first three quarters overstrong ties to western European institutions, the past five years.which he highlighted owned a large proportion of Meanwhile, firms are competing to raise 102banks in CEE. He said: “With everything going on funds targeting an aggregate €14.3bn, the big-in western Europe, banks fundamentally need gest of which is a $1.5bn buyout fund managedto reduce balance sheets. Availability of financ- by Avangard Asset Management. Akina is rais-ing for consumers and private equity in central ing the second-largest, a €720m fund of funds,Europe could become seriously constrained. while Switzerland-based LGT Capital Partners isThis has not happened yet, but it looks like debt raising the third-largest, a €600m fund of funds.quantums have been dropping over the last few However, in October, central and eastern Europe-weeks.” He expected the growing crisis in west- focused buyout firm Abris Capital Partnersern Europe to lead to a fall in deal volume, saying: provided some positive news for the region when“There could always be opportunities that buck it raised almost half of its latest fund in a matterthe trend but logically there should be fewer of months after strong demand from investorsdeals because there should be fewer sellers.” for exposure to the region.Tough competition in a stagnant funds market The firm had raised €210m of its targetedFundraising by central and eastern Europe- €450m in a first close following the launchbased firms slumped by the third quarter. Data of the process in June, according to a personprovider Preqin said firms raised €2.8bn across familiar with the situation. The source said the18 vehicles in the first three quarters, the lowest relatively quick nature of fundraising amid a dif-in the first three quarters of any year over the ficult market environment reflected investors’past five years. The number of funds was also appetite for deals in the CEE region.16 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  17. 17. From Private Equity NewsGIC MULLS SALE OF $1BN SECONDARIES INTERESTSBy Kiel Porter GIC is the latest in a string of banks and finan- CDC’s fund interest portfolios, worth a combined05 December 2011 cial institutions worldwide to dispose of private $500m, are now “very advanced”, according to equity assets as they seek to comply with two people familiar with the situation. tougher capital requirements and generate Private equity accounts for about 10% of GIC’sSovereign wealth fund the Government of early liquidity. In the 12 months to June this year, asset allocation, alongside infrastructure invest-Singapore Investment Corporation has begun $16.1bn of secondaries deals were signed glob- ments, according to its annual report for the yeardiscussions over the possible sale of a portfo- ally, 15% up on the same period last year when to March. The group has not disclosed the sizelio of private equity fund interests which could $14bn worth of deals were signed, according to of its assets under management but has beentotal $1bn, according to two people familiar with UBS data. widely cited as having about $200bn, giving it athe matter. Last week it was reported that the French bank commitment to private equity of $20bn.GIC, which manages private equity through BNP Paribas was in the process of selling a In addition to backing third party managers,its subsidiary GIC Special Investments, has legacy portfolio of private equity fund interests GIC invests directly, completing large-cap andengaged intermediaries to handle the sale pro- it inherited when it purchased the Belgian bank small-cap buyouts alongside mezzanine debt,cess according to the sources. Fortis in 2009. The assets – which comprise distressed debt and secondary fund deals.The contents of the portfolio are currently direct investments and co-investments in small The group was previously reported to haveunknown, however one person with knowledge and mid-sized companies as well as stakes in pri- submitted a joint bid alongside the Canadianof the matter said that they were likely to be pri- vate equity funds – have a guide price of $700m. pension fund Caisse de Dépôt et Placement dumarily US fund interests with a minimum value UBS is handling the sale process. Quebec for the private equity arm of insuranceof $500m, potentially rising depending on the A range of banks including Citigroup, Bank of group Axa.level of interest. GIC has investments in funds America Merrill Lynch, Barclays Bank and HSHmanaged by several of the private equity indus- Nordbank have sold private equity assets overtry’s largest houses including Blackstone Group the past 18 months, while the sale of WestLB andand Apax Partners.Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 17
  18. 18. From Private Equity NewsUK INNOVATION FUND BECOMES A JUMBO FLOPThe government’s flagship private As the world economy moved from a state of had fallen well short of the proposed £1bn targetequity fund quietly fell short in its credit constraint to full-blooded recession in early having raised just £5m in third-party capitalbid to attract third-party investors 2009, the UK’s governing Labour Party moved at the final close. Even in a difficult fundraising away from the laissez faire position to industry it environment the figures represented a huge dis-By Kiel Porter had adopted over much of the previous decade appointment, with one European investor calling05 December 2011 to something more proactive and interventionist. it “a categorical failure by all parties involved”. A number of initiatives were introduced, including So where did it all go wrong? the Strategic Investment Fund, aimed at directly Promising start supported manufacturing, and more capital for Following the June 2009 announcement of the the export-focused government department, fund, further details of how it would be struc- United Kingdom Trade & Investment. tured began to emerge. A key plank of this was the UKIIF, a scheme The Department of Business, Innovation and launched in June 2009 to attract £1bn in private Skills, advised by David Quysner, the former sector investment using state funds as seed cap- chairman of the British Private Equity and ital in a private equity fund structure. The fund Venture Capital Association and an executive of was hailed by UK Prime Minister Gordon Brown private equity investor 3i Group, took the deci- as providing the ability to “foster early-stage sion that two funds – covering the technology technology businesses with real potential”. and environmental sectors, respectively – would However, this summer, following a change of be created with the government mandating two government in May 2010 when a Conservative- private sector managers to run the ventures. led coalition with the Liberal Democrats on The funds would operate on a fund of funds basis board took the helm, it transpired that the fund rather than directly investing, with both the state18 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
  19. 19. From Private Equity Newsand the mandated manager providing capital and The summit attracted the interest of key players January 2010 and the EIF the following month.the manager then soliciting commitments from in both the investor and fund manager commu- The Hermes Environmental Innovation Fundthird-party investors in order to reach the target. nity. Government records show that among the held a first close of £125m with a £50m com-The process for selecting the managers began audience were representatives from Aviva, Axa, mitment from the government and £75m fromin July 2009, according to a person close to the BP, Greater Manchester Pension Fund, RailPen Hermes’ parent, the BT pension scheme. TheDepartment of Business, Innovation and Skills. Investments, Standard Life, West Midlands EIF’s Future Technologies Fund held a first closeAn investor “summit” was then held in November Pension Fund, Abingworth, Advent, Albion, of £200m with funding coming equally from the2009 for interested parties, with government Amadeus, Capital Dynamics, Hermes, MTI and government and EIF.minister Lord Paul Drayson, a science minis- Pantheon Ventures. The closes were met with great fanfare by theter at the Department of Business, Innovation A number of these attendees, including private Labour government and private sector alike withand Skills, keen to explain the funds’ aims equity firms Pantheon and Capital Dynamics, Lewis Chong, counsel at law firm O’Melveny &and emphasise that while there would be a had also bid for the mandate to manage the Myers, echoing government sentiment that “thestate element to the funds the UKIIF was funds. However, in December 2009, the gov- parties did well to get a close so quickly”. Furtherintended to be “fundamentally a hard-nosed ernment announced that the investment arm of announcements on subsequent closes by bothcommercial proposition”. the BT pension scheme, Hermes, and the fund funds were expected by the end of 2010 butDrayson said: “UKIIF will be a fund of funds that subsidiary of multilateral lender the European aside from mentions of commitments to manag-will invest in the top-quartile performing tech Investment Bank, the European Investment ers being made, little information on the funds’funds in the UK and Europe. It will have a spread Fund, had won the mandates for the environ- progress was provided.across a number of specialist funds and a ment and technology funds respectively. Lack of interestportfolio of investments in high-growth compa- The two funds moved swiftly to announce first Instead, the two funds quietly held their finalnies. It will have a ruthless focus on achieving a closes – the point at which a fund can begin closes over the summer of 2011 with a spokes-strong return.” investing – with Hermes holding a first close in man for Hermes confirming that it had managedPrivate Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 19
  20. 20. From Private Equity Newsto attract just £5m in third party commitments funds still have significant capital to deploy and targets to SMEs.while a spokesman for the EIF confirmed it both have been actively investing. The EIF has The BGF will be seeded with £300m from five UKhad failed to garner any outside capital. One made commitments to a number of managers banks – Barclays, HSBC, Lloyds Banking Group,European investor said that the UKIIF funds including the Munich-based firm Acton Capital Royal Bank of Scotland and Standard Chartered“didn’t provide anything I couldn’t find elsewhere Partners and Netherlands buyout firm Gilde – with the aim of taking minority stakes ofwith far less restrictive investment criteria”. Healthcare Partners. between £2m and £10m in up 20 to SMEs withThe consensus view from investors was that the Hermes, meanwhile, is understood to be an turnover of up to £100m. Should these initialUKIIF funds were too restrictive in their investment investor in the latest renewable energy funds of investments be deemed a success the bankscriteria when weighed against other managers’ UK-based private equity investor HgCapital and have the option of increasing the size of theirfundraising that targeted the same sector. Zouk Ventures, according to a person familiar total commitment to the BGF to £2.5bn.Both funds had to invest 50% of their capital in with the situation. The new enterprise was launched in April 2011UK-based managers while co-investments were The next big idea with the former CCMP Capital partner Stephenalso limited, according to three people familiar The new UK administration has also been keen Welton becoming chief executive and the formerwith the situation. to increase the provision of equity capital to head of industrial company Williams, Sir NigelThe EIF and Hermes declined to comment on businesses. However, unlike with UKIIF, the new Rudd, becoming chairman. The BGF has madethe fundraising besides confirming totals, while coalition government chose to pressure the two investments – in online business out-a spokesman for the Department of Business, banking sector to fund the endeavour. sourcing firm Benefex and travel managementInnovation and Skills said that the £1bn figure The Business Growth Fund was established in company Statesman Travel Group – worth atrumpeted in 2009 was an “aspirational target” July last year to provide growth capital for small combined £8m, while extensively hiring in anwhile the £330m raised makes the UKIIF “one of and medium sized businesses. It was born out effort to build a regional network in addition tothe largest technology fund of funds in Europe”. of Project Merlin, discussions between the gov- its Birmingham headquarters.While the fundraising targets were not met, the ernment and the UK’s largest banks over lending20 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book
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