DealMarket Digest Issue117 - 14th November 2013


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November 15, 2013 - Issue 117
- Cautious Optimism for MENA Dealmaking
- Growth in Multi-Trillion Sovereign Wealth Fund Assets Could Boost PE
- Shoes, Handbags & Mascara: Private Equity’s High Fashion Passion
- Smart Money Monitors Private Equity Costs
- Sustained Recovery Predicted for Global M&A
- Quote of the Week: Outperformance – Algorithms versus Humans

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DealMarket Digest Issue117 - 14th November 2013

  1. 1. DIGEST 117 1 2 3 Cautious Optimism for MENA Dealmaking Growth in Multi-Trillion Sovereign Wealth Fund Assets Could Boost PE Shoes, Handbags & Mascara: Private Equity’s High Fashion Passion Smart Money Monitors Private Equity Costs Sustained Recovery Predicted for Global M&A Quote of the Week: Outperformance – Algorithms versus Humans November 14, 2013
  2. 2. CAUTIOUS OPTIMISM FOR MENA DEALMAKING Private equity activity in the Middle East North Africa region is still a long way off from a peak in 2011, but dealmaking is showing improvement this year, according to Financial News. Citing data provider Dealogic, the article reports, 24 private equity deals worth a combined USD 783 million in the Mena region to the end of the third quarter of 2013. It is an improvement on the 16 deals worth USD 525 million done during the same period of 2012, but the reporter notes that the figure “hides a sharp reduction in average deal size” in the third quarter of 2013, when the eight deals were worth just USD 85 million. Activity falls short of the 11 deals worth a total of $1.3 billion in the first three quarters of 2011. The main problem is finding an exit. The political instability has created more need for capital in certain sectors and a wealth of mid-market deals. The trend is a “flight to quality” both in individual deals and in GP selection. (Image source: Four Seasons Hotel, Istanbul, Turkey) GROWTH IN MULTI-TRILLION SOVEREIGN WEALTH FUND ASSETS COULD BOOST PE Sovereign wealth funds globally have added more than USD 750 billion to their total assets since 2012, the largest growth since to 2007, according to new research from Preqin. Growth is driven by the number of new sovereign wealth funds formed over the last few years and new capital injected into existing sovereign wealth funds. It is an important trend because the level of capital flowing into alternatives from sovereign wealth funds is “extremely significant”, according to Preqin, which expects that once the newly established sovereign wealth funds become more developed, we could see a number of new allocators to alternative assets, including private equity. Preqin analysts are upbeat on this group of institutional investors, as a statement by Amy Bensted, Head of Hedge Fund Products, makes clear, “Despite the challenging financial landscape and political unrest, sovereign wealth funds have continued to thrive and to grow, and this trend is predicted to continue over the next few years. We are still seeing new launches of sovereign wealth funds, with many countries approving plans for new launches over 2012-13.” (Image source: preqin) 2
  3. 3. SHOES, HANDBAGS & MASCARA: PRIVATE EQUITY’S HIGH FASHION PASSION Over at the WSJ’s MoneyBeat, a young reporter has undertaken an entertaining assignment to live a week without touching or using anything owned by a private equity investor. She’s had to toss out her mascara and stop using Twitter and avoid certain blockbuster movies at the cinema. We assume, the point being that private equity has become so integral to the economy that it has stakes in almost every area of consumer and business endeavor. One thing is certain is that private equity has a passion for fashion brands. Several PE bidders have stepped to acquire a EUR 850 million stake in Versace that is on the blocks, according to the FT, which also makes it DealMarket Digest’s buyout deal of the week. According to the WSJ, the dollar value of investment by private equity firms in retail apparel companies rose nearly ten-fold last year to USD 5.5 billion, citing data from Dealogic. (Image source: Versace website) SMART MONEY MONITORS PRIVATE EQUITY COSTS The big US endowment funds, those of Yale University and Harvard University in particular, are considered the benchmarks for patient, smart, long-term investment, according to Forbes, so when Yale’s Endowment team made a decision to reduce its allocation to private equity from 35% of its portfolio to 31% of the portfolio (which is still a hefty stake in PE), the magazine took note and did a bit of investigative reporting. The article describes recent investment activity of endowments and sovereign wealth funds in alternative assets. The conclusion was that the smart money appears to still like private equity, but are keeping a close eye on whether they are getting sufficient return for the illiquidity involved. The smart money apparently “mistrusts” hedge funds; and “loves” infrastructure funds. One of the chief criticisms is the illiquidity of private equity and the fact that there is not much of a discount because 3
  4. 4. of it. These careful investors will no doubt be awaiting the finalizing of an academic study that was announced this week. Barrons wrote about it here. The internationally-authored study investigates whether the performance of private equity investments is sufficient to LPs for risk, long-term illiquidity, and management and incentive fees charged by the general partner. Initial findings were that “management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha to compensate LPs for bearing these costs”. In other words, LPs have to be very good at selecting GPs and at the same time be meticulous about monitoring the costs of PE investments. (Image source: Yale Endowment website) SUSTAINED RECOVERY PREDICTED FOR GLOBAL M&A The latest report from the mergermarket/ Intralinks Deal Flow Indicator (Q32103) team suggests that a sustained recovery may be underway based on analysis of its global data on M&A deals across, which shows an 18% year-on-year increase in global early-stage M&A deals. The improvement is a result of growing investor and corporate confidence. The report says that this is the largest YoY increase in the DFI since Q3 2012, but also the third successive quarter where YoY growth has increased. EMEA and Latin America have performed particularly strongly, gains of 35% and 21% respectively. The popular sectors are consumer, life sciences, and telecoms, media and entertainment (as shown in the graphic here). Private equity is no longer on the decline, according to the data. Exit activity increased in Q3 2013 for the first time in several years. QUOTE OF THE WEEK – OUTPERFORMANCE - ALGORITHMS VERSUS HUMANS “It seems that individual investors, once given the freedom to vary from the ‘model’ promptly went about shooting themselves in the proverbial financial foot. Many didn’t buy the biggest winning stocks - stocks that were often very cheap but had major business problems or industry challenges” Who said it: Michael Nairne, President of Tacita Capital, family office & investment advisory firm 4
  5. 5. Context: In a discussion about portfolio management and the suitability of using computer-aided models, Nairne suggests that it should not be a surprise to hear that individuals make mistakes when managing a portfolio of investments. He believes that a good investment model will outperform the typical investor. A model avoids the emotional and fear-driven buy/sell decisions that a typical investor would make. Sophisticated investors such as pension plans have known for decades that defining their own longterm “asset mix model” is vital to success, he writes. A model sets out allocations to the major asset classes to stay on course, in good markets and bad. He said that many investors, including wealthy ones, gloss over the critical step of thoughtfully defining the right long-term asset mix for their risk profile and financial situation. “It is so easy to resist the needed discipline of an asset mix model when stock prices are skyrocketing, top equity managers abound and suave market experts are offering free tips in every media outlet,” writes Nairne. (Image source: Financial Post) Where we found it: Canada’s Financial Post 6
  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 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 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, 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 thirdparty 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.