DealMarket Digest Issue 89 - 5th April 2013


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- Hot or Not: Direct Investments?
- Deloitte Recalibrates the PE Business Model for 2013
- BMC Rumor: Another Mega Buyout in the IT Sector?
- Mercer Reveals Fees Are Dropping
- Best Performing Funds Less Likely to Adopt Industry Standards
- Quote of the Week: PE Fund Manager on Dope

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DealMarket Digest Issue 89 - 5th April 2013

  1. 1. DIGEST 89SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 89 1 Hot or Not: Direct Investments? Deloitte Recalibrates the PE Business Model for 2013 2 BMC Rumor: Another Mega Buyout in the IT Sector? Mercer Reveals Fees Are Dropping Best Performing Funds Less Likely to Adopt Industry Standards 3 Quote of the Week: PE Fund Manager on Dope April 05, 2013
  2. 2. PE DEAL VALUE SOARS BOOSTED BYTWO BLOCKBUSTER TRANSACTIONS Reuters says pension funds and other large investors are looking for ways to invest directly in companies, as well as continuing co-invest. The article suggests the main reason for the trend is that large pension funds and insurers are seeking to avoid the “large fees” associated investing through PE vehicles. Limited partners (LP) who are taking this approach are still only doing about 10% or less of their investments as direct deals or club deals. Some of the LPs mentioned in the report are Hermes GPE, an investor with 20 percent its assets in co-investments, British insurer Legal & General, the Canada Pension Plan Investment Board (CPPIB), and the Ontario Teachers Pension Plan Board. Elsewhere, pensionpulse noted that CPPIBs newly appointed Image source: Pension Pulse Blog and well-regarded CEO, Mark Wiseman, has said private equityreal estate and infrastructure are a better fit for the long view and relatively risk-averse tastes of CPPIB.DELOITTE RECALIBRATES THE PEBUSINESS MODELL FOR 2013According to a new analysis from Deloitte, general partners in the PE world will have to rethink theirbusiness and operating models in 2013 to manage regulatory, compliance, and tax uncertainties, as wellas combat cost pressures by identifying operational efficiency improvements, and they will have to aimto pursue new growth opportunities amidst elusive exits.Further details• Deal making remains elusive as competition for quality investments is fierce, and those willing to sell are demanding higher valuations.• Continued economic weakness and market volatility is clouding the investment environment, slowing the pace of initial public offerings, and making it more difficult for early investments to recover their value.• The good news is that the industry continues on its upward trek. Assets under management climbed to a record USD 3 trillion in 2012, says Deloitte quoting statistics in an article from Dan Primack’s blog, and LPs are still attracted to private equity given the industry’s historic ability to generate returns across various economic environments.• Adopting more technology and outsourcing will become more important to combat cost pressures. Deloitte say that those who have to tap the full benefits of improved technology capabilities will likely make up lost ground in 2013 as cost efficiencies emerge as a tangible lever to deliver alpha.1
  3. 3. BMC RUMOR: ANOTHER MEGABUYOUT IN THE IT SECTOR?Houston, Texas-based BMC Software is currently the latest publicly traded software company to be thetarget of buyout funds, according to Reuters which published a report late last month, citing unnamedsources. The deal could be worth as much as USD 6 billion, which would make it our deal of the postEaster-break week. BMC provides IT management solutions for large, mid-sized and small enterprisesand public sector organizations around the world.MERCER REVEALS FEES ARE DROPPINGA new survey by Mercer finds that asset management fees in alternatives have fallen “due to supply anddemand dynamics”. In Mercer’s 2012 Global Asset Manager Fee Survey, data on more than 25,000 assetmanagement products from over 5,000 investment management firms were analyzed. The survey coversa range of asset managers.According to Mercer, the majority of managers left fees relatively unchanged. Yet asset managers areunder pressure to negotiate fees for hedge funds, direct private equity and infrastructure funds. Theareas where fee reductions are evident include equity mandates. Retail equity funds have tended tolower their fees more than have their institutional and segregated counterparts, it said.It also said that “2 and 20” industry standard continues to move toward “1.5 and 20”. Taking all assetclasses into consideration, Mercer found that Canada remains the most inexpensive country/region inwhich to invest, with average median fees of around 0.3%. The UK and Europe are also relatively lowpriced, with average median fees of around 0.4% and 0.5% respectively. Emerging markets remain themost expensive country/region at 0.89% on average, with Asia averaging 0.75%, a fall of 0.08% since2010.BEST PERFORMING FUNDS LESS LIKELYTO ADOPT INDUSTRY STANDARDS In its March newsletter, Preqin noted that industry guidelines from ILPA have had a “noticeable” impact, according to a study it did along with Dechert. However, it notes that in both the US and Europe, the best performing private equity funds were the least likely to adopt the more significant recom- mendations in the ILPA Guidelines. Where the guidelines are having an effect is in the area of fee income offsets, making inroads on terms set by private equity funds.2
  4. 4. On average, 86% of new funds in 2011 and 85% of new funds in 2012 in the buyout fund sector rebatedall transaction fees. In its 2012 Preqin Private Equity Fund Terms Advisor analysis, Preqin said that theredid “not seem to be a significant difference” on average in the treatment of fees regardless of whethertransaction, monitoring, directors, breakup or other. It does see more limited partners requestingmanagement company information, including management fee budgets, as well as managementprofessionals compensation criteria. Fees have generally declined since vintage 2010 funds in all sizecategories. For instance in funds under USD 500mn, fees have declined from 2% to 1.99% in 2010 and2012 respectively; in funds from USD 500mn to USD 999mn, fees have declined in 2011 and 2012 to1.97% and 1.94% respectively; and in funds over USD 1bn, fees have declined from 1.81% in 2010 to1.75% in 2011 and 1.72% in 2012 respectively.QUOTE OF THE WEEK: NFL GOES PE ”Marijuanas legalization in Washington state and Colorado, entrepreneurs are lining up to get into the marijuana business. Theyre increasingly seeing marijuana as a legitimate business opportunity, rather than the illegal activity it has been for the better part of a century.” Who said it: Brendan Kennedy, general partner Privateer HoldingsIn context: Kennedy was quoted in an article about his recently founded private equity firm that istargeting investments in the legalized marijuana trade in the US market. He estimates the market forcannabis to be USD 50 billion. There are huge hurdles to overcome with the legal of cannabis status in theUS, according to the article. Colorado and Washington have legalized possession. Eighteen states allowmedical marijuana even though the federal government still considers it illegal. (Image source: PrivateerHoldings). Kennedy sees lots of potential in the professionalization of the trade in the coming years.Where we found it: Upstart Business Journal3
  5. 5. The Dealmarket Digest empowers members of Dealmarket by providingup-to-date and high-quality content. Each week our in-house editor siftsthrough scores of industry and academic sources to find the mostnoteworthy news items, scoping trends and currents events in the globalprivate equity sector. The links to the sources are provided, as well as aneditorialized abstract that discusses the significance of the articlesselected. It is a free service that embodies the values of the Dealmarketplatform delivers: Professional, Accessible, Transparent, Simple, Efficient,Effective, and Global.To receive the weekly digest by email register on Valerie Thompson, ZurichDealMarketDealMarket launched in 2011 and is growing fast. Just one year afterlaunch, DealMarket counts more than 52,000 recurring users from 154countries, and over 3,000 deals and service providers promoted or listedon the platform.DealMarket is an online platform enabling private equity buyers, sellersand advisors to maximize opportunities around the world – a one-stopshop for Private Equity professionals. Designed by Private Equityprofessionals for Private Equity professionals, the platform is easy to use,cost effective and secure, providing access, choice and control across theinvestment 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 2012”by Corporate Newswire.