1. DIGEST143
May 30, 2014
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Eye the Transaction Alpha for Team Selection
PE-Backed IPOs Hit a High
Family Offices Deepen Direct Investing
Activity
Accor Announces Billion Dollar Hotels
Buyout
The Show Me the Money Ratio
Quote of the Week: Good Stewards
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EYE THE TRANSACTION ALPHA FOR TEAM
SELECTION
New research from Golding Capital and the HEC School of Management has found “strong evidence”
on how to identify PE fund managers able to repeatedly outperform the market. The study authors say
that private equity returns have to be analyzed at the company transaction level, not aggregated across
a fund or a number of funds, in order to compare PE returns to stock market returns.
This is the best way to determine alpha, they say. Furthermore, the ability to determine the persistence
of outperformance is elusive if IRR (Internal Rate of Return) alone is the measuring stick. There is a
“statistically significant correlation between an excess return compared to stock market investments
in the past and in the future” if alpha is calculated in this way. What is new, is the data suggests that
GPs that have generated an above-average alpha in the past with their funds are “highly likely” to also
achieve an above-average alpha in future, and better absolute returns.
The Golding Capital and HEC metric is a predictor. The research team says theirs is the first empirical
study that presents reliable data on the relative performance of private equity during the financial cri-
sis looking at a pool of 5600 PE transactions. If the methodology catches on amongst LPs, it will likely
have an impact on due diligence methodologies, and fund manager selection.
PE-BACKED IPOS HIT A HIGH
Dealogic said in a research note this week that
there were 41 financial-sponsor backed IPOs in
the US this year so far, making it the “highest re-
cord”. The average deal size of PE-backed IPOs
is USD 377 mn, an increase of 12% compared to
2013 when it was USD 335 mn. This contrasts
with the overall IPO deal size in the US, which
actually shrunk in the period Jan to May com-
pared to previous years, to the lowest level since
2010, according to Dealogic. The data is consis-
tent with first quarter numbers from PWC that
said that the “open IPO window and strong equity market helped set the stage for the highest quarterly
filings since the second quarter of 2011, with 108 companies publicly filing for an IPO”. In the same re-
search note, PWC gave the JOBS Act some credit for improving company’s ability to launch IPOs. (Im-
age source: Dealogic)to stock market investments in the past and in the future” if alpha is calculated in
this way. What is new, is the data suggests that GPs that have generated an above-average alpha in the
past with their funds are “highly likely” to also achieve an above-average alpha in future, and better
absolute returns.
The Golding Capital and HEC metric is a predictor. The research team says theirs is the first empirical
study that presents reliable data on the relative performance of private equity during the financial cri-
sis looking at a pool of 5600 PE transactions. If the methodology catches on amongst LPs, it will likely
have an impact on due diligence methodologies, and fund manager selection.

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FAMILY OFFICES DEEPEN DIRECT
INVESTING ACTIVITY
An easy to read article in the NY Times describes the direct investment trend as it is unfolding in
Family Offices in the US. The direct dealmaking is evident not only among pension plans, SWFs, and
endowments but also family offices, it seems. The article entitled, Never Mind Stocks. Just Buy the
Company, provides some insights on challenges for FOs, such as dealflow, due diligence, and illiquid-
ity risks. Some FOs profiled are doing direct deals related to how the family originally made its fortune,
which makes sense, and others invest in debt product, real estate, and property. The same publication
has an in-depth look at the SEC’s investigation of PE fees, the hidden ones, the seemingly unfair ones,
and the transparent ones, entitled The Deal’s Done But Not the Fees.
Both articles are recommended due to the depth of reporting. It is worth noting that the mainstream
press usually only covers private equity when profits are quite high (or exceedingly low - like during
the dotcom bubble and the post-financial crisis era, respectively), or when PE is under public scrutiny.
These days two conditions, high returns and high level of scrutiny, are met in the US PE market.
ACCOR ANNOUNCES BILLION DOLLAR
HOTELS BUYOUT
This week’s buyout of the week is actually a “buy back” in the sense that Accor, a major player in the
hospitality industry, announced it would acquire for USD 1.23 billion 97 hotels from real estate fund
managers (that act and finance activity in much the same way that PE funds do).
According to the WSJ, Accor said it is buying the hotels in Germany and the Netherlands from private
equity fund Moor Park Capital Partners. All the hotels are operated by Accor under its Ibis, Ibis Bud-
get, Mercure and Novotel brands. Accor had sold these hotels to Moor Park for USD 747 million in
2007, said the newspaper.

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Probably only professional engineers like to use two and three letter acronyms (TLAs) more than in-
vestment bankers and private equity professionals. For SME entrepreneurs, that is owners and found-
ers of small and medium sized companies seeking quality private equity capital, the acronym alphabet
soup can be daunting. There is VC, PE, LP, GP, DPI, PME, ROI, IRR, NAV, IPO, LBO, and many more.
Pictet Alternative Investments, an arm of the Swiss private bank, has just published, An Introduction
To Private Equity that could be useful to business owners using DealMarket’s platform and who want
to understand private equity, as well as some of the ratios and metrics used by PE fund managers, as
well as institutional investors, to qualify investments and teams. And just to keep us on our toes, an
article in Unquote has an article on how and why the DPI (distributions to paid in ratio) metric should
be used to complement the standard IRR metric for assessing GP performance. It is the “show me
the money metric”, says Unquote. The article warns that when it comes to private equity, there is no
one-size-fits-all solution for how to best measure fund performance, therefore sophisticated investors
employ a mix of metrics. (Image source: Pictet Alternative Investments)
THE SHOW ME THE MONEY RATIO
QUOTE OF THE WEEK: GOOD STEWARDS
“…in private equity we made our first co-investment alongside managers as part of the successful con-
sortium bidding for a branch network of RBS. We see this as both an exciting investment opportunity
and also the chance to create a ‘good’ bank.”
Who said it: Andrew Brown, Secretary and Chief Executive the Church Commissioners of
Church of England

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In context: The Church of England is an institutional investor with about
4% of its GBP 6.1 billion (USD 10.7 bn) fund invested in private equity. It is
responsible for managing the money that pays pensions and church costs.
The quote about building
a good bank is referring
to the consortium, led by
Corsair Capital, a PE fund
specialized exclusively
in financial institution
buyouts, and that now
includes a Kuwait-based
Sovereign Wealth fund that
has been attempting to re-
vive a languishing savings
and loan bank brand from Royal Bank of Scotland in
the UK. The new bank will serve consumers and SMEs
based on strong compliance to ethical and governance
guidelines.
The Church’s Investment board is quite activist in the
UK on ethical loans and investment activity, moreso
than typical institutional investors in this respect, and
it is apparently not interfering with its portfolio perfor-
mance. In the report, the return for 2013 was an im-
pressive 15.9%. It said, “Everything that could go right
did go right. Risk assets such as equities and property
performed strongly. Our investment managers including our in-house property team did better than
their peers, and the market and the safe-haven assets where we have a low allocation, UK gilt-edged
securities, index- linked bonds and US Treasuries, duly went down.”
Interestingly, the Church’s portfolio is constructed on the basis that such favorable conditions will be
relatively rare, and therefore it has a number of defensive investments, which it discloses in fair detail
in the report. (See Graphic). For those interested in watching smart money, this may be one to add to
the list, keeping in mind that outperformance over time is key. (Image source: CofE Commissioner’s
Fund)
Where we found it: Annual Report 2013 Church Commissioner’s Fund via PIOnline

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Editor: Valerie Thompson, Zurich
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