GEMS 2009, London 29 April 09

1. GLOBAL EMERGING MARKETS SUMMIT 2009, 29 APRIL 2009
The Global Credit Crisis – Reforming Governance, Rebuilding Economies
“Sovereign Wealth Funds & Private Equity:
Driving Growth & Prosperity in Emerging Markets”
Synopsis of a Presentation by Tuck Seng Low, Managing Director, Frey Capital, Zurich
“The Positioning of Sovereign Wealth Funds in Private Equity investment”
Overview of the Current Market
Conditions in the private equity market industry today are challenging. This state is likely to
persist with credit conditions remaining tight (affecting refinancings), recession taking hold in
many of the economies in which these funds operate and a contraction of dealflow. At the end of
last year, some of the largest PE funds wrote down the value of investments in their European
portfolios by a range of 40 – 70%. Permira IV (EUR11.4bn committed) recorded a multiple of
0.46, ie 54% down on their investments. Note that Europe was not truly in recession yet and we
are only scratching the surface of a distressed market. Carlyle, a global private equity group, has
seen its value fall by a third or so – this is based on the purchase of a stake by Mubadala (an Abu
Dhabi based SWF). For a concrete figure, look at Blackstone: bought at a valuation of USD30bn
in mid 2007, and today valued at some USD10bn.
TABLE 1
PRIVATE EQUITY PERFORMANCE
31-Dec-08
Distributions
Draw- in excess of Net
Vintage downs paid-in Multiple
Advent Int'l GPE V 2005 88 87 1.64
CVC European Equity Partners IV 2005 93 43 1.22
AXA LBO Fund III A 2005 100 42 1.21
Montagu III 2005 68 17 1.08
EQT V 2006 52 10 1.02
Fourth Cinven 2006 55 0 0.91
PAI Europe V 2007 19 22 0.89
BC European Capital VIII 2005 53 0 0.78
Bridgepoint Europe III 2005 83 0 0.70
CVC European Partners IV (Tandem) 2007 56 3 0.67
KKR European Fund II 2005 100 9 0.56
Candover 2005 2005 83 13 0.55
Cognetas Europe Fund II 2005 68 7 0.47
Permira IV 2006 52 0 0.46
Terra Firma Capital Partners III 2006 49 0 0.21
Source: FT Research
In a sense all of this should not be surprising. PE is a cyclical industry and the regime of greater
transparency, especially mark-to-market accounting, has provided a rare glimpse into current
performance especially among large PE firms. The explosion of credit had provided fuel for an
unprecedented wave of investment at aggressive take-out prices, high levels of leverage at
favourable market rates.
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2. Around three quarters of the record USD1,000bn of buyouts were done by the largest 25 private
equity firms – classic concentration risk. Fitch has just remarked that “Europe’s leveraged credit
market is on its knees…”
The Table below best illustrates the cycle in private equity investment over five years; especially
noteworthy is the trend concerning leveraged buy-outs with peak cycle in 2007 and a collapse in
the 2008.
TABLE 2
PRIVATE INVESTMENT TRANSACTIONS
No of No of No of No of No of
Year ended 31 March Deals 2005 Deals 2006 Deals 2007 Deals 2008 Deals 2009
LBOs
N. America 957 129,109 1,001 133,264 1,288 500,779 1,352 326,421 1,073 71,868
Europe 869 179,987 1,262 181,666 1,666 270,314 1,808 205,152 1,564 79,138
PE - Non LBO
N. America 439 7,899 214 6,577 249 8,527 395 19,024 530 19,817
Europe 345 3,802 226 5,234 304 11,507 307 32,326 381 61,926
PIPEs
N. America 4,459 50,996 5,032 72,480 4,976 93,086 4,586 142,145 3,819 622,665
Europe 192 11,965 412 19,871 575 35,894 719 61,016 787 152,762
VC
N. America 1,968 23,932 2,528 28,875 3,147 37,175 3,405 40,872 2,517 31,115
Europe 621 7,832 1,065 9,218 1,604 16,021 1,886 12,305 1,693 12,808
Source: Capital IQ, Standard & Poors
In terms of investment activity at peak cycle, ie 2007, North America accounted for 71% and
Europe 15%. The balance (14%) largely comprised Asia (Source: IFSL). On the fund raising side,
the respective percentages are 66%, 22% and 12%.
Fund raisings in H1 2008:
Asia: USD12.5bn 25 funds
Europe: USD11.9bn 31 funds
US: USD58.0bn 61 funds
Source: Private Equity Intelligence
A quick forecast:
1) Secondaries will see massive supply. Paul Capital estimates some USD130-140bn of
secondary private equity interests for sale over the next 24 months.
2) Increasing discounts on senior debt (debt used in 14 of the largest deals are 30% lower).
3) Cautious approach to PIPEs as some blow-ups await.
4) Repayment and covenant breaches with little scope for renegotiation.
5) Consolidation and closures in the industry.
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3. The Potential of SWFs
We are clearly in a different landscape for alternative asset class investing today. Against this
background, cash equity is king and smart moves will lead to very substantial returns in the near
future. In this new unchartered environment, do SWFs have a meaningful role to play; or to be
more explicit:
1) Do they want or need to play the game under the regime of the current rulebook and
generally-accepted practices?
2) What key advantages do they bring to the table for investee companies?
3) Are they driven purely by financial return or are there strategic and/or social agendas?
4) Do SWFs even need to consider conventional routes to achieving some of their
respective objectives?
5) How do they minimize public criticism in their own countries over certain investments or
substantial losses suffered and deflect or mitigate resistance, sometimes resentment,
from the public or investor community in countries in which target companies or assets
reside?
I am not here to answer all these but to shed light on some of the issues, express some of our
views but importantly debate these with you.
What is clear is that there is concern that SWFs can and will use their enormous financial muscle
to gain undue positions and influence in certain companies or assets, especially in industries with
existing or potential security concerns. The US has recently amended legislation dealing with
SWF investment under the aegis of vetting procedures enforced by the Committee on Foreign
Investment in the US. Canada and Australia have legislation restricting selected foreign
investment and these are aimed at sensitive areas such as uranium mining. In the EU, a range of
guidelines is being introduced but these are unclear at present with countries such as France
adopting already a protectionist stance. In core Europe, we would say that Britain and
Switzerland have the most open regimes, currently and traditionally.
Overall, we argue that no model needs to be cast in stone and some current investments are not
clever in terms of approach, structure, timing and pricing notwithstanding a plethora of
opportunistic situations. We forsee “Shadow” or Hybrid equity increasingly used and debt with
equity pay-off structures. In terms of sectors, apart from natural resources and energy, we see
investing moving to sectors that potentially introduce a multiplier impact, eg via technology
transfer, know-how acquisition, etc. These tend to fall in:
• Healthcare
• Education
• Technology
• Infrastructure & Transportation
• Food
• Alternative Energy
We see in this environment a pivotal point for SWF investing in the so-called private equity
sphere.
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