THE ANNUAL REVIEW 2010 - PEI Media
THE ANNUAL REVIEW 2010 - PEI Media
THE ANNUAL REVIEW 2010 - PEI Media
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<strong>THE</strong> <strong>ANNUAL</strong> <strong>REVIEW</strong> <strong>2010</strong><br />
PE portfolios surge<br />
at CalPERS, CalSTRS<br />
Nigerian pensions eye alternatives<br />
Energy Capital closes second fund on $4.3bn<br />
Pantheon closes fourth secondaries fund on $3bn<br />
Indian exits reach<br />
ecord high in <strong>2010</strong><br />
India’s Religare to go global in $1bn push<br />
Standard Bank in top-level hiring spree<br />
Goldman plays down<br />
‘capital overhang’ fears<br />
Mezz funds take centre stage<br />
Montagu sells Sebia to Cinven for €800m<br />
New Horizon closes on $750m<br />
3i reaps 3.5x on healthcare exit<br />
TPG, KKR, GIC to spend<br />
Apax nets 4.5x on Tommy Hilfiger exit<br />
$1bn on Chinese bank stake<br />
Scholars find buyout funds produce alpha<br />
Abraaj boosts MENA totals with $545m deal<br />
Blackstone, Bain fund<br />
interests back at par<br />
Marks ‘shocked’<br />
by market return<br />
Private equity IPOs trump market average<br />
Bridgepoint fetches 8x<br />
with Pets at Home sale<br />
LPs keep faith with<br />
private equity<br />
Warburg goes<br />
back to Brazil<br />
Advent and Bain purchase<br />
£2bn of RBS assets<br />
CDH Fund IV heavily over-subscribed<br />
New pools of capital open<br />
Oncap in 5.8x<br />
CPPIB, Onex make £3bn play for Tomkins<br />
for private equity<br />
education exit<br />
Norway considers commitments<br />
Carlyle, TPG pip KKR with $2.3bn Healthscope bid
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CHICAGO | MENLO PARK | LONDON | SINGAPORE
private equity annual review <strong>2010</strong> pa g e 1<br />
the pei annual review <strong>2010</strong><br />
A market recovers<br />
i s s n 1 4 7 4 – 8 8 0 0<br />
It’s been a tough few years for the global private<br />
equity industry. The uncertainty and dislocation<br />
resulting from the credit collapse and global<br />
financial crisis in 2008 was followed in 2009<br />
by market unpredictability and upheaval. A<br />
dearth of leverage brought buyout markets to<br />
a standstill; too many portfolio companies were<br />
showing severe signs of distress; fund valuations<br />
were written down dramatically; limited partners<br />
kept tighter grips on their purse strings;<br />
and critics once again were taking aim at an<br />
industry whose core tenets were being called<br />
into question.<br />
Evidence of the revolution and evolution<br />
that detractors, as well as industry insiders,<br />
were subsequently calling for, however, is<br />
plain to see. Examining headlines carried in<br />
<strong>2010</strong> by PrivateEquityInternational.com –<br />
this review’s cover image – shows an industry<br />
firmly in recovery mode, adapting its approach<br />
as market cycles change. For instance: “Scholars<br />
find buyout funds produce alpha”; “Blackstone,<br />
Bain fund interests back at par”; “PE portfolios<br />
surge at CalPERS, CalSTRS”; and “Private<br />
equity IPOs trump market average”. There<br />
are plenty more.<br />
This edition looks back at some of the year’s<br />
key issues: the shifting relationships between<br />
fund managers and their investors; the revival<br />
of M&A activity; the secondaries surge fuelled<br />
by the withdrawing banking sector; and the<br />
widely anticipated distressed investment<br />
boom that didn’t quite happen as expected.<br />
We chronicle the year’s top stories (p. 6), from<br />
the rise of RMB funds in China and impressive<br />
momentum in emerging markets, to regulatory<br />
challenges and veteran private equity firms’<br />
changing compositions post-crisis.<br />
We also, of course, highlight the investors,<br />
managers, advisors and transactions that<br />
particularly stood out from the crowd in<br />
<strong>2010</strong> with our annual awards section (p. 30).<br />
The list of winners, decided by thousands of<br />
voters from around the world, makes plain that<br />
the brightest players in the industry are now<br />
thriving, rather than just surviving.<br />
Reading back through these pages, it’s clear<br />
that <strong>2010</strong> marked a much-needed turning point<br />
for the private equity industry. That’s not to say<br />
it’s all smooth sailing ahead, but if the energy<br />
and resolve displayed by hardworking GPs and<br />
investors in <strong>2010</strong> continues, then 2011 should<br />
be filled with even more positive headlines.<br />
Enjoy the Review,<br />
Amanda Janis<br />
Senior Editor<br />
Senior Editor, Private Equity<br />
Amanda Janis<br />
Tel: +44 20 7566 4270<br />
amanda.j@peimedia.com<br />
Editor, Private Equity International<br />
Toby Mitchenall<br />
Tel: +44 20 7566 5438<br />
toby.m@peimedia.com<br />
Editor, PrivateEquityInternational.com<br />
Christopher Witkowsky<br />
Tel: +1 212 633 1072<br />
christopher.w@peimedia.com<br />
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Jenny Blinch<br />
Nicholas Donato<br />
Jenna Gottlieb<br />
Aston Tan<br />
Hsiang-Ching Tseng<br />
Graham Winfrey<br />
Editor-at-Large<br />
David Snow<br />
Tel: +1 212 633 1455<br />
david.s@peimedia.com<br />
Editorial Director<br />
Philip Borel<br />
Tel: +44 20 7566 5434<br />
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Head of Marketing<br />
Paul McLean<br />
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Group Managing Director<br />
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tim.m@peimedia.com<br />
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page 2 private equity annual review <strong>2010</strong><br />
Contents<br />
STORIES OF <strong>THE</strong> YEAR<br />
6. Month-by-month highlights of<br />
the year in global private equity<br />
<strong>THE</strong> <strong>2010</strong> PRVATE EQUITY<br />
INTERNATIONAL AWARDS<br />
30. Introduction<br />
32. The roll of honour<br />
34. Europe<br />
50. North America<br />
58. Africa, Latin America and<br />
MENA<br />
59. Asia<br />
GLOBAL <strong>THE</strong>MES <strong>2010</strong><br />
68. The year in fundraising<br />
The firms that came to market and<br />
how they did<br />
70. Fundraising: Capital Pursuit!<br />
The board game that puts the<br />
“fun” back in fundraising<br />
72. Fundraising: In the money<br />
Highlighting successful fund<br />
closes during <strong>2010</strong><br />
73. Secondaries: Banking on it<br />
How changes in the banking<br />
market created opportunity for<br />
secondaries<br />
78. LP Focus: Cash back<br />
Tracking distributions and capital<br />
calls throughout the year<br />
79. Terms tug of war<br />
Mapping the tussle between LPs<br />
and GPs over Ts and Cs<br />
80. The year of regulation<br />
Following the twists and turns of<br />
the creation of various regulatory<br />
developments affecting the asset<br />
class<br />
82. Fund administration:<br />
Regulations on the horizon<br />
Mapping the globe’s various new<br />
fund laws<br />
84. Fund administration:<br />
Outlook<br />
Four forces affecting the lives of<br />
fund administrators<br />
85. Distress: Slim pickings<br />
What happened to the muchanticipated<br />
feast of distressed<br />
opportunities?<br />
123. LP Radar<br />
Limited partners have been<br />
flexing their muscles and making<br />
demands, according to extracts<br />
from <strong>PEI</strong>’s ‘LP Radar’ column<br />
125. Industry comment<br />
A collection of<br />
commentary as featured on<br />
PrivateEquityInternational.com<br />
127. Data room<br />
Key data points from the year’s<br />
private equity market<br />
26<br />
30<br />
79<br />
93
Passion for achievement.<br />
www.mvision.com<br />
for the 9th consecutive year
page 4 private equity annual review <strong>2010</strong><br />
Contents<br />
NORTH AMERICAN <strong>THE</strong>MES <strong>2010</strong><br />
88. First round<br />
<strong>PEI</strong>’s sideways look at the North American private<br />
equity market in <strong>2010</strong><br />
90. Stateside<br />
Extracts from <strong>PEI</strong>’s ‘Stateside’ column chronicle a<br />
shifting relationship between LP and GP<br />
92. M&A makes a comeback<br />
A review of the North American large buyout market<br />
93. Defrosting the mid-market<br />
A review of North American<br />
mid-market activity<br />
94. Tax changes: Carrying on<br />
Chronicling the rise of carry tax<br />
95. Leverage for sale<br />
Following developments in the US leveraged<br />
loan markets<br />
EUROPE <strong>THE</strong>MES <strong>2010</strong><br />
98. First round<br />
<strong>PEI</strong>’s sideways look at the European private equity<br />
market in <strong>2010</strong><br />
100. In Europe<br />
Extracts from <strong>PEI</strong>’s ‘In Europe’ column show<br />
a market reigniting<br />
102. Mid-market crowding<br />
Europe’s mid-market players found their hunting<br />
ground more crowded than usual<br />
104. Europe’s exclusive billionaires club<br />
Few firms managed to seal multi-billion deals<br />
EMERGING MARKETS <strong>THE</strong>MES<br />
108. Asia Monitor<br />
Extracts from <strong>PEI</strong>’s ‘Asia Monitor’ column show a<br />
region developing its own identity<br />
110. Greater China<br />
A market review and a closer look at the rise of<br />
domestic LPs<br />
112. India<br />
A market review and a look at the high number<br />
of GP spin-outs<br />
114. Latin America<br />
A market review and a look beyond the core market<br />
of Brazil<br />
116. Central and Eastern Europe<br />
The nuances of the region and its aging<br />
entrepreneurs<br />
118. Middle East and North Africa<br />
A transformational shake-out in the region is<br />
on its way<br />
121. Sub-Saharan Africa<br />
Private equity’s decade of opportunity<br />
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1119<br />
The answer, my friend,<br />
is blowing in the wind<br />
The winds of change will always bring uncertainty<br />
but they also create opportunity wherever they<br />
blow, spreading seeds of wisdom, experience and<br />
new ideas; the most solid foundation for growth.<br />
Ethos enjoys an unparalleled history of over 25 years<br />
of successful investing across a broad range of<br />
economic and political cycles. It’s our innovative<br />
thinking, patience and inventive approach that enables<br />
Ethos to evaluate and execute transactions, generating<br />
value for investors and business partners alike,<br />
that sets us apart.<br />
www.ethos.co.za<br />
BUILDING BETTER BUSINESSES<br />
Ethos is an Authorised Financial Services Provider
<strong>2010</strong><br />
Stories of the year<br />
page 6 private equity annual review <strong>2010</strong><br />
January: Renminbi rising 10<br />
February: Volcker lays down the law 12<br />
March: Parcel passing 14<br />
April: Hugo Boss face-off 16<br />
May: Messing with the middlemen 18<br />
June: Leaving lobbyists 20<br />
July: Going to the bank 22<br />
August: Quality vs. quantity 24<br />
September: R.I.P. GSC 25<br />
October: Battle commences 26<br />
November: Assault on the<br />
public markets 27<br />
December: Closure for Candover 28<br />
Oncap in 5.8x education exit<br />
LPs keep faith with private equity<br />
Carlyle, TPG pip KKR with $2.3bn Healthscope bid<br />
Private equity IPOs trump<br />
New pools of capital open for private equity<br />
market average Marks ‘shocked’ by market return<br />
Bridgepoint fetches 8x with Pets at Home sale<br />
New pools of capital open for private equity<br />
CDH Fund IV heavily over-subscribed<br />
Warburg goes back to Brazil<br />
Indian exits reach<br />
record high in <strong>2010</strong><br />
New Jersey barters carry cut from Tenex<br />
Aldus settles New York<br />
pension probe<br />
Scholars find buyout funds produce alpha<br />
Blackstone, Bain fund<br />
interests back at par<br />
PE portfolios surge at<br />
CalPERS, CalSTRS<br />
Standard Bank in top-level hiring spree<br />
Goldman plays down<br />
‘capital overhang’ fears
Actis is a private equity investor that<br />
invests exclusively in the emerging<br />
markets. With a growing portfolio,<br />
we currently have US$4.7bn in funds<br />
under management.<br />
We bring more than capital to our<br />
investments and produce benefits for<br />
our investee companies, investors and<br />
society at large. In our approach to<br />
business ethics, the environment, our<br />
labour laws, and our stewardship of<br />
these businesses, we actively look for<br />
opportunities to do good.<br />
In 2011, Actis won ‘African Private Equity Firm<br />
of the Year’ for the fourth consecutive year, and<br />
‘Latin American Private Equity Firm of the Year’,<br />
both awarded by Private Equity International.<br />
www.act.is<br />
Latin America<br />
Africa<br />
South Asia<br />
China<br />
South East Asia
Middle East, North Africa & South Asia<br />
MENASA<br />
Turkey<br />
• Acibadem | Healthcare<br />
& Insurance<br />
• Numarine | Luxury<br />
Yacht Manufacturer<br />
Jordan<br />
• Aramex | Logistics*<br />
• D1g.com | <strong>Media</strong>**<br />
• JorAMco | MRO<br />
• Maktoob | <strong>Media</strong>*<br />
• The Dead Sea Company for Conferences &<br />
Exhibitions | Convention Complex<br />
Tunisia<br />
Lebanon<br />
• Spinneys | Retail<br />
Morocco<br />
Algeria<br />
Libya<br />
Egypt<br />
• Agrocorp | Agriculture<br />
• Al Borg Laboratories | Healthcare<br />
• EFC/Orascom | Fertilizer & Construction<br />
• OMS | Information Technology**<br />
• Spinneys | Retail<br />
• The 47th | Real Estate<br />
Countries outside investment area<br />
Abraaj Capital offices: Dubai, Istanbul, Cairo,<br />
Amman, Riyadh, Karachi, Beirut, Ramallah<br />
* Exited Investments<br />
** In process of closing<br />
Saudi Arabia<br />
• National Air Services |<br />
Aviation*<br />
• Tadawi | Healthcare<br />
Dubai International Financial Centre, Gate Village 8, 3rd Floor, PO Box 504905, Dubai, United Arab Emirates<br />
T: +971 4 506 4400, F: +971 4 506 4600, info@abraaj.com, www.abraaj.com<br />
Abraaj Capital Ltd. is regulated by the Dubai Financial Services Authority
ENGINEERING SUCCESS<br />
Kuwait<br />
Pakistan<br />
• Teshkeel <strong>Media</strong> Group | <strong>Media</strong>**<br />
• BMA | Financial Services<br />
• Byco (formerly Bosicor) |<br />
Oil & Gas<br />
• Karachi Electric Supply Co. |<br />
Utilities<br />
• MS Forgings | Steel Forging<br />
Abraaj Capital is the largest private equity group<br />
in the Middle East, North Africa and South Asia<br />
(MENASA). Since inception in 2002, it has raised close<br />
to US$ 7 billion and distributed almost US$ 3 billion<br />
to its investors. Based out of Dubai, the Abraaj Group<br />
operates eight offices in the MENASA region including<br />
Istanbul, Cairo and Riyadh.<br />
India<br />
• ECI | Infrastructure<br />
• Man Infraconstruction |<br />
Infrastructure<br />
• Osian’s | Art<br />
• Ramky | Infrastructure<br />
Bahrain<br />
Oman<br />
• ONIC Holding | Insurance*<br />
Qatar<br />
• Amwal | Financial Services*<br />
United Arab Emirates<br />
• Air Arabia | Airline Services<br />
• Arabtec Holding PJSC | Construction*<br />
• Emirates Heights Development Company | Real Estate<br />
• ENSHAA | Real Estate<br />
• E3 | Information Technology<br />
• GEMS | Education<br />
• GMMOS | Oil & Gas Fabrication<br />
• Marine Hospitality Holdings | Marine & Leisure Services<br />
• <strong>Media</strong>quest | <strong>Media</strong><br />
• Network International | Financial Services**<br />
• Septech | Waste Water Treatment*<br />
• Signature Clubs International | Private Member Clubs*
page 10 private equity annual review <strong>2010</strong><br />
s to r i e s o f t h e y e a r<br />
j a n | f e b | m a r | a p r | m a y | j u n e | j u ly | a u g | s e p | o c t | n o v | d e c<br />
r m b - d e n o m i n a t e d f u n d s<br />
Renminbi rising<br />
The prevalence of Chinese RMB funds continued to<br />
grow in <strong>2010</strong>, causing celebration in some quarters<br />
and concern in others<br />
Shanghai: the future is RMB-denominated<br />
China-focused private equity funds denominated<br />
in Yuan raised more capital than US<br />
dollar-denominated funds for the first time<br />
ever in 2009. Of the $13 billion raised by<br />
funds investing either only in China or with<br />
an exposure to China, a whopping $8.73<br />
billion was raised by 21 RMB-denominated<br />
funds, more than twice the amount raised<br />
by funds denominated in USD, according<br />
to Chinese data firm Zero2IPO Research<br />
Centre.<br />
The trend showed no sign of abating<br />
in <strong>2010</strong>. Among the many domestic and<br />
global firms to launch or close their first<br />
or second RMB funds were CITIC Private<br />
Equity Funds Management, The Carlyle<br />
Group, The Blackstone Group, TPG,<br />
Hony Capital, Kleiner Perkins Caufield &<br />
Byers, Blue Oak Capital, Infinity Equity<br />
and Everbright China. Funds of funds also<br />
got in on the action: Chinese state-backed<br />
Suzhou Ventures Group launched two funds<br />
of funds targeting a total of RMB15 billion<br />
(€1.7 billion; $2.3 billion), while emerging<br />
markets-focused EM Alternatives also began<br />
raising an RMB vehicle.<br />
While the RMB fervor has been seized<br />
upon by both domestic and foreign players,<br />
firms running parallel USD-denominated<br />
funds have had to navigate potential<br />
conflicts of interests or risk alienating<br />
offshore LPs. USD dollar funds face<br />
substantially greater restrictions on where<br />
they can invest and how quickly they can<br />
do it. With RMB funds, meanwhile, able<br />
to invest comparatively quickly, some<br />
foreign LPs have had to watch parallel<br />
RMB-denominated vehicles make deal<br />
after attractive deal, while counterpart<br />
USD-denominated fund, to which they<br />
committed, lies largely idle.<br />
Still, the growth of China’s RMB<br />
industry is not only unstoppable, but also<br />
natural, Vincent Huang, a Hong Kongbased<br />
partner at Pantheon previously told<br />
sister publication PE Asia. “We have to wake<br />
up to the reality that the RMB funding<br />
source is the future in China and returns<br />
from RMB funds are likely to be better<br />
in the near future,” he said. “We cannot<br />
change this; we can at best try to align<br />
interests with the GPs.” ■<br />
Passing the reigns<br />
Montagu and LMS Capital were<br />
among the European firms in<br />
<strong>2010</strong> that put leadership into the<br />
hands of the next generation<br />
Montagu Private Equity in January elevated<br />
longtime chief executive Chris Masterson to<br />
the newly created role of chairman, allowing<br />
10-year veteran Jason Gatenby to take on the<br />
chief executive role.<br />
Masterson had spent 18 years working for<br />
the mid-market European firm, which spun out<br />
of HSBC in 2003. Gatenby joined Montagu in<br />
2000 after having spent a decade at 3i Group.<br />
The management shuffle came ahead of<br />
launching Montagu’s fourth fund, which is<br />
targeting €2 billion with a hard-cap of €2.5<br />
billion.<br />
A few weeks later, publicly listed midmarket<br />
firm LMS Capital also revamped its<br />
leadership structure, bringing in former First<br />
Reserve director Glenn Payne to become its<br />
chief executive officer.<br />
“We’re laying the foundations for the next<br />
generation,” outgoing chief executive Robert<br />
Rayne told <strong>PEI</strong> at the time. Rayne, who helped<br />
established LMS Capital’s investment activities in<br />
the early 1980s as London Merchant Securities,<br />
succeeded retiring chairman Jonathan Agnew. ■<br />
CD&R raises $5bn<br />
The firm attracted several new<br />
LPs to its eighth buyout fund<br />
Clayton Dubilier & Rice rounded up $5<br />
billion for Fund VIII in January, ending a<br />
two-year fundraising effort independent of<br />
placement agents and besting its prior fund’s<br />
$4 billion in commitments.<br />
The 32-year-old firm held a first close in<br />
March 2008. In 2009, it lowered its original<br />
target to $5 billion from $7.5 billion. Fund<br />
VIII included several new limited partners,<br />
including the Maryland Retirement System,<br />
which committed $75 million; the Teachers’<br />
Retirement System of Texas; and the<br />
South Carolina Retirement System, which<br />
invested $100 million. ■
page 10 private equity annual review <strong>2010</strong><br />
s to r i e s o f t h e y e a r<br />
j a n | f e b | m a r | a p r | m a y | j u n e | j u ly | a u g | s e p | o c t | n o v | d e c<br />
r m b - d e n o m i n a t e d f u n d s<br />
Renminbi rising<br />
The prevalence of Chinese RMB funds continued to<br />
grow in <strong>2010</strong>, causing celebration in some quarters<br />
and concern in others<br />
Shanghai: the future is RMB-denominated<br />
China-focused private equity funds denominated<br />
in Yuan raised more capital than US<br />
dollar-denominated funds for the first time<br />
ever in 2009. Of the $13 billion raised by<br />
funds investing either only in China or with<br />
an exposure to China, a whopping $8.73<br />
billion was raised by 21 RMB-denominated<br />
funds, more than twice the amount raised<br />
by funds denominated in USD, according<br />
to Chinese data firm Zero2IPO Research<br />
Centre.<br />
The trend showed no sign of abating<br />
in <strong>2010</strong>. Among the many domestic and<br />
global firms to launch or close their first<br />
or second RMB funds were CITIC Private<br />
Equity Funds Management, The Carlyle<br />
Group, The Blackstone Group, TPG,<br />
Hony Capital, Kleiner Perkins Caufield &<br />
Byers, Blue Oak Capital, Infinity Equity<br />
and Everbright China. Funds of funds also<br />
got in on the action: Chinese state-backed<br />
Suzhou Ventures Group launched two funds<br />
of funds targeting a total of RMB15 billion<br />
(€1.7 billion; $2.3 billion), while emerging<br />
markets-focused EM Alternatives also began<br />
raising an RMB vehicle.<br />
While the RMB fervor has been seized<br />
upon by both domestic and foreign players,<br />
firms running parallel USD-denominated<br />
funds have had to navigate potential<br />
conflicts of interests or risk alienating<br />
offshore LPs. USD dollar funds face<br />
substantially greater restrictions on where<br />
they can invest and how quickly they can<br />
do it. With RMB funds, meanwhile, able<br />
to invest comparatively quickly, some<br />
foreign LPs have had to watch parallel<br />
RMB-denominated vehicles make deal<br />
after attractive deal, while counterpart<br />
USD-denominated fund, to which they<br />
committed, lies largely idle.<br />
Still, the growth of China’s RMB<br />
industry is not only unstoppable, but also<br />
natural, Vincent Huang, a Hong Kongbased<br />
partner at Pantheon previously told<br />
sister publication PE Asia. “We have to wake<br />
up to the reality that the RMB funding<br />
source is the future in China and returns<br />
from RMB funds are likely to be better<br />
in the near future,” he said. “We cannot<br />
change this; we can at best try to align<br />
interests with the GPs.” ■<br />
Passing the reigns<br />
Montagu and LMS Capital were<br />
among the European firms in<br />
<strong>2010</strong> that put leadership into the<br />
hands of the next generation<br />
Montagu Private Equity in January elevated<br />
longtime chief executive Chris Masterson to<br />
the newly created role of chairman, allowing<br />
10-year veteran Jason Gatenby to take on the<br />
chief executive role.<br />
Masterson had spent 18 years working for<br />
the mid-market European firm, which spun out<br />
of HSBC in 2003. Gatenby joined Montagu in<br />
2000 after having spent a decade at 3i Group.<br />
The management shuffle came ahead of<br />
launching Montagu’s fourth fund, which is<br />
targeting €2 billion with a hard-cap of €2.5<br />
billion.<br />
A few weeks later, publicly listed midmarket<br />
firm LMS Capital also revamped its<br />
leadership structure, bringing in former First<br />
Reserve director Glenn Payne to become its<br />
chief executive officer.<br />
“We’re laying the foundations for the next<br />
generation,” outgoing chief executive Robert<br />
Rayne told <strong>PEI</strong> at the time. Rayne, who helped<br />
established LMS Capital’s investment activities in<br />
the early 1980s as London Merchant Securities,<br />
succeeded retiring chairman Jonathan Agnew. ■<br />
CD&R raises $5bn<br />
The firm attracted several new<br />
LPs to its eighth buyout fund<br />
Clayton Dubilier & Rice rounded up $5<br />
billion for Fund VIII in January, ending a<br />
two-year fundraising effort independent of<br />
placement agents and besting its prior fund’s<br />
$4 billion in commitments.<br />
The 32-year-old firm held a first close in<br />
March 2008. In 2009, it lowered its original<br />
target to $5 billion from $7.5 billion. Fund<br />
VIII included several new limited partners,<br />
including the Maryland Retirement System,<br />
which committed $75 million; the Teachers’<br />
Retirement System of Texas; and the<br />
South Carolina Retirement System, which<br />
invested $100 million. ■
page 12 private equity annual review <strong>2010</strong><br />
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b a n k i n g re g u l a t i o n<br />
Volcker lays down the law<br />
Former Federal Reserve chairman Paul Volcker turned the spotlight on bank-owned<br />
private equity operations and got the ball rolling on industry-changing new rules<br />
Volcker: points out the dangers of bank-backed private equity<br />
Proposals to limit bank involvement with<br />
private equity outfits took a decisive tone in<br />
February when former Federal Reserve chairman<br />
Paul Volcker appeared before the Senate<br />
Banking Committee. The chairman testified on<br />
the behalf of the eponymous “Volcker Rule” –<br />
endorsed by President Obama just weeks earlier<br />
– which would restrict banks from owning,<br />
sponsoring and investing in hedge and private<br />
equity funds. Volcker argued such operations<br />
should live or die by their activities – without<br />
the unfair advantage of taxpayer support.<br />
During his testimony, Volcker stressed<br />
that commercial banks were covered by<br />
federal deposit insurance and have access<br />
to the Fed’s discount window for emergency<br />
loans due to the public’s interest in providing<br />
a “safety net”. However, Volcker insisted if<br />
bank holding companies wanted to invest<br />
in riskier activities, such as private equity<br />
funds, these operations should “stand alone”.<br />
“They are, and should be, free to trade,<br />
to innovate, to invest – and to fail,” he said.<br />
“[They should be] able to profit handsomely<br />
or fail entirely as appropriate in a free<br />
enterprise system.”<br />
In full agreement, the White House urged<br />
lawmakers to back the Volcker Rule, saying<br />
bank holding companies should choose<br />
between taking deposits and being a “financial<br />
company that can do other activities”.<br />
After months of negotiations and<br />
compromise, the Volcker Rule eventually<br />
cemented its place in history as part of the<br />
broader “Dodd-Frank Wall Street Reform<br />
and Consumer Protection Act”, signed<br />
into law on 21 July <strong>2010</strong>. The rule’s final<br />
language was watered down to prohibit<br />
banks from investing more than 3 percent<br />
of their Tier 1 capital in private equity and<br />
hedge funds, with an additional restriction<br />
from acquiring more than a 3 percent<br />
ownership stake in any private equity group<br />
or hedge fund.<br />
The signed bill, which provided only a<br />
framework around which the rules would be<br />
implemented, would not prove to be the end<br />
of the reform process, however. In October<br />
the newly formed Financial Stability Oversight<br />
Council began a public consultation period<br />
over the rule as mandated by the Dodd-Frank<br />
Act, which requires the council to complete<br />
a study of the rule no later than six months<br />
after the bill’s enactment.<br />
Upon completion of the study, which<br />
will help guide regulators in cementing the<br />
final details of the Volcker Rule, financial<br />
supervisory agencies will have nine months<br />
to implement the rule’s final language.<br />
The rule will ultimately become effective<br />
either one year following that, or on July<br />
21, 2012 (two years after Dodd-Frank was<br />
first enacted), whichever date comes first.<br />
Banks may be slightly comforted by<br />
provisions which allow for a comfortable<br />
lapse-time to sell or unwind assets should<br />
the 3 percent threshold be breached. Up<br />
to five years could be provided to banks<br />
to reach full compliance with the rule<br />
following its implementation, with the<br />
Federal Reserve Board authorized to grant<br />
further extensions in select circumstances.<br />
A number of banks have already started to<br />
unwind their private equity activities either<br />
by spinning out captive teams or selling off<br />
portfolios of fund interests. Most notably, in<br />
August a group of Bank of America private<br />
equity professionals spun out to launch<br />
independent firm Ridgemont Equity<br />
Partners; and in December the management<br />
buyout of HSBC Private Equity (Asia) was<br />
completed, reemerging as Headland Capital<br />
Partners.<br />
Better news for banks may come in 2011.<br />
With Republicans taking over the House of<br />
Representatives in 2011, they will wield<br />
increasing influence as details of the rule are<br />
drafted in the months to come. ■
This announcement appears as a matter of record only<br />
Rockland Power Partners, L.P.<br />
$333,000,000<br />
North American Power Asset Investments<br />
December <strong>2010</strong><br />
www.rocklandcapital.com<br />
The undersigned acted as exclusive global placement agent<br />
for the limited partnership interests<br />
www.berchwoodpartners.com
page 14 private equity annual review <strong>2010</strong><br />
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s e c o n d a r y b u yo u t s<br />
Parcel passing<br />
Montagu was one of the most active firms on the sell-side of secondary buyouts,<br />
which dominated the <strong>2010</strong> deal landscape<br />
Passing the parcel: secondary deals flourished in <strong>2010</strong><br />
Montagu Private Equity in March sold medical technology business<br />
Sebia to Cinven in a deal understood to be worth roughly €800<br />
million. The transaction ended a long and hotly contested auction<br />
process, which ultimately earned Montagu a return of three times<br />
its invested capital.<br />
It also marked the third major asset sale by Monagu to a private<br />
equity buyer in as many months, having previously sold safety<br />
equipment manufacturer Survitec to Warburg Pincus for £280<br />
million and sausage casing manufacturer Kalle to Silverfleet Capital<br />
for €213 million.<br />
Montagu was not alone in selling assets to fellow GPs: in the first<br />
nine months of <strong>2010</strong> in the UK, for example, secondary buyouts<br />
accounted for nearly half (44 percent) of total buyout activity, with<br />
firms trading £5.5 billion-worth of investments between themselves,<br />
according to the Centre for Management Buy-out Research.<br />
Referred to as “pass-the-parcel” deals because they involve assets<br />
being passed from one financial sponsor to another, secondary<br />
buyouts have drawn criticism from limited partners and other market<br />
participants who argue the deals are often struck at high prices and<br />
provide little scope for further value creation. In some instances LPs<br />
find themselves indirectly owning the same asset, which has been<br />
passed between two of its GPs with all the associated transaction costs.<br />
Guy Hands, chief investment officer of Terra Firma, is one GP<br />
that has repeatedly criticised the practice. “Pass-the-parcel deals<br />
take substantial value away from LPs – I estimate approximately<br />
20 to 30 percent of equity each time,” Hands told delegates at a<br />
conference in November. “And if private equity increasingly goes this<br />
route, then it has only itself to blame when governments, unions,<br />
employees and eventually investors don’t support it.”<br />
The criticisms, however, may be unjustified, according to<br />
research produced in late <strong>2010</strong> by the Technische Universtät<br />
Mücnhen in conjunction with Munich-based fund of funds Golding<br />
Capital Partners. The study found that secondary buyouts have<br />
historically generated only marginally lower returns than primary<br />
buyouts. An analysis of 286 realised transactions from Golding’s deal<br />
database revealed that secondary buyouts had generated a median<br />
IRR of 31.9 percent, compared with 37.9 percent generated by<br />
primary investments.<br />
The difference in returns can largely be put down to the fact<br />
that secondary deals are on average larger in size than primary<br />
buyouts, and returns are inversely correlated to deal size, said<br />
the report. The study also concluded there is “little difference”<br />
in the levers for operational value creation between primary and<br />
secondary transactions. ■<br />
Goldman takes top rank in <strong>PEI</strong> 300<br />
The investment bank’s in-house group<br />
had the largest direct private equity<br />
investment programme in the world<br />
In Spring <strong>PEI</strong> revealed that private equity’s “silent<br />
giant”, Goldman Sachs’ Principal Investment Area,<br />
had catapulted to the No. 1 spot on the <strong>PEI</strong> 300,<br />
<strong>PEI</strong>’s annual proprietary ranking of private equity<br />
direct-investment programmes.<br />
The Wall Street behemoth raised nearly $55<br />
GS headquarters: towering<br />
above competition<br />
billion for direct private equity investment over<br />
the past five years, up from the $49 billion that<br />
earned Goldman the No. 2 spot on 2009’s list.<br />
The firm’s figures have remained high in part<br />
due to the impressive $13 billion it raised for its<br />
fifth mezzanine fund (a strategy that is counted<br />
in the <strong>PEI</strong> 300 methodology). And, unlike some<br />
other firms that raised large buyout funds in<br />
2007, Goldman has not downsized its $20.3<br />
billion GS Capital Partners VI, which is silently<br />
active all over the planet. ■
page 16 private equity annual review <strong>2010</strong><br />
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i n d u s t r i a l re l a t i o n s<br />
Hugo Boss face-off<br />
Permira found itself at odds with some of its LPs after its portfolio company, Hugo Boss,<br />
announced a plant closure in Ohio<br />
Permira caused quite a stir with some of its limited partners<br />
when its portfolio company, Hugo Boss, announced plans<br />
to close a plant in Ohio, which would have put hundreds<br />
of jobs in jeopardy. The company’s management said it had<br />
tried to find ways to increase profitability at the plant, but<br />
after talks broke down with its production workers union,<br />
the company decided to shutter the plant.<br />
The decision was one of economics, but it quickly<br />
became political.<br />
The Ohio Public Employees’ Retirement System bypassed<br />
the Hugo Boss management and sent a letter directly to<br />
Permira, calling into question its relationship with the firm.<br />
OPERS had invested €110 million with the buyout shop.<br />
OPERS also expressed concern about the performance<br />
of Permira’s most recent fund – Fund IV – which closed<br />
in 2006 and was producing a -36.6 percent internal rate of return as<br />
of 30 September 2009, 60x multiple, according to performance data<br />
from the California Public Employees’ Retirement System. Permira’s<br />
funds were written up 31 percent by the end of <strong>2010</strong>, however,<br />
compared to 2009 figures.<br />
In what became a tough two months for Permira, some of<br />
the firm’s other LPs joined OPERS in expressing their concerns.<br />
CalPERS and the Pennsylvania State Employees’ Retirement System<br />
both sent letters to the firm.<br />
“Hugo Boss’s plan is problematic on many levels. Not only would<br />
it cost hundreds of jobs in a neighbouring state – therefore affecting a<br />
regional economy already hard hit by the recession – it implicates PA<br />
SERS, since PA SERS has invested in the partnership whose portfolio<br />
company is planning to close the plant,” wrote Robert McCord, a<br />
Hugo Boss: cutting its cloth<br />
member of the PA SERS board, at the time.<br />
Throughout the ordeal, Permira focused its attention on keeping<br />
communication channels with its investors open.<br />
Hugo Boss stressed it had done everything possible to keep the<br />
plant open and make the facility competitive. “And when that effort<br />
failed, we acted in the best interests of shareholders and customers<br />
by deciding to close the facility,” the company said.<br />
Hugo Boss eventually chose to reengage with the union, stressing<br />
that its decision to re-negotiate stemmed from contact it had with<br />
the National Labor Relations Board, which encouraged the firm<br />
to re-enter talks.<br />
After 12 months of dialogue between Hugo Boss management<br />
and the union, the two sides reached a solution that has allowed<br />
the plant to continue life in Ohio with changes to its benefits and<br />
remuneration packages. ■<br />
Expanding PEC<br />
An industry lobbying group<br />
formerly called the Private<br />
Equity Council, now known<br />
as the Private Equity Growth<br />
Capital Council, threw open<br />
its membership to include<br />
mid-market firms<br />
Private equity lobbying organisation the Private<br />
Equity Council, which launched in 2007<br />
with 11 mega-firm backers, announced a big<br />
move to expand and invite more mid-sized<br />
firms into the fold.<br />
The group had decided to make an effort<br />
to better portray the asset class to lawmakers<br />
as a diverse collection of business-builders and<br />
entrepreneurs, PEC’s president Doug Lowenstein<br />
told <strong>PEI</strong> at the time. PEC has since changed its<br />
name to the Private Equity Growth Capital<br />
Council to better reflect its wider membership.<br />
By opening its door to more members, the<br />
PEC was acknowledging that its profile as a<br />
collection of the most powerful private equity<br />
firms often presented obstacles when dealing<br />
with a Congress that was in no mood to be seen<br />
as doing favours for Wall Street.<br />
A more diverse organisation that included, for<br />
example, women-owned and ethnic minorityowned<br />
private equity firms would allow the PEC<br />
to more compellingly argue that private equity’s<br />
impact on the US economy was both broad and<br />
positive. ■
page 18 private equity annual review <strong>2010</strong><br />
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p l a c e m e n t a g e n t s c a n d a l<br />
Messing with the middlemen<br />
After an investigation into ‘pay-to-play’ activity was undertaken in New York,<br />
California’s state attorney general Jerry Brown took action on the West Coast<br />
As part of a wide-ranging investigation, California<br />
came out hard against placement agent Alfred Villalobos<br />
in May, filing a civil fraud suit against him,<br />
his company ARVCO Capital and former CalP-<br />
ERS chief executive officer Federico Buenrostro.<br />
State Attorney General Edmund Brown<br />
alleged that Villalobos “attempted to bribe”,<br />
the head of CalPERS alternative investment<br />
programme, Leon Shahinian, who had been<br />
placed on administrative leave. Shahinian no<br />
longer works for the pension.<br />
Brown: turning the heat up on ARVCO<br />
Former New York State Comptroller,<br />
Alan Hevesi, who oversaw the state’s<br />
massive public pension system, pleaded<br />
guilty to accepting nearly $1 million in<br />
exchange for approving a $250 million<br />
commitment to Markstone Capital<br />
Partners, an investment firm based in<br />
California.<br />
While Villalobos fights in California,<br />
placement agents in the US have been<br />
faced with a barrage of regulations in<br />
“Working as a placement agent for ARVCO, Villalobos spent tens of<br />
thousands of dollars to lavishly entertain key senior executives at CalPERS,<br />
who then influenced the board to authorise investments that generated<br />
over $40 million in commission to Villalobos,” Brown said in a statement.<br />
Villalobos denied the accusations. He eventually filed for bankruptcy<br />
and the case against him is pending in state court.<br />
The lawsuit led to CalPERS reviewing its relationship with Apollo<br />
Global Management, which used Villalobos to help raise money from the<br />
pension, even though CalPERS holds an ownership stake in the Apollo.<br />
The California lawsuit came after a vigorous investigation in New<br />
York exposed wide-ranging pension “pay-to-play” activities, in which<br />
investment firms paid sham finder’s fees in exchange for commitments<br />
from the New York State Common Retirement Fund.<br />
The New York investigation eventually uncovered connections to<br />
New Mexico’s state pension systems, and eventually connections to<br />
California firms.<br />
the wake of the various scandals.<br />
US regulators, both state and federal, latched onto the scandal<br />
and proposed various rules they said would prevent similar payto-play<br />
activities in the future. The SEC for a brief time considered<br />
enacting a nationwide law that would have banned placement agents<br />
from interacting with public pensions on behalf of investment firms.<br />
That rule never happened, but the SEC did eventually pass a rule<br />
forcing all placement agents to register with the SEC. California<br />
also considered a rule that would force placement agents wanting<br />
to work with pensions in the state to register as lobbyists.<br />
The state assembly eventually passed a law that ends payments for<br />
successful fundraisings. Placement agents under the law are instead<br />
paid flat fees up front, as are lobbyists. Agents also are subject to<br />
stricter disclosure requirements.<br />
The scandal also prompted US institutions like CalPERS to revise<br />
disclosure policies for third-party marketers. ■<br />
Apax debuts in Brazil with $1bn deal<br />
Apax joined a host of private equity firms that struck deals<br />
as part of a hot M&A surge in the country in <strong>2010</strong><br />
Apax Partners inked its debut Brazil deal,<br />
agreeing to acquire a 54 percent stake in<br />
Tivit, an integrated IT and BPO services<br />
company, for about $1 billion.<br />
Apax’s entrance into Brazil came at a<br />
time when private equity firms everywhere<br />
were looking for ways to get exposure to the<br />
country, either through deals, fundraisings or<br />
even picking up stakes in native Brazilian firms.<br />
The Carlyle Group started the year off<br />
with its debut Brazil deal, committing $250<br />
million for a 63.6 percent stake in CVC<br />
Brasil Operadore e Agencia de Viagens,<br />
an operator of tours and travel services in<br />
Brazil and throughout Latin America.<br />
DLJ South American Partners, which<br />
closed its debut fund in 2008 on $300<br />
million, got in on the act and led an investor<br />
group that committed $370 million for a<br />
25 percent stake in Grupo Santillana de<br />
Ediciones, which publishes educational text<br />
books in Latin America and Spain.<br />
First Reserve found an energy-related<br />
opportunity in the country, investing $500<br />
million in Barra Energia, an independent<br />
exploration and production company.<br />
Not to be outdone, The Blackstone<br />
Group chose to ramp up its presence in<br />
Brazil this year by taking a 40 percent stake<br />
in Sao Paulo-based Patria Investments, one<br />
of Brazil’s largest asset managers. ■
This announcement appears as a matter of record only.<br />
is pleased to announce the closing of<br />
Southern Cross Latin America Private Equity Fund IV, L.P.<br />
A Value-Oriented Buyout Fund Focused on<br />
Operational and Strategic Management<br />
$1,681,013,000<br />
Limited Partnership Interests<br />
The undersigned acted as financial advisor and<br />
placement agent for the limited partnership interests.<br />
www.stanwichadvisors.com
page 20 private equity annual review <strong>2010</strong><br />
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Leaving lobbyists<br />
As debate around the AIFM directive drew toward<br />
a conclusion, two prominent trade body members<br />
decided to step down from their posts<br />
Two years of rugged debate over the European<br />
Union Directive on Alternative Investment<br />
Fund Managers had the unintended consequence<br />
of transforming the European Private<br />
Equity and Venture Capital Association into a<br />
unified lobbying force for the industry.<br />
In June, the association’s long-time<br />
secretary general Javier Echarri said he would<br />
step down from his post before the end of<br />
the year. Echarri had been at the helm of the<br />
organisation since 2000.<br />
In a letter to contacts, he said the<br />
organisation had not achieved “everything<br />
that we set out to gain” in lobbying on the<br />
AIFM directive, but that it had “succeeded in<br />
having many of the most egregious proposals<br />
excluded”. He also praised 3i Group’s<br />
Jonathan Russell and Apax Partners’ Richard<br />
Wilson – two former chairman of EVCA –<br />
for “pulling the whole industry together to<br />
speak with a single voice over the past three<br />
years”. Echarri’s replacement would be<br />
unveiled later in the year as Dörte Höppner,<br />
the then head of the German private equity<br />
association BVK.<br />
Also in June, Wilson vacated the EVCA<br />
chair, making way for Uli Fricke, cofounder<br />
Echarri (left) and Höppner: EVCA’s changing<br />
guard<br />
and chief executive officer of the Triangle<br />
Group. An incoming Fricke said the AIFM<br />
poses ongoing challenges to the industry as a<br />
whole, but that EVCA was also looking ahead<br />
to tackle other issues on the table such as<br />
Solvency II, which could limit flexibility of LP<br />
investments in certain private equity funds.<br />
Later on in the year it would emerge<br />
that a replacement was being sought for<br />
Simon Walker, chief executive of the British<br />
Private Equity & Venture Capital Association.<br />
Walker, who has consistently worked to dispel<br />
criticism of the industry in the UK, indicated<br />
that he would be stepping down at some point<br />
in 2011. He was replaced by former Doughty<br />
Hanson pricipal Mark Florman ■<br />
Dubai’s private<br />
equity retrench<br />
DIC’s woes prompted a<br />
parental takeover<br />
Dubai’s private equity retrench may be<br />
far from over. In mid-December 2009<br />
Dubai International Capital, the private<br />
equity investment arm of Dubai Holding,<br />
was in earnest talks to negotiate the<br />
refinancing of $2.6 billion in debt, half of<br />
which matured at the end of November.<br />
In June <strong>2010</strong>, it emerged that DIC was<br />
effectively rudderless following the dissolution<br />
of its board and the exit of the<br />
board’s non-executive chair, Sameer Al<br />
Ansari of SHUAA Capital. The changes<br />
put DIC under the direct control of its<br />
parent group Dubai Holding, which is currently<br />
looking to restructure $12 billion<br />
in debt of its own.<br />
By December the situation had eased<br />
for the private equity unit. A committee<br />
negotiating on the behalf of its lenders,<br />
which together holds 67 percent of the<br />
debt value, recommended the wider<br />
lending group accept a debt extension<br />
plan for up to 6 years, with $2 billion<br />
of the loans to receive a 2 percent cash<br />
interest coupon in exchange. ■<br />
Dual deals renew PAI<br />
A long-standing name in European private equity returned to action<br />
In a signal that the “shake out” of the private<br />
equity industry may not be as severe as once<br />
thought, PAI Partners, a firm considered to<br />
be on the verge of implosion during 2009,<br />
returned to deal mode with a deal double. A<br />
spokesman for the firm described it as a return<br />
to “business as usual”, as the firm agreed to<br />
buy a majority stake in Cerba, a Franceheadquartered<br />
clinical laboratory business<br />
currently owned by IK Investment Partners,<br />
another European private equity firm.<br />
The investment in Cerba was inked just<br />
a week after the IPO of CHR Hansen, a<br />
biosciences firm PAI took private in a 2005<br />
deal that valued it at around €1.1 billion. The<br />
IPO raised proceeds of DKK3.2 billion (€430<br />
million; $513 million) for the company and<br />
gave the business a market capitalisation of<br />
DKK 12.4 billion. PAI retained a stake of<br />
59.6 percent.<br />
The return to the business of making and<br />
exiting investments follow a turbulent year<br />
for the firm. The shock departure of chief<br />
executive Dominique Megrét in September,<br />
and his replacement with Lionel Zinsou, led<br />
to a protracted period of negotiation – during<br />
which the fund’s investment period was<br />
suspended – while LPs debated what should<br />
become of the €5.35 billion fund. Ultimately<br />
the fund had been slashed to €2.7 billion. ■
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page 22 private equity annual review <strong>2010</strong><br />
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s e c o n d a r i e s<br />
Going to the bank<br />
A pair of over-sized secondary transactions illustrated<br />
a trend of banks withdrawing from the asset class<br />
Bank of America: backing away<br />
from private equity<br />
The sale of private equity portfolios by banks hoping to<br />
relieve financial and political pressure was a significant<br />
theme in <strong>2010</strong> and two of the year’s most significant<br />
emerged in July.<br />
In Europe Lloyds Banking Group offloaded a majority<br />
stake in the 40 private equity assets it inherited when it<br />
subsumed Bank of Scotland’s Integrated Finance unit in<br />
2008. The spin-off was rebranded as Cavendish Square<br />
Partners, a joint venture 70 percent owned by secondaries<br />
firm Coller Capital and 30 percent owned by Lloyds..<br />
Coller won an auction process for the assets, beating out<br />
competition from Bridgepoint, 3i Group and Lexington Partners.<br />
Coller paid £332 million (€401 million; $502 million) for its stake in the joint venture, valuing<br />
the portfolio as a whole at approximately £480 million. This represented a “small premium to<br />
current book value” according to a press release at the time. Coller and Lloyds, which retained<br />
the remaining 30 percent, kept the existing BOSIF management team, led by Graeme Shankland,<br />
on to manage the portfolio.<br />
On the other side of the Atlantic, Bank of America was also working to reduce its private equity<br />
exposure. Bank of America sold $1.2 billion in commitments it had to Warburg Pincus-managed<br />
funds. Portions of Bank of America’s assets sold went to the China Investment Corp, which was<br />
seeking to build up its private equity book, and Lexington Partners. The July deal followed the<br />
sale of $1.9 billion of Bank of America’s private equity assets to France’s AXA Private Equity,<br />
which earlier in year itself had picked up a portfolio of private equity assets from French bank<br />
Natixis valued at €534 million.<br />
In a move also prompted by balance-book reshuffling, HSBC announced that it was actively<br />
considering management buyout offers for its various in-house private equity operations. Though<br />
much of the secondaries volume was tied to bank activity, wider market forces played a part in<br />
stirring activity. The chasm between bid-ask prices seen in 2009 began to narrow. As the second<br />
half of <strong>2010</strong> got underway, industry insiders were estimating annual secondary transactions would<br />
weigh in at a cumulative $20 billion to $30 billion, up from an estimated $10 billion seen in 2009. ■<br />
Think tank trouble<br />
Coverage of a negative<br />
report on private equity fired<br />
up a heated debate<br />
Apax Partners inked its debut Brazil deal,<br />
agreeing to acquire a 54 percent stake in Tivit,<br />
an integrated IT and BPO services company,<br />
for about $1 billion.<br />
Apax’s entrance into Brazil came at a<br />
time when private equity firms everywhere<br />
were looking for ways to get exposure to the<br />
country, either through deals, fundraisings or<br />
even picking up stakes in native Brazilian firms.<br />
The Carlyle Group started the year off<br />
with its debut Brazil deal, committing $250<br />
million for a 63.6 percent stake in CVC Brasil<br />
Operadore e Agencia de Viagens, an operator<br />
of tours and travel services in Brazil and<br />
throughout Latin America.<br />
DLJ South American Partners, which<br />
closed its debut fund in 2008 on $300 million,<br />
got in on the act and led an investor group<br />
that committed $370 million for a 25 percent<br />
stake in Grupo Santillana de Ediciones, which<br />
publishes educational text books in Latin<br />
America and Spain.<br />
First Reserve found an energy-related<br />
opportunity in the country, investing $500<br />
million in Barra Energia, an independent<br />
exploration and production company.<br />
Not to be outdone, The Blackstone Group<br />
chose to ramp up its presence in Brazil this<br />
year by taking a 40 percent stake in Sao Paulobased<br />
Patria Investments, one of Brazil’s<br />
largest asset managers. ■<br />
Registration, compliance looms large<br />
SEC registration became a reality for private equity funds<br />
After months of debate, the US Senate passed a version of the financial<br />
reform bill that would force private equity firms with more than $150<br />
million in assets to register with the US Securities and Exchange Commission<br />
by 21 July 2011. While venture capital firms escaped registration<br />
requirements, the legislative changes signed into law by President Barrack<br />
Obama required private equity firms to designate a compliance officer<br />
and face regular SEC inspections, as is already the case for US hedge<br />
funds. Foreign funds with more than 15 US-based limited partners also<br />
must register as an investment advisor with the SEC. It’s worth noting<br />
that even prior to passage of the legislation, the SEC had already formed<br />
an Asset Management Unit, charged with overseeing compliance for<br />
private equity funds and other alternative investments. ■
This announcement appears as a matter of record only<br />
AIRLINE CREDIT OPPORTUNITIES II<br />
U.S. $604,750,000<br />
Limited Partnership and Limited Liability Company formed to make<br />
investments in asset and credit opportunities in the global airline industry<br />
Placement of the Limited Partnership and membership interests were exclusively arranged by<br />
Member of FINRA and SIPC<br />
November <strong>2010</strong><br />
Spotlight Africa<br />
In July, Africa-focused private equity outfit Emerging Capital Partners demonstrated the<br />
‘forgotten continent’ of Africa is anything but<br />
While GPs in more developed markets came to<br />
terms with a tighter fundraising environment,<br />
certain African firms had a more positive experience<br />
and even managed to set some records.<br />
Washington DC-based Emerging Capital<br />
Partners secured $613 million in commitments<br />
for its Africa Fund III, closing it in July. It was<br />
the single largest Africa-focused private equity<br />
fund raised to date. While the fund fell short<br />
of its original $1 billion target, the final figure<br />
eclipsed the group’s prior vehicle which closed<br />
on $523 million during a bustling 2007.<br />
A look at the fund’s limited partner roster revealed a mix<br />
of development finance institutions and more recently added<br />
commercially-focused private and institutional investors.<br />
Returning LPs committed $450 million of the fund’s total<br />
committed capital. These included the African Development<br />
Bank, the International Finance Corporation, OPIC and CDC—<br />
the UK government-backed development finance institution. The<br />
remainder of the fund received commitment from new investors,<br />
including pan-African fund of funds manager, South Suez.<br />
Africa: fundraising success<br />
Earlier on in the year another Pan Africafocused<br />
private equity firm, Kingdom Zephyr<br />
Africa Management, had set the benchmark<br />
for African private equity high, when it<br />
closed its second fund narrowly short of its<br />
$500 million target. Development finance<br />
institutions such as the European Investment<br />
Bank, FMO (Netherlands Development<br />
Finance Company), and the Development Bank<br />
of Southern Africa committed cash, as well<br />
as the aforementioned African Development<br />
Bank and IFC. The fundraise represented a huge<br />
step up for Kingdom Zephyr. The firm had previously raised a<br />
$122.5 million fund in 2003.<br />
A total of $11 billion was raised for emerging markets private<br />
equity in the first half of <strong>2010</strong>, representing an increase of 22<br />
percent on the same period of 2009, according to the Emerging<br />
Markets Private Equity Association. A significant increase in<br />
the total amount raised for African and Latin American funds<br />
contributed to the <strong>2010</strong> half-year totals; with both regions<br />
already able to exceed their full 2009 stats, said the EMPEA. ■
page 24 private equity annual review <strong>2010</strong><br />
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l p a p p e t i t e<br />
Quality vs. quantity<br />
A number of large LPs announced they would reduce<br />
their GP base to improve performance<br />
CalSTRS: eyes open to<br />
‘less traditional opportunities’<br />
The California State Teachers’ Retirement System took proactive<br />
measures to manage its private equity portfolio in August<br />
by cutting out underperforming managers and keeping its eyes<br />
open for “new and potentially less traditional” opportunities.<br />
The pension said it had “entered a period in which there<br />
will be a net reduction in the number of its active general<br />
partner relationships,” according to board documents. “Staff<br />
is redoubling its efforts to monitor its existing partnerships<br />
and detect those heading in errant directions.”<br />
CalSTRS was not the only large limited partner who saw<br />
value in fewer, better managers. In August, Credit Suisse,<br />
which received a $150 million mandate for private equity<br />
investing from The San Diego City Employees’ Retirement<br />
System in 2009, said in a report that “one of the guiding<br />
principles of [San Diego’s] programme will be to invest in<br />
fewer better managers”.<br />
Harvard University’s $27.4 billion endowment also<br />
announced over the summer that it would continue to reduce its private equity relationships.<br />
“The field of private equity has become more and more crowded – with capital, with<br />
managers and with investors – over the last decade,” said Jane Mendillo, president and chief<br />
executive officer of the Harvard Management Company. “Our expectations for this asset<br />
class are that returns will be more muted going forward, and we are even more committed<br />
to holding our fire for the best-in-class opportunities.” Her comments were published in<br />
one of the endowment’s fiscal <strong>2010</strong> performance reports.<br />
“We will continue to have a meaningful level of exposure to this asset class over the long<br />
term … but we anticipate that the number of active relationships within our private equity<br />
and venture capital portfolio will be reduced, while the concentration will be increased in<br />
our highest conviction managers.” ■<br />
Cashing out<br />
The Royal Bank of Scotland<br />
unloaded a number of noncore<br />
businesses after being<br />
forced to dispose of assets<br />
by the European Union<br />
After receiving a total £45.5 billion (€53.6<br />
billion; $71.5 billion) in government bailout<br />
funds – the largest bailout of any bank<br />
worldwide – the Royal Bank of Scotland<br />
was forced by European Union regulators<br />
to sell off a number of assets, which it<br />
did in August to the tune of roughly £3.2<br />
billion.<br />
The bulk of that sum came from the sale<br />
of RBS WorldPay, its card payment subsidiary<br />
business, to Advent International and Bain<br />
Capital for an enterprise value of more than<br />
£2 billion.<br />
Government-owned RBS retained a<br />
minority stake of 19.9 percent in WorldPay,<br />
with Advent and Bain evenly splitting the<br />
remainder. Approximately £299 million<br />
of mezzanine finance was provided by a<br />
consortium of lenders comprising Kohlberg<br />
Kravis Roberts’ KKR Asset Management,<br />
mezzanine specialist TCW/Crescent<br />
Mezzanine and Bain Capital affiliate Sankaty<br />
Advisors.<br />
Within two weeks of selling off WorldPay,<br />
RBS sold a portfolio of leveraged loans to<br />
Intermediate Capital Group for £1.2 billion.<br />
It went on to sell mental health and rehab<br />
clinic group Priory to Advent in January. ■<br />
Dwindling debt<br />
The sale of a Spanish toll road operator to CVC<br />
Capital Partners started as a €12bn LBO before<br />
shrinking to a €1.7bn transaction<br />
One of the summer’s hottest private equity infrastructure deals closed<br />
in August when Spanish infrastructure group ACS sold part of its stake<br />
in toll road operator Abertis to CVC Capital Partners for €1.7 billion.<br />
The transaction had originally been conceived as a €12 billion<br />
leveraged buyout involving Abertis’ main shareholders – La Caixa and<br />
ACS – and CVC, with €8 billion of bank debt and €4 billion in equity<br />
from the consortium members.<br />
Mediobanca found it difficult to get banks to commit financing,<br />
however, in part because of their reticence to being exposed to the<br />
troubled Spanish economy, diminishing the original debt package down<br />
to just over € 5 billion. In the end, even that amount proved troublesome,<br />
prompting the deal to steadily mutate from a three-way leveraged buyout<br />
to a stake sale from ACS to CVC.<br />
At the height of the transaction, between 14 and 20 banks were<br />
said to be looking at the deal, which was ultimately closed by a<br />
four-bank syndicate. ■
private equity annual review <strong>2010</strong> pa g e 25<br />
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g f c c a s u a lt y n o . 1<br />
R.I.P GSC<br />
Alfred Eckert’s debt-focused firm was one of the most<br />
significant casualties during <strong>2010</strong><br />
GSC Group, once a bright star in the private<br />
debt universe, filed for bankruptcy in<br />
September, citing a “lack of liquidity in the<br />
credit markets”, “declining asset values” and<br />
a “deterioration in investor relations”.<br />
The firm, co-founded in 1994 by Alfred<br />
Eckert and former Blackstone Group<br />
managing director Keith Abell as a subsidiary<br />
of Travelers Group, said in bankruptcy<br />
documents it had about $8.4 billion in<br />
assets under management as of 31 March,<br />
<strong>2010</strong>, down from its peak of $28 billion.<br />
The firm was originally called Greenwich<br />
Street Capital Partners and changed to GSC<br />
Eckert: moving on to Black Diamond in 1999.<br />
In the downturn of the credit markets in 2008, the firm’s funds, including those related<br />
to distressed debt, US and European corporate debt, European mezzanine and US assetbacked<br />
securities CDOs, struggled, and GSC resigned as the manager of certain funds<br />
while opting for early termination of others.<br />
Limited partners in GSC funds included pensions in New York City, the Pennsylvania<br />
Public School Employees’ Retirement System, College of Holy Cross and the New Mexico<br />
State Investment Council.<br />
One of the last funds raised by GSC was a European collateralised debt obligation fund,<br />
which closed on €300 million in 2007. GSC European CDO V targeted 90 percent senior<br />
and 10 percent subordinated debt and invested primarily in private equity-backed deals.<br />
GSO also raised at least 11 CDO funds for the US.<br />
Several executives left GSC during its final years of existence, including senior managing<br />
director Christine Vanden Beukel, who ended her 10-year career leading GSC’s European<br />
mezzanine business and re-surfaced at Clayton Dubilier & Rice in 2009.<br />
In November, Black Diamond Capital Management won a bankruptcy auction for<br />
“substantially all” of the assets of GSC Group with a bid of $235 million.<br />
The firm has acquired a slew of funds that cover a variety of debt strategies, including<br />
mezzanine, collateralised debt obligations and distressed investments. The combined assets<br />
have about $8 billion of assets under management.<br />
GSC founder Alfred Eckert joined Black Diamond as a strategic advisor and GSC’s<br />
president, Peter Frank, joined as senior managing director.<br />
The bell tolled for another former heavyweight of the alternative asset management<br />
world in September: buyout group Candover was forced to throw in the towel, continuing<br />
life only as a realisation vehicle, winding up its portfolio and returning cash to investors<br />
(see p.32 for the story in full). ■<br />
Summer makeover<br />
3i revealed a new shape,<br />
with the merger of two<br />
departments and a<br />
management reshuffle<br />
3i Group announced in September that it<br />
was merging its buyout and growth capital<br />
divisions into one consolidated private equity<br />
division, giving the firm two distinct business<br />
lines: infrastructure and private equity.<br />
Chief executive officer Michael Queen<br />
said the move to consolidate into one private<br />
equity division was the logical step given 3i’s<br />
regional strength and focus, as well as the fact<br />
that both teams had already been working<br />
together closely for some time.<br />
Leadership of the private equity business<br />
is shared between four managing partners<br />
with different geographical remits. Guy<br />
Zarzavatdjian, formerly head of growth capital,<br />
has taken charge of France, Spain and Italy.<br />
Bob Stefanowski continues to head up North<br />
America and Asia, while Alan Giddins runs UK<br />
private equity and BeNeLux head Menno Antal<br />
now covers Germany and the Nordic region.<br />
3i’s restructuring saw the departure of<br />
veteran of 24 years and head of buyouts for<br />
11 years, Jonathan Russell. Russell had been<br />
part of the firm’s management committee<br />
since 1999 and also spent a year as chairman<br />
of the European Private Equity and Venture<br />
Capital Association.<br />
Russell’s departure followed that of the<br />
firm’s head of buyouts for Asia earlier in the<br />
summer. David Osborne, who had been with<br />
the firm for 25 years, left the Singapore office<br />
to join infrastructure investment business<br />
CapAsia. At the time the firm said its Asian<br />
operations were predominantly focused on<br />
growth capital rather than buyouts.<br />
3i also revealed it had been exploring the<br />
possibility of adding a third product line, a<br />
separate debt management business. Weeks<br />
later the firm made good on this suggestion<br />
and unveiled the acquisition of Mizuho<br />
Investment Management from Japanese<br />
headquartered Mizuho Corporate Bank,<br />
instantly giving the group a £4 billion debt<br />
management division. ■
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t e r r a f i r m a v. c i t i<br />
Battle commences<br />
The private equity trial of the century kicked off when Guy Hands took Citi to court<br />
over its soured EMI investment<br />
Guy Hands with wife Julia: taking it to court<br />
<strong>2010</strong>’s greatest private equity sideshow was undoubtedly Guy Hands’<br />
and Terra Firma’s epic lawsuit against Citi. In October the eagerly<br />
anticipated trial kicked off in New York to determine whether Citi<br />
owed Terra Firma Capital Partners up to £7 billion (€8.3 billion; $11<br />
billion) for tricking it into overpaying for music publisher EMI.<br />
Citi was motivated to intentionally mislead Terra Firma about<br />
the then ongoing auction for EMI, withholding the fact that the<br />
last bidder, Cerberus Capital Management, had dropped out,<br />
argued David Boies, attorney for Terra Firma Capital Partners,<br />
in opening remarks. Citi’s so-called “busted auction” could mean<br />
the loss of “hundreds of millions of pounds”, Boies contended.<br />
Citi’s attorney, Theodore Wells, countered that the<br />
struggling state of EMI caused Guy Hands to look for a<br />
scapegoat to blame for the investment. Wells would paint Hands<br />
actions as saying “oh, it’s not my fault” only upon realizing the<br />
EMI investment was going sour.<br />
As the trial progressed throughout the month, spectators<br />
were made party to a number of personal details about the<br />
charismatic Hands: revealing a penchant for chocolate biscuits,<br />
a mistrust of the Financial Times and the fact he has between<br />
60 and 70 percent of his own wealth – almost £100 million<br />
– tied up in EMI. Later in November, after just four hours of<br />
deliberation, the jury ruled in favour of Citi.The bank went<br />
on to seize EMI in January. ■<br />
Europe stays open for business<br />
A dueling EU Parliament and Council put down<br />
their swords over language in the pending<br />
AIFM directive<br />
It took over a year and a half, but in October<br />
the European government finally found<br />
a way to reach agreement on language over<br />
the long-anticipated Alternative Investment<br />
Fund Manager directive. Until then, discussions<br />
had been deadlocked between the EU<br />
Parliament – arguing for stricter regulation<br />
of fund managers – and the more GP-friendly<br />
EU Council.<br />
The hotly contested directive, formally<br />
passed by parliament in November, ushers<br />
in a wave of regulations over Europe’s private equity industry. The<br />
210 page text will impose new rules on general partners’ pay, fund<br />
transparency and restrictions on “asset stripping”. Most notably,<br />
however, there was no outright ban on non-EU firms marketing<br />
their funds to the 27-member bloc as had been feared.<br />
Non-EU managers are permitted access to European investors<br />
under the condition their own country has in place sufficient<br />
regulatory standards and information sharing agreements with<br />
member states.<br />
Under the system, two years<br />
after the directive becomes fully<br />
implemented by EU member<br />
states into national law (sometime<br />
in early 2013), EU fund managers<br />
can be granted a passport, which<br />
would allow them to be market to<br />
professional investors across all EU<br />
member states. Non-EU firms will be<br />
able to obtain this passport sometime<br />
in early 2015, provided they are able<br />
to meet the directive’s requirements.<br />
The directive ultimately underwent 17 compromise proposals,<br />
the latest being in late October under the Belgian presidency of<br />
the EU Council, when EU finance ministers played their part in<br />
approving the negotiated text. ■<br />
EU legislators: able to find harmony in October
private equity annual review <strong>2010</strong> pa g e 27<br />
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Assault on the public markets<br />
p u b l i c - to - p r i vates<br />
Private equity firms with money to invest turned their attention to listed targets<br />
The prospect of a slew of publicto-private<br />
deals, in which private<br />
deal was the largest buyout agreed<br />
At $5.3 billion, the Del Monte<br />
equity firms delist publicly-traded<br />
in <strong>2010</strong>. The second and third largest<br />
companies, had been mooted<br />
buyouts agreed were also takeprivates:<br />
The Blackstone Group’s<br />
many times since the onset of<br />
the financial crisis, but only in<br />
proposed $4.8 billion acquisition<br />
November did the trend really<br />
of Dynergy, whose shareholders<br />
seem to gather momentum.<br />
ultimately rejected the offer, and the<br />
Some of the world’s largest<br />
$4.7 billion completed acquisition<br />
private equity firms shook hands<br />
of Tomkins in the UK by the Canada<br />
on take-private deals. The Carlyle<br />
Pension Plan Investment Board and<br />
Group kicked proceedings off in<br />
Onex Corp.<br />
late October with a deal double. In<br />
Since the onset of the financial<br />
Meow Mix: part of the Del Monte Foods stable<br />
one week the firm agreed to take likely to shift into private hands<br />
crisis there had been a number<br />
two communications businesses<br />
of market drivers which led<br />
– Syniverse Technologies and<br />
observers to predict a rush of<br />
Commscope – private for a combined total deal value of $6.5 public market acquisitions. Initially with stock market prices<br />
billion. In the same week in Europe, CVC Capital Partners and decimated, there seemed to be an opportunity for private equity<br />
Apollo Management gained approval from the board of Brit firms to swoop in. Then it became clear that listed corporates<br />
Insurance, a UK-listed financial services group, for the company would need to raise capital to refinance – and that there may not<br />
to be taken private for up to £888 million (€1 billion; $1.4 billion). be sufficient institutional appetite for a series of rights issues.<br />
US firms Thoma Bravo and TPG continued the trend through This would provide another driver for take-private deals.<br />
November. Thoma Bravo delisted computing services company As <strong>2010</strong> drew into the fourth quarter, it became clear that<br />
Novell for $2.2 billion and TPG teamed up with Leonard Green another set of circumstances could make take-privates a more<br />
Partners to delist clothing brand J. Crew for $3 billion. attractive option. Private equity firms increasingly needed to<br />
Finally in November, Kohlberg Kravis Roberts partnered make investments. Share prices had generally rebounded, so<br />
with two other firms – Vestar Capital Partners and Centerbridge institutions could more readily entertain offers. If the same<br />
Partners – to reacquaint itself with a familiar brand. The three institutions feared a “double-dip” recession threatened the share<br />
firms agreed to back a $5.3 billion take-private of Del Monte price in the short term, they may be even happier to cash out to<br />
Foods, a former member of the brand stable of RJR Nabisco. a private equity firm who can take a slightly longer-term view. ■<br />
Flying the nest<br />
Barclays’ private equity unit reshuffled the management deck ahead of its prospective spin-out<br />
The much vaunted spin-out of Barclays Private Equity – the midmarket<br />
private equity unit of Barclays Bank – took a major step<br />
forward in November as the firm told limited partners who would<br />
lead the firm when it spins out. The new head of the firm was not<br />
selected from the three existing co-heads and was not – as many<br />
expected – London-based.<br />
Guillaume Jacqueau, a 45-year-old veteran managing director from<br />
the French team, was named as the next managing partner and head of<br />
France, to come into effect when the firm finally executes the spin-out.<br />
This is due to happen when the team reaches a first close for its fourth<br />
fund, which is in pre-marketing stages with a target of €1.5 billion.<br />
Jacqueau has been with BPE since 1995 and previously had<br />
responsibility for co-managing the French investment team. He has led<br />
some of BPE’s most successful transactions, including Converteam, a<br />
power storage business which was partially exited in 2008 in a deal<br />
understood to have generated a 12x multiple and 170 percent IRR. ■
page 28 private equity annual review <strong>2010</strong><br />
s to r i e s o f t h e y e a r<br />
j a n | f e b | m a r | a p r | m a y | j u n e | j u ly | a u g | s e p | o c t | n o v | d e c<br />
g f c c a s u a lt y n o . 2<br />
Closure for Candover<br />
After a distressing two years of searching for options, London-listed Candover opted<br />
to spin off and wind down<br />
In what was set to become one of<br />
the highest-profile spin-outs of <strong>2010</strong>,<br />
Candover Investments revealed in<br />
early December that it would sell off<br />
its private equity management firm<br />
– Candover Partners – to the firm’s<br />
management in a secondaries transaction<br />
backed by Pantheon.<br />
Since 2008, Candover had battled<br />
against falling portfolio valuations, the<br />
loss of one of its largest investments<br />
in yacht-maker Ferretti and vast overcommitments<br />
by the listed parent<br />
company, Candover Investments, to Grimstone: bowing out<br />
funds run by Candover Partners.<br />
Funding problems at the highly geared parent company meant<br />
it could no longer honour a €1 billion commitment to Candover’s<br />
2008 fund. This ultimately led to the fund being disbanded and<br />
the vast majority of the €3 billion already raised being cancelled<br />
in late 2009.<br />
From this point on, the company grappled with the problem<br />
of how to move the company forward. It held talks with potential<br />
suitors, the most promising being with Canadian pension investor<br />
Alberta Investment Management Corporation (AIMCo). These<br />
talks, however, broke down in July. When Candover released its<br />
half-yearly report in September it said it would become a realisation<br />
vehicle and focus all its efforts on returning cash to investors.<br />
As part of the deal unveiled in December, fund of funds and<br />
secondaries investor Pantheon teamed up with the Candover<br />
Partners management team – who reformed under the name<br />
Arle Capital Partners – to buy the management company for a<br />
nominal fee.<br />
Pantheon and Arle would also acquire a “strip” of assets from the<br />
listed parent company for £60 million (€71 million; $94 million),<br />
Candover said in a statement. The “strip” comprised stakes in the<br />
13 existing portfolio companies under Candover’s management,<br />
or nearly a third (29.1 percent) of the listed parent’s investment<br />
portfolio. The price represented a discount of around 14.3 percent<br />
to the £70 million carrying value of the assets.<br />
The spin-out of Arle ensured “Candover’s portfolio continues<br />
to be managed by an experienced team who are focused on<br />
maximising returns”, the firm said in a statement.<br />
Ensuring the management team<br />
is sufficiently incentivised was<br />
“central to the discussions,” said Elly<br />
Livingstone, who heads up Pantheon’s<br />
secondaries activity. The management<br />
of Arle put up £4 million of the £60<br />
million price tag with the remainder<br />
accounted for by Pantheon. The<br />
management team, said Livingstone,<br />
would have “skin in the game”.<br />
The Arle team is now in a position<br />
to work towards the goal of raising<br />
another fund, although this is not part<br />
of current plans, said a spokesperson<br />
for the new firm.<br />
Livingstone described the deal as “a very significant transaction”<br />
for Pantheon, which in October closed its fourth global secondaries<br />
fund on $3 billion after almost two years of fundraising. The firm<br />
has funded a number of spin-outs from banks and corporates and<br />
is understood to be behind the establishment of Goldman Sachs<br />
spin-off, New Mainstream Capital, which was also revealed in<br />
December.<br />
For the listed parent company, Candover Investments, the sale<br />
meant a stronger balance sheet with a smaller net debt level and<br />
reduced outstanding commitments to Candover funds to the tune<br />
of up to £11.2 million.<br />
The deal also saw the departure of Gerry Grimstone, who has<br />
been chairman of Candover Investments for four years.<br />
“Given these important changes,” said Grimstone in a statement,<br />
“I have decided that after 11 years on the Candover board, four<br />
as Chairman, the time is right for me to announce my intention<br />
to step down.”<br />
“A tightly focused Candover,” Grimstone added, “with a resolved<br />
operating model, is the best platform from which to deliver to<br />
shareholders the significant value in the underlying investments.”<br />
Iain Scouller, an analyst with Oriel Securities described the deal<br />
as a good development for both the listed trust and the management<br />
team. “Whilst it is always disappointing to see investments being<br />
sold at below the previous valuation, we think that the sale is<br />
helpful in further strengthening the balance sheet with net debt<br />
falling to £16 million on a pro-forma basis, compared with £59<br />
million [in June].” ■
10<br />
Ten Top Years for<br />
Clifford Chance<br />
(But don’t just take our word for it.)<br />
Clifford Chance is very pleased to be voted Private Equity International’s Law Firm of the Year for<br />
transactions in Europe, for the tenth year in succession. Thank you to everyone who voted for us.<br />
Visit www.cliffordchance.com/privateequity to discover more about our award-winning practice.<br />
Clifford Chance LLP
page 30 private equity annual review <strong>2010</strong><br />
Welcome to the <strong>2010</strong> Private Equity International Awards<br />
Let the celebrations begin<br />
This time last year, a look down our awards<br />
roll of honour spoke to the ability of certain<br />
firms to weather horrendous market conditions.<br />
As we honour <strong>2010</strong>’s best-in-class<br />
firms, transactions and advisors, it becomes<br />
clear that the brightest firms in the industry<br />
are now thriving, rather than just surviving,<br />
in what is an industry landscape going<br />
through structural and restorative changes.<br />
These awards, voted on by thousands of<br />
PrivateEquityInternational.com readers,<br />
showcase the firms that have – in the eyes<br />
of their peers – excelled and set the industry<br />
benchmark.<br />
The results of these awards also reflect<br />
some of the wider themes prevalent in the<br />
world of private equity during <strong>2010</strong>. High<br />
on this list of themes was the effect on the<br />
industry of a dramatically changed banking<br />
market. Government bailouts, consolidation<br />
and incoming regulation all encouraged<br />
banks to dispose of assets, meaning big<br />
opportunities in both the secondary and<br />
primary markets. It is no surprise then,<br />
that the likes of Coller Capital, Advent<br />
International, Bain Capital, Landmark<br />
Partners and AXA Private Equity all found<br />
their way onto the honours list, having been<br />
on the buy-side of bank-sourced deals.<br />
Another theme – the bifurcation of<br />
the private equity market between the<br />
large global firms and small domestic<br />
specialists – is becoming increasingly clear.<br />
Among our winners, a handful of global<br />
firms have picked up awards on multiple<br />
continents: Apax Partners, Oaktree Capital<br />
Management, Sequoia Capital and Partners<br />
Group. Likewise, domestic specialists like<br />
Gilde in the Netherlands and Archer Capital<br />
in Australia, have been honoured.<br />
In recognition of the changing private<br />
equity landscape, this year we have<br />
instituted some new categories into each<br />
of our regions’ rolls of honour. Two of those<br />
categories have to do with the lifeblood of<br />
the industry: limited partners. LPs are<br />
increasingly on the hunt for direct and<br />
co-investment opportunities as they try to<br />
boost returns and lighten their fee burdens.<br />
They have also increasingly sought to<br />
integrate responsible investment practices<br />
into their portfolios, and by extension, their<br />
fund managers’ day-to-day activities. This<br />
year for the first time our readers have voted<br />
for the LPs who have been leading the pack<br />
on both of these fronts.<br />
Congratulations to all our winners. ■<br />
private equity leader <strong>2010</strong><br />
Joseph Dear, chief investment officer, California Public Employees’ Retirement System<br />
Every year Private Equity International honours<br />
one individual who, over the course of their<br />
career, has made a crucial contribution to the<br />
development of private equity as an industry<br />
and an asset class. They have helped private<br />
equity grow into the position of influence<br />
it occupies today and continue to lead by<br />
example.<br />
The California Public Employees’<br />
Dear: LP leader<br />
Retirement System has been at the forefront<br />
of the private equity limited partner community since 1990. But it is<br />
not the organisation we honour this year; it is the man who makes the<br />
investment decisions at the $220 billion pension, Joseph Dear, who is<br />
Private Equity International’s fourth annual Private Equity Leader.<br />
Dear arrived at CalPERS (see p. 54 and p. 56 for more on the<br />
pension) in March 2009, where he was to find a battered portfolio, an<br />
over-weighted allocation to private equity and a soon-to-unfold scandal<br />
involving allegations of “pay-to-play” activity between some placement<br />
agents and fund managers. Since then he has led an overhaul of the<br />
pension’s asset allocation model, initiated a wide ranging review of the<br />
pension’s interaction with placement agents and brought managers to<br />
account over high fees and misaligned interests.<br />
Dear has always been an authoritative supporter of the asset class.<br />
Before joining CalPERS, he was executive director for the Washington<br />
State Investment Board. During Dear’s tenure, the $77 billion pension<br />
grew its private equity allocation from to a market leading 25 percent<br />
from 17 percent. Furthermore, he seems to be keeping the faith. “I don’t<br />
know how we make our return objectives without investing in illiquid<br />
assets,” he told delegates at the Milken Institute Global Conference in<br />
May <strong>2010</strong>.<br />
Previous winners of the Private Equity Leader Award include<br />
Oaktree Capital Management’s Howard Marks, Coller Capital’s<br />
Jeremy Coller and the founder of Bridges Ventures and Apax<br />
Partners, Sir Ronald Cohen. ■
Alex Cho Investment Solutions Asia, Kelvin Chan Private Equity Directs & Primaries, Junichiro Kawamura Head Tokyo<br />
and Reto Schwager Head Investment Solutions Asia<br />
PASSION FOR PRIVATE MARKETS<br />
P a s s i o n f o r P r i v a t e M a r k e t s<br />
Over 450 employees based in 14 offices around<br />
the globe focus on what we do best - making our<br />
clients' private markets investment programs a<br />
true success. That's all we do.<br />
And we do it with passion.<br />
• PRIVATE EQUTIY<br />
• PRIVATE REAL ESTATE<br />
• PRIVATE INFRASTRUCTURE<br />
• PRIVATE DEBT<br />
WWW.PARTNERSGROUP.COM<br />
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page 32 private equity annual review <strong>2010</strong><br />
The roll of honour<br />
<strong>PEI</strong>’s Private Equity Leader Award <strong>2010</strong> Joseph Dear, The California Public Employees’ Retirement System<br />
EUROPE<br />
Large-cap firm of the year<br />
Mid-market firm of the year<br />
Venture capital firm of the yea<br />
Benelux<br />
Central and Eastern Europe<br />
Germany<br />
Iberia<br />
Israel<br />
Italy<br />
Nordic<br />
Russia<br />
Switzerland<br />
UK<br />
France<br />
Law firm (fund formation) of the year<br />
Law firm (transactions) of the year<br />
Debt provider of the year<br />
M&A advisor of the year<br />
Placement agent of the year<br />
Fund of funds of the year<br />
Secondaries firm of the year<br />
Distressed debt firm of the year<br />
Special situations/ turnaround firm<br />
of the year<br />
Mezzanine firm of the year<br />
Limited partner of the year<br />
Direct/co-investor of the year<br />
Responsible investor of the year<br />
Private equity deal of the year<br />
Venture capital deal of the year<br />
Private equity exit of the year<br />
Venture capital exit of the year<br />
Secondaries deal of the year<br />
NORTH AMERICA<br />
Large-cap firm of the year<br />
Mid-market firm of the year<br />
Venture capital firm of the year<br />
Firm of the year in Canada<br />
Law firm (fund formation) of the year<br />
Law firm (transactions) of the year<br />
Debt provider of the year<br />
M&A advisor of the year<br />
Placement agent of the year<br />
Fund of funds of the year<br />
Secondaries firm of the year<br />
Distressed debt firm of the year<br />
Special situations/ turnaround firm of the year<br />
Mezzanine firm of the year<br />
Limited partner of the year<br />
Apax Partners<br />
HgCapital<br />
Index Ventures<br />
Gilde<br />
Mid Europa Partners<br />
Triton Partners<br />
Investindustrial<br />
Jerusalem Venture<br />
Partners<br />
Investindustrial<br />
EQT Partners<br />
Baring Vostok Capital<br />
Partners<br />
Capvis Equity Partners<br />
Bridgepoint<br />
AXA Private Equity<br />
SJ Berwin<br />
Clifford Chance<br />
BNP Paribas<br />
Rothschild<br />
MVision Private Equity<br />
Advisers<br />
Capital Dynamics<br />
Coller Capital<br />
Oaktree Capital<br />
Management<br />
Sun European Partners<br />
ICG Group<br />
ATP Private Equity<br />
Partners<br />
Partners Group<br />
Robeco Private Equity<br />
RBS WorldPay—Bain<br />
Capital, Advent<br />
International<br />
Zong— Matrix Partners,<br />
Advent Venture Partners,<br />
Newbury Ventures<br />
Pets at Home—<br />
Bridgepoint<br />
Betfair—Balderton<br />
Capital Management,<br />
Index Ventures,<br />
Softbank Capital<br />
Bank of Scotland<br />
Integrated Finance<br />
portfolio — Coller Capital<br />
The Blackstone Group<br />
The Riverside Company<br />
Sequoia Capital<br />
Onex<br />
Debevoise & Plimpton<br />
Simpson Thacher &<br />
Bartlett<br />
JPMorgan<br />
Goldman Sachs<br />
Credit Suisse<br />
HarbourVest Partners<br />
Landmark Partners<br />
Oaktree Capital<br />
Management<br />
Sun Capital Partners<br />
GSO Capital Partners<br />
The California Public<br />
Employees’ Retirement<br />
System<br />
Direct/co-investor of the year<br />
Responsible investor of the year<br />
Private equity deal of the year<br />
Venture capital deal of the year<br />
Private equity exit of the year<br />
Venture capital exit of the year<br />
Secondaries deal of the year<br />
Firm of the year in Latin America<br />
Firm of the year in MENA<br />
Firm of the year in Africa<br />
ASIA<br />
The PE Asia Leadership Award <strong>2010</strong><br />
Large-cap firm of the year<br />
Mid-market firm of the year<br />
Venture capital firm of the year<br />
Australia<br />
China<br />
Japan<br />
India<br />
Southeast Asia<br />
Law firm (fund formation) of the year<br />
Law firm (transactions) of the year<br />
Debt provider of the year<br />
M&A advisor of the year<br />
Mezzanine provider of the year<br />
Placement agent of the year<br />
Fund of funds of the year<br />
Secondaries firm of the year<br />
Limited partner of the year<br />
Direct/co-investor of the year<br />
Responsible investor of the year<br />
Large deal of the year [$500m+]<br />
Large exit of the year<br />
Mid-sized deal of the year [$100m - $500m]<br />
Mid-sized exit of the year<br />
Small exit of the year<br />
CPP Investment Board<br />
The California Public<br />
Employees’ Retirement<br />
System<br />
Interactive Data—<br />
Warburg Pincus,<br />
Silver Lake Partners<br />
Endgame Systems—<br />
Bessemer Venture Partners<br />
Columbia Capital, Kleiner<br />
Perkins Caufield & Byers<br />
and TechOperators<br />
Tommy Hilfiger—<br />
Apax Partners<br />
Facebook—Sequoia<br />
Capital<br />
Bank of America fund<br />
interest portfolio—<br />
AXA Private Equity<br />
Actis<br />
Abraaj Capital<br />
Actis<br />
Jean Eric Salata, Baring<br />
Private Equity Asia<br />
TPG Capital<br />
Baring Private Equity Asia<br />
Sequoia Capital<br />
Archer Capital<br />
CDH Investments<br />
Japan Industrial Partners<br />
Sequoia Capital India<br />
Navis Capital Partners<br />
O’Melveny & Myers<br />
Debevoise & Plimpton<br />
Standard Chartered<br />
Goldman Sachs<br />
CLSA Capital Partners<br />
Mercury Capital Advisors<br />
Emerald Hill Capital<br />
Partners<br />
Partners Group<br />
Temasek Holdings<br />
Temasek Holdings<br />
Squadron Capital<br />
Healthscope—TPG Capital,<br />
The Carlyle Group<br />
Shenzhen Development<br />
Bank—TPG Capital<br />
Coffee Day Holdings—<br />
Kohlberg Kravis Roberts,<br />
New Silk Route, Standard<br />
Chartered PE<br />
BPG Food & Beverage—<br />
Lunar Capital<br />
Management<br />
Kasco—Next Capital<br />
AFRICAN, LATIN AMERICAN AND MENA<br />
Firm of the year in Africa<br />
Firm of the year in Latin America<br />
Firm of the year in MENA<br />
Actis<br />
Actis<br />
Abraaj Capital
Winners<br />
Equity<br />
2001, 2002, 2003, 2004, 2005,<br />
2007, 2009, <strong>2010</strong> <strong>PEI</strong> Award winner<br />
‘Best Private Equity Firm for the<br />
Benelux Region’<br />
With the acquisition of CID Lines Group in Belgium and successful tender offers<br />
for Gamma Holding in The Netherlands and Teleplan International in Germany,<br />
Gilde continued to invest in strong, leading businesses. We feel honored that<br />
in recognition thereof we won Private Equity International’s ‘<strong>2010</strong> Private Equity<br />
Firm for the Benelux Region’ award for the 8th time. The successful closing of Gilde<br />
Buy-Out Fund IV with overwhelming support from both existing and new investors<br />
enables us to continue supporting management teams in creating value and realizing<br />
their growth ambitions.<br />
Having completed over 60 transactions since its inception in 1982, Gilde Buy Out<br />
Partners has grown to become one of continental Europe’s premier mid-market<br />
private equity firms managing over EUR 2 billion of capital.<br />
www.gilde.com<br />
We are grateful to the management teams we have backed and to our investors and<br />
advisors whose continuous support and trust are paramount to our lasting success.
page 34 private equity annual review <strong>2010</strong><br />
e u ro p e a n a w a rd s<br />
Large-cap FIRm of <strong>THE</strong> YEAR<br />
1. Apax Partners<br />
2. CVC Capital Partners<br />
3. Cinven<br />
The deal team at Apax Partners can look<br />
back over <strong>2010</strong> with a sense of achievement.<br />
Under the stewardship of chief executive<br />
officer Martin Halusa, the European<br />
private equity heavyweight made eight new<br />
investments and completed $6.8 billionworth<br />
of realisations. In many ways this<br />
level of activity was just a continuation<br />
Halusa: leading<br />
Apax to the apex of<br />
European private<br />
equity<br />
of Apax’s performance in 2009, a year it<br />
rounded off with a transaction – the buyout<br />
of clinical trial logistics company Marken<br />
– that to some extent typified the type of<br />
deal that private equity’s large-cap firms had turned their attention<br />
to: a chunky £1 billion mid-market secondary buyout of a<br />
high quality company.<br />
As the year went on the firm chalked up a number of victories,<br />
including a lucrative partial exit of Danish telecoms giant TDC; a<br />
duo of healthcare exits in the form of Voyager HospiceCare and<br />
Qualitest; and a headline-grabbing €2.2 billion exit of clothing<br />
company Tommy Hilfiger, which earned Apax and LPs a 5x return.<br />
The firm even launched its first foray in Latin America with a $1<br />
billion investment in Brazilian IT and BPO services company Tivit.<br />
The popular vote from <strong>PEI</strong>’s readership confirms the view<br />
that Apax enters the New Year with the wind at its back. This<br />
will certainly prove useful; its latest fund, an €11.2 billion 2007<br />
vintage fund, is now understood to be 65 percent invested, so a<br />
fundraising effort is imminent. <strong>Media</strong> reports have suggested the<br />
firm will enter the market and try to raise another €11 billion,<br />
although sources tell <strong>PEI</strong> that it’s still too early to talk fund sizes.<br />
Mid-market FIRm of <strong>THE</strong> YEAR<br />
1. HgCapital<br />
2. Montagu Private Equity<br />
3. Doughty Hanson<br />
As reflected elsewhere in these awards results, the year <strong>2010</strong> presented<br />
an opportunity for mid-market operators to polish up their<br />
best assets and sell them to larger buyout houses, hungry to invest<br />
in high quality businesses. London-headquartered HgCapital<br />
capitalised on this with what it described as “one of the largest and<br />
most successful exits” in its history: the sale of Visma to Kohlberg<br />
Kravis Roberts for an enterprise value of NOK11 billion ($1.9<br />
billion; €1.4 billion). The September exit represented a return<br />
multiple of 3.7x for limited partners in Hg’s £1.7 billion sixth<br />
fund. A couple of months later Hg sold Pulse Staffing, a healthcare-focused<br />
recruitment firm, to a Blackstone Group portfolio<br />
company for a 2x money multiple.<br />
On the buyside, Hg deployed a<br />
total of £710 million across eight<br />
deals, most of which were agreed<br />
in “a short, shallow buyer’s market”<br />
at the beginning of the year, said Ian<br />
Armitage, the charismatic boss who<br />
has led the firm since 1990. In a webcast<br />
following the two successful exits<br />
late last year, Armitage summed up<br />
the firm’s approach: “Our job is<br />
simple: to give our money to people<br />
smarter than us, whose interests are<br />
aligned with us, who manage decent<br />
Armitage: keeping it<br />
simple<br />
businesses.” The voters in <strong>PEI</strong>’s awards clearly think there is<br />
more to it than that, as they rank Hg as leaders in the European<br />
mid-market, taking the crown from last year’s winner, Advent<br />
International.<br />
venture CAPITAL FIRm of <strong>THE</strong> YEAR<br />
1. Index Ventures<br />
2. Accel Partners<br />
3. Jerusalem Venture Partners<br />
Name a European venture capital victory of recent years and it’s<br />
more than likely that Index Ventures will have been involved<br />
at some point. The firm can draw lines between its diverse staff<br />
of entrepreneurs-cum-VCs and success stories such as Skype,<br />
YouTube, Lastminute.com, Wonga, Zoopla and Last.fm.<br />
Index recorded a number of successes during <strong>2010</strong>. It<br />
broadened its franchise with the creation of “Index Seed” and<br />
the hire of Robin Klein, founder of The Accelerator Group<br />
and member of the Klein venture dynasty, to help lead the<br />
seed team. The firm also brought on Kevin Johnson, the<br />
former chief executive officer of Pangenics, as a partner in<br />
the life sciences team.<br />
No doubt what swung it for <strong>PEI</strong> readers in casting their<br />
votes, however, was the phenomenal exit of peer-to-peer<br />
gambling website Betfair in October. Index had been an<br />
investor in the company since the late 90s. When it floated<br />
on the London Stock Exchange it had a market capitalisation<br />
of £1.3 billion (€1.5 billion; $2.1 billion).<br />
The firm has started 2011 in typical style with the chunky<br />
exit of LoveFilm, a web-based DVD rental business similar<br />
to Netflix in the US, to internet retailing giant Amazon.<br />
Index and fellow VCs Balderton Capital and DFJ Esprit sold<br />
their minority stakes in the business to Amazon for £200<br />
million. The firm also recently sold Dimdim, a web-based<br />
video conferencing business, to trade buyer Salesforce for<br />
$31 million.
www.capvis.com<br />
<strong>2010</strong><br />
Thank you!<br />
For voting Capvis<br />
“Best Private Equity Firm in Switzerland”<br />
in <strong>2010</strong> – our 9 th annual reward.<br />
Capvis is the leading buyout firm in Switzerland and one of the top mid-size funds in German-speaking Europe with an actual<br />
investment volume of over EUR 900m. In <strong>2010</strong>, Capvis went public with Orior at Zurich Stock Exchange, invested in Kaffee Partner and<br />
Wittur, divested Ticketcorner and supported add-on acquisitions for Bartec (Technor Safe Ex) and De Sede Group (Team by Wellis).
page 36 private equity annual review <strong>2010</strong><br />
Firm of the YEAR in BENELux<br />
1. Gilde<br />
2. AAC Capital Partners<br />
3. Gimv<br />
A tip of the hat goes to those making the<br />
shortlist in Benelux this year, given the<br />
region’s somewhat lacklustre deal climate<br />
in <strong>2010</strong>. Gilde, which readers this year<br />
awarded the No. 1 spot, deserves special<br />
attention not just for a steady stream of<br />
deals and exits by its three subsidiary<br />
investment groups, including Gilde<br />
Healthcare Partners, but proving that<br />
Benelux: Gilde rules LPs indeed opened their wallets – and<br />
the region<br />
wide – last year when the right PPM<br />
crossed their desk.<br />
Gilde Buy Out Partners, which focuses on mid-market deals<br />
in Benelux as well as French- and German-speaking economies<br />
in Europe, had more investors than it could accommodate lining<br />
up for its fourth fund, which closed on €800 million. Meanwhile,<br />
Gilde Equity Management Benelux held a first and final close on its<br />
second fund on its €200 million hard-cap. The GEM II fund, which<br />
focuses on smaller mid-market buyouts in Benelux, had a huge vote<br />
of confidence from existing LPs: they increased commitments by<br />
an average of 45 percent.<br />
Established in 1982, Gilde’s three arms have invested in more<br />
than 250 companies and have roughly €2 billion in funds under<br />
management.<br />
Firm of the YEAR in CENTRAL AND<br />
EASTERN EuROPE<br />
1. Mid Europa Partners<br />
2. Warburg Pincus<br />
3. Enterprise Investors<br />
Mid Europa Partners retained<br />
the Central and Eastern Europe<br />
crown in the <strong>PEI</strong> Awards for the<br />
third consecutive year. The group<br />
made headlines last year when it<br />
acquired the largest Czech-based<br />
solar power producer, Energy21,<br />
and when it further cemented its<br />
presence in the CEE healthcare<br />
market with the buyout of Polish<br />
healthcare services provider Med-Sport.<br />
Cable TV: good reception for<br />
returns<br />
But neither deal eclipsed what likely pushed the 12-year-old firm<br />
to the top of this year’s list: In December Mid Europa sold its Polish<br />
cable television business Aster to a US trade buyer, Liberty Global,<br />
in what the firm described as the largest exit in Central and Eastern<br />
Europe of <strong>2010</strong>. The deal valued the company at PLN2.4 billion<br />
(at the time worth €600 million; $794 million), and generated a<br />
return of roughly 2x.<br />
Mid Europa’s confidence in the region’s private equity firms<br />
extend beyond its own capabilities, as well. “For all the leading<br />
players we consider to be our peers in the region, I don’t think<br />
anyone has lost a position in a portfolio company,” Mid Europa<br />
partner Craig Butcher said during a <strong>PEI</strong> roundtable. “I doubt there<br />
are many Western European buyout firms who can say they haven’t<br />
lost at least one company.”<br />
Firm of the YEAR in FRANCE<br />
1. AXA Private Equity<br />
2. LBO France<br />
3. Activa Capital<br />
AXA Private Equity has for the second<br />
year running been named firm of the year<br />
in France.<br />
Led by chief executive Dominique<br />
Senequier, the firm made huge news in<br />
<strong>2010</strong> for its secondary-focused fund’s<br />
acquisition of Bank of America’s $1.9<br />
billion portfolio of limited partnership<br />
interests.<br />
Its direct private equity investment<br />
Senequier: sharing<br />
profits<br />
team, meanwhile, made investments in<br />
Italian gas company E.ON Rete Gas and<br />
French online travel site GO Voyages. It<br />
also exited three companies: the sale of chemicals company Eliokem<br />
for €227.5 million resulted in a 2x exit multiple; the sale of its<br />
minority stake in Trecobat Group back to the Brittany-based home<br />
builder’s management team generated 3x; and the sale of European<br />
laundry detergent and cleaning products maker Spotless generated<br />
a return of roughly 2x.<br />
AXA’s exits are different from many private equity peers because<br />
the firm believes its portfolio company employees should also be<br />
rewarded at exit and subsequently gives them a percentage of AXA’s<br />
financial gain. Spotless employees, for example, each received a<br />
bonus equivalent to two months’ salary post-sale.<br />
Firm of the YEAR in GermANY<br />
1. Triton Partners<br />
2. BC Partners<br />
3. IK Investment Partners<br />
Triton Partners doubled down on fund size in <strong>2010</strong> when it raised<br />
a €2.3 billion Fund III, more than double the size of its €1 billion<br />
Fund II. The fund – which was reportedly the largest closed in the<br />
first quarter of <strong>2010</strong> – had been targeting €2 billion and reportedly<br />
attracted heavyweight investors including Chinese sovereign fund<br />
China Investment Corp.<br />
The German- and Nordic-focused firm also took part in one of
page 38 private equity annual review <strong>2010</strong><br />
the largest healthcare deals in Europe in <strong>2010</strong>, acquiring healthcare<br />
services company Ambea from 3i Group for €850 million in<br />
February. Triton invited Kohlberg Kravis Roberts to take part in<br />
the deal, giving it the option to become a joint equity lead investor.<br />
The firms have another connection as well – Johannes Huth,<br />
who manages KKR’s European operations, is the brother of Martin<br />
Huth, a managing director at Triton. A source told <strong>PEI</strong> the familial<br />
connection had nothing to do with the partnership, however.<br />
Firm of the YEAR in IBERIA<br />
1. Investindustrial<br />
2. Altamar Private Equity<br />
3. HgCapital<br />
Look beyond the news coverage<br />
of Spain and Portugal’s woeful<br />
debt crises, high unemployment<br />
and economic malaise and you’ll<br />
find Investindustrial, shrugging<br />
off the downturn as an<br />
opportunity to invest. In <strong>2010</strong> the<br />
Inaer: high-flying exit<br />
firm deployed some €65 million<br />
in capital across the region as others tended to wounded portfolios.<br />
“Half of [Spanish GPs] are licking their wounds, trying to manage<br />
the portfolio companies that are not performing,” Investindustrial<br />
senior partner Carlo Umberto Bonomi told <strong>PEI</strong> in November. Many<br />
portfolio companies, added Bonomi, were asking for more equity to<br />
seize the opportunity to acquire small- to medium-sized companies.<br />
The firm also caused a stir when in April it sold a minority stake<br />
of Spanish helicopter fleet business Grupo Inaer to Kohlberg Kravis<br />
Roberts in a deal valued at roughly €700 million. “In the midst of<br />
Spain appearing to implode, we attracted one of, if not the best<br />
investor, KKR, to invest in a company,” said Bonomi, who added<br />
“even in the worst moment, there are opportunities”.<br />
Firm of the YEAR in ISRAEL<br />
1. Jerusalem Venture Partners<br />
2. Carmel Ventures<br />
3. Pitango Venture Capital<br />
After two years at the top, Sequoia<br />
Capital has been dethroned by<br />
Jerusalem Venture Partners<br />
as this year’s best private equity<br />
player in Israel. JVP, which was<br />
founded in 1993 by Erel Margalit,<br />
NASDAQ: JVP in landmark<br />
listing<br />
closed two funds last year, totalling<br />
$145 million in fresh capital.<br />
But perhaps on voter’s minds<br />
this year was the firm’s success in exits. In July, QLIK Technologies,<br />
a business analysis software company in which JVP invested in 2004,<br />
was listed on NASDAQ based on a valuation of $770 million. The<br />
listing was “one of the most successful IPOs of a European originated<br />
technology company in close to a decade”, says vice president of<br />
investor relations Fiona Darmon. By the end of <strong>2010</strong>, QLIK had<br />
appreciated in value by over 150 percent, reaching roughly $2<br />
billion. The rise would net JVP a 4,000 percent return when it<br />
sold its 30 percent shareholding for $112 million in December.<br />
Firm of the YEAR in ITALY<br />
1. Investindustrial<br />
2. Permira<br />
3. Ambienta<br />
In a sign that Italy continues to<br />
reward private equity players<br />
who recognise the value of<br />
its medium-sized companies,<br />
Investindustrial has retained<br />
its crown as the country’s best<br />
Ducati: driving private equity<br />
to new geographies<br />
firm. “Success in Italy comes from<br />
transforming a domestic, quality<br />
company into an international<br />
competitor,” senior partner Andrea Bonomi told <strong>PEI</strong> recently.<br />
In April the firm opened an office in Shanghai—its first outside<br />
Europe. The Southern Europe-focused firm is looking East to<br />
capture growing Asian appetite for established Western brands,<br />
which for Investindustrial includes motorcycle manufacturer Ducati<br />
and Morris Profumi, a maker of fragrances and perfumes.<br />
Investindustrial’s Asian presence is already paying dividends.<br />
In late November the group sold Italmatch, a maker of specialty<br />
chemicals, to Sino-European investor Mandarin Capital Partners<br />
following the creation of new production plants, three of which are<br />
based in China. The sale would sit alongside the group’s second exit<br />
in Italy last year: the divestment of its remaining stake in winemaker<br />
Ruffino to wine and spirits company Constellation Brands.<br />
Firm of the YEAR in <strong>THE</strong> NORDIC<br />
REGION<br />
1. EQT Partners<br />
2. Nordic Capital<br />
3. Litorina<br />
EQT Partners and Nordic Capital<br />
are constantly jostling for the<br />
top spot in the Nordic region;<br />
after an incredibly tight race,<br />
EQT won the <strong>PEI</strong> crown for the<br />
second year running.<br />
The Stockholm-headquartered<br />
firm’s performance has<br />
been pleasing LPs according to<br />
Private education: a<br />
promising investment<br />
one insider. Following a candid assessment on the performance of<br />
some portfolio companies at the outset of the crisis, its investments
INDUSTRIAL SOLUTIONS AND CAPITAL<br />
Firm of the year<br />
in Italy<br />
Investindustrial<br />
Firm of the year<br />
in Iberia<br />
Investindustrial<br />
AWARDS 2009<br />
Best Private Equity<br />
firm in Italy<br />
Investindustrial<br />
AWARDS 2009<br />
Best Private Equity<br />
firm in Iberia<br />
Investindustrial<br />
R e c o g n i s e d a s t h e<br />
best private equity firm<br />
both in Italy and Spain for the<br />
second consecutive year<br />
www.investindustrial.com
page 40 private equity annual review <strong>2010</strong><br />
have “started to come back, quite strongly over the last 12 months”<br />
a source told <strong>PEI</strong> in an April <strong>2010</strong> interview.<br />
Aside from raising roughly €350 million for its debut credit<br />
opportunities fund, the firm also drew attention last year when<br />
it proved victor in the auction for Academedia, Sweden’s biggest<br />
private education company. EQT valued Academedia, which<br />
operates in 150 schools with 45,000 students across Sweden, at<br />
around SKr 2.5 billion (at the time, worth €262 million; $319<br />
million).<br />
All these developments are sure to cross the minds of investors as<br />
EQT this year begins to raise its sixth private equity fund, targeting<br />
€4.25 billion.<br />
Kaffee Partner:<br />
caffeine for Capvis<br />
portfolio<br />
The firm also celebrated a partial<br />
exit last year from its 80 percent stake<br />
in Swiss food maker Orior, which it<br />
listed on the SIX Swiss Exchange in<br />
Zurich via an IPO in March – the first in<br />
Switzerland since pharmaceuticals group<br />
Mondobiotech listed in August 2009.<br />
Capvis manages €900 million and since<br />
1990, its investment team has undertaken<br />
40 transactions totalling more than €3<br />
billion.<br />
Firm of the YEAR in RuSSIA<br />
1. Baring Vostok Capital Partners<br />
2. TPG Capital<br />
3. VTB Capital<br />
Russia has always presented an interesting investment proposition<br />
from a private equity perspective. It has failed to keep up with<br />
its BRIC peers in terms of GDP growth rates, and the perceived<br />
risk factors have put a lot of international capital off committing<br />
to the country. There are a few firms, however, which have<br />
consistently managed to raise and deploy capital with success<br />
in the country and at the head of this pack is Baring Vostok<br />
Capital Partners, which this year celebrates its sixth year as<br />
<strong>PEI</strong>’s firm of the year in Russia.<br />
After a difficult 2009 for Russia’s GPs, growth returned to<br />
the BVCP portfolio, says one source, who adds that steps taken<br />
by the management during the crisis have begun to bear fruit<br />
in terms of growing profitability and increasing market share.<br />
The firm made several new investments in <strong>2010</strong>, including a<br />
November investment in regional consumer bank Orient Express<br />
Bank, the first major investment in a local bank since the onset<br />
of the financial crisis. It also invested in local broadband and<br />
cable television provider ER Telecom.<br />
Firm of the YEAR in SwitzERLAND<br />
1. Capvis Equity Partners<br />
2. Capital Dynamics<br />
3. Cross Equity Partners<br />
Switzerland remains a relatively small private equity market dominated<br />
by a handful of local players. Zurich-based mid-market firm<br />
Capvis Equity Partners has been voted the strongest player in<br />
the country, ahead of last year’s champion Capital Dynamics, and<br />
had an active <strong>2010</strong>.<br />
Capvis acquired a majority stake in coffee-maker Kaffee Partner<br />
for €200 million in May. The Kaffee Partner transaction was the<br />
40th investment by the Capvis team and the third by the Capvis<br />
Fund III, which was closed in March 2008 on €600 million.<br />
Firm of the YEAR in <strong>THE</strong> UK<br />
1. Bridgepoint<br />
2. 3i Group<br />
3. Inflexion Private Equity<br />
London-based Bridgepoint served as<br />
a reminder during <strong>2010</strong> that the private<br />
equity industry was continuing to flourish<br />
despite challenging economic conditions.<br />
As some pundits trumpeted the demise<br />
of the LBO, Bridgepoint kicked off the year<br />
with an 8x return from its exit of Pets at<br />
Home, selling the thriving pet retailer to<br />
KKR at an 11.3x EBITDA multiple and<br />
probably putting more than one headline<br />
writer in the doghouse. Bridgepoint<br />
LPs were further cheered in March by a<br />
partial exit of storage company Safestore,<br />
representing a 4x return on invested capital.<br />
Jackson: proving<br />
the LBO doubters<br />
wrong<br />
Led by William Jackson, the firm also kept a steady purchasing pace<br />
throughout <strong>2010</strong>, sealing three deals that meant its €4.8 billion fourth<br />
fund was roughly 20 percent deployed by year-end.<br />
Among the deals agreed was the £414 million purchase of healthcare<br />
provider Care UK. Completed in July, the take-private was a coup for<br />
the firm – which had been eyeing the asset for nearly five years. But it<br />
was also an important indicator: The £210 million in senior loans raised<br />
to finance the transaction – as well as a £250 million, oversubscribed<br />
high yield bond offering that priced at par – made clear that Europe’s<br />
credit markets were opening up for the right assets.<br />
Law firm (fund FORmATION) of <strong>THE</strong><br />
YEAR<br />
1. SJ Berwin<br />
2. Clifford Chance<br />
3. O’Melveny & Myers<br />
SJ Berwin has been the perennial winner of this award and continued<br />
to lead the pack in terms of fund formation in <strong>2010</strong>, advising<br />
on a record-setting 31 funds that closed over the year.
A Decade as Law Firm<br />
of the Year for Funds<br />
We'd like to thank all our friends in the<br />
industry for voting us Law Firm of the<br />
Year for Fund Formation in Europe at the<br />
<strong>PEI</strong> Awards for the 10th consecutive year.<br />
We are at the forefront of private equity and we<br />
are still going full steam ahead. Last year our<br />
international team of funds specialists closed<br />
more funds in Europe than any other firm.<br />
We continue to take the lead in all types of<br />
private fund, including in fast developing<br />
areas such as secondaries, infrastructure,<br />
funds of funds and emerging markets.<br />
And we have worked on some of the highest<br />
profile and most complex private equity deals<br />
and restructurings over the last 12 months,<br />
including a series of major portfolio sales.<br />
We remain committed to serving the private<br />
equity industry. And to delivering our clients<br />
the very best advice.<br />
Here’s to another 10 years.<br />
www.sjberwin.com<br />
Berlin Brussels Dubai Frankfurt Hong Kong London Madrid Milan Munich Paris Shanghai<br />
SL Berwin LLP is a limited liability partnership registered in England no OC313176<br />
20134
page 42 private equity annual review <strong>2010</strong><br />
Some of the major funds to close that were advised by the SJ<br />
Berwin team included winners or runners up in this year’s awards.<br />
It worked on the significantly over-subscribed fundraising effort<br />
from Litorina, the Stockholm-based mid-market investor. Litorina<br />
corralled SEK2.5 billion (€270 million; $378 million) in around five<br />
months. SJ Berwin also advised on two other record-setting European<br />
funds: HgCapital’s sixth fund, which raised more than £1.9 billion,<br />
and Gilde Buy Out Partners’ fourth fund, which raised €800 million.<br />
In addition to fund formation work, the team – which is the<br />
largest fund formation team in the UK and Europe – also worked on<br />
numerous restructurings including an arrangement in which Apax<br />
Europe VII investors were given the opportunity to transfer €685<br />
million of unfunded commitments to new investors.<br />
sponsor-related loans across Europe, worth a total value of approximately<br />
€1.5 billion, according to data provider Dealogic. The bank<br />
topped the European league tables by both volume and value for<br />
European financial sponsor-backed loans, excluding refinancings.<br />
Moreover the bank acted as lead syndicate in some high profile<br />
buyouts over the course of the year. Among the most notable<br />
was the bank’s role as one of the book runners for the €1.93<br />
billion in debt for the buyout of Swiss telecoms company Sunrise<br />
Communications by CVC in September for an enterprise value of<br />
CHF3.3 billion (€2.5 million; $3.25 billion).<br />
The bank’s leveraged finance team in Europe is comprised of<br />
46 professionals spread across Paris, London, Frankfurt, Munich,<br />
Milan and Madrid.<br />
Law firm (TRANSACTIONS) of <strong>THE</strong> YEAR<br />
1. Clifford Chance<br />
2. Allen & Overy<br />
3. Sullivan & Cromwell<br />
Walker: topping<br />
transaction charts<br />
Clifford Chance’s reign as Europe’s top<br />
legal advisor on deals spans a decade of <strong>PEI</strong><br />
Awards. So it’s not surprising to learn the<br />
magic circle firm’s private equity transactions<br />
team, led by David Walker, has once<br />
again won kudos from our readers, and also<br />
topped European league charts in terms of<br />
European buyside deals by volume last year.<br />
All together Clifford Chance advised<br />
on 33 buyside deals worth a total value<br />
of £6.3 billion (€7.4 billion; $10 billion)<br />
for its European private equity clients in<br />
<strong>2010</strong>, according to Mergermarket data. An<br />
impressive figure in its own right, but which does not include work<br />
done on the behalf of clients’ portfolio companies. For instance, it<br />
would be wrong not to note work carried out by the firm’s London<br />
and Milan offices on the €805 million acquisition by Permira portfolio<br />
company Birds Eye Iglo Group of Unilever’s Italian frozen foods<br />
business, Findus Italia, which completed in October.<br />
Other notable transactions the firm worked on in <strong>2010</strong> included<br />
The Carlyle Group’s €480 million acquisition of B&B Hotel, France’s<br />
third-largest budget hotel chain, from Eurazeo; and the £414 million<br />
acquisition of Care UK, a provider of elderly home care, by Bridgepoint.<br />
Debt provider of <strong>THE</strong> YEAR<br />
1. BNP Paribas<br />
2. Barclays Capital<br />
3. Société Générale<br />
Debt markets started to spark back to life in <strong>2010</strong>, and no creditor<br />
made more of a splash in Europe than BNP Paribas. The Parisbased<br />
bank acted as lead book runner for 17 European financial<br />
M&A advisor of <strong>THE</strong> YEAR<br />
1. Rothschild<br />
2. KPMG<br />
3. Goldman Sachs<br />
Merchant bank Rothschild records its third consecutive win as<br />
Europe’s M&A advisor of the year—an achievement it wrestled<br />
away from Goldman Sachs in 2008. Though Goldman continued<br />
to top league tables in terms of value, Rothschild ranked first in<br />
terms of volume, advising on 111 deals (worth more than $95<br />
million) in the first three quarters of the year alone, according to<br />
Mergermarket data.<br />
Among the many deals it advised on was BC Partners’ sale of<br />
Picard Surgeles, a French frozen food retailer, to rival UK shop Lion<br />
Capital for roughly €1.5 billion. It also advised on the blockbuster<br />
£955 million sale of pet retailer Pets at Home, which fetched its<br />
client Bridgepoint a return of 8 times its original investment.<br />
Placement AGENT of <strong>THE</strong> YEAR<br />
1. MVision Private Equity Advisers<br />
2. Global Private Equity<br />
3. Credit Suisse<br />
MVision Private Equity Advisers has been crowned placement<br />
agent of the year in Europe for the ninth year running. The firm<br />
chalked up several successful fund closes in <strong>2010</strong> and expanded<br />
its franchise into infrastructure advisory services.<br />
Led by founder Mounir Guen, MVision put its name next to<br />
three oversubscribed fund closes for clients. Nordic-based energy<br />
specialist HitecVision took the market by storm raising $420 million<br />
for a niche oil and gas fund in just three months, surpassing its<br />
$325 million target; Benelux-focused Gilde Buy Out Partners,<br />
meanwhile, hit the €800 million hard-cap on its fourth buyout<br />
fund in less than a year; and turnaround investor Anchorage Capital<br />
Partners closed an oversubscribed fund on A$200 million. MVision<br />
also assisted Paris-based venture firm Sofinnova Partners in raising<br />
€260 million for its sixth fund.
Responsible Investor<br />
of the year in Europe<br />
Robeco Private Equity is proud to be recognised by the readers of Private Equity International<br />
as <strong>2010</strong> Responsible Investor of the year in Europe. Founded in 2000, our Private Equity<br />
team has demonstrated a strong commitment to sustainability and clean technology with<br />
the launch of several pioneering strategies. Our success leverages the expertise of our parent<br />
Rabobank, the global leader in food and agribusiness, and SAM, a member of Robeco<br />
dedicated to sustainable investing. Robeco Private Equity currently manages EUR 2 billion<br />
from four offices on three continents.<br />
Robeco<br />
Private<br />
Equity<br />
Responsible Investor<br />
of the year in Europe<br />
Robeco Private Equity<br />
www.robeco.com<br />
This advertisement has been prepared by Robeco Institutional Asset Management B.V. (‘Robeco’). Robeco is registered with, and supervised by, the Netherlands Authority for<br />
the Financial Markets (‘AFM’) in Amsterdam, the Netherlands. Rabobank is a regulated entity as set out under the Wet Financieel Toezicht. This advertisement is solely intended<br />
to supply the reader with information and reference on Robeco’s specific capabilities and does not constitute an offer, an invitation to subscribe for or investment advice in connection<br />
with any financial instruments. Investment decisions should be solely based on the final prospectuses relating to such funds, which will be available free of charge at<br />
Robeco. There will be no public market for the interests in the Robeco private equity funds contemplated in this advertisement. The Robeco private equity funds have not been<br />
recommended by any U.S. federal or state or any foreign securities commission or (financial) regulatory authority or supervisor. No rights whatsoever are licensed or assigned or<br />
shall otherwise pass to persons accessing this information. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.
page 44 private equity annual review <strong>2010</strong><br />
Separately, MVision announced in the autumn that it was building<br />
out an infrastructure-focused team. In place of traditional fund-style<br />
investing, Guen said at the time he believed institutional investors<br />
were looking for a broader array of services including separatelymanaged<br />
accounts, direct investments, joint ventures and other<br />
forms of gaining exposure to the infrastructure asset class.<br />
Fund of fuNDS of <strong>THE</strong> YEAR<br />
1. Capital Dynamics<br />
2. Partners Group<br />
3. LGT Capital Partners<br />
Switzerland plays host to the headquarters<br />
of six of the world’s 50<br />
largest funds of funds – in terms<br />
of assets under management –<br />
between them investing nearly $50<br />
billion into the asset class. While<br />
this may be fewer than either the<br />
US or the UK, in terms of quality<br />
in Europe it is Switzerland which<br />
Rio de Janeiro: one of<br />
CapDyn’s new outposts<br />
plays host to the crème de la crème, according to <strong>PEI</strong> readers.<br />
For the second year in a row, Capital Dynamics has fought<br />
off its compatriots to be crowned best fund of funds in Europe.<br />
The firm continued to grow its AUM in <strong>2010</strong>. Of note was its vote<br />
of confidence from the $226 billion California Public Employees’<br />
Retirement System, which brought CapDyn in to manage a $480<br />
million clean energy programme, replacing incumbent manager<br />
Pacific Corporate Group.<br />
CapDyn also established a clean energy infrastructure offering<br />
for clients, as well as extending its own infrastructure, adding offices<br />
in Zurich (its base is in nearby Zug), Tokyo and Rio de Janeiro.<br />
Secondaries FIRm of <strong>THE</strong> YEAR<br />
1. Coller Capital<br />
2. AXA Private Equity<br />
3. Pantheon<br />
behind one of the year’s marquee transactions: the spin-out of 40<br />
private equity investments from Lloyds Banking Group (for more<br />
details see p. 49). The firm will hope limited partners are equally<br />
impressed by another strong year; Coller is currently in the market<br />
trying to raise $5 billion for its next vehicle.<br />
Special mention should be made of the two runners up, both<br />
of whom agreed stand-out transactions during <strong>2010</strong>. AXA Private<br />
Equity was behind the acquisition of a massive $1.9 billion portfolio<br />
of fund interests from Bank of America while Pantheon backed the<br />
high profile spin-out of Candover Partners from its listed parent.<br />
Distressed DEBT FIRm of <strong>THE</strong> YEAR<br />
1. Oaktree Capital Management<br />
2. Apollo Global Management<br />
3. Towerbrook Capital Management<br />
Oaktree Capital Management has once again won the distressed<br />
debt firm of the year category in Europe, where its European<br />
Principal Group began operating in 2005.<br />
Among the deals it executed in <strong>2010</strong> was the recapitalisation<br />
of Germany-based Beluga Shipping, a global supplier of heavy-lift<br />
shipping services that, after having enjoyed a period of growth,<br />
found itself in a liquidity crisis stemming from the global financial<br />
downturn and its impact on global trade. Oaktree provided about<br />
€150 million of new financing in the form of both debt and equity,<br />
which was used to fund the construction of previously ordered ships,<br />
opportunistic vessel purchases and other potential acquisitions. The<br />
structure of the deal allowed for the full financing of Beluga while<br />
allowing Oaktree to retain security in the most valuable vessels<br />
in the company’s fleet, providing both downside protection and<br />
“attractive upside potential”, the firm said.<br />
Oaktree’s London-based European Principal Group combines<br />
local presence in key markets with its in-house operating and legal<br />
restructuring expertise to pursue both distressed private-equity<br />
and distress-for-control transactions. It has made 17 controloriented<br />
investments in every major European country and has<br />
also purchased debt positions in more than 25 companies.<br />
Coller: doubling<br />
down<br />
In 2009 Coller Capital – led by industry<br />
pioneer Jeremy Coller – inked two<br />
of Europe’s most remarkable secondaries<br />
deals and was subsequently honoured<br />
twice in <strong>PEI</strong>’s awards in both the “Best<br />
secondaries firm in Europe” category and<br />
“Best private equity deal” category for its<br />
investment in listed firm SVG Capital.<br />
As an encore, <strong>2010</strong> has not<br />
disappointed. Once again Coller picks up<br />
two European awards – “Secondaries firm<br />
of the year in Europe” and “Secondaries<br />
deal of the year in Europe” – after it was<br />
Special situATIONS/tuRNAROund FIRm<br />
of <strong>THE</strong> YEAR<br />
1. Sun European Partners<br />
2. Oakley Capital<br />
3. Endless<br />
Not to be outdone by its parent company, Sun Capital Partners,<br />
which won the award for Special Situations/Turnaround Firm of the<br />
Year in North America, Sun European Partners took the same<br />
prize in Europe by completing 14 deals in <strong>2010</strong> worth approximately<br />
$800 million, setting firm records for both the amount of<br />
transactions and combined deal value.<br />
Led by senior managing director Michael Kalb, Sun Europe has
OVER 10 YEARS AS A LEADING BUYOUT FIRM IN<br />
CENTRAL AND EASTERN EUROPE<br />
Largest Exit in CEE in <strong>2010</strong><br />
Polish Quadruple -Play Operator,<br />
acquired March 2006;<br />
Exit Agreed December <strong>2010</strong><br />
Second Largest Exit in CEE in <strong>2010</strong><br />
Czech Broadcasting Operator, acquired<br />
November 2006; as part of the Falcon Group<br />
Exit Agreed December <strong>2010</strong><br />
Lithuanian &Latvian<br />
Mobile Operator<br />
Acquired February<br />
2007<br />
Serbian Cable &<br />
Satellite Operator<br />
Acquired June<br />
2007<br />
Polish Healthcare<br />
Providers<br />
Acquired October<br />
2007<br />
Polish Healthcare<br />
Provider<br />
Acquired October<br />
2007<br />
Austrian Mobile<br />
Operator<br />
Acquired October<br />
2007<br />
Polish Healthcare<br />
Provider<br />
Acquired August<br />
2008<br />
Polish Healthcare<br />
Provider<br />
Acquired September<br />
2008<br />
Global Machinery<br />
Producer<br />
Acquired Feb 2006 &<br />
Sept 2008<br />
Czech Mobile Operator<br />
Acquired November<br />
2006, as part of the<br />
Falcon Group<br />
Slovenian Triple-Play<br />
Operator<br />
Acquired July<br />
2009<br />
Hungarian Telecoms<br />
Provider<br />
Acquired October<br />
2009<br />
Czech Photovoltaic<br />
Park Operator<br />
Acquired June<br />
<strong>2010</strong><br />
WITH OVER 3 BILLION OF ASSETS UNDER MANAGEMENT<br />
AND TWENTY-SEVEN INVESTMENTS IN FIFTEEN COUNTRIES<br />
www.mideuropa.com BUDAPEST LONDON WARSAW
page 46 private equity annual review <strong>2010</strong><br />
invested in companies located throughout<br />
Europe, but made its debut deal in Spain<br />
in August <strong>2010</strong>, acquiring Madrid-based<br />
independent toymaker Famosa for an<br />
estimated €100 million. It also backed<br />
V&D, the largest department store<br />
chain in the Netherlands, and La Place,<br />
a foodservice provider that operates both<br />
standalone locations and stores within<br />
V&D.<br />
Kalb: turning around “I do believe that we’re at the bottom<br />
European companies of the cycle … this is a good point in<br />
which to be picking up assets,” Kalb told<br />
<strong>PEI</strong> in September.<br />
Sun Europe’s 25-person team focuses on leveraged buyouts,<br />
equity, debt and other investments in companies with €30 million<br />
to €3 billion in sales.<br />
Mezzanine FIRm of <strong>THE</strong> YEAR<br />
1. ICG Group<br />
2. Partners Group<br />
3. KKR Asset Management<br />
ICG managing director Tom Attwood<br />
told <strong>PEI</strong> in January <strong>2010</strong> that the mezzanine<br />
firm’s 20-year track record of 20<br />
percent compound returns – along with<br />
reportedly returning more cash to LPs<br />
than it was spending pre-credit crisis –<br />
were prime factors in helping it to survive<br />
the most volatile market conditions in its<br />
history. It appears the firm has not just<br />
survived the crisis and its aftermath, but<br />
continues to thrive.<br />
As of December <strong>2010</strong>, 70 percent of<br />
its portfolio companies were performing<br />
at or above prior year levels, with<br />
Attwood: confident<br />
in ICG’s future<br />
improvements in EBITDA and revenue pointing to a continuing<br />
“downward trend” in impairments ICG has taken over the past<br />
year-and-a-half, according to an interim management statement.<br />
ICG also surpassed its €1 billion target for the ICG Recovery<br />
Fund, which it began raising in 2008 to target the more than €240bn<br />
in European buyout-related debt that will mature in the next two<br />
to six years. That fund, alongside the ICG European Fund 2006,<br />
in August acquired a €1.4 billion loan portfolio from the Royal<br />
Bank of Scotland.<br />
The firm also began expanding into other asset classes,<br />
purchasing a 51 percent stake in Longbow Real Estate Capital,<br />
which provides mezzanine and debt financing to the UK property<br />
market.<br />
Limited partner of <strong>THE</strong> YEAR<br />
1. ATP Private Equity Partners<br />
2. Wellcome Trust<br />
3. SL Capital Partners<br />
Denmark’s ATP Private Equity Partners has been one of the<br />
most consistent private equity investors in the market over the<br />
last decade.<br />
The fund of funds generally commits €500 million to €1 billion<br />
a year, and looks for funds that aren’t too flashy. In fact, midmarket<br />
funds that are operationally focused and sector specific<br />
are more likely to win a commitment from ATP PEP.<br />
The fund of funds is exclusively supported by the €70 billion<br />
Danish pensions system ATP and manages €6.9 billion. In <strong>2010</strong>,<br />
ATP PEP closed its fourth fund of funds on €1 billion with plans<br />
to double its allocation to emerging markets assets and seek larger<br />
stakes in existing managers.<br />
Even a consistent investor like ATP PEP slowed down activities<br />
in the downturn, however. In 2009, the fund of funds committed<br />
just €142 million, well below average investments of €400 million<br />
to €600 million pre-2008, though the fund of funds expects to<br />
ramp up commitments this year.<br />
Direct/co-INVESTOR of <strong>THE</strong> YEAR<br />
1. Partners Group<br />
2. AlpInvest Partners<br />
3. Morgan Stanley<br />
Zug, Switzerland-headquartered Partners Group spent time last<br />
year beefing up its direct investment capabilities, having added<br />
around 20 staff to its direct investment team since 2009, which<br />
now numbers more than 120 people.<br />
Early in the year, Partners closed a €537 million global fund<br />
of funds, which it indicated was likely to make a number of direct<br />
investments in both distressed companies in need of restructuring<br />
as well as in SMEs with moderate leverage.<br />
It went on in September to close the “Partners Group Direct<br />
Investments 2009” on its €650 million hard-cap, its largest direct<br />
investment fund ever. At the time of the final close, the fund had<br />
already made 19 investments and was showing a positive net<br />
performance.<br />
Among the co-investments already made were Kaffee Partner,<br />
a supplier of commercial coffee provisions and drinks dispensers<br />
in Germany backed by Capvis, and Oasis Dental, backed by Duke<br />
Street. The fund has also already made at least one exit, having<br />
listed China Forestry, a forestry plantation operator, after holding<br />
the business for six months.
MIDDLE EAST FORUM 2011<br />
HOW PRIVATE EQUITY WILL<br />
DRIVE GROWTH IN A POST CRISIS MENA<br />
11-12 April | The Jumeirah Emirates Towers, Dubai<br />
Having established itself as the destination meeting place for the most senior industry<br />
practitioners, investors, officials and advisors, this year’s forum is inviting this community<br />
to help map the contribution private equity can make to the economic evolution of the<br />
region and beyond.<br />
Key themes to be discussed at this year’s event include:<br />
- What role can private capital play in the MENA region?<br />
- Learn about the hottest strategy in MENA PE: SME, early stage and growth investing<br />
- Find out where MENA fits in the emerging markets allocation of a global portfolio<br />
- What to do with all the dry powder; can all the money be put to work?<br />
World class speakers include:<br />
www.peimedia.com/me11<br />
Book your<br />
place today:<br />
Online<br />
www.peimedia.com/me11<br />
Email<br />
tereza.l@peimedia.com<br />
Phone<br />
+44 (0) 20 7566 5445
page 48 private equity annual review <strong>2010</strong><br />
Responsible INVESTOR of <strong>THE</strong> YEAR<br />
1. Robeco Private Equity<br />
2. AlpInvest Partners<br />
3. Morgan Stanley<br />
Responsible investing has been getting a lot of attention in recent<br />
years. But Robeco Private Equity, a subsidiary of Dutch bank<br />
Rabobank, has long been preaching the responsible investment<br />
gospel.<br />
It introduced its first responsible investment fund, Robeco<br />
Sustainable Equities, in 1999. In May 2009 the firm held a first close<br />
on €50 million for its second private equity fund of funds, which<br />
focuses on investments in funds that adhere to socially responsible<br />
investing principles.<br />
Robeco PE adheres to multiple frameworks for responsible<br />
investing, including the UN Principles for Responsible Investment,<br />
the Dutch Corporate Governance Code and the United Nations<br />
Global Compact. To it, responsible investment consists of five<br />
elements: engagement and voting; transparency regarding risk,<br />
cost and returns; “an excellent range of sustainable and responsible<br />
products”; integration of environmental, social and governance<br />
factors into investment analysis and decision processes; and the<br />
implementation of corporate responsibility principles into its<br />
operational management.<br />
The firm’s investment portfolio stretches across 20 to 30 private<br />
equity funds and is diversified by geography, industry, companies<br />
and vintage years. Robeco’s Swiss investment manager SAM makes<br />
corporate ESG data available to the fund managers, who use the<br />
information in their investment decisions.<br />
Private equITY DEAL of <strong>THE</strong> YEAR<br />
1. WorldPay – Advent International, Bain Capital<br />
2. Alcan – Apollo Global Management, Fonds<br />
Stratégique d’Investissement<br />
3. Care UK – Bridgepoint<br />
One of the running themes of<br />
<strong>2010</strong> was banks shedding assets<br />
and opportunistic private equity<br />
firms picking them up. Most<br />
active among the banks in this<br />
regard, were the ones which<br />
had been forced to receive government<br />
investment during the<br />
Worldpay: Credit card<br />
processing deal wins kudos<br />
nadir of the financial crisis.<br />
The Royal Bank of Scotland was on the sell-side of a number<br />
of interesting deals in <strong>2010</strong> in both the secondary and primary<br />
market. In this instance Boston-based private equity firms Advent<br />
International and Bain Capital agreed in August to buy RBS<br />
WorldPay, the Royal Bank of Scotland’s card payment subsidiary<br />
business, for an enterprise value of up to £2.025 billion (€2.43<br />
billion; $3.24 billion).<br />
Government-owned RBS retained a minority stake of 19.9 percent<br />
in WorldPay, with Advent and Bain evenly splitting the remainder.<br />
Advent went on to revisit the RBS sell-off at the end of the year,<br />
acquiring RBS’ stake in £925 million healthcare group The Priory.<br />
Venture CAPITAL DEAL of <strong>THE</strong> YEAR<br />
1. Zong – Matrix Partners, Advent Venture Partners,<br />
Newbury Ventures<br />
2. Mimecast – Index Ventures, Dawn Capital<br />
3. Criteo – Bessemer Venture Partners<br />
Facebook: fuelling Zong’s<br />
success<br />
In a year when Facebook seemed<br />
to become more widely talkedabout<br />
than ever before – witness<br />
Facebook’s $450 million in funding<br />
from Goldman Sachs and the<br />
$200 million-plus pulled in from<br />
ticket sales for the movie “The<br />
Social Network” – it should come<br />
as little surprise that the venture<br />
capital deal of the year was for a Facebook-related company: Zong,<br />
the social networking giant’s mobile payment provider.<br />
Matrix Partners led a group of investors including Advent<br />
Venture Partners and Dawn Capital in completing a $15 million<br />
round of funding for the Palo Alto-headquartered company.<br />
Zong’s platform provides gamers and users of social networks<br />
with the ability to make payments over mobile devices that are<br />
processed by wireless carriers instead of financial institutions.<br />
In similarly unsurprising news, when Dow Jones VentureWire<br />
examined hundreds of young technology start-ups that raised<br />
venture capital in today’s challenging economy, Zong was named<br />
one of the 50 most promising companies to watch.<br />
Private equITY exit of <strong>THE</strong> YEAR<br />
1. Pets at Home – Bridgepoint<br />
2. Pandora – Axcel Partners<br />
3. Vue Cinemas – Cavendish Square Partners<br />
As the credit crisis unfolded, large-cap private equity giants start<br />
looking down the deal size spectrum to put capital to work. Many<br />
firms in the mid-market worried about the competitive element this<br />
would bring. Prices would be pushed sky-high; the true mid-market<br />
firms would be squeezed out of heated auctions. Well … that was<br />
only half of the story, because buyout firms looking for smaller targets<br />
also provided a welcome exit channel for mid-market owners<br />
of high-quality assets.<br />
One of the more eye-catching deals in this mould was European<br />
mid-market firm Bridgepoint’s sale of Pets at Home, a pet superstore<br />
chain, to Kohlberg Kravis Roberts. The £955 million (€1.1 billion;<br />
$1.5 billion) price tag valued the company at an 11.3x multiple of<br />
its projected <strong>2010</strong> EBITDA. The deal marked the culmination of an
Awarded Fund of Funds of the Year Europe <strong>2010</strong><br />
Thank you for your support throughout the years<br />
Fund of funds of<br />
the year in Europe<br />
Capital Dynamics<br />
We understand the dynamics of performance and know that<br />
uncompromising commitment to quality is the best route<br />
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Awards issued to various Capital Dynamics affiliated companies. Not an offer to sell or a solicitation<br />
to purchase any security. Capital Dynamics Ltd. is authorized and regulated by the Financial Services<br />
Authority (FSA). Past performance is not indicative of future results.<br />
auction process that had drawn nine first-round bidders when it started<br />
in November 2009, with TPG, Bain Capital and Apax Partners coming up<br />
against KKR in the second round of bidding. The investment generated a<br />
total return of eight times Bridgepoint’s original investment.<br />
Venture CAPITAL exit of <strong>THE</strong> YEAR<br />
1. Betfair – Balderton Capital, Index Ventures, Softbank<br />
Capital<br />
2. Polar Rose – Nordic Venture Partners<br />
3. Qliktech – Accel Partners, Jerusalem Venture Partners<br />
Venture capital firms Balderton Capital, Index Ventures and Softbank<br />
Capital made headlines in October by partially exiting their investment<br />
in Betfair, the world’s largest international online sports betting<br />
provider, when the company raised nearly £1.4 billion (€1.6 billion;<br />
$2.2 billion) in its initial public offering.<br />
Headquartered in the UK, Betfair processes more than 5 million<br />
transactions per day and has won two Queen’s Awards for Enterprise.<br />
Hosted in Malta, it also has a games portfolio including Betfair Poker.<br />
Balderton’s original investment in the company was made in<br />
2000, when Betfair launched, and the firm remains one of the largest<br />
institutional shareholders after the listing.<br />
It’s unclear exactly how large a return the VCs ma de on the online<br />
betting company at the IPO, but it’s plain that Betfair has long been a<br />
winner for venture firms. Back in 2006, Benchmark Capital sold its<br />
stake in Betfair to Japanese technology group Softbank, generating a<br />
40 times return.<br />
Secondaries DEAL of <strong>THE</strong> YEAR<br />
1. Bank of Scotland Integrated Finance portfolio –<br />
Coller Capital<br />
2. Natixis Private Equity – AXA Private Equity<br />
3. Candover Partners – Pantheon<br />
One of the most anticipated and closely watched direct secondary deals of<br />
<strong>2010</strong> was struck in July when Coller Capital acquired a 70 percent stake<br />
in a portfolio of 40 Bank of Scotland Integrated Finance (BOSIF)<br />
assets from owner Lloyds Banking Group. Coller paid £332 million (€401<br />
million; $502 million) for its stake in the joint venture, valuing the portfolio<br />
as a whole at approximately £480 million and representing a “small<br />
premium to current book value” according to a statement.<br />
Tim Jones, Coller’s deputy chief investment officer, told <strong>PEI</strong> in<br />
August that market chatter about the deal pricing too high was to be<br />
expected. “Whenever a transaction’s closed, there’s always some people<br />
saying the price was too high either because they weren’t invited [to<br />
bid on] the transaction, or they lost. It’s just natural,” he said, quipping,<br />
“I would perhaps imply that about transactions we weren’t in.” Both<br />
Lloyds, which is retaining a 30 percent stake, and Coller were happy<br />
with the price, he said. “Only time will tell whether we’ve made a<br />
smart investment; we believe we have, but time will tell.”
page 50 private equity annual review <strong>2010</strong><br />
n o r t h a m e rc i a n a w a rd s<br />
Large-cap FIRm of <strong>THE</strong> YEAR<br />
1. The Blackstone Group<br />
=2. Kohlberg Kravis Roberts*<br />
=2. Silver Lake Partners*<br />
Schwarzman:<br />
helming an industry<br />
stalwart<br />
Take a lesson from The Blackstone<br />
Group – patience and perseverance are<br />
keys to success, especially in one of the worst<br />
financial downturns in recent memory.<br />
The Stephen Schwarzman-led firm<br />
spent more than two years raising its sixth<br />
global private equity fund. It started out<br />
in early 2008 aiming to raise $20 billion,<br />
but after Lehman Brothers collapsed later<br />
that year, the target was revised down to<br />
$15 billion – a number it is expected to<br />
hit upon a final close in early 2011. For a<br />
mega-fund in an uncertain economy, during a period in which<br />
the large LBO model was consistently called into question, the<br />
fundraising was nothing short of incredible.<br />
As was Blackstone’s earnings statement: it reported $1.4 billion<br />
in net income for <strong>2010</strong>, more than double the amount reported in<br />
2009. Its total assets under management increased 30 percent to $128<br />
billion. And it committed nearly $10 billion to fresh deals across its<br />
various business lines – an amount that could increase in 2011, given<br />
its $30 billion in dry powder across various funds and strategies.<br />
Publicly listed Blackstone also continued to diversify its<br />
business lines and expand geographically. Among its most notable<br />
private equity moves was purchasing a 40 percent stake in Sao<br />
Paulo-based Patria Investments, one of Brazil’s largest private<br />
equity and asset management firms, for a reported $200 million.<br />
* Tied for second place<br />
Mid-market FIRm of <strong>THE</strong> YEAR<br />
1. The Riverside Company<br />
2. GTCR<br />
3. General Atlantic<br />
Gaining distinction in the North American<br />
mid-market can be difficult considering the<br />
amount of private equity firms competing<br />
for deals, but The Riverside Company<br />
maintained its reputation as one of the most<br />
active buyers in <strong>2010</strong> by making 24 acquisitions<br />
across a dizzying array of sectors.<br />
“For 22 years we’ve been generalists in<br />
our sector expertise and we continue to<br />
have a strong generalist bent everywhere we<br />
do business,” Riverside co-chief executive<br />
officer Béla Szigethy told <strong>PEI</strong> in October.<br />
Szigethy: midmarket<br />
standout<br />
The firm was also busy racking up impressive distributions<br />
for LPs: notable exits included the sale of Virginia-based window<br />
film manufacturer CLC, from which Riverside reaped a return<br />
of 10 times its investment and a 68 percent IRR; and the sale of<br />
court reporting company Veritext to Investcorp, generating a 5.1x<br />
return and a 38 percent gross IRR.<br />
Its activities weren’t limited to the US, either. Riverside made<br />
its first-ever investments in Italy, Spain, Turkey and Australia,<br />
where it opened a Melbourne office in April. Riverside’s Australian<br />
debut came the following month when it acquired a majority stake<br />
in The Boost Investment Group, owners of Boost Juice Bars and<br />
Salsa’s Fresh Mex Grill.<br />
Venture CAPITAL FIRm of <strong>THE</strong> YEAR<br />
1. Sequoia Capital<br />
2. New Enterprise Associates<br />
3. Bessemer Venture Partners<br />
Silicon Valley heavyweight Sequoia Capital continued to woo<br />
limited partners in <strong>2010</strong>: it had blown past the $1 billion target for<br />
its “Sequoia Capital <strong>2010</strong>” fund as of a January 2011 filing with the<br />
Securities and Exchange Commission.<br />
Why LPs clamour for access to the Michael Moritz -led firm was<br />
well illustrated last year by the public listing of portfolio company<br />
Green Dot, a prepaid credit card company whose IPO in July priced<br />
above the expected range, raising $164 million. It soared 22 percent<br />
in its first day of trading; at press time in mid-February 2011, it was<br />
trading at $54.80, up nearly 27 percent from is $43.15 offering price.<br />
Sequoia hasn’t sold any of its 35 percent stake in the company,<br />
according to an analysis published in September by Techcrunch<br />
founder Michael Arrington. But were it to do so, based on a $2.1<br />
billion market cap at the time, Arrington estimated the firm would<br />
net a return of 35x on the roughly $20 million it had invested in the<br />
company since inception: “That is what the big boys in Silicon Valley<br />
call a big f**king home run deal.”<br />
Firm of the YEAR in CANADA<br />
1. Onex Partners<br />
2. Northleaf Capital<br />
3. DRI Capital<br />
Onex Partners, the large-cap private equity platform within the<br />
publicly listed asset management firm, began <strong>2010</strong> with plenty of<br />
capital to deploy, having just closed its third private equity fund<br />
on $4.3 billion in December 2009.<br />
The Canadian firm swung for the fences in July with the $4.7<br />
billion take-private of UK engineering company Tomkins alongside<br />
the Canada Pension Plan Investment Board, agreeing one of the<br />
largest LBOs in the UK last year.
Thanks<br />
to the readers of Private Equity<br />
International for voting us the <strong>2010</strong><br />
“Mid-market firm of the year.” We<br />
are also very grateful for the trust and<br />
support of our investors, portfolio<br />
companies, lenders and advisors who<br />
helped us achieve a record-setting <strong>2010</strong>.<br />
[ ]<br />
For those that didn’t vote for us…<br />
we hope to earn your vote next year.<br />
To learn more about what makes us<br />
different, visit riversidecompany.com<br />
or call Robert (+1 212 265 6408) or<br />
Juan (+34 91 562 74 36) — they’d love to<br />
hear from you.<br />
1 9 o f f i c e s<br />
1 3 c o u n t r i e s<br />
4 c o n t i n e n t s
page 52 private equity annual review <strong>2010</strong><br />
Its mid-market private equity platform, ONCAP, meanwhile<br />
made headlines with the $155 million sale of CSI Global<br />
Education to Moody’s, generating a return multiple of<br />
approximately 5.8x.<br />
Since 1984, Onex’s private equity teams have averaged a<br />
3.4x return and 29 percent IRR, according to its website.<br />
Onex Partners’ first fund, launched in 2004, has returned 4x<br />
and generated a 72 percent IRR, while ONCAP’s first fund,<br />
launched in 1999, has returned 4.1x and a 47 percent IRR. It’s<br />
no wonder the franchise resonates with <strong>PEI</strong> readers.<br />
Law firm (fund FORmATION) of<br />
<strong>THE</strong> YEAR<br />
1. Debevoise & Plimpton<br />
2. Kirkland & Ellis<br />
3. Proskauer Rose<br />
Debevoise & Plimpton kept busy with numerous fund launches<br />
in <strong>2010</strong>, including secondary- and distressed debt-focused private<br />
equity funds. Debevoise advised Oaktree Capital Management in<br />
the formation of Oaktree Opportunities Fund VIII, a $4.5 billion<br />
global distressed fund split into two separate structures (see p. 54).<br />
It helped London-based Doughty Hanson with the establishment<br />
of its European buyout, real estate and technology funds. It also<br />
advised Deutsche Bank on the creation of its secondary opportunity<br />
funds, among other funds.<br />
The firm’s 50-person fund formation team is one of the largest<br />
in the world, having worked on more than 1,350 private equity<br />
funds globally, worth more than $1 trillion in committed capital,<br />
since 1995.<br />
Law firm (TRANSACTIONS) of <strong>THE</strong> YEAR<br />
1. Simpson Thacher & Bartlett<br />
2. Skadden Arps Slate Meagher & Flom<br />
3. Latham & Watkins<br />
Simpson Thacher & Bartlett oversaw a number of high profile<br />
North American private equity deals in <strong>2010</strong>, including the largest<br />
leveraged buyout of the year. The firm represented Kohlberg Kravis<br />
Roberts, Vestar Capital Partners and Centerview Partners in their<br />
$5.3 billion acquisition of Del Monte Foods. It also advised BC<br />
Partners and Silver Lake Partners on the $3.1 billion Multiplan<br />
deal, Silver Lake’s first in the healthcare sector. BC Partners and<br />
Silver Lake acquired MultiPlan from rival private equity firms The<br />
Carlyle Group and Welsh, Carson, Anderson and Stowe for $3.1<br />
billion, a source familiar with the situation confirmed.<br />
Hellman & Friedman also retained the law firm to advise on<br />
one of the biggest media deals of the year: a $640 million takeprivate<br />
for Internet Brands, an online media company that owns<br />
and operates more than 100 websites including vacationhomes.<br />
com and carsdirect.com.<br />
Debt provider of <strong>THE</strong> YEAR<br />
1. JPMorgan<br />
2. Bank of America Merrill Lynch<br />
3. Goldman Sachs<br />
US leveraged buyout loan volume in <strong>2010</strong> was nearly seven times<br />
that of 2009, a clear indication that the lending market reopened for<br />
business. Standard & Poor’s recorded approximately $35.4 billion<br />
of loans for large-cap and mid-market deals in <strong>2010</strong>, compared to<br />
just $5.3 billion in 2009. Involved with many of the transactions<br />
contributing to those totals was <strong>2010</strong>’s debt provider of the year,<br />
JPMorgan.<br />
JPMorgan provided financing for several significant deals in<br />
<strong>2010</strong> including Leonard Green & Partners’ $1.6 billion deal to<br />
privatise NYSE-listed retailer Jo-Ann Stores. The firm also provided<br />
financing for one of the largest buyouts of the year: the $5.3 billion<br />
take-private of Del Monte Foods by Kohlberg Kravis Roberts.<br />
M&A advisor of <strong>THE</strong> YEAR<br />
1. Goldman Sachs<br />
2. Houlihan Lokey<br />
3. Morgan Stanley<br />
Once again Wall Street behemoth Goldman Sachs was involved in<br />
some of the biggest private equity deals of <strong>2010</strong>. During the year,<br />
the firm advised on a whopping 347 M&A transactions valued at<br />
about $581 billion, according to data provider Dealogic.<br />
Among the private equity transactions it was retained to advise<br />
on was the $1.5 billion public offering of storage terminal operator<br />
Kinder Morgan, which was taken private in 2007 in a $22 billion<br />
deal by Goldman’s own private equity arm along with The Carlyle<br />
Group, Riverstone Holdings and Highstar Capital.<br />
It also advised The Carlyle Group and Welsh, Carson, Anderson<br />
and Stowe on the $3.1 billion sale of MultiPlan to BC Partners and<br />
Silver Lake Partners, as well as Unitas Capital’s purchase of Hyva,<br />
a hydraulic cylinder manufacturer, from 3i Group.<br />
Placement AGENT of <strong>THE</strong> YEAR<br />
1. Credit Suisse<br />
2. Probitas Partners<br />
3. Atlantic-Pacific Capital<br />
Credit Suisse: opening doors<br />
for LPs<br />
By most accounts, fundraising in<br />
<strong>2010</strong> was no easy task. Among<br />
the successful placement agents<br />
to find capital for their clients,<br />
Credit Suisse’s private funds<br />
group was voted North America’s<br />
best in class by <strong>PEI</strong> readers.<br />
Wellspring Capital Management<br />
was among the clients who
“North American<br />
Law Firm of the Year<br />
(Fund Formation)”<br />
“Asian Law Firm<br />
of the Year (Deals)”<br />
— P r i vAt e e q u i t Y i N t e r NAt i o NAL<br />
We thank our<br />
clients for the<br />
opportunities<br />
that have made<br />
this honor<br />
possible.<br />
N e w Yo r k<br />
w A s h i N g to N , D. C .<br />
Lo N D o N<br />
PA r i s<br />
F r A N k F u rt<br />
M o s C ow<br />
h o N g ko N g<br />
s h A N g h A i<br />
w w w. D e b e vo i s e . C o M
page 54 private equity annual review <strong>2010</strong><br />
depended on Credit Suisse to help raise capital; the US mid-market<br />
firm’s fund five was its largest-ever, collecting $1.2 billion from<br />
institutional investors in the US, Canada, Europe, Japan and Australia.<br />
Another US fund raised by Credit Suisse in <strong>2010</strong> was Newbury<br />
Partners’ second secondaries vehicle, which collected $1 billion,<br />
beating its $800 million target and attracting new LPs.<br />
Credit Suisse also raised London-based Phoenix Equity Partners’<br />
<strong>2010</strong> fund, which was oversubscribed and collected £450 million.<br />
The investment bank’s private equity third-party fundraising<br />
team is led by Anthony Bowe and John Robertshaw. The group<br />
generally takes on fund size mandates of $300 million to $ 2 billion.<br />
The team is spread out among offices in New York, San Francisco,<br />
Chicago, Los Angeles, Dallas, London, Tokyo and Melbourne.<br />
Canadian Imperial Bank of Commerce. No broker was involved in<br />
the transaction – unlike many other high profile secondaries deals<br />
agreed in <strong>2010</strong>.<br />
Led by 14 partners and principals, the firm also notably gained a<br />
new backer in the form of Indian financial services company Religare<br />
Enterprises. Religare, which previously announced its intentions to<br />
invest up to $1 billion in asset management businesses around the<br />
world, agreed to buy a 55 percent stake in the firm for up to $171.5<br />
million. Landmark’s management said at the time it had made a<br />
“long-term commitment” to the business and would continue to run<br />
the daily operations and be responsible for all investment decisions.<br />
Landmark’s professionals retained a substantial equity stake as part<br />
of the deal.<br />
Fund of fuNDS of <strong>THE</strong> YEAR<br />
1. HarbourVest Partners<br />
2. Adams Street Partners<br />
3. Neuberger Berman<br />
Boston-headquartered HarbourVest Partners received a strong vote<br />
of confidence from the New York State Teachers’ Retirement System in<br />
November: it received a total of $225 million in commitments from US<br />
public pension, $125 million of which went to HarbourVest/NYSTRS<br />
Co-Invest fund, with the remaining $100 million going to HIPEP Select<br />
Asia Fund . That brought the pension’s total commitment with Harbour-<br />
Vest to about $1 billion across several funds.<br />
HarbourVest made headlines in other parts of the world, too,<br />
listing its Amsterdam Euronext-traded vehicle HarbourVest Global<br />
Private Equity (HVPE) on the London Stock Exchange. The duallisting<br />
was meant to provide access to a greater number of “typical”<br />
listed private equity investors, such as wealth management and<br />
asset management firms.<br />
The firm’s other activities during the year included the launch of<br />
HarbourVest Senior Loans Europe, a vehicle to invest in senior secured<br />
loans of up to 30 European small- and mid-market private equitybacked<br />
companies. It also invested $300 million to acquire minority<br />
interests in five companies owned by Bahrain-based investment firm<br />
Arcapita Bank. HarbourVest and Arcapita created a new fund to effect<br />
the transaction, with Arcapita continuing to manage the portfolio.<br />
Secondaries FIRm of <strong>THE</strong> YEAR<br />
1. Landmark Partners<br />
2. Lexington Partners<br />
3. AXA Private Equity<br />
Landmark Partners, one of the oldest secondaries firms in the<br />
industry, last year closed its 14th fund with commitments totalling<br />
$2 billion. The Connecticut-headquartered firm has already agreed<br />
at least eight transactions for Fund XIV that together comprise 67<br />
interests in 62 funds managed by 37 different GPs.<br />
Among the transactions it closed last year was the acquisition<br />
of a $450 million portfolio of private equity LP stakes from<br />
Distressed DEBT FIRm of <strong>THE</strong> YEAR<br />
1. Oaktree Capital Management<br />
2. Apollo Global Management<br />
3. Avenue Capital<br />
Sea Island: Oaktree finds<br />
sweet spot<br />
Oaktree Capital Management<br />
remains best known for distressed<br />
debt and debt-for-control investing,<br />
and has once again swept the<br />
category for all regions in which it<br />
features in the <strong>PEI</strong> Awards.<br />
Last year, the firm raised its eighth “Opportunities” fund, which<br />
was split between an “A” and “B” structure. Fund A raised $4.4 billion,<br />
with Fund B serving as an “overflow” reservoir of capital that would<br />
not be capped and would not incur management fees unless and until<br />
capital was drawn.<br />
That distressed debt fund wasn’t the only distressed investmentrelated<br />
fundraising the firm did in <strong>2010</strong>. It also closed its “Principal Fund<br />
V” in early <strong>2010</strong>, raising $3.33 billion from LPs for control-oriented<br />
investments via both distressed debt and private equity investment.<br />
And it continues to raise its third European “Principal” fund.<br />
But it wasn’t just in fundraising mode. Oaktree was involved in a<br />
number of high profile US deals last year, including partnering with<br />
Angelo Gordon on the bankruptcy reorganisation of the Tribune<br />
Company. It also partnered with firms including Avenue Capital and<br />
Starwood on the reorganisation of Sea Island, a famed US coastal golf<br />
resort that went bankrupt.<br />
Special situATIONS/tuRNAROund FIRm<br />
of <strong>THE</strong> YEAR<br />
1. Sun Capital Partners<br />
2. WL Ross & Co.<br />
3. KPS Capital Partners<br />
Turnaround specialist Sun Capital Partners was busier than ever in<br />
<strong>2010</strong> as companies struggled to rebound in the wake of the economic<br />
downturn.
Pioneered The Market<br />
Now<br />
Leading Its Evolution <br />
www.landmarkpartners.com <br />
Captain D’s: one of Sun’s<br />
<strong>2010</strong> catches<br />
“We had our second-most active<br />
deal year for us in terms of new deals,”<br />
co-chief executive officer Rodger Krouse<br />
said at a media event in January 2011.<br />
“We expect 2011 to be similar to that.”<br />
The firm completed more than<br />
25 deals during the year, split roughly<br />
evenly between platform transactions<br />
and add-on acquisitions. Sun targeted between 30 and 35 deals in <strong>2010</strong>,<br />
roughly the average target amount for the firm prior to the financial crisis.<br />
Continuing the firm’s industry agnostic strategy, Sun invested in a<br />
diverse group of companies in <strong>2010</strong>, including Captain D’s Seafood<br />
Kitchen, the second largest casual seafood chain in the US and the<br />
Scooter Store, a maker of scooters for the disabled and elderly. Its existing<br />
portfolio companies also agreed a slew of add-on deals, including the<br />
$82 million acquisition of two cheese and meat packaging facilities by<br />
Expopack and American Standard Brands’ purchase of Safety Tubs, a<br />
walk-in bathtub manufacturer;<br />
“We’ve been very opportunistic,” Sun principal Christopher Thomas<br />
told <strong>PEI</strong> in August.<br />
Mezzanine FIRm of <strong>THE</strong> YEAR<br />
1. GSO Capital Partners<br />
2. Sankaty Advisors<br />
3. TCW/Crescent Mezzanine<br />
In a year when limited partners were reluctant to open their wallets, GSO<br />
Capital Partners, the credit business spun out from Donaldson Lufkin<br />
& Jenrette and acquired by The Blackstone Group in 2008, managed to<br />
raise an impressive $3.25 billion for its Capital Solutions Fund in July.<br />
Notable investors in the fund included the California Public<br />
Employees’ Retirement System, the California State Teachers’ Retirement<br />
System, the Illinois Teachers’ Retirement System, the Korea Investment<br />
Corporation, the Teachers’ Retirement System of Texas and the San Diego<br />
County Employees’ Retirement Association, which committed $50<br />
million. The fund has a 1.5 percent management fee, which is offset 100<br />
percent by transaction fees, according to San Diego pension documents.<br />
The debt-focused fund targets rescue loans, and also seeks distressedfor-control<br />
and opportunistic transactions such as bankruptcy loans.<br />
In select cases, the GSO Capital Solutions will invest alongside core<br />
Blackstone funds. At the time of the closing in July, the fund had already<br />
invested roughly $60 million in seven different companies.<br />
Limited partner of <strong>THE</strong> YEAR<br />
1. California Public Employees’ Retirement System<br />
2. Oregon Investment Council<br />
3. Florida SBA<br />
With it $48 billion private equity portfolio and hefty ticket size, the<br />
California Public Employees’ Retirement System can make or<br />
break private equity firms. A commitment from the US public pension<br />
can be the badge of legitimacy a GP needs to get through the fundraising<br />
slog. Likewise, a decision not to re-up can be detrimental.<br />
Aside from assisting in the growth and institutionalisation of the asset
page 56 private equity annual review <strong>2010</strong><br />
class on the primary side, CalPERS has also embraced the secondaries<br />
market as a means to actively manage its large number of relationships<br />
and massive private equity portfolio. Having already sold some $2<br />
billion in LP stakes back in 2008, the pension in <strong>2010</strong> reportedly began<br />
shopping $800 million-worth of largely unfunded mega-buyout stakes<br />
from brand-name GPs.<br />
Because of its outsized presence in the market, the public pension,<br />
with some $220 billion of assets, has also led the charge in changing<br />
the dynamic between LPs and GPs. CalPERS has demanded of its<br />
managers lower fees, and in the wake of the pay-to-play scandal,<br />
instituted a placement agent disclosure policy that is emulated by<br />
public pensions across the US.<br />
Direct/co-INVESTOR of <strong>THE</strong> YEAR<br />
1. CPP Investment Board<br />
2. Teachers’ Private Capital (Ontario Teachers)<br />
3. The Teacher Retirement System of Texas<br />
With a do-it-yourself work ethic, Canadian pensions have been the<br />
standard-bearers of limited partners heavily complementing fund<br />
investments with a strong direct investment programme. CPP<br />
Investment Board’s in-house principal investments team does<br />
direct deals and co-investments ranging from $20 million to $500<br />
million and to date has committed more than $7 billion directly<br />
alongside its private equity fund partners.<br />
Last year, the pension made several notable co-investments. It<br />
teamed up with publicly listed Canadian firm Onex Partners in the<br />
£2.9 billion acquisition of UK-based engineering firm Tomkins in<br />
what was one of the UK’s largest buyouts of the year. It also closed<br />
the record-setting $5.2 billion take-private, alongside TPG Capital,<br />
of IMS Health, which was the largest agreed US LBO in 2009.<br />
At the beginning of <strong>2010</strong>, CPPIB promoted Mark Wiseman,<br />
former private investments chief, to oversee all private equity, real<br />
estate and public deals.<br />
Responsible INVESTOR of <strong>THE</strong> YEAR<br />
1. California Public Employees’ Retirement System<br />
2. California State Teachers’ Retirement System<br />
3. Illinois State Board of Investments<br />
The California Public Employees’ Retirement System<br />
tweeted in November <strong>2010</strong> that it planned to “incorporate ESG<br />
investing across all of its funds by middle of next year”.<br />
In terms of private equity, the pension in the past has supported<br />
cleantech initiatives, committing $600 million since 2007 to a<br />
dedicated programme that is now managed by Capital Dynamics.<br />
Since June <strong>2010</strong>, it has committed $200 million as part of the<br />
programme to seven GPs including DFJ Element, Carlyle/<br />
Riverstone, Craton Equity Partners and VantagePoint Venture<br />
Partners.<br />
It is also a signatory to the UN Principles for Responsible<br />
Investment, a framework for making responsible investments.<br />
Typically LPs that sign up to the PRI wish for their GPs to do<br />
the same, or at very least demonstrate that a policy is in place<br />
for methodically considering and addressing environmental, social<br />
and governance issues throughout the investment selection and<br />
management process.<br />
Given the breadth and depth of CalPERS’ relationships in<br />
the private equity world, its support of both the PRI and ESG<br />
integration are expected to influence both institutional investors<br />
and fund managers.<br />
Private equITY DEAL of <strong>THE</strong> YEAR<br />
1. Interactive Data – Warburg Pincus, Silver Lake<br />
Partners<br />
2. First Republic Bank – Colony Capital, General<br />
Atlantic<br />
3. NBTY – The Carlyle Group<br />
Warburg Pincus and Silver Lake Partners joined forces once again<br />
in <strong>2010</strong> to agree what <strong>PEI</strong> readers felt was the private equity transaction<br />
of the year: the $3.4 billion take-private of financial market<br />
data and analytics powerhouse Interactive Data.<br />
The deal was struck amid a resurgence of the debt markets last<br />
year that contributed to a rejuvenation of mergers and acquisitions<br />
in general. Warburg and Silver Lake were able to gain financing<br />
support for the deal from Bank of America Merrill Lynch, Barclays,<br />
Credit Suisse and UBS.<br />
It is not the first time the private equity firms have joined<br />
together on deals over the years. For example, in 2004 the pair,<br />
along with Bain Capital, teamed on the $2 billion buyout of UGS<br />
PLM Solutions from EDS. In 2007, they sold the industrial software<br />
supplier to Siemens for $3.5 billion, netting a roughly 3x return.<br />
Warburg and Silver Lake are surely expecting to replicate, or better,<br />
that success with Interactive Data.<br />
Venture CAPITAL DEAL of <strong>THE</strong> YEAR<br />
1. Endgame Systems – Bessemer Ventures, Columbia<br />
Capital, Kleiner Perkins Caufield & Byers and<br />
TechOperators<br />
2. Bright Source – VantagePoint Venture Partners,<br />
Draper Fisher Jurvetson and Morgan Stanley<br />
3. Better Place – HSBC, Morgan Stanley Investment<br />
Management, Lazard Asset Management, Israel<br />
Corp., VantagePoint Venture Partners, Ofer Hi-Tech<br />
Holdings and Maniv Energy Capital<br />
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page 58 private equity annual review <strong>2010</strong><br />
technology market research firm The Radicati Group.<br />
So it’s perhaps unsurprising the VC deal of the year was related<br />
to Endgame Systems, an Atlanta start-up whose cloud-based<br />
malware and botnet detection software – an industry first – has<br />
tech circles buzzing.<br />
The company in October raised $29 million in a Series A<br />
financing round from Bessemer Ventures, Columbia Capital,<br />
Kleiner Perkins Caufield & Byers and TechOperators. A statement<br />
at the time noted that more than 280,000 organisations and over<br />
250 million IP addresses had been infected with viruses and<br />
other malware, and as the attacks get smarter, so too must the<br />
technology to combat them.<br />
Endgame’s appeal to VCs was also heightened by the fact that<br />
it’s led by Tom Noonan, who previously ran Internet Security<br />
Systems, a security software company IBM acquired for $1.3<br />
billion in 2006.<br />
Private equITY exit of <strong>THE</strong> YEAR<br />
1. Tommy Hilfiger – Apax Partners<br />
2. East Resources – Kohlberg Kravis Roberts<br />
3. CLC – Riverside Company<br />
Apax Partners scored a blockbuster 4.5x return on its investment<br />
in clothing brand Tommy Hilfiger with its €1.9 billion sale to<br />
strategic buyer Philips-Van Heusen.<br />
The private equity firm had acquired the company in a €1.2<br />
billion take-private in 2006, with capital from its €4.3 billion<br />
Europe Fund VI and its $856 million US Fund VII.<br />
Under Apax’s ownership, Tommy Hilfiger acquired its Japanese<br />
licensee; entered into an exclusive department store distribution<br />
agreement with Macy’s in the US; sold its sourcing operation to Li<br />
& Fung; and re-launched its e-commerce business in cooperation<br />
with D+S, another Apax portfolio company.<br />
The company also served as a reminder to critics that private<br />
equity ownership is indeed positive: the company’s earnings before<br />
interest, taxes, depreciation and amortisation increased to €256<br />
million from €180 million under Apax’s ownership, while net<br />
debt decreased from about 4.3x EBITDA to the current level of<br />
1.5x EBITDA.<br />
Venture CAPITAL exit of <strong>THE</strong> YEAR<br />
1. Facebook – Accel Partners<br />
2. Tesla Motors – VantagePoint Venture Partners, Bay<br />
Area Equity Fund, Westly Capital Partners, Compass<br />
Venture Partners, Riverwood Capital, Vertical Fund<br />
3. Green Dot – Sequoia Capital, Tech Coast Angels<br />
Limited partners found another reason to “like” Silicon Valley<br />
veteran Accel Partners last year: the firm sold an undisclosed<br />
amount of its stake in Facebook at a reported $34 billion<br />
valuation. It’s unclear how<br />
much was sold and to whom<br />
– industry publication VentureBeat<br />
estimated Accel<br />
had sold less than 20 percent<br />
of its total stake, while Techcrunch’s<br />
bloggers reportedly<br />
heard $80 million-worth of<br />
Facebook: Returns in focus shares was sold to Andreessen<br />
Horowitz and another<br />
$200 million-worth to Technology Crossover Ventures.<br />
Reports also differ as to whether Accel remains the largest VC<br />
shareholder in the social networking behemoth – but it’s clear<br />
the firm is already making an epic return on its participation<br />
in Facebook’s $12.7 million Series A financing round. Accel’s<br />
purchase of an 11 percent stake in the Series A reportedly<br />
prompted some high valuation VC trash-talking back in 2005<br />
– but the recent partial exit alone may make the firm’s $520<br />
million Fund IX one of the most successful venture funds ever<br />
raised.<br />
Secondaries DEAL of <strong>THE</strong> YEAR<br />
1. Bank of America fund interests portfolio –<br />
AXA Private Equity<br />
2. Citi fund interests portfolio – Lexington Partners/<br />
Stepstone Group<br />
3. New Mainstream Capital spin-out from Goldman<br />
Sachs – Pantheon Ventures<br />
It’s fitting that a French firm was “fashion-forward” in <strong>2010</strong>.<br />
AXA Private Equity capitalised in a big way on what secondary<br />
market participants had been eagerly awaiting as the next<br />
big trend: the divestiture of assets deemed non-core by large<br />
banks struggling to shore up balance sheets and avoid future<br />
regulatory conflicts.<br />
In July, the Paris-headquartered firm completed what it<br />
dubbed “one of the largest secondary private equity transactions<br />
in history”, with the acquisition of Bank of America’s $1.9<br />
billion portfolio of LP stakes. Terms were not disclosed,<br />
though about $400 million of the purchase price was syndicated<br />
out to AXA LPs, a source close to the deal told <strong>PEI</strong> at the time.<br />
The funds were 2005, 2006 and 2007 vintages – 90 percent of<br />
which were US vehicles – that Bank of America had invested in<br />
from its balance sheet. It gave AXA instant exposure to some<br />
mature US buyout assets.<br />
The deal also marked a return to the secondaries market<br />
for AXA, which had largely sat on the sidelines since 2008,<br />
concerned by some of the high premiums buyers were paying<br />
for assets. The firm is marketing its latest secondaries fund,<br />
which has a $3.5 billion target and by year-end was said to have<br />
received indications of interest worth nearly $2 billion.
private equity annual review <strong>2010</strong> pa g e 59<br />
african, latin american, mena awards<br />
Firm of the YEAR in AFRICA<br />
1. Actis<br />
2. Aureos Capital<br />
3. Emerging Capital Partners<br />
Actis has once again earns top honours for its private equity activities<br />
in Africa. The pan-emerging markets specialist continued to deploy<br />
capital from its $2.9 billion 2008 fund into a selection of deals that<br />
reads like a lesson in how to capitalise on pan-African investment<br />
trends: an Egyptian payment processing business to capitalise on the<br />
shift from cash to electronic payments; a clothing fabric producer and<br />
a shopping mall to serve the expanding middle class; and a bolt-on<br />
deal for a power plant to capitalise on the infrastructure opportunity.<br />
Actis takes the crown in the face of stiff competition from<br />
the likes of Emerging Capital Partners, which raised the largest<br />
ever Africa focused fund in <strong>2010</strong> at $613 million, and Aureos<br />
Capital, which has nearly $600 million of Africa-focused capital<br />
under management.<br />
Firm of the YEAR in LATIN AmERICA<br />
1. Actis<br />
2. Southern Cross Group<br />
3. The Carlyle Group<br />
Actis has a 30-year history of investing in Latin America, but in<br />
0000 <strong>PEI</strong> Half Page <strong>2010</strong> Ad_Layout it samba-ed 1 its 20/01/2011 way into Brazil, 14:05 striking Page 1three<br />
private equity<br />
deals in rapid succession worth nearly $170 million.<br />
Its $58 million minority investment in Brazilian supermarket<br />
chain operator Companhia Sulamericana de Distribuição, agreed<br />
in September, marked the firm’s first Latin American acquisition<br />
since spinning out in 2004 from UK development finance<br />
institution CDC Capital Partners. It again sought to capitalise<br />
on the country’s growing consumer class in November, investing<br />
$53 million in cleaning products company Gtex.<br />
And later that month, it backed Brazil’s largest independent<br />
brokerage firm, XP Investimentos. It invested $58 million for a<br />
minority stake ahead of a planned IPO.<br />
Firm of the YEAR in MENA<br />
1. Abraaj Capital<br />
2. Citadel Capital<br />
3. Invest AD<br />
Abraaj Capital ended <strong>2010</strong> with a bang, agreeing the Middle East<br />
and North Africa region’s largest private equity deal of the year by<br />
investing AED2 billion (€415 million; $545 million) in exchange<br />
for a 49 percent stake in Network International, the credit card<br />
processing arm of Emirates NBD bank.<br />
Its SME-focused platform, Riyada Enterprise Development<br />
(RED), was also busily expanding its footprint. It opened an<br />
office in the West Bank in connection with a Palestinian SME<br />
fund that Abraaj established with the Palestine Investment Fund.<br />
RED also received a boost from the Overseas Private Investment<br />
Corporation, which committed $150 million to its latest regional<br />
SME fund, targeting $1 billion.<br />
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page 60 private equity annual review <strong>2010</strong><br />
a s i a a w a rd s<br />
Large-cap FIRm of <strong>THE</strong> YEAR<br />
1. TPG Capital<br />
2. Carlyle Group<br />
3. CVC Capital Asia<br />
Chongqing: RMB<br />
launching pad for<br />
TPG<br />
As the firm behind both Asia’s large deal<br />
and the large exit of the year (for Healthscope<br />
and Shenzhen Development Bank<br />
respectively), it’s not a surprise that TPG<br />
was also voted large-cap firm of the year.<br />
Despite suffering a major setback with the<br />
departure of top China dealmaker Weijian<br />
Shan in June, TPG continued throughout<br />
<strong>2010</strong> to stamp its presence across Asia.<br />
Large deals agreed during the year<br />
included the $1 billion co-investment with<br />
Kohlberg Kravis Roberts and Singapore’s<br />
GIC to buy Morgan Stanley’s 34.3<br />
percent stake in Chinese investment bank CICC; a $400 million<br />
co-investment with GIC into Indonesian Stock Exchange-listed<br />
mining company Delta Dunia Makmur; and the recapitalisation<br />
plan for stricken Australian power firm Alinta.<br />
The global firm has also been digging deeper into China,<br />
launching not one, but two, RMB funds in as many days in August.<br />
The Chongqing- and Shanghai-based vehicles, both targeting<br />
RMB5 billion (€580 million; $736 million), mean TPG joins an<br />
elite group of only two global firms, the other being The Carlyle<br />
Group, to have more than one RMB fund under its belt.<br />
Mid-market INVESTOR of <strong>THE</strong> YEAR<br />
1. Baring Private Equity Asia<br />
2. Bain Capital<br />
3. SAIF Partners<br />
Last year it came second, but this year<br />
pan-Asia-focused Baring Private Equity<br />
Asia, headed by industry stalwart Jean Eric<br />
Salata, has taken the crown for mid-market<br />
firm of the year.<br />
While the fundraising environment<br />
remains tough for many private equity<br />
firms, BPEA had no problem attracting<br />
capital for its fifth fund – in fact it seems<br />
investors all but formed a queue. After only<br />
five months in the market, the firm closed<br />
on its hard cap of $2.46 billion – turning<br />
away $1 billion of over-subscriptions.<br />
Salata: hot off the<br />
fundraising trail<br />
BPEA’s market standing was also evidenced by the secondary<br />
market in <strong>2010</strong>, which is often used as another way to gain primary<br />
exposure to Asian funds. According to a source whose firm tracks<br />
the appetite of about 500 active secondaries buyers, BPEA in<br />
<strong>2010</strong> came second only to China-focused CDH Investments on<br />
a secondaries buy-side wish list.<br />
Venture CAPITAL FIRm of <strong>THE</strong> YEAR<br />
1. Sequoia Capital<br />
2. KPCB China<br />
3. Qiming Ventures<br />
Sequoia Capital:<br />
Making a call on<br />
mobile security<br />
Sequoia Capital’s success in the West has<br />
also translated to Asia, whose early stage companies<br />
are set to receive a good portion of the<br />
$1.35 billion its “Sequoia Capital <strong>2010</strong>” fund<br />
had raised as of a January 2011 filing with the<br />
Securities and Exchange Commission.<br />
That fund, which had been targeting<br />
$1 billion and remains open, is earmarked<br />
specifically for early and growth stage tech<br />
companies in the US and China. The firm’s<br />
Chinese arm, led by Neil Shen, will also<br />
focus on other sectors, targeting “companies<br />
positioned to benefit from China’s growing economy and increasing<br />
number of consumers”, according to a document from the University<br />
of Michigan Regents, which committed $15 million to the fund.<br />
Last year the China team was particularly busy: it participated in two<br />
funding rounds; exited Beijing-based social networking site Comsenz<br />
via a trade sale to Chinese internet giant Tencent; and had nine portfolio<br />
companies go public.<br />
Sequoia’s activities in India, in particular, were also given kudos by<br />
readers this year – see page xx.<br />
Firm of the YEAR in AuSTRALIA<br />
1. Archer Capital<br />
2. CHAMP Private Equity<br />
3. Quadrant Private Equity<br />
Last year’s runner-up, this year<br />
Archer Capital has taken the<br />
top spot in Australia, despite<br />
not having had as active a year<br />
in <strong>2010</strong> as some of the other<br />
firms on the shortlist.<br />
While CHAMP and<br />
Quadrant both closed funds<br />
last year, Archer, currently<br />
Dairy: a sector Archer thinks<br />
worth milking<br />
investing from its fourth buyout fund and first growth fund,<br />
popped up less frequently on the news radar. The times that it did<br />
included its $200 million bid for Australian Securities Exchangelisted<br />
Boom Logistics in May; the divestment of New Zealand
private equity annual review <strong>2010</strong> pa g e 61<br />
tech company Onesource Group in December; and the ongoing<br />
bolt-on acquisition of milk and juice company Brownes by portfolio<br />
company DairyWest.<br />
There has also been constant speculation over the timing of an<br />
IPO of Ascendia Retail, originally slated to list in late 2009, which<br />
includes retail brands Amart All Sports and Rebel Sports. <strong>Media</strong><br />
reports have suggested the IPO – when it does happen – could<br />
fetch well over $700 million.<br />
While it may not necessarily reflect <strong>2010</strong> activity levels,<br />
Archer’s win could instead speak to another trend playing out in<br />
Australian private equity. The consensus view is that the industry<br />
is about to enter a period of consolidation due to fundraising<br />
constraints. In this climate, the expectation is, naturally, that the<br />
best-performing GPs will stand the greatest chance of survival.<br />
Clearly, readers expect Archer to be among them.<br />
Firm of the YEAR in CHINA<br />
1. CDH Investments<br />
2. Lunar Capital<br />
3. Baring PE Asia<br />
Pay by Finger:<br />
CDH has backed<br />
the company’s bid<br />
to eliminate bank<br />
cards<br />
CDH Investments, led by dealmaker<br />
Shangzhi Wu, has for the third time won<br />
the title of firm of the year in China.<br />
In early <strong>2010</strong>, the firm closed its<br />
heavily-oversubscribed fourth fund on its<br />
$1.4 billion hard-cap, in a market where<br />
many firms have struggled even to reach a<br />
first close. And in the first half of 2011, it’s<br />
expected to reach a final close on its second<br />
RMB-denominated fund, with a reported<br />
target of RMB10 billion (€2.2 billion; $3<br />
billion). That fund reportedly stands to<br />
secure a commitment from China’s Social Security Fund, which<br />
committed RMB2 billion to the firm’s RMB5 billion predecessor.<br />
CDH was also busy pleasing its LPs with exits last year. Two<br />
of its companies went public on the New York Stock Exchange:<br />
Chinese real estate service provider Syswin raised $67.2 million<br />
and Xueda Education Group raised $127.6 million. Meanwhile,<br />
portfolio company China Modern Dairy raised $450.8 million<br />
from an IPO on the Hong Kong Stock Exchange.<br />
Firm of the YEAR in JAPAN<br />
1. Japan Industrial Partners<br />
2. CITIC Capital<br />
3. Nippon Mirai Capital<br />
Though they fly very much under the radar – a source says even<br />
their LPs sometimes find them elusive – Japan Industrial Partners<br />
has done a good job of staying in the game when it comes<br />
to new investments and exits.<br />
Bathroom fixtures: Japan<br />
Industrial Partners taps into<br />
opportunity<br />
In <strong>2010</strong>, the firm completed<br />
the acquisition of a majority<br />
stake in kitchen and bathroom<br />
fixture manufacturer Yamaha<br />
Livingtec; backed the takeprivate<br />
of Jasdaq-listed used<br />
car auction operator JAA FOR<br />
$140 million; and bought Kyowa<br />
Hakko Chemical from Kyowa<br />
Hakko Kirin in a deal reportedly worth $733 million.<br />
On the exit front, the firm was part of a consortium, also<br />
including Daiwa Corporate Investment and Polaris Capital, which<br />
sold health food company Q’Sai to Coca Cola West, returning a<br />
multiple greater than 2x and an IRR in the mid-twenties. As one<br />
Japanese private equity professional noted, that kind of return may<br />
not be spectacular, but it is pretty outstanding given the 2006-08<br />
vintage of the original deal.<br />
Firm of the YEAR in INDIA<br />
1. Sequoia Capital India<br />
2. 3i Group<br />
3. CX Partners<br />
India’s top three private equity<br />
firms of 2009 have been replaced<br />
by a completely new roster in<br />
<strong>2010</strong>, led by growth investor<br />
Sequoia Capital India.<br />
Last year, Sequoia made<br />
several small scale investments<br />
in companies such as software<br />
maker Quick Heal, education<br />
Paras Pharmaceuticals:<br />
popping exit for Sequoia<br />
provider K-12 Techno services, appliance maker StoveKraft and<br />
insurance company Star Health and Allied Insurance. In total,<br />
Sequoia Capital India secured 15 investments, with eight in<br />
IT-related companies.<br />
It also made use of a buoyant exit market to cash out on several<br />
previous deals, such as pathology laboratory Dr Lal Pathlabs (runner<br />
up in the small exit of the year category); Paras Pharmaceuticals<br />
(which netted roughly $700 million for Sequoia and co-investor<br />
Actis); and legal process outsourcing company Pangea3, which<br />
Sequoia Capital and New York-based private equity firm The<br />
Glenrock Group sold to Thomson Reuters for about $100 million.<br />
Firm of the YEAR in Sou<strong>THE</strong>AST ASIA<br />
1. Navis Capital<br />
2. Mekong Capital<br />
3. CVC Asia Pacific<br />
Though Nicholas Bloy, co-founder and managing partner of Navis<br />
Capital Partners, said last year he was sceptical of some LPs’ ability
page 62 private equity annual review <strong>2010</strong><br />
to find Southeast Asia on a map, this does not<br />
seem to have held Navis back in any way.<br />
In fact, the Kuala Lumpur-headquartered<br />
firm closed its sixth fund focusing on<br />
Southeast Asia and Australia on $1.2 billion<br />
in September <strong>2010</strong>, albeit $100 million<br />
short of its original target. Since then the<br />
fund has made a $30 million commitment<br />
Bloy: leading to Kuala Lumpur-based cosmetic products<br />
Southeast Asian distributor Alliance Cosmetics Group and<br />
private equity acquired container company Eng Kong<br />
holdings in a S$77.4 million take-private.<br />
Navis also scored a 5.5x return in <strong>2010</strong> on the $200 million<br />
sale of specialty rubber company Linatex, which its fourth fund<br />
had acquired for $31.4 million in 2005.<br />
Law firm (fund FORmATION) of <strong>THE</strong><br />
YEAR<br />
1. O’Melveny & Myers<br />
2. Debevoise & Plimpton<br />
3. Goodwin Procter<br />
To understand how relative newcomer<br />
O’Melveny & Myers managed to break<br />
Debevoise & Plimpton’s two-year stronghold<br />
on this title, all you need to do is glance at<br />
the firm’s client base, which includes some<br />
of the most high profile new names in Asian<br />
private equity.<br />
In China, CITIC Private Equity Funds<br />
Management and Primavera, the firm set<br />
up by ex-Goldman Greater China chairman<br />
Fred Hu, count as clients. Elsewhere in Asia,<br />
OMM is working on the maiden fund of KV<br />
Collins: advising the<br />
new wave of Asian<br />
PE<br />
Asia Capital, the firm recently established by ex-Stanchart PE executive<br />
Karam Butalia and ex-Morgan Stanley Southeast Asia PE head Vibhav<br />
Panandiker.<br />
Led by Singapore-based Dean Collins, the OMM Asian funds<br />
team has also placed itself at the forefront of the RMB/USD fund<br />
industry in China. In fact, Beijing-based partner Lawrence Sussman,<br />
a China funds veteran, reportedly worked with Shanghai on drafts<br />
of its recently released Pilot Program of Foreign-invested Equity<br />
Investment Enterprises.<br />
Law firm (TRANSACTIONS) of <strong>THE</strong> YEAR<br />
1. Debevoise & Plimpton<br />
2. Norton Rose<br />
3. Herbert Smith / Gleiss Lutz / Stibbe<br />
Debevoise & Plimpton has won readers’ votes for law firm<br />
of the year with respect to its work on Asian private equity<br />
transactions. High-profile deals Debevoise advised on in <strong>2010</strong><br />
included AIG’s $2.16 billion sale of its Taiwan Nan Shan Life unit<br />
to a consortium led by local conglomerate Ruentex, and Baring<br />
Private Equity Asia’s investment in Hyderabad-based Coastal<br />
Projects, a deal reportedly valued at $60 million.<br />
Hong Kong-based partner Thomas Britt leads the firm’s work<br />
on financial sponsor-backed transactions throughout the region,<br />
while fund formation-focused partner Andrew Ostrognai chairs<br />
Debevoise’s Asia practice. In October, the firm announced that<br />
Paris-based partner Drew Dutton was relocating to the firm’s<br />
Hong Kong office, along with four associates, to help expand<br />
its financial services and transactional private equity platforms.<br />
Debt provider of <strong>THE</strong> YEAR<br />
1. Standard Chartered<br />
2. JPMorgan<br />
3. HSBC<br />
Global bank Standard Chartered<br />
has once again taken the<br />
top spot for its financing of Asian<br />
private equity transactions.<br />
The bank, which has in the past<br />
participated in the underwriting<br />
Stanchart: Digging deep into<br />
the debt market<br />
of such mammoth transactions<br />
as 2009’s $1.8 billion Oriental<br />
Brewery buyout by Kohlberg<br />
Kravis Roberts, returned to the fray again in <strong>2010</strong> with such deals<br />
as the debt financing package for Ivanhoe Mines, and bond issues of<br />
Singaporean SWF Temasek Holdings.<br />
Sumit Dayal is the global head of StanChart’s leveraged finance<br />
division, while Sanjeev Chhabra leads the division’s Indian activities,<br />
Sanjay Chowdhry looks after Southeast Asia and Edward Crook<br />
helms Greater China.<br />
M&A advisor of <strong>THE</strong> YEAR<br />
1. Goldman Sachs<br />
2. Morgan Stanley<br />
3. Ernst & Young<br />
No one can dispute Goldman Sachs’ place at the front of the<br />
pack in Asian M&A, given this is the fourth consecutive year the<br />
investment banking giant has won this award. Through the third<br />
quarter <strong>2010</strong>, the bank had advised on 43 M&A deals in Asia, ex-<br />
Japan, worth more than $40 billion – which in keeping with an<br />
upswing of Asian M&A activity, represented a steep increase over<br />
the same period in 2009, when it advised on 36 deals worth more<br />
than $21 billion, according to Mergermarket data.<br />
The heavyweight investment bank advised on number of Asian<br />
private equity transactions in <strong>2010</strong>, including the $2.7 billion takeprivate<br />
of Australian hospital chain Healthscope by The Carlyle<br />
Group and TPG Capital (see p. xx). It also advised CVC Capital
Delivering outstanding returns to our<br />
investors since 1997<br />
Focus<br />
Operational<br />
Expertise<br />
Control investments in Australia & New Zealand<br />
middle market companies with leading market<br />
positions and growth potential<br />
Archer’s partners have deep operational<br />
management experience. Concentrated<br />
portfolios allow for real ‘hands on’ involvement<br />
Discipline<br />
28 deals in 12 years. Avoid top of cycle traps<br />
Archer Capital<br />
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Growth Fund 1<br />
Committed capital of $1.36B.<br />
Acquiring businesses with enterprise values<br />
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Archer Capital Pty Ltd<br />
Suite 7, Pier 2/3<br />
13 Hickson Road<br />
Sydney NSW 2000<br />
T. +612 8243 3333<br />
F. +612 9241 3151<br />
www.archercapital.com.au
page 64 private equity annual review <strong>2010</strong><br />
Partners and Indonesian retailer Matahari Putra Prima on their<br />
$777 million acquisition of Matahari Department Store.<br />
Mezzanine PROVIDER of <strong>THE</strong> YEAR<br />
1. CLSA Capital Partners<br />
2. Asia Mezzanine Capital Group<br />
3. ICG Asia<br />
Delatte: hard to<br />
market mezzanine<br />
Following the doldrums of 2009, <strong>2010</strong> was<br />
a year in which Asia regained some appetite<br />
for mezzanine debt. Leading the pack in<br />
<strong>2010</strong> was CLSA Capital Partners and<br />
its MezzAsia Capital division, which last<br />
year placed third and this year was named<br />
mezzanine provider of the year in Asia.<br />
The private equity arm of Asian<br />
brokerage house and investment bank<br />
CLSA Asia-Pacific Markets, CLSA is quick<br />
to acknowledge that mezzanine still needs<br />
to bed down in Asia, where it has yet to gain<br />
the momentum it has in Western markets. In a recent interview,<br />
Stephane Delatte, CLSA managing director, told us recently that<br />
part of the issue one has marketing mezzanine is that it often<br />
carries a higher yield compared to traditional senior bank financing.<br />
Placement AGENT of <strong>THE</strong> YEAR<br />
1. Mercury Capital Advisors<br />
2. Probitas Partners<br />
3. MVision Private Equity Advisers<br />
It might seem strange that a firm that’s only<br />
been in business for a year-and-a-half has<br />
won placement agent of the year in Asia,<br />
but it can be put down to the reputation<br />
built by the former Merrill Lynch private<br />
fund placement team before it went independent<br />
in September 2009. The spin-out<br />
followed Bank of America’s decision in June<br />
2009 to “downsize” the unit, which it had<br />
inherited as part of its merger with Merrill.<br />
From 2003 to 2008, the group raised<br />
approximately $92 billion of capital, most<br />
Cuan: building up<br />
the franchise<br />
recently including Silver Lake Partner’s $9.3 billion third fund,<br />
AIG Highstar’s $3.5 billion third fund and Avista Capital’s $2<br />
billion debut fund.<br />
Led by Enrique Cuan, Michael Ricciardi and Alan Pardee,<br />
Mercury has been slowly building out its franchise. In Asia,<br />
sources say the firm is working with Hong Kong-based North<br />
Asia-focused Excelsior Capital and China-focused newcomer<br />
Themes Investment Management, led by former Och-Ziff China<br />
head Frank Yu.<br />
Fund of fuNDS of <strong>THE</strong> YEAR<br />
1. Emerald Hill Capital Partners<br />
2. Squadron Capital<br />
3. Partners Group<br />
Choung: Looking for<br />
the returns in Asia<br />
In a case of “small is beautiful”, Hong<br />
Kong-based Emerald Hill squeezed out<br />
competition from some much larger rivals<br />
to take the title of fund of funds of the year.<br />
The firm, which has a total of $500 million<br />
in assets under management, closed its second<br />
fund in July on its $300 million target – no<br />
mean feat in a market so crowded that some<br />
are beginning to question whether there are<br />
too many funds of funds in Asia.<br />
With around two-thirds of the fund<br />
expected to be deployed in emerging markets, its sector-agnostic<br />
remit is simply to find the venture and growth and buyout funds that<br />
are going to yield the best return, Eugene Choung, managing director,<br />
told PE Asia last year. The firm also positions itself as “extended staff in<br />
Asia” to its clients, helping them source direct co-investments in the<br />
region alongside or outside the EHCP fund, according to its website.<br />
Secondaries FIRm of <strong>THE</strong> YEAR<br />
1. Partners Group<br />
2. Paul Capital<br />
3. Axiom Asia Private Capital<br />
The Zug, Switzerlandheadquartered<br />
alternatives giant<br />
has for the second year taken top<br />
honours in Asia as secondaries firm<br />
of the year. In <strong>2010</strong>, Partners<br />
Group made 15 private equity<br />
and 10 real estate secondaries<br />
investments across the Asia-Pacific<br />
region, investing more than $500<br />
million.<br />
Seoul: Partners’ latest Asian<br />
locale<br />
The firm has also been actively strengthening its presence in the<br />
region for the past year. Following the opening of its Dubai office to<br />
support its investment activities and client relationships in the Middle<br />
East and India in May, Partners in November opened a fifth Asian office in<br />
Seoul, which is led by Korean private equity industry veteran Alex Cho.<br />
Limited partner of <strong>THE</strong> YEAR<br />
1. Temasek Holdings<br />
2. China Investment Corp.<br />
3. Korea Investment Corp.<br />
One common thread tying GPs like The Carlyle Group, Hopu<br />
Investment Management, CITIC Capital and FountainVest Partners
ehcp.com<br />
Thank You<br />
Emerald Hill Capital Partners would like to sincerely thank all the limited partners,<br />
fund managers and friends in the private equity community who voted for us as<br />
Fund of Funds of the Year in Asia
page 66 private equity annual review <strong>2010</strong><br />
together is they all count Temasek Holdings as an investor.<br />
The smaller of Singapore’s two sovereign wealth funds, Temasek<br />
is also a frequent co-investor with its private equity partners (see<br />
the following category).<br />
The S$186 billion (€107 billion; $145 billion) Temasek<br />
rebounded in <strong>2010</strong> from a dismal fiscal 2008/09, when its<br />
portfolio value had hit a low of S$130 billion. That brought it<br />
back in line with pre-crisis valuations.<br />
Temasek has recorded 17 percent compound annual returns<br />
by market value since inception in 1974, and 42 percent in the<br />
12 months through June <strong>2010</strong>. Temasek executive director Simon<br />
Israel said in a press conference at the time that a significantly<br />
higher level of returns had been recorded by investments made<br />
after 31 March 2002, when Temasek shifted its investment strategy<br />
to incorporate a greater focus on Asia and reduce exposure to the<br />
mature economies of the OECD.<br />
Direct/co-INVESTOR of <strong>THE</strong> YEAR<br />
1. Temasek Holdings<br />
2. China Investment Corp.<br />
3. Partners Group<br />
In line with a trend taking place<br />
around the globe, large asset<br />
owners in Asia, like pension<br />
and sovereign wealth funds,<br />
are increasingly interested in<br />
making direct investments or<br />
co-investing alongside private<br />
equity firms with attractive<br />
Temasek: Going directly to the<br />
source<br />
terms (usually paying no GP fees or carry).<br />
Temasek’s name pops up frequently on direct deals, often in<br />
partnership with GPs like Hopu Investment Management, run by<br />
former Goldman Sachs China partner Fang Fenglei. Prominent<br />
<strong>2010</strong> investments of this kind include the pair’s $600 million share<br />
purchase into North American oil and gas developer Chesapeake<br />
Energy, as well as a $200 million investment in China’s largest<br />
orange plantation, Asian Citrus Holdings.<br />
Responsible INVESTOR of <strong>THE</strong> YEAR<br />
1. Squadron Capital<br />
2. CDC Group<br />
3. The Government Superannuation Fund Authority<br />
of New Zealand<br />
Taking home PE Asia’s inaugural responsible investor award is Hong<br />
Kong-based fund of funds Squadron Capital, a firm notable for being<br />
an early mover – amongst Asia-based investors at least – for signing up<br />
to the UN Principles for Responsible Investment, which it did in 2009.<br />
The PRI gives firms a framework and process for implementing responsible<br />
investment practices throughout the life cycle of an investment.<br />
Alice Chow, managing director at the<br />
firm, said shortly after Squadron signed<br />
up to the Principles that influencing<br />
environmental, social and governance<br />
issues at Asian portfolio companies can<br />
be difficult since most GPs own minority<br />
positions. “You don’t have majority control<br />
of the board and you don’t have majority<br />
Chow: An early control of the management of the company.<br />
signatory to the You’re really relying on your judgement of<br />
UN PRI<br />
the management team that they are honest,<br />
do their job with integrity and follow the rules,” she said.<br />
Large deal of <strong>THE</strong> YEAR [$500m+]<br />
1. Healthscope – TPG, Carlyle Group<br />
2. Dili Group – The Blackstone Group, Warburg<br />
Pincus, Atlantis Investment Management Capital<br />
3. Matahari – CVC Asia Pacific<br />
Not only was the $2.3 billion acquisition in<br />
July of hospital chain Healthscope by The<br />
Carlyle Group and TPG Capital the largest<br />
buyout seen in Australia for two years, it was<br />
also an example of private equity firms returning<br />
to doing what private equity firms do best:<br />
“buying companies no one else wants”, as one<br />
GP put it. The company was perceived to<br />
be under-valued on the stock exchange, and<br />
though there was one strategic buyer in the<br />
mix, the pricing battle primarily centered on<br />
rivalry between two competing private equity consortia.<br />
Others pointed to the Healthscope take-private as a sign that<br />
fears foreign private equity firms would avoid investment in<br />
Australia due to uncertainty around the tax treatment of offshore<br />
holding companies in deal structures were unfounded. That TPG<br />
itself – the firm whose exit from Myer Group prompted the<br />
Australian Taxation Office to revise its private equity policies –<br />
was back in the fray suggested, said one professional, that the firm<br />
was confident it had found a way to navigate the uncertainty. The<br />
Healthscope deal had also attracted interest from CVC Asia Pacific,<br />
The Blackstone Group and Kohlberg Kravis Roberts.<br />
Large exit of <strong>THE</strong> YEAR<br />
1. Shenzhen Development Bank – TPG<br />
2. Parkway Holdings – TPG<br />
3. Study Group – CHAMP Private Equity<br />
TPG, Carlyle: Had<br />
their fingers on the<br />
pulse with Healthscope<br />
The financial services sector in Asia has been notoriously tricky<br />
to transact in, but the exit of Shenzhen Development Bank<br />
(SDB) by TPG Capital proved that if you were prepared to tackle a<br />
mountain of uncertainty, you may just reap a mountain of returns.
private equity annual review <strong>2010</strong> pa g e 67<br />
The firm had attempted, but failed, to buy into the bank twice before<br />
the deal finally went through in 2004 – but not without some legal battles.<br />
Five years later, TPG began negotiations to divest its interest in SDB<br />
with Hong Kong-listed Chinese insurance company Ping An Insurance.<br />
TPG eventually gained approval to sell its SDB shares in May <strong>2010</strong> in<br />
exchange for 299 million newly issued Ping An shares with no lock-up<br />
period. TPG moved quickly to sell a little more than half of its 4 percent<br />
Ping An stake only one week after the swap, generating HK$9.7 billion,<br />
or $1.25 billion in proceeds. It sold the remaining shares in September.<br />
In total, TPG raised about $2.4 billion through the share sales,<br />
representing a 16.5x return on the firm’s original investment – a<br />
landmark return on a landmark private equity transaction.<br />
Mid-sized DEAL of <strong>THE</strong> YEAR<br />
[$100m - $500m]<br />
1. Coffee Day Holdings – Kohlberg Kravis Roberts,<br />
New Silk Route, Standard Chartered Private Equity<br />
2. KS Energy – Actis<br />
3. Huiyan Juice – SAIF Partners<br />
<strong>2010</strong>’s mid-sized deal award was swept up by not one, but three firms.<br />
Western investors Kohlberg Kravis Roberts and Standard Chartered<br />
Private Equity share their spot on the podium with Asian counterpart<br />
New Silk Route through a collaborative $220 million investment in<br />
Coffee Day Holdings.<br />
Coffee Day owns and operates Café Coffee Day, India’s largest<br />
coffee house chain, which has more than 820 cafés across India. It is<br />
not the first time it has received interest – and capital – from private<br />
equity firms; previous investors include JPMorgan, which invested<br />
$250 million in the company in 2008; Darby Overseas Investments,<br />
which invested $25 million from its mezzanine fund also in 2008;<br />
and Sequoia Capital.<br />
This round bought the three firms a “significant minority” stake<br />
in the company.<br />
Mid-sized exit of <strong>THE</strong> YEAR<br />
1. BPG Food & Beverage – Lunar Capital<br />
2. Linatex – Navis Capital Partners<br />
3. National Hearing Care – Crescent Capital<br />
BFG Food & Beverage:<br />
juicy exit for Lunar<br />
Capital<br />
After less than a year, China-focused<br />
Lunar Capital realised its $25 million<br />
investment in tropical juice maker BPG<br />
Food & Beverage by way of a trade<br />
sale to Hong Kong-listed Asian Citrus<br />
Holdings, a deal that in turn was linked<br />
to other private equity players in the<br />
region.<br />
Asian Citrus agreed to pay an aggregate<br />
consideration of more than $257.7 million<br />
for BPG from various stakeholders. Lunar<br />
had acquired a 25 percent stake in the juice maker at the end of 2009,<br />
when the company had a valuation of about $100 million.<br />
Asian Citrus’ purchase of BPG was funded in part by a $200<br />
million investment by Hopu Investment Management, along with<br />
seven other investors including Singapore’s Temasek Holdings.<br />
Small deal of <strong>THE</strong> YEAR [sub $100m]<br />
1. eHi Car Service – Goldman Sachs, Qiming<br />
Ventures, Ignition Partners, CDH Ventures,<br />
JAFCO Asia and New Access Capital<br />
2. QuEST Global – Warburg Pincus<br />
3. Avon Japan – TPG Capital<br />
Government policies that would reduce vehicle purchases to ease<br />
traffic, coupled with the rising price of car ownership in China, has<br />
investors betting big on the country’s auto rental industry. eHi Car<br />
Service, which says it is the country’s largest car service company,<br />
has now attracted $165 million in private funding.<br />
The most recent round was a $70 million capital injection in<br />
August, which was led by Goldman Sachs and included previous<br />
eHi private equity backers including Qiming Ventures, Ignition<br />
Partners, CDH Ventures, JAFCO Asia and New Access Capital.<br />
eHi has more than 120 rental locations in 34 cities with half<br />
a million customers; it also has chauffeured service in more than<br />
70 cities, which also caters to more than half the Fortune Global<br />
500 companies in China, according to a statement.<br />
Small exit of <strong>THE</strong> YEAR<br />
1. KASCO – Next Capital<br />
2. Dr Lal Pathlabs – Sequoia Capital<br />
3. Comsenz – Sequoia and Morningside Ventures<br />
Proving that Japan is not always<br />
the black hole for private equity<br />
money that it is portrayed to be,<br />
Next Capital ’s ¥2.1 billion (€18.5<br />
million; $25.9 million) exit of golf<br />
equipment manufacturer KASCO<br />
to trade buyer Mamiya-OP reaped<br />
KASCO: Coming in under par a gross return of 4x and a 40 percent<br />
IRR in October. This was on<br />
for Next Capital<br />
the back of a ¥505 million investment<br />
made by the Tokyo-based special situations investor in 2006.<br />
According to NCP’s statement on the exit, the debt-burdened<br />
company was recording ¥350 million of ordinary pre-tax losses<br />
annually prior to the firm’s investment. Since then, KASCO had<br />
become profitable with <strong>2010</strong> revenues forecast to be ¥4.6 billion<br />
with ordinary pre-tax profits of ¥360 million.<br />
Shikoku-based KASCO is a manufacturer of golf gloves and other<br />
branded golf equipment consumables including KASCO gloves, Kira<br />
balls, and Power Tornado and Pyra clubs. n
page 68 private equity annual review <strong>2010</strong><br />
s e c t i o n h e a d e r<br />
m i n i h e a d e r s<br />
Title here<br />
69 The year in fundraising<br />
70 Capital Pursuit<br />
Intro 73 in here In the money<br />
74 Outlook: Fund administration<br />
75 Banking on it<br />
80 Cash back<br />
81 Terms tug of war<br />
82 The year of regulation<br />
84 Regulations on the horizon<br />
87 Slim pickings<br />
<strong>2010</strong><br />
Global themes<br />
ILPA to introduce reporting standards<br />
Some foreign GPs to<br />
face US registration<br />
Distressed fundraising drops 87%, secondaries soar 201%<br />
Oregon slashes re-up to<br />
Centerbridge by $100m<br />
Conversus: Distributions<br />
Asian appetite to aid secondaries surge<br />
like it’s 2007 LPs stay committed, focus on fees<br />
PE returns positive for fifth straight quarter<br />
Private equity rounds off year of recovery<br />
Lexington buys Lloyds’<br />
£470m PE portfolio<br />
KKR reacquaints itself with Del Monte<br />
Lone Star revises<br />
targets on funds<br />
to $4bn each<br />
Private equity-backed buyouts still chasing 2007 peak<br />
CalPERS does away with<br />
traditional asset allocations<br />
Private equity spends record amounts in October<br />
Canadian PE ‘needs more<br />
foreign investment’<br />
Investors in ‘steady march’ to alternatives<br />
SEC approves ban on unregistered<br />
placement agents<br />
Oaktree, Angelo Gordon to<br />
take over Zell’s Tribune<br />
Managers eye<br />
‘emerging’ LPs<br />
for fundraising<br />
LPs demand focus on operations<br />
AIFM ‘third country’<br />
threat stirs wide concern
private equity annual review <strong>2010</strong> pa g e 69<br />
f u n d r a i s i n g<br />
m i n i h e a d e r s<br />
Title in here<br />
Intro in here<br />
The year in fundraising<br />
Fundraising in <strong>2010</strong> was not for the faint of heart,<br />
but a number of firms came to market with some<br />
ambitious targets. Graham Winfrey reports<br />
China: the focus of many significant marketing efforts<br />
january<br />
In January, The Carlyle Group signed a memorandum of understanding<br />
with the Beijing Municipal Bureau of Financial Work to<br />
set up an RMB fund in the Chinese capital. Carlyle was the first<br />
foreign firm to act on pilot measures introduced by the Beijing<br />
government at the beginning of the year to attract foreign private<br />
equity firms to Beijing’s Zhong Guan Cun area, often referred<br />
to as China’s Silicon Valley. Carlyle’s fund is a pure RMB fund,<br />
raising capital from domestic limited partners in China. Though<br />
no details on the size of the fund were disclosed, a report carried<br />
by Bloomberg cited Chinese media reports that the firm was<br />
seeking to raise RMB 5 billion (€539 million; $732 million).<br />
The fund is Carlyle’s second RMB fund; the firm set up a smaller<br />
RMB fund to make growth capital investments in early 2009.<br />
march<br />
AXA Private Equity began pre-marketing its €1 billion-plus<br />
infrastructure fund in March. At the time, the firm had a total<br />
of €1.3 billion in infrastructure assets under management across<br />
two funds. Fund III follows the same strategy as its two predecessors,<br />
focusing on investments in core infrastructure investments<br />
across Europe, in France, Italy, Germany and the UK.<br />
Also in March, Advent International came to market with<br />
its fifth Latin American fund, targeting about $1.5 billion for<br />
investments primarily in Mexico, Brazil and Argentina. The firm<br />
closed its fourth Latin American fund on $1.3 billion in 2007.<br />
Advent received several commitments to the fund from US<br />
pensions, including the Washington State Investment Board and<br />
the Pennsylvania State Employees’ Retirement System. The firm<br />
has been working in Latin America since 1996.<br />
may<br />
JMI Equity came to market in May with its seventh growth equity<br />
fund targeting $800 million. By the end of November, Fund<br />
VII had closed on $875 million, with existing limited partner<br />
relationships accounting for about 85 percent of commitments,<br />
a person with knowledge of the fundraising told <strong>PEI</strong>. JMI did<br />
not use a placement agent for the fundraising.<br />
july<br />
Kohlberg Kravis Roberts joined Carlyle on the increasing list of<br />
Western private equity firms setting up China-focused funds in<br />
July. The firm is currently raising capital for a fund focused solely<br />
on Chinese opportunities, targeting “around” $1 billion, sources<br />
said. The fund is KKR’s first country-specific vehicle, having<br />
in the past raised regionally and sector-focused funds. KKR is<br />
already an active investor in China, making investments in the<br />
country from its $4 billion pan-Asian fund that closed in 2007.<br />
august<br />
In August, TPG Capital launched its first and second RMBdenominated<br />
funds, each with RMB5 billion (€579.7 million;<br />
$735.5 million) targets.<br />
“I believe the growth of Western China will be the defining<br />
Continued on p. 72 →
Capital purSuit!<br />
Putting the fun back into fundraising<br />
to the victor go the spoils<br />
Welcome to capital Pursuit, a board game devised by <strong>PEI</strong> to reflect some<br />
of the highs and lows of private equity fundraising today.<br />
The game is easy to play. All you need is a die, some small change to act<br />
as markers and your friends. There’s no limit on how many fund managers<br />
– or investors – can play.<br />
Roll the die to determine who goes first. The player with the highest score<br />
starts proceedings, the second-highest score goes second and so on.<br />
When landing on a square, read the message within it to determine whether<br />
you are fortuitous enough to advance forward, unlucky enough to be forced<br />
backwards or have been forced to miss a go by a certain turn of events.<br />
If you find yourself on a photograph, stay put, you’ve earned a<br />
well-deserved break.<br />
However you fare, fortune favours the brave, so get fundraising.<br />
You allowed your LPs to<br />
reduce their commitments by<br />
10% at the height of the crisis.<br />
They now have extra cash to<br />
deploy and are choosing you<br />
aDVaNCE 4 SpaCES<br />
A spike in oil prices boosts<br />
the coffers of certain<br />
sovereign wealth funds that<br />
are interested in investing in<br />
your fund.<br />
aDVaNCE 5 SpaCES<br />
Stock markets crash creating<br />
denominator problems for<br />
several of your key LPs.<br />
GO BaCK 4 SpaCES<br />
Rather than re-up into your<br />
blind pool fund, an existing<br />
cornerstone investor asks<br />
you to manage a separate<br />
account instead.<br />
GO BaCK 4 SpaCES<br />
FirSt<br />
close<br />
Start<br />
The Fed and the Euro<br />
Central Bank both indicate<br />
low base rates for the next<br />
18 months. LPs loosen their<br />
purse strings.<br />
aDVaNCE 3 SpaCES<br />
You hire a placement agent<br />
with global reach. You quickly<br />
begin to accrue capital (and<br />
air miles!).<br />
aDVaNCE tO<br />
1st ClOSE<br />
Your opportunistic investment<br />
in distressed mezzanine<br />
debt is regarded by your LPs<br />
as style drift. They are not<br />
impressed.<br />
GO BaCK 3 SpaCES
FiNal<br />
close<br />
Your firm becomes the<br />
target of a sustained<br />
attack by labour unions<br />
and the press. Miss a turn<br />
while new LPs consider<br />
the reputational risk of<br />
committing to your fund.<br />
Your firm suffers sizeable<br />
write downs in its past two<br />
funds, prompting new LPs to<br />
reject making commitments.<br />
GO BaCK 5 SpaCES<br />
An existing fund suffers a<br />
claw-back, but you pay back<br />
the capital gross of taxes<br />
paid. Your LPs are extremely<br />
impressed.<br />
aDVaNCE 3 SpaCES<br />
You’ve gone PRI-compliant,<br />
pleasing heavyweight<br />
European<br />
and US LPs.<br />
.<br />
Can you believe it? One of<br />
your key executives quits midfundraising<br />
to join a rival.<br />
An in-kind distribution you<br />
foolishly made in<br />
2007 is now worth 20%<br />
of its distributed value.<br />
Your LPs are livid.<br />
aDVaNCE 1 SpaCE<br />
rEturN tO Start<br />
GO BaCK 2 SpaCES<br />
Your LPs are pushing you on<br />
terms, and your fund’s dealby-deal<br />
carry provisions look<br />
to be under threat.<br />
Your key US public pension<br />
LPs ban the use of placement<br />
agents, restricting your<br />
fundraising capabilities in the<br />
process.<br />
Several Australian<br />
superannuation funds really<br />
like your strategy and they’re<br />
sharing notes with their<br />
peers.<br />
GO BaCK 2 SpaCES<br />
GO BaCK 3 SpaCES<br />
aDVaNCE 1 SpaCE<br />
You invest in a new IR team<br />
that includes a politics<br />
veteran. Your LPs are charmed<br />
beyond reason.<br />
aDVaNCE 5 SpaCES<br />
One of your largest existing<br />
LPs is shifting<br />
to direct investments.<br />
GO BaCK 2 SpaCES<br />
You have plenty of dry<br />
powder, but the risk-adjusted<br />
returns in your target<br />
market are not compelling.<br />
Stay put until the market<br />
improves.
page 72 private equity annual review <strong>2010</strong><br />
story of the next thirty years, creating<br />
vast investment opportunities and we<br />
would like to be part of it,” Sing Wang,<br />
co-chairman of TPG China, told Reuters.<br />
The second fund will make on-shore<br />
investments to expand Chinese companies<br />
to and from Western China, the report<br />
added. This is in contrast to the first fund,<br />
which will invest in mid- to large-sized<br />
Chinese firms with a focus on the financial<br />
services, consumer, retail and healthcare<br />
sectors.<br />
september<br />
Denver-based leisure investment firm<br />
KSL Capital launched its third investment fund targeting $1.5<br />
billion in September. The firm raised $1 billion for its previous<br />
investment vehicle, KSL Capital Partners II fund in September<br />
2006, with commitments from limited partners including<br />
Canada’s Ontario Municipal Employees Retirement System, CPP<br />
Investment Board and the Oregon Public Employees’ Retirement<br />
fund.<br />
october<br />
In October, BC Partners launched its ninth buyout fund, targeting<br />
about €6 billion. The firm is offering a 5 percent reduction<br />
of all GP fees on the fund for LPs who commit prior to the first<br />
close. BC is looking to tap new investors in the Middle East and<br />
Asia, a source told <strong>PEI</strong>. Over half of the capital in BC’s current<br />
fund, BC European Capital VIII, came from North American<br />
Hotel Del Coronado: KSL stockpiles more<br />
resort-focused dry powder<br />
who’s coming to market in 2011?<br />
investors, such as the California State<br />
Teachers’ Retirement System and Canada<br />
Pension Plan Investment Board.<br />
Also in October, AXA Private Equity<br />
launched its fifth secondaries fund of funds<br />
with a target of $3.5 billion and a hard<br />
cap of $4 billion. AXA closed its fourth<br />
secondaries fund of funds on $2.9 billion<br />
in 2006.<br />
november<br />
The Blackstone Group-owned GSO Capital<br />
Partners came to market in November<br />
with its second mezzanine fund, targeting<br />
$3 billion. GSO Capital Opportunities<br />
II Fund will provide capital aimed at buyouts, recapitalisations,<br />
acquisitions and other types of transactions. The fund will make<br />
allocations in blocks of $75 million to $200 million, with up<br />
to 85 percent being made in debt and the remainder used for<br />
equity stakes.<br />
december<br />
In December, Morgan Stanley signed a memorandum of understanding<br />
with the Hangzhou Municipal government to launch an<br />
RMB-denominated private equity fund. No further details about<br />
the fund were released, but Morgan Stanley said in a statement<br />
it plans to establish its headquarters for Chinese private equity<br />
investment in Hangzhou. The firm’s in-house private equity group<br />
Morgan Stanley Private Equity Asia already has offices in Hong<br />
Kong, Beijing, Mumbai, Seoul and Tokyo. n<br />
A number of major firms raised funds in the period up to 2007 and have yet to raise successors.<br />
With investment periods reaching an end, these managers could find themselves marketing<br />
new vehicles in 2011<br />
Vestar Capital Partners – Vestar’s fifth fund closed on $3.7 billion in 2005.<br />
Apax Partners – Apax’s seventh European Fund closed on €11.2 billion 2007.<br />
Leonard Green – Leonard Green’s fifth fund closed on $5.3 billion in 2007.<br />
The Carlyle Group – Carlyle’s third Europe Partners Fund closed on €5.35 billion in 2007.<br />
Morgan Stanley – Morgan Stanley’s third Asia Fund closed on $1.5 billion in 2007.<br />
The Blackstone Group – Blackstone’s Credit Liquidity Partners Fund closed on<br />
$1.3 billion in 2007.<br />
Permira – Permira’s fourth fund closed on €11.1 billion in 2007.<br />
Palamon Capital Partners – Palamon’s second fund, Palamon European Equity II,<br />
closed on €670 million in July 2006.
private equity annual review <strong>2010</strong> pa g e 73<br />
f u n d r a i s i n g<br />
In the money<br />
A number of firms managed to shrug off the fundraising malaise and hold significant<br />
fund closes during <strong>2010</strong>, including…<br />
Sterling Group Partners III – $820 million<br />
The Sterling Group’s third fund is focused on investments<br />
in mid-market companies in manufacturing,<br />
industrial services and distribution. The Houstonbased<br />
firm exceeded its $600 million target and took<br />
10 months to raise the fund. The firm used Lazard<br />
Freres as placement agent for the fundraising, and<br />
added 10 new limited partners to its roster.<br />
Carlyle Global Financial Services Partners<br />
– $1.1 billion<br />
The Carlyle Group began raising its financial services<br />
fund in May 2008, when it invested $75 million<br />
in Boston Private Financial, a wealth management<br />
company. Led by Olivier Sarkozy, half brother of<br />
the French president, the fund also invested $550<br />
million in Bank of NT Butterfield, and joined an<br />
investment consortium that included The Blackstone<br />
Group in the $900 million buyout of Florida-based<br />
BankUnited.<br />
Advent Latin American Private Equity Fund<br />
V – $1.65 billion<br />
Advent’s fifth Latin American vehicle took the title<br />
for the region’s largest private equity fund raised.<br />
The fund had initially gone to market in the fourth<br />
quarter of 2008 with a $2 billion target, but given<br />
the global economic situation the firm later agreed<br />
with LPs that $1.5 billion was a more reasonable<br />
target.<br />
DRI Drug Royalty II – $700 million<br />
Toronto-based DRI Capital beat its initial target<br />
of $500 million for its second drug royalties fund,<br />
which attracted capital from institutional investors<br />
in the US, Canada, Europe, Australia and Asia.<br />
Atlantic-Pacific was the fund’s placement agent.<br />
DRI has more than $2 billion under management<br />
that is uses to buy royalties from pharmaceutical<br />
and biotechnology companies, research institutes<br />
universities and inventors.<br />
Madison Dearborn Capital Partners VI –<br />
$4.1 billion<br />
Madison Dearborn cut its initial target for Fund VI from<br />
$10 billion to $7.5 billion in 2008, one year after the fund<br />
came to market. In January <strong>2010</strong>, the firm asked LPs for<br />
a fundraising extension, as Fund VI was originally slated<br />
to close in February <strong>2010</strong>. Several large public pension<br />
funds invested in Fund VI, including the Washington State<br />
Investment Board, the New York State Teachers’ Retirement<br />
System, the Maryland State Retirement and Pension<br />
System and the Illinois State Board of Investment.<br />
GSO Capital Solutions Fund – $3.2 billion<br />
Blackstone Affiliate GSO Capital Partners’ second<br />
debt-focused fund targets investments in rescue loans,<br />
distressed-for-control and opportunistic transactions<br />
like bankruptcy loans. In select cases, the fund will<br />
invest alongside core Blackstone funds. Investors in<br />
the fund include the San Diego County Employees’<br />
Retirement Association, the California State Teachers’<br />
Retirement System, the Illinois Teachers’ Retirement<br />
System, the Korea Investment Corporation and the<br />
Teachers’ Retirement System of Texas.<br />
HIG Bayside Loan Opportunity Fund II –<br />
$1.1 billion<br />
US-headquartered Bayside Capital’s second debt vehicle,<br />
which originally had a target size of $1 billion,<br />
invests in non-control loan obligations of stressed<br />
and distressed companies in the US and Europe. The<br />
fund has a slightly different strategy than the firm’s<br />
previous distressed investment vehicle, which raised<br />
$3 billion for control investments in 2008.<br />
Pantheon Global Secondary Fund IV –<br />
$3 billion<br />
After almost two years of fundraising, Pantheon<br />
closed its fourth global secondaries fund in October.<br />
The $3 billion raised included a $300 million<br />
separate account with the Ohio Public Employees’<br />
Retirement System. The firm’s original target was<br />
$3.75 billion, with a hard cap of $4.7 billion.<br />
Newbury Equity Partners II – $1 billion<br />
Auda International spinout Newbury Partners beat<br />
its original target of $800 million for its second fund<br />
focused on secondary investments. Credit Suisse<br />
worked as placement agent for the fund, which<br />
has more than 75 institutional investors from the<br />
Americas, Europe, Asia and Australia.<br />
EnCap Energy Capital Fund VIII – $1.2 billion<br />
Texas-based energy fund manager EnCap Investments<br />
in October raised $1.06 billion for its eighth<br />
fund and another $140 million across two investment<br />
vehicles affiliated with the fund. EnCap ultimately<br />
went on to smash its $2.5 billion target and<br />
close oversubscribed on its $3.5 billion hard cap<br />
in February 2011.<br />
Park Hill placed the fund and limited partners<br />
in the fund include the Minnesota State Board of<br />
Investment and the New Mexico Public Employees<br />
Retirement System.<br />
Bertram Growth Capital II – $500 million<br />
US-based Bertram Capital held a final close on $500<br />
million for its second growth capital fund in October.<br />
The fund invests in mid-market companies in<br />
sectors such as healthcare, manufacturing, technology<br />
and business services industries.<br />
Wellspring Capital Partners V – $1.2 billion<br />
Wellspring’s fifth buyout fund’s $1.2 billion haul<br />
was a record amount for the firm. The fund, which<br />
was placed by Credit Suisse, came to market in April<br />
2009 with an original target of $1.3 billion and had<br />
collected around $900 million by August. Fund V<br />
targets mid-market US companies in the consumer<br />
products, manufacturing, retail, distribution and<br />
business and consumer services industries.
page 74 private equity annual review <strong>2010</strong><br />
f u n d a d m i n i s t r a t i o n<br />
Outlook: Fund administration<br />
Four forces altered the landscape of private equity fund administration last year.<br />
Jenna Gottlieb reports<br />
From new regulations in Europe to continued<br />
scrutiny on fees, 2011 promises a host<br />
of fresh fund administration challenges.<br />
Here are four changes that will have GPs<br />
rethinking their approach.<br />
1. European regulation<br />
The EU’s Alternative Investment Fund<br />
Managers directive could prove costly for<br />
GPs in terms of time and money.<br />
The directive will impose rules on<br />
general partners’ pay, fund transparency,<br />
restrictions on asset stripping and, notably,<br />
allows compliant non-EU funds marketing<br />
access to the 27-member bloc.<br />
EU fund managers will also have to hire<br />
independent valuators and depositories to<br />
hold assets in segregated accounts. The<br />
transparency measures may mean hiring an<br />
outsourced fund administrator will start<br />
to look very appealing to some managers.<br />
“Compliance costs could rise by €110<br />
million to €2.2 billion for private equity<br />
funds that operate in the EU,” said one<br />
fund formation lawyer based in London.<br />
“At the time of the [EU Parliament’s]<br />
decision we were pleased … but now the<br />
additional costs are beginning to sink in.”<br />
2. Pressure on fees<br />
In challenging economic times, more<br />
private equity firms were looking to outsource<br />
fund operations to reduce costs.<br />
LPs, however, are increasingly unwilling to<br />
foot the outsourcing bill. GPs are engaging<br />
in tough negotiations with LPs with regard<br />
to outsourcing expenses.<br />
“We are constantly reassessing our<br />
costs,” said Marc Unger, chief operating<br />
officer and CFO at CCMP Capital<br />
Advisors. “We are going to save where<br />
we can, but we are going to spend when<br />
we need to spend.”<br />
3. Consolidation<br />
Consolidation in the fund administration<br />
Singapore: Fund admin firms expand<br />
market has stepped up considerably over<br />
the past year.<br />
JPMorgan Worldwide Securities<br />
Services (WSS) bought the private equity<br />
administration services business of Schroders<br />
in April. At the time, WSS had $15.3 trillion<br />
in assets under custody and $6.5 trillion in<br />
funds under administration. Schroders had<br />
$240 billion under management.<br />
BNY Mellon bought PNC’s global<br />
investment servicing business for $2.31<br />
billion, including the purchase of $1.57 billion<br />
of stock and repayment of intercompany<br />
debt from PNC. PNC’s investment servicing<br />
business provides custody, fund accounting,<br />
transfer agency and outsourcing solutions for<br />
asset managers and financial advisors.<br />
State Street acquired Mourant International<br />
Finance Administration (MIFA), a smaller<br />
European competitor based in Jersey. Bostonheadquartered<br />
State Street, which provides<br />
fund accounting and administration services,<br />
will take over MIFA’s 650 employees and<br />
$170 billion in assets under administration<br />
in Europe and Asia. Three-quarters of this<br />
amount is accounted for by private equity<br />
funds, with the remainder split between real<br />
estate and hedge funds.<br />
“Simply put, less competition is bad for<br />
business,” said one New York-based fund<br />
formation lawyer. “Unfortunately we will<br />
see more of this as service providers refocus<br />
their businesses and determine that fund<br />
administration is a niche they no longer want<br />
to compete in.”<br />
4. Serving more regions<br />
While consolidation among fund administrators<br />
is a concern, some positive news<br />
for GPs came when several firms decided<br />
to expand in <strong>2010</strong>, setting their sights on<br />
new regions.<br />
In November, Citigroup increased<br />
its private equity and real estate service<br />
capabilities for managers based in Europe,<br />
the Middle East and Africa. In expanding its<br />
Global Transaction Services unit into EMEA,<br />
Citi began offering GPs in the region greater<br />
fund administration services including<br />
financial reporting, cash management and<br />
asset safekeeping solutions.<br />
As part of the expansion, Citi has also<br />
established a new client service team in<br />
Dublin. The team joins existing funds<br />
businesses in Luxembourg and Jersey as part<br />
of Citi’s overall private equity capabilities in<br />
the EMEA space.<br />
Luxembourg-based fund administration<br />
provider, Alter Domus, launched two new<br />
European offices in Belgium and Malta in<br />
September. Alter Domus provides fund<br />
administration services to the private equity<br />
industry, including assistance in a fund’s<br />
launch, compliance support and managing<br />
capital calls.<br />
In July Alter Domus opened an additional<br />
office in Singapore as a way of offering further<br />
support to clients in Asia.<br />
New offices are often opened at the<br />
request of clients, said one fund formation<br />
lawyer. “The overhead is low and it keeps<br />
clients happy.” n
private equity annual review <strong>2010</strong> pa g e 75<br />
s e c o n d a r i e s<br />
Banking on it<br />
Last year, pending regulations in the US and Europe caused financial institutions to<br />
begin divesting various private equity holdings. And they found a host of secondaries<br />
firms eager to help, finds Christopher Witkowsky<br />
The secondaries market kicked off <strong>2010</strong><br />
with a running start – several high-profile,<br />
headline-grabbing deals came to fruition in<br />
the early months of the year signaling that<br />
the market that had been dormant in 2009<br />
was finally hitting its stride.<br />
In February, China Investment<br />
Corporation agreed to invest $500 million<br />
each with Lexington Partners, Goldman<br />
Sachs and Pantheon via special accounts for<br />
secondaries investments. (Pantheon would<br />
eventually turn down the commitment due<br />
to disagreements over terms).<br />
But it wasn’t until March that it became<br />
clear what sort of transactions would come<br />
to dominate the secondaries market.<br />
year of the bank<br />
AXA Private Equity in March announced one<br />
of the largest ever secondaries deals, when<br />
it acquired a $1.9 billion portfolio of fund<br />
interests from Bank of America. The funds<br />
were 2005, 2006 and 2007 vintages the bank<br />
had invested in from its balance sheet. About<br />
90 percent of the funds were US-based, with<br />
the balance being European vehicles.<br />
At the time, the AXA deal was closely<br />
watched as a potential bellwether for things<br />
to come – it wasn’t yet clear if the AXA deal<br />
would be the norm for <strong>2010</strong>. But soon after,<br />
Lexington Partners and Citi announced a<br />
similarly large and complex deal – and again,<br />
originated from a bank disposing of assets.<br />
Lexington agreed to buy roughly $1<br />
billion-worth of private equity holdings at<br />
a slight discount from Citi, putting private<br />
equity advisor StepStone Group in place to<br />
manage out a portion of the Citi funds<br />
But it wasn’t just fund interest portfolios<br />
banks started disposing – in some cases it was<br />
entire in-house private equity units. AXA,<br />
for example, picked up some of French bank<br />
Natixis’ domestic private equity operations<br />
for €534 million. HSBC confirmed in early<br />
June that, because of a “changing regulatory<br />
environment”, it was in MBO discussions<br />
with its five remaining in-house units (its<br />
European buyout arm spun out as Montagu<br />
Private Equity in 2003).<br />
Those regulations include the Volcker<br />
Rule in the US, which will eventually limit<br />
banks’ proprietary trading activities with<br />
regard to private equity and hedge funds and<br />
permit them to hold no more than 3 percent<br />
of a private equity fund’s capital. It includes<br />
the existing Basel II, which regulators are<br />
working to interpret, and the upcoming Basel<br />
III, which would likely enforce stringent<br />
capital adequacy requirements on the global<br />
banking sector.<br />
While the regulatory changes aren’t<br />
expected to come into effect for some<br />
time, market conditions in <strong>2010</strong> made it<br />
a good time for both buyers and sellers to<br />
transact. Pricing for assets continued to<br />
rise throughout the year – for example, the<br />
average bid price for all funds marketed in<br />
the first half of the year was 79.6 percent of<br />
net asset value and increased to 84 percent<br />
of NAV in the second half. By year’s end,<br />
many fund interests were selling at par and<br />
even some sold at premiums.<br />
“Stars are aligning for banks to start using<br />
the secondaries market,” Andrew Sealey,<br />
managing partner of advisory and placement<br />
firm Campbell Lutyens, told <strong>PEI</strong> in August.<br />
The friendly environment also encouraged<br />
portfolio sales. Lloyds Banking Group<br />
got into the act, selling 40 private equity<br />
investments in UK-based companies from its<br />
Bank of Scotland Integrated Finance (BOSIF)<br />
business to a joint venture called Cavendish<br />
Square Partners. The joint venture was 70<br />
percent owned by secondaries specialist<br />
Coller Capital and 30 percent by Lloyds.<br />
Coller paid £332 million (€401 million; $502<br />
million) for its stake, valuing the portfolio<br />
as a whole at about £480 million – a slight<br />
premium to book value.<br />
“It’s a large portfolio of reasonably<br />
mature, very good businesses such as [oil<br />
and gas contractor] PSN, [cinema chain]<br />
Vue Cinemas and [health and fitness chain]<br />
David Lloyd,” Coller partner Tim Jones<br />
told <strong>PEI</strong> at the time. “We’ve invested at the<br />
Continued on p. 78 →
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page 78 private equity annual review <strong>2010</strong><br />
bottom end [of the cycle] and it was a fair<br />
and reasonable price.”<br />
Lloyds had inherited the portfolio when<br />
it took over Bank of Scotland in late 2008.<br />
Lloyds was later told by the European<br />
Commission to sell assets to allay competition<br />
concerns. At the time, Coller’s Jones said<br />
“Lloyds won’t be unique by any means” as<br />
banks around the world scrutinised whether<br />
to retain or divest private equity portfolios.<br />
Indeed, Royal Bank of Scotland sold off<br />
two major assets to private equity firms. It<br />
sold its Worldpay card processing division<br />
to Bain Capital and Advent International for<br />
enterprise value of up to £2 billion. It then<br />
sold Priory Group, a provider of mental<br />
health and specialist care services best known<br />
for its rehab clinics popular with celebrities,<br />
to Advent in a £925 million deal.<br />
big war chests<br />
Banks found willing buyers because a number<br />
of secondaries players, many of whom had sat<br />
on the sidelines in the depths of the financial<br />
downturn, were able to raise big funds in 2009<br />
from investors expecting a flood of secondaries<br />
deals that never really materialised.<br />
Firms raised $22.3 billion in 2009, a<br />
massive jump from the $7.4 billion raised<br />
for secondaries in 2008, according to a study<br />
by secondaries advisor and placement agent<br />
Probitas Partners. Despite the fundraising<br />
explosion in 2009, deal volume plunged to<br />
under $10 billion, the lowest level since 2005.<br />
Last year, then, wasn’t about fundraising,<br />
but about spending the capital already raised.<br />
Fundraising plunged to just $6.9 billion, but<br />
deal volume rocketed to about $20 billion, the<br />
highest ever level in Probitas’ study universe,<br />
which stretched back to the mid-1990s.<br />
Pantheon was one of the few firms that<br />
closed new funds last year. The fund of funds<br />
and secondaries firm collected $3 billion for its<br />
fourth global secondaries fund, which had been<br />
in the market for two years. Morgan Stanley’s<br />
Alternative Investment Partners raised its<br />
first-ever fund dedicated to investments in<br />
the smaller end of the secondaries market,<br />
collecting $585 million. Landmark Partners<br />
also closed its 14th private equity fund on<br />
around $2 billion.<br />
beyond bank deals<br />
<strong>2010</strong> also marked the start of what some<br />
insiders believe will be a growing trend in<br />
2011: complex synthetic secondaries deals<br />
involving spin-outs from parent organisations.<br />
Pantheon, for example, backed a<br />
management buyout of Candover Partners,<br />
the beleaguered private equity firm owned by<br />
listed investment trust Candover Investments.<br />
The firm was sold to a new entity, Arle Capital<br />
Partners, led by John Arney and comprising<br />
the entire 25-person Candover Partners team.<br />
As part of the deal, Pantheon and the Arle<br />
team acquired a “strip” of assets from the listed<br />
parent company for £60 million. The “strip”<br />
comprised stakes in the 13 existing portfolio<br />
companies under Candover’s management, or<br />
nearly one-third (29.1 percent) of the listed<br />
parent’s investment portfolio.<br />
Pantheon also backed the spin-out of two<br />
Goldman Sachs managing directors, who<br />
launched private equity firm New MainStream<br />
Capital. Pantheon contributed about $250<br />
million to the firm, which allowed New<br />
MainStream to buy six portfolio companies<br />
from Goldman’s Urban Investment Group.<br />
At press time, such spin-outs with<br />
secondary firm backing seemed set to<br />
become a key theme for 2011. In the first<br />
part of 2011, HarbourVest Partners backed<br />
the spin out of Nomura’s venture team as<br />
well as the €177 million spin-out of German<br />
publishing group Verlagsgruppe Georg von<br />
Holtzbrinck’s 12-year-old captive venture<br />
arm, Holtzbrinck Ventures.<br />
Watch this space. n<br />
market momentum<br />
Transactions on the global secondaries market (both directs as well as LP interests including unfunded commitments)<br />
were projected to reach roughly $20bn in <strong>2010</strong><br />
$ bn<br />
$20.0<br />
$20.0<br />
1990 – 1H’10 Cumulative<br />
$16.4<br />
Secondary Directs $11.1<br />
$17.5<br />
Secondary Partnerships 85.7<br />
$2.7<br />
$96.8<br />
$13.3<br />
$15.0<br />
$2.4<br />
$10.3<br />
$12.5<br />
$9.2<br />
$2.4<br />
$8.6<br />
$10.0<br />
$8.4 $7.5<br />
$0.6 $0.5<br />
$7.1 $1.4<br />
$0.7<br />
$0.4<br />
$7.5<br />
$13.7<br />
$11.4<br />
$5.0<br />
$2.3<br />
$3.1<br />
$2.1<br />
$7.0<br />
$7.9<br />
$8.6 $8.1<br />
$0.9<br />
$1.5 $0.1<br />
$2.3<br />
$6.7<br />
$6.8<br />
$0.1<br />
$0.7<br />
$2.5<br />
$0.1<br />
$1.0<br />
$0.1<br />
$0.2 $0.4 $0.4<br />
$0.5<br />
$0.6 $0.1<br />
$2.2<br />
$1.4<br />
$2.0<br />
$0.8<br />
$0.6<br />
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H’10<br />
Source: Lexington Partners<br />
Transaction year
page 80 private equity annual review <strong>2010</strong><br />
d i s t r i b u t i o n s<br />
Cash back<br />
Money started to flow back to LPs in <strong>2010</strong> … assuming<br />
they had a mature portfolio of fund interests, reports<br />
Christopher Witkowsky<br />
Limited partners were given some breathing<br />
space last year by their private equity<br />
managers, who began to return capital at<br />
levels not seen since before the financial<br />
crash in 2008.<br />
In the first half of the year, the amount of<br />
cash coming in to LPs through distributions<br />
almost caught up with the amount going<br />
out in the form of capital calls, according<br />
to numbers from Cambridge Associates, an<br />
advisor to private equity limited partners.<br />
Cambridge reported in November that<br />
during the first half of <strong>2010</strong>, capital calls<br />
outpaced distributions by only 1.4 times.<br />
Money was still being called faster than<br />
it was being distributed, but the gap had<br />
narrowed to the smallest margin in two<br />
years.<br />
In 2009, calls for capital by GPs had<br />
outpaced distributions by 1.9 times. In the<br />
previous year, LPs had had the toughest time<br />
in terms of private equity cash management,<br />
with capital calls out-pacing distributions<br />
by about 2.5 times, the widest margin in<br />
the time period Cambridge studied, which<br />
stretched back to 1996. Cambridge’s<br />
information comes from a universe of about<br />
850 funds.<br />
Wilshire Associates, another advisory<br />
firm, noted similar flows. It observed a<br />
60/40 split between dollars going out and<br />
dollars coming in, based on data from about<br />
450 funds.<br />
Private equity portfolios which were<br />
adequately diversified across vintage years,<br />
therefore, began to have an easier time in<br />
terms of cash flow; for these portfolios,<br />
the distribution vs. capital call cycle had<br />
“normalized”. For less mature programmes,<br />
however, the cycle remained imbalanced.<br />
The $31.8 billion Maryland Retirement<br />
System, for example, in November<br />
announced that it had pulled back from<br />
private equity commitments in recent<br />
months because the “normal cycle of<br />
calldowns and distributions [had] been<br />
broken since late 2008”.<br />
Maryland was likely feeling ongoing<br />
pressure because the pension made a big<br />
push into the asset class starting in 2008,<br />
when it ramped up its allocation to private<br />
equity from 5 to 15 percent. Maryland made<br />
more than $1 billion of commitments to<br />
private equity since it raised its allocation.<br />
Unfortunately for Maryland, and the many<br />
other institutional investors which upped<br />
the private equity exposure between 2005<br />
and 2008, funds raised during this period<br />
are well into the process of calling down<br />
capital, but are not necessarily returning<br />
capital to LPs.<br />
Triago, a placement agent and secondaries<br />
advisor, found that within the universe of<br />
about 200 funds it tracks, capital calls during<br />
<strong>2010</strong> outpaced distributions by a significant<br />
amount. According to the firm, capital calls<br />
accounted for 11.5 percent of committed<br />
capital, while distributions were just 6.3<br />
percent. The disparity between Triago’s<br />
and the other two advisers’ numbers is<br />
likely down to the fact that the universe for<br />
Triago’s study consists of funds it sees in the<br />
a big call<br />
Source: Triago<br />
secondaries market, which tend to be from<br />
more recent vintages, from 2005 and later.<br />
This is bad news for LPs with portfolios<br />
biased towards the younger vintages.<br />
Anecdotally, limited partners more<br />
recently have seen distribution and activity<br />
levels rise even further. In January 2011,<br />
HarbourVest Partners’ listed investment<br />
vehicle reported a dramatic return to<br />
activity in its portfolio in December,<br />
with large increases in capital calls and<br />
realisations. The fund of funds met capital<br />
calls totalling $35 million during December<br />
from its funds of funds, a direct investment<br />
fund and its global secondaries fund. This<br />
compares with just $4.3 million in calls<br />
funded during November, or $9.2 million<br />
during December 2009. The increased<br />
investment pace was almost matched by<br />
distributions received. 32 exits across the<br />
portfolio returned a total of $31.6 million<br />
to the HVPE.<br />
Steve Belgrad, chief financial officer of<br />
HarbourVest Global Private Equity, said the<br />
activity levels for December were broadly<br />
on a par with those seen in during the highs<br />
of 2007. “You are finally seeing the listed<br />
private equity fund functioning in the way<br />
it was intended, with distributions just<br />
outpacing capital calls,” Belgrad said in<br />
January. “It feels like the industry has finally<br />
turned a corner.” n<br />
Triago’s data show distributions as a proportion of all committed capital more than<br />
trebling in <strong>2010</strong>, but still be ing outpaced by capital calls<br />
8%<br />
n Distributions<br />
n Calls<br />
6%<br />
4%<br />
6.3%<br />
2%<br />
2.0%<br />
0%<br />
-2% -5.3%<br />
-11.5%<br />
-4%<br />
-6%<br />
-8%<br />
-10%<br />
-12%<br />
2009 <strong>2010</strong>
private equity annual review <strong>2010</strong> pa g e 81<br />
t e r m s & c o n d i t i o n s<br />
Terms tug of war<br />
The push-pull between fund managers and investors over<br />
terms and conditions may not have been as dramatic as<br />
some assumed, finds Nicholas Donato<br />
Limited partners’ rising negotiating power<br />
on terms and conditions was discussed frequently<br />
in 2009 and <strong>2010</strong>.Tougher fundraising<br />
conditions, more GPs needing to<br />
replenish dry powder and LP-friendly terms<br />
and conditions guidelines released by the<br />
Institutional Limited Partners Association<br />
were all said to have given LPs the upper<br />
hand in many cases.<br />
But a study released last year by New<br />
York-headquartered law firm Debevoise<br />
& Plimpton found there had been no<br />
“substantial shift” in terms in the past five<br />
years. The study examined more than 200<br />
buyout funds globally, comparing the key<br />
financial and legal terms of funds that had<br />
final closing prior to the financial crisis, with<br />
those closed post-crisis.<br />
“LPs and their advisors are vigorously<br />
negotiating fund terms these days, in many cases<br />
citing the ILPA [guidelines] to support their<br />
arguments,” the report acknowledged, adding<br />
there was, however, little evidence of an overall<br />
industry-wide shift of power towards LPs.<br />
The study measured nine key economic<br />
terms of buyout funds: the timing of<br />
carried interest distributions; carried<br />
interest percentages, preferred return<br />
rates; management fees both during and<br />
after the investment period; sharing of<br />
transaction and other fees; joint and several<br />
guarantees on GP clawback provisions;<br />
interim clawback provisions; and after-tax<br />
calculations on clawbacks.<br />
On most demands, including the timing<br />
of carried interest distributions and carry<br />
points, little concession was found to have<br />
been made on the part of GPs.<br />
giving way<br />
LPs did however gain ground on a few<br />
issues highlighted by ILPA – most notably<br />
on transaction and management fee reductions<br />
or offsets.<br />
The Debevoise study found many GPs<br />
gave way on management fee “step downs”,<br />
which had been long-demanded by investors<br />
who argue that reduced management fees<br />
after the wind-down of a fund’s investment<br />
period reflect lower operating costs.<br />
Large funds raised after the crisis – those<br />
of $2 billion or more – had post-investment<br />
period management fees of on average 1.1<br />
percent. Those raised before the crisis charged<br />
a fee of 1.24 percent. For smaller funds, the<br />
post-crisis funds charged 1.73 percent in<br />
management fees after the investment period.<br />
Pre-crisis funds charged 1.81 percent.<br />
Concessions were also made on the<br />
handling of fee offsets, which occur when<br />
a GP reduces or cancels management fees as<br />
a result of receiving income from break-up<br />
fees, transaction and/or monitoring fees<br />
Show of strength: GPs and LPs in<br />
<strong>2010</strong> continued to negotiate hard<br />
on terms<br />
charged to portfolio companies.<br />
Also found more prevalent in post-crisis<br />
funds were more LP-friendly clawback<br />
provisions, which allowed fund investors<br />
to recover money in the event GPs receive<br />
too much carried interest – such as when<br />
managers receive carry on successful exits<br />
early in the fund’s life. In noting ILPA’s<br />
recommendation that GPs should make any<br />
necessary clawback payments within two<br />
years, as opposed to waiting until the fund<br />
completes its last exit, the study revealed<br />
16 percent of the sample funds now provide<br />
for the provision compared to the lesser<br />
10 percent of funds offering the provision<br />
raised during the boom years.<br />
While many GPs have given in to LP<br />
demands on fees, however, it may not be<br />
enough. For instance the California Public<br />
Employees’ Retirement System (CalPERS),<br />
a trendsetter in the LP community in terms<br />
of negotiations with fund managers, has<br />
indicated it may push for incentive-based<br />
fees rather than flat management fees.<br />
Should that proposal become policy,<br />
there will no doubt be further friction<br />
between LPs and GPs on the fee front. But<br />
is that such a bad thing? After all, a leaner,<br />
hungrier group of smart, hardworking<br />
managers who merit their fees is good for<br />
the industry as a whole – not just CalPERS.<br />
The squeaky wheel complaint from LPs of<br />
GPs growing fat on fees gets jettisoned and<br />
instead there is an unambiguous alignment<br />
of interest. No more “heads I win, tails you<br />
lose” as one fund formation lawyer recently<br />
put it to <strong>PEI</strong>. n
page 82 private equity annual review <strong>2010</strong><br />
re g u l a t i o n<br />
The year of regulation<br />
Congress: registration rules<br />
will trouble foreign GPs<br />
In <strong>2010</strong> governments around the world rubber-stamped<br />
a number of new sets of rules that will certainly change<br />
the way private equity firms do business. Nicholas Donato<br />
reports<br />
The year <strong>2010</strong> will most likely be remembered<br />
in one of two ways: either as the year<br />
that the private equity markets reignited<br />
or – for some – the year of the regulator.<br />
While policymakers have generally<br />
conceded that the asset class was not<br />
responsible for the recent economic collapse,<br />
the industry was nonetheless caught up in<br />
legislators’ efforts to mitigate future risks<br />
to the global financial system. As a result, a<br />
flurry of bills have been either proposed or<br />
already inked into law in <strong>2010</strong> demanding<br />
private equity houses across the world<br />
submit to increased transparency, reporting<br />
requirements, and other rules which will<br />
referee the industry’s playing field.<br />
Leading the charge has been the European<br />
Parliament which for months debated<br />
tougher restrictions on GPs both inside and<br />
outside of the 27-member European Union.<br />
As a result, the private equity community<br />
held its breath for most of <strong>2010</strong> as EU<br />
lawmakers negotiated just how far the law<br />
would clamp down on the industry through<br />
the controversial Alternative Investment<br />
Fund Manager’s directive.<br />
The 210-page directive proposal, which<br />
was passed by the EU Parliament on a vote of<br />
513 to 92 in November, subjects managers<br />
to new rules on pay, fund transparency<br />
and “asset stripping”, but perhaps most<br />
importantly settled the question of how<br />
non-EU funds and managers would be<br />
treated once the law takes effect.<br />
Prior to this agreement, most of <strong>2010</strong><br />
played out as a deadlock between the EU<br />
Parliament and the more GP-friendly EU<br />
Council. The Parliament had originally<br />
argued that GPs based outside the Union<br />
should be unable to market funds to European<br />
institutions. The Council disagreed. The two<br />
camps would ultimately volley 17 different<br />
compromise proposals before finally seeing<br />
eye to eye; the Council eventually succeeding<br />
in leaving the EU open for business to outside<br />
GPs and funds. The compromise was reached<br />
under the condition the non-EU GPs must<br />
be subject to regulatory regimes in their own<br />
country of a certain stringency.<br />
And while the directive was formally<br />
adopted in January <strong>2010</strong>, the industry’s
private equity annual review <strong>2010</strong> pa g e 83<br />
tussle with the regulators continues as the<br />
directive’s broader principles are fleshed out<br />
under so-called “Level 2” measures, which<br />
are due to be completed by early 2013. The<br />
follow-up rules will address a range of matters,<br />
including how a fund’s assets are valued, how<br />
a fund’s annual report should be drafted and<br />
will reveal criteria used by regulators when<br />
assessing whether non-EU countries measure<br />
up to the directive’s requirements. The EU<br />
government will be looking to finalise these<br />
measures by early 2012, giving EU member<br />
states an additional year to reach compliance.<br />
frank discussions<br />
Similar efforts against the industry took place<br />
on the other side of the Atlantic in the United<br />
States. When the blockbuster Dodd-Frank<br />
Wall Street Reform and Consumer Protection<br />
Act passed in July, lawmakers were sure<br />
to include GPs worldwide in their crosshairs.<br />
Provisions in the law mandate that domestic<br />
firms register with the US Securities and<br />
Exchange Commission. The law also requires<br />
foreign private equity firms with more than<br />
15 US-based LPs, at least one office in the<br />
US and more than $25 million in combined<br />
US investor assets to register. This will mean<br />
firms - both based in or out of the US - will<br />
need to establish formal compliance policies<br />
to outline how they would deal with potential<br />
conflicts of interest. Registration also means<br />
firms need to designate a compliance officer<br />
and face regular inspections by the Securities<br />
and Exchange Commission.<br />
Registration will mean unwelcome<br />
changes for some GPs, but a broader shift<br />
in the industry’s landscape may stem from<br />
parallel reform measures setting new limits<br />
on a banks’ involvement with private equity<br />
firms. The so-called “Volcker rule”, named<br />
after former Federal Reserve chairman Paul<br />
Volcker, will impose restrictions on banks’<br />
abilities to invest in or sponsor private equity<br />
and hedge funds based both within the US<br />
and abroad.<br />
Unlike the White House’s campaign for<br />
a complete ban on proprietary trading and<br />
fund sponsorship early in <strong>2010</strong>, Congress<br />
passed softer language which allows banks<br />
to invest up to 3 percent of their Tier 1<br />
capital in private equity, with an additional<br />
restriction on acquiring more than a 3<br />
percent ownership stake in any fund.<br />
Similar to efforts underway in Europe,<br />
the signed bill, which provided only a<br />
framework around which the rules would<br />
be implemented, would not prove to be the<br />
end of the reform process. In October the<br />
newly formed Financial Stability Oversight<br />
Council began a public consultation period<br />
over the rule as mandated by the Dodd-Frank<br />
Act, which requires the council to complete<br />
a study of the rule no later than six months<br />
after the bill’s enactment.<br />
weighting game<br />
Banks are also being targeted on a global<br />
basis. The Basel Committee on Banking<br />
Supervision is in the process of creating new<br />
international standards – dubbed “Basel III”<br />
– which are the latest global agreements on<br />
capital requirements for banks following<br />
the financial crisis. The rules, which were<br />
endorsed in November by nations at the<br />
G20 summit, will introduce higher capital<br />
requirements and liquidity measures for<br />
banks.<br />
Final rules for Basel III, scheduled to<br />
come into effect between 2015 and 2018,<br />
will increase the minimum common equity<br />
requirement banks must hold from the<br />
current 2 percent to 4.5 percent and will<br />
further introduce a capital conservation<br />
buffer of 2.5 percent, bringing the total<br />
common equity requirement to 7 percent.<br />
Depending on how private equity assets are<br />
risk-weighted, the provisions could result in<br />
banks decreasing their holdings in the asset<br />
class as a way of complying with capital<br />
requirements.<br />
Or perhaps more likely, Basel III may<br />
result in a number of banks spinning out<br />
in-house firms to be compliant. Global<br />
banking giant HSBC, for example, agreed<br />
late last year to sell an 80.1 percent<br />
stake of its Asian private equity business<br />
HSBC Private Equity Asia to the firm’s<br />
management team, while retaining the<br />
remaining share. It has indicated plans to<br />
do the same with other in-house private<br />
equity groups, as have other banks.<br />
Other risk-based rules in the European<br />
Union will likely affect investment activities<br />
by the insurance industry in a similar<br />
fashion. The Solvency II directive, scheduled<br />
to be introduced in November of 2012, will<br />
introduce risk-based solvency requirements<br />
for insurance and re-insurance groups.<br />
It looks likely that the capital a European<br />
insurer would need to hold against its private<br />
equity assets will increase. Indeed, insurers<br />
are likely to “reduce appreciably” their private<br />
equity holdings, perhaps even stopping<br />
investments in the asset class altogether,<br />
according to a study carried out by the<br />
EDHEC Financial Analysis and Accounting<br />
Research Centre last year.<br />
<strong>2010</strong> has thus been a watershed moment<br />
in the world of private equity regulation. And<br />
as new laws take effect, and secondary rulemaking<br />
processes kick-off, it will become<br />
increasingly important fund managers keep<br />
abreast of the new regulatory landscape. n
page 84 private equity annual review <strong>2010</strong><br />
re g u l a t i o n<br />
Regulations on the horizon<br />
Canada: RE RULES<br />
Canadian pension plans’ exposure to the real estate asset<br />
class could increase after the government finalised new<br />
regulations which scrapped previous caps on investment.<br />
The Canadian department of finance last summer ruled<br />
that it would eliminate previous regulations that limited<br />
public pensions to investing no more than 5 percent of its<br />
portfolio in a single parcel of real estate, and allocate no<br />
more than 25 percent of its portfolio to the asset class. The<br />
rules also apply to Canadian resource properties (real estate<br />
related to petroleum, natural gas or hydrocarbons extraction<br />
and operations) and abolished a cap on such investments<br />
exceeding 15 percent of a pension portfolio.<br />
US: SEC REGISTRATION<br />
The Dodd-Frank act will require private equity<br />
firms with $150 million or more in assets to<br />
register with the SEC by 21 July, 2011. The act<br />
also introduced the “Volcker rule” which will<br />
force banks to hold no more than 3 percent<br />
of a private equity fund’s capital.<br />
US: Carried INTEREST<br />
Efforts to change the tax treatment of carried<br />
interest failed following the Republicans<br />
reclaim over the House of Representatives<br />
late last November. But the tax debate is<br />
set to reignite thanks to a line in President<br />
Obama’s budget.<br />
US: Anti-trust<br />
Last August the Federal Trade Commission<br />
proposed new rules which will make it<br />
much tougher for private equity outfits to<br />
gain anti-trust clearance when attempting<br />
to acquire a rival business. Under the<br />
proposals firms will be subject to greater<br />
information requirements and reporting<br />
costs. The FTC is expected to issue its final<br />
rules sometime this year.
private equity annual review <strong>2010</strong> pa g e 85<br />
Ireland: Non-RESIDENT TAX<br />
Irish revenue commissioners will no longer<br />
require outside investors to complete a<br />
non-resident tax declaration as part of<br />
the fund subscription process, easing<br />
administrative costs for private equity<br />
funds domiciled in the country. The change<br />
is the result of a new provision in the Irish<br />
Finance Act <strong>2010</strong>, which says that in lieu<br />
of the declaration, the fund must put in<br />
place “equivalent measures” which satisfy<br />
the revenue commissioners. Prior to the<br />
change, outside investors who failed to<br />
declare themselves a non-resident were<br />
deemed to be Irish by default, meaning<br />
they were liable to pay Irish tax on their<br />
income and gains.<br />
UK: Bribery ACT<br />
Under the UK’s Bribery Act passed last year,<br />
a “commercial organisation” will become<br />
criminally liable should any “associated<br />
person” offer or conduct a bribe designed<br />
to provide a business advantage for the<br />
commercial organisation. Expected to<br />
come into force in April of this year, the act<br />
makes no distinction between bribes paid<br />
in the UK or anywhere else in the world,<br />
nor does it matter if foreign authorities do<br />
not interpret a UK firm’s activity in its home<br />
district as bribery.<br />
China: FOREIGN LPs<br />
Shanghai in the autumn received<br />
in-principle approval from China’s financial<br />
authorities to launch a pilot programme<br />
allowing foreign limited partners to<br />
invest in the country’s domestic private<br />
equity and venture capital markets.<br />
Under the programme, qualified foreign<br />
LPs will be able to convert foreign<br />
currency for investment into an onshore<br />
RMB-denominated fund established<br />
in Shanghai, as long as the aggregate<br />
quota for foreign-originated capital does<br />
not exceed 50 percent of the total size of<br />
the fund.<br />
Dubai: New HUB<br />
Dubai’s Financial Services Authority (DFSA) relaxed<br />
restrictions on fund managers in effort to solidify Dubai<br />
as a hub for international investment alongside London,<br />
New York and Hong Kong. The regulatory body for the<br />
Dubai International Financial Centre (DIFC), lowered<br />
the free trade zone’s fund manager application fee to<br />
$10,000 from $40,000 and expanded the scope for<br />
marketing of foreign funds in or from the DIFC. Under<br />
the old regime, DIFC-based fund managers were<br />
restricted from managing foreign funds. Similarly,<br />
foreign fund managers were restricted from acting as<br />
DIFC managers without first establishing a base in the<br />
DIFC and obtaining a DFSA license.<br />
Australia: Tax HIKE<br />
The Australian Tax Office has ruled that<br />
gains from asset sales by private equity<br />
firms would be taxed as income. The ruling<br />
specifically targeted private equity firms<br />
domiciled in international tax havens.
PRIVATE FUND<br />
COMPLIANCE FORUM 2011<br />
<strong>THE</strong> ROAD AHEAD<br />
May 3-4 | 3 West Club, New York<br />
The second annual Private Fund Compliance Forum comes at a critical time for compliance<br />
professionals. With the recent passage of the Dodd-Frank Act, the private equity industry is<br />
facing a transformational event that will change the scope of how GPs manage their firms.<br />
This year’s forum will focus on how to implement and manage an effective compliance<br />
program amidst this new wave of regulations, as well as provide a comprehensive update on<br />
other key global tax and regulatory initiatives that could change the way you do business.<br />
As the SEC increases its focus on the private equity industry more than ever before, ensure<br />
that your firm stays abreast of compliance matters.<br />
Hear from our distinguished speakers including:<br />
www.peimedia.com/compliance11<br />
Book your<br />
place today:<br />
Online<br />
www.peimedia.com/<br />
compliance11<br />
Email<br />
nicole.w@peimedia.com<br />
Phone<br />
+1 212 633 2905
private equity annual review <strong>2010</strong> pa g e 87<br />
Slim pickings<br />
d i s t re s s e d i n v e s t i n g<br />
What happened to the feast of distressed investment opportunities expected to flood<br />
the US and UK markets? Amanda Janis reports<br />
Take a trip through the <strong>PEI</strong> archives back<br />
to autumn 2006 and you’ll be reminded<br />
that private equity distressed investors were<br />
beginning to rub their hands in anticipatory<br />
glee, noting that the boom cycle’s high valuations,<br />
excess liquidity and low interest rates<br />
couldn’t continue in perpetuity.<br />
Indeed, one year on, the term “credit<br />
crunch” was beginning to appear regularly<br />
in our pages – but no one was prepared<br />
for the severity of the global economic<br />
crisis that was to unfold over the next two<br />
years, causing large financial institutions to<br />
collapse, stock markets to plummet and the<br />
entire global financial system to be called<br />
into question.<br />
The severity of the crisis – and the<br />
subsequent responses by banks and central<br />
governments –dampened a lot of the<br />
anticipatory glee.<br />
Josh Wolf Powers, founding partner<br />
of New York-based turnaround and<br />
restructuring firm Blue Wolf Capital<br />
Management, has been predicting an<br />
avalanche of opportunities related to distress<br />
for nearly five years. He’s still waiting<br />
for the wave of conventional distressed<br />
opportunities, he says.<br />
“There just has not been the avalanche of<br />
companies in the US filing for Chapter 11<br />
bankruptcy protection,” Wolf Powers says.<br />
“And when they have filed for Chapter 11,<br />
they’ve typically been far further gone, so<br />
the Chapter 11 has resulted in a liquidating<br />
[Chapter] 7 or has been a reorganisation<br />
opportunity available primarily to the<br />
lenders, to the senior creditors or secured<br />
lenders.”<br />
That resulted in a number of<br />
distressed debt specialists like Oaktree<br />
Capital Management, Anchorage Capital<br />
Partners, Towerbrook Capital Partners and<br />
Wayzata Investment Partners taking over<br />
companies (often from private equity firm<br />
sponsors), but Wolf Powers says “even those<br />
opportunities haven’t been as numerous as<br />
anyone imagined”.<br />
banks and bailouts<br />
“Things that are good for most investors,<br />
and most citizens” aren’t so wonderful for<br />
those hoping to find distressed investment<br />
bargains, Howard Marks, chairman of Oaktree,<br />
wrote in <strong>PEI</strong>’s recent book, The Definitive<br />
Guide to Distressed Debt and Turnaround<br />
Investing.<br />
Thus various government bailouts and<br />
stimulus packages over the past two years<br />
– which one veteran distressed investor<br />
dubbed “the socialist bailout game where<br />
the consequence of taking absurd risk was<br />
forgiven” – have helped restore confidence<br />
and revive credit markets, but suppressed<br />
the supply of distressed investment<br />
opportunities.<br />
However, it’s the actions – or rather<br />
lack thereof – of lenders that industry<br />
insiders most frequently pointed to as a<br />
principal reason why the expected plethora<br />
of distressed investment deals didn’t quite<br />
come to fruition.<br />
“Lenders – in particular banks, but<br />
also hedge funds and other non traditional<br />
lenders – chose rather than to exit their<br />
uneconomic holdings, to essentially ‘live<br />
to fight another day’ by neither admitting<br />
defeat nor funding continued investment,”<br />
says Wolf Powers.<br />
Reeling from mortgage-related losses<br />
and caught out by the suddenness of the<br />
downturn, many banks hadn’t taken<br />
reserves against corporate loans that<br />
should have been marked down and become<br />
distressed investment candidates, says David<br />
Blechman, who in August 2009 left Sun<br />
Capital to join distress- and turnaroundfocused<br />
Tower Three Partners. “If it’s on<br />
your books at par, you’re not going to<br />
transact on it. You have to mark it down<br />
first,” he says.<br />
“So in late ‘08 and the first part of ‘09,<br />
a lot of those lenders just weren’t willing<br />
to do anything yet. And meanwhile, to<br />
the extent that it was [private equity and<br />
hedge] funds holding the bank debt, more<br />
and more of those funds were willing to<br />
own the company,” Blechman says. “So there<br />
were far, far fewer actual distressed private<br />
equity control buyouts of these companies<br />
as a result of those two things.”<br />
The situation has been the same on<br />
both sides of the Atlantic. And while many<br />
lenders in Europe increasingly started to<br />
divest some of these assets in the latter<br />
part of <strong>2010</strong>, industry participants say<br />
they weren’t likely to attract many true<br />
distressed investors now, either because<br />
the assets were no longer “distressed” given<br />
the market rally seen in the first part of<br />
<strong>2010</strong>, or because they’ve essentially become<br />
“zombie companies” while sitting on the<br />
banks’ balance sheets.<br />
timing it right<br />
Before the subprime crisis fully hit, distress<br />
hadn’t really begun to manifest itself save<br />
for in certain sectors like those related to<br />
housing. “So there were some opportunities<br />
there, before fall 2008, but it was all<br />
complicated by the fact that you had no<br />
visibility as to what the future was likely<br />
to hold with respect to that sector,” Wolf<br />
Powers recalls. “You saw that you were on<br />
the edge of a cliff but you didn’t know how<br />
high the cliff was or how fast you were<br />
going to fall. So that made it very hard to<br />
invest in that situation.”
page 88 private equity annual review <strong>2010</strong><br />
a brief distressed debt and<br />
restructuring timeline<br />
1978 Chapter 11 of the US bankruptcy code is adopted, creating<br />
an effective framework for restructuring companies in<br />
financial distress instead of liquidating them<br />
1978 Capital gains tax rate slashed from 49.5 percent to 28 percent;<br />
the US Department of Labor clarifies that pension plans can<br />
invest in private equity, leading to increased interest in the<br />
overall sector<br />
1980 Total commitments raised for US private equity: $600 million<br />
1980s High yield bond market surges on a new issuance basis, with<br />
Michael Milken of Drexel Burnham Lambert a major force in<br />
the activity; much of the high yield new issuance activity is in<br />
support of leveraged buyouts<br />
1989-91 First spate of distressed debt and restructuring deals<br />
triggered by the junk bond boom of the 1980s<br />
1989 The Resolution Trust Corporation formed by the US<br />
government to help restructure the savings and loan industry<br />
creates additional distressed security opportunities<br />
1991 Total commitments raised for US private equity: $7.7 billion<br />
1992 Cerberus Capital Management founded<br />
1997 Asian currency crisis creates many distressed debt and<br />
restructuring opportunities in Asia<br />
1997 Oaktree Capital Management raises $1.25 billion for OCM<br />
Principal Opportunities Fund II and $1.5 billion for the OCM<br />
Opportunities Fund II, the largest such vehicles to date<br />
1997 Klesch Capital raises one of the first dedicated European<br />
restructuring funds in the UK<br />
2000 Total commitments raised for private equity: $155.2 billion in<br />
North America, € 60.7 billion in Europe and $17.9 billion in Asia<br />
2000 Ripplewood Holdings and JC Flowers lead a consortium to<br />
purchase Long Term Credit Bank of Japan from the Japanese<br />
government and restructure it as Shinsei Bank in one of the<br />
highest profile turnarounds in Asia<br />
2002 The EU Regulation on Insolvency Proceedings is adopted,<br />
providing a framework for coordinating restructurings in the<br />
EU (with the exception of Denmark)<br />
2003 Two local fund groups – Nordwind Capital and Orlando<br />
Management – raise restructuring funds in Germany<br />
2004 Shinsei’s IPO generates tremendous profits for the syndicate<br />
that funded the restructuring, though Shinsei later runs<br />
into difficulties<br />
2006 Lone Star Funds’ Korea Exchange Bank transaction attracts<br />
various investigations by the Korean government upset by the<br />
high level of profitability in this public sector restructuring<br />
2007 Largest global recession since the Great Depression<br />
commences; fund managers anticipate a strong investment<br />
environment for distressed debt and restructuring funds<br />
2008 Fundraising for distressed debt and restructuring funds hit a<br />
new high of $51.4 billion<br />
2009 Cerberus turnaround of auto manufacturer Chrysler fails in a<br />
massive bankruptcy<br />
2009 TPG Financial Partners decreases its fund size from $6 billion to<br />
first $4.5 billion, then $2.5 billion, as changing government<br />
regulation impacts the attractiveness of investing in<br />
distressed banks<br />
2009 Default rate for high yield bonds hits 13 percent, a new high,<br />
though Moody’s forecast for the rate for the end of <strong>2010</strong> falls<br />
to 3 percent<br />
<strong>2010</strong> Blackstone debt affiliate GSO Capital raises $2 billion for<br />
investment in rescue loans, distressed for control and<br />
opportunistic transactions<br />
<strong>2010</strong> Global corporate default rates fall 44 percent from their<br />
13.5 percent peak in November 2009, according to Moody’s<br />
data released in June<br />
Source: Probitas Partners, <strong>PEI</strong><br />
Those that did take the leap did so in some cases with unpleasant<br />
results.<br />
“A number of groups jumped too early and started buying up<br />
bonds and the like in 2007 or early 2008, figuring that we were<br />
sort of in the crisis, and of course with hindsight now we now that<br />
was just the warm-up to the crisis,” says Josh Lerner, a Harvard<br />
Business School professor and private equity scholar. “A lot of<br />
those fund investors got pretty badly burned when things turned<br />
south in the second half of ‘08.”<br />
Likewise, Lerner says, many GPs were also burned because they<br />
waited too long to begin making distressed investments, figuring<br />
the cycle would continue for at least two to three years, based on<br />
historical recessions. Most GPs thought they would have time to<br />
adapt and see if things got any worse, he says. “I don’t think anyone<br />
anticipated how rapidly the economy – or equity prices – would<br />
recover,” Lerner says. “In general I think the private equity industry<br />
will regret not having invested more money in 2009.”<br />
The snapback in equity valuations affected firms with various<br />
distressed investment strategies, including traditional private equity<br />
firms that were simply expecting to purchase cheap assets. “I think<br />
the anticipation was that we would be in an environment like one of<br />
the ones we saw coming out of the ’91 and ’01 recessions, in which<br />
we would be able to buy companies at multiples ranging from 5 to<br />
8 times EBITDA – that didn’t happen this time, partly because of<br />
the enormous jump in the public equities markets,” Scott Sperling,<br />
co-president of Thomas H Lee Partners, told <strong>PEI</strong> last month.<br />
It also threw off-kilter some of the distressed debt investors that<br />
look to amass a company’s debt in a loan-to-own strategy. “The<br />
average duration is two-and-a-half to three years down into the cycle<br />
at the bottom and back up. This one happened in six months – the<br />
most precipitous fall to the steepest reestablishment of value is by<br />
far the shortest in history,” says one distressed debt firm founder.<br />
“If you’re trying to [take control of a company by purchasing its<br />
debt] in a ‘V’ of six months, down and back up, you can virtually<br />
not accomplish it.”<br />
Their firm did take over one company that way, but o therwise<br />
found itself in possession of numerous bonds in companies it wasn’t<br />
able to take over before markets rebounded. Selling those positions<br />
has generated profit, but “you don’t get control of the company, so<br />
it’s a booby prize almost”.<br />
tomorrow’s opportunties<br />
Many distressed investment specialists will now be pulling back from<br />
conventional distressed investments, looking instead to realise their<br />
portfolios and await the next change in market cycle. “There’ll be<br />
a day when things come back,” says one New York-based distressed<br />
debt fund investor. “Come back meaning ‘break’,” he added, referring<br />
to the economy.<br />
In many ways, distressed investment experts see the events of<br />
the past two years, and the revival of credit markets, as further<br />
building up future distressed investment cycles. n
<strong>2010</strong><br />
North America themes<br />
90 First Round: A sideways look at the news<br />
92 Stateside: Shaping an industry<br />
94 M&A makes a comeback<br />
95 Defrosting the mid-market<br />
96 Carrying on<br />
97 Leverage for sale<br />
TIAA-CREF’s Schwartz joins Perseus<br />
KPS completes<br />
$400m in recaps<br />
Centre Partners sells Bumble Bee for $980m<br />
LPs may flood US mid-market<br />
with capital<br />
Cerberus to sell Chrysler<br />
Pennsylvania commits $75m in re-ups<br />
Financial for $6.3bn Clarion nets 25x return on healthcare<br />
South Carolina delays direct effort<br />
SEC defines venture capital<br />
Leonard Green offers<br />
$1.6bn for Jo-Ann Stores<br />
New Jersey barters carry cut from Tenex<br />
NY Teachers’ makes<br />
$90m bet on mid-market<br />
US industry group replaces spokesman with politico<br />
US Senate drops carry<br />
proposal in tax bill<br />
Chicago Teachers’ to hire first PE consultant<br />
Aldus settles New York<br />
pension probe<br />
PE deal activity picks up in Canada<br />
US lawmakers unveil hybrid<br />
tax rate for carry<br />
BC and Silver Lake reunite<br />
for $3.1bn buyout<br />
Carlyle in $6.1bn<br />
ManorCare<br />
asset sale<br />
LPs demand focus on operations<br />
Clayton Dubilier & Rice<br />
closes eighth fund on $5bn
page 90 private equity annual review <strong>2010</strong><br />
f i r s t ro u n d<br />
<strong>PEI</strong>’s sideways look at the North American private equity market in <strong>2010</strong><br />
March madness<br />
Coinciding with the basketball fever that<br />
sweeps the US each March, private equity and<br />
hedge fund professionals took to the court<br />
last month for an annual charity basketball<br />
match in New York. Benefitting non-profit<br />
organisation Youth, I.N.C, which raises money<br />
for New York area high schools that can’t<br />
afford gymnasium time for their basketball<br />
teams, the event saw the private equity team<br />
break their two-year winning streak.<br />
The hedge fund team “jumped out to a<br />
14-nothing lead in the first few minutes of<br />
the 15-minute game and never looked back.<br />
They swarmed on defense. They dunked and<br />
hit long threes on offense,” according to a Wall<br />
Street Journal blog post. The private equity pros<br />
scored just 11 points to the hedge fund team’s<br />
27 points.<br />
The blog post noted that “in its defense”<br />
When Stone<br />
met Blackstone<br />
Stone: What are you going to do?<br />
the private equity squad had featured more<br />
“seasoned” players, the oldest being 62-yearold<br />
Gary Munson, president of Whitney<br />
Capital, while the hedge fund players<br />
“looked to be much closer to grad school<br />
than to retirement for the most part”.<br />
The private equity team’s captain,<br />
Ted Virtue, chief executive at MidOcean<br />
Partners and co-chair of Youth, I.N.C.,<br />
joked that next year the private equity<br />
team would need to play in a wheelchair<br />
league. “These guys could be our kids,” he<br />
told the WSJ.<br />
Other private equity players included<br />
Paul Queally, co-president of Welsh Carson<br />
Anderson & Stowe; Welsh Carson principal<br />
Michael Donovan and Ron Blaylock,<br />
managing partner of GenNx360 Capital<br />
Partners. ■<br />
“You know, half the people in this place<br />
could be prosecuted,” said legendary director<br />
Oliver Stone as he dined with Andrew<br />
Ross Sorkin at the fabled Four Seasons Grill<br />
Room in Manhattan, reported the New York<br />
Times last month.<br />
Other observations: Citigroup is the<br />
“mother of all evil”. Goldman Sachs “is evil,<br />
maybe”. Wall Street has “gone crazy. It’s banking<br />
on steroids”. On Stephen Schwarzman, at<br />
a nearby table: “It was just wealth, wealth,<br />
wealth. Guys like that, having birthday parties,<br />
it’s not my deal”.<br />
An awkward moment ensued when<br />
Schwarzman approached Sorkin to say hello,<br />
and realised that Stone was at the table. The<br />
conversation reportedly “fizzled out” and after<br />
the Blackstone chief left, Stone “looked down”<br />
and said: “What are you going to do? Not shake<br />
his hand? ... That’s the problem with New York<br />
society, it’s all an interlocking network.” ■<br />
Charity hoops: hedge pros take lead<br />
Literary<br />
criticism<br />
Private equity has finally entered the realm<br />
of high culture – The New Yorker magazine<br />
has published a poem about it. Well, not<br />
about it, really. The title of Sophie Cabot<br />
Black’s new poem is “Private Equity”. The<br />
five-stanza work meditates on the themes<br />
of human longing for increase and renown.<br />
We’re not sure to what extent Black<br />
understands private equity in a way<br />
that, say, Leon Black (no relation) would<br />
agree with, but there are a few lines in<br />
the poem for GPs and LPs to stew on.<br />
For example the closing line: “To end up<br />
where we start/ Again, and look as if we<br />
gained.” If that’s not a scathing critique of<br />
performance reporting we don’t know<br />
what is. Then there’s: “Everyone wants<br />
beyond.” Gotcha – a clear reference to the<br />
universal desire for alpha. ■
private equity annual review <strong>2010</strong> pa g e 91<br />
Disco diligence<br />
The price<br />
of posterity:<br />
$100m<br />
The Institutional Limited Partners Association has become a real force for change as<br />
well as sometime bugaboo to GPs. It apparently also has become a cultural touchstone.<br />
For evidence of this, look no further than a recent weekly management meeting of an<br />
unnammed, prominent private equity firm. <strong>PEI</strong> has learned that among the entertainments<br />
at this meeting was a parody performance of The Village People’s “YMCA”, but with an<br />
ILPA theme.<br />
The firm in question cruelly failed to send us the lyrics, and so below we have come<br />
up with our own approximation of what might have been sung. The ILPA should be<br />
flattered – people parody institutions that they fear.<br />
Key man! Put yourself back at ease, I said ...<br />
Key man! You’ll get transaction fees, I said ...<br />
Key man! You can reach a first close<br />
Without BOW-ING DOWN BE-FORE <strong>THE</strong> ...<br />
[bmph bmph bmph bmph bmph]<br />
We must bamboozle the<br />
I-L-P-A<br />
It’s fun to humour the<br />
I-L-P-A<br />
LP-friendly’s a pledge we’re expected to make<br />
So let’s fake it for funding’s sake!<br />
Haught hitchhikers<br />
Las Vegas: road to<br />
commitments?<br />
Key man! You’ve got checklist fatigue, I said ...<br />
Key man! It’s an LP blitzkrieg, I said ...<br />
Key man! Make concessions and smile, because<br />
WE NEED MO-NEY FROM <strong>THE</strong><br />
[bmph bmph bmph bmph bmph]<br />
Let’s all kowtow to the<br />
I-L-P-A<br />
Beg and bow-wow to the<br />
I-L-P-A<br />
You can push back a bit, but I’m warning you, dude<br />
Not to mention the word “collude”...<br />
Urban fundraising legend or stark new reality? That’s the<br />
question we’re left asking upon hearing tales of venture<br />
capitalists heading to Las Vegas to “catch whales”. Rumour is<br />
that a few, erm, “enterprising” VCs are confronting a lack<br />
of institutional investor interest in their funds by hanging<br />
around the lounge at the Henderson Executive Airport, the<br />
private airport just outside of Las Vegas. They then allegedly<br />
look disgruntled their (non-existent) driver hasn’t shown<br />
up, try to catch a ride with a high-net-worth individual<br />
and have a meaningful conversation during the 20-minute<br />
drive to The Strip. Some questionable characters have been<br />
recruited as LPs this way, says once source. Then again, the<br />
source adds, “One man’s arms dealer is another’s defense<br />
contractor.” ■<br />
New York Public Library: the house that<br />
Steve built<br />
Cementing your legacy beyond the world of<br />
private equity can be an expensive business.<br />
Henry Kravis, who helped co-found<br />
private equity giant Kohlberg Kravis<br />
Roberts, has pledged $100 million to<br />
Columbia Business School, from which he<br />
graduated in 1969. The gift, the largest in<br />
the school’s history, will be used to fund the<br />
construction of the business school’s new<br />
facilities. One of the business school’s two<br />
new buildings will be called The Henry R.<br />
Kravis Building.<br />
The new campus will help broaden<br />
Columbia Business School’s various<br />
community-focused programmes,<br />
which provide guidance and support to<br />
entrepreneurs in west Harlem. Columbia<br />
Business School’s new buildings will<br />
encompass about 450,000 square feet,<br />
replacing 280,000 square feet of outdated<br />
facilities.<br />
The last time the private equity world<br />
saw a donation of that magnitude was in<br />
2008, when a certain Stephen Schwarzman<br />
announced a $100 million contribution<br />
towards the expansion of the New York<br />
Public Library. As a result of The Blackstone<br />
Group founder’s donation, the library’s<br />
Fifth Avenue building has been renamed<br />
The Stephen A. Schwarzman Building. ■
page 92 private equity annual review <strong>2010</strong><br />
s ta t e s i d e : re v i e w o f t h e y e a r<br />
Shaping an industry<br />
Extracts from <strong>PEI</strong>’s ‘Stateside’ column chronicle a shifting<br />
relationship between LP and GP<br />
d av i d s n o w<br />
An LP source has come up with a<br />
unique partnership term he thinks<br />
GPs should find highly interesting<br />
– any return over 2x and the<br />
carried interest rate is 30 percent.<br />
Anything under 2x and you get<br />
10 percent<br />
FEBRUARY<br />
Real estate investors turn their back on the blind-pool fund<br />
A desire among investors for some control over how money is invested is, of course, a direct<br />
affront to the traditional blind pool limited partnership, which stipulates that the GP has total<br />
authority over investment decisions within agreed upon parameters. If LPs don’t like what<br />
they’re getting from their GPs they can band together to replace the manager (very difficult),<br />
sell their interests on the secondary market (a fraught process) or default on their commitments<br />
(painful financially and harmful to the reputation). What disapproving LPs can’t do is say, ‘Hold<br />
on Mr. GP – I don’t like that deal and so I’d prefer not to back it.’ Limited partnerships are set<br />
up as very serious legal obligations to prevent exactly this kind of flake-out from happening.”<br />
MARCH<br />
GPs grapple with ILPA’s guidelines<br />
“It’s not hard to guess which of the suggested ‘best practices’ some GPs find most objectionable.<br />
The call for management fees to merely cover ‘normal operating costs for the firm’ as well as<br />
the preference for the European-style, LPs-get-all-their-money-back-first waterfall distribution<br />
formula would, if made the industry norm, seriously challenge the business models of big,<br />
established US firms. But a GP doesn’t score many points by arguing that the management fee<br />
should be a wealth creator. So instead some GPs are finding other fights to pick with the ILPA<br />
Principles, among them that the guidelines may represent a ‘collusion’ among LPs, and that the<br />
guidelines risk ‘piercing the GP veil’.”<br />
APRIL<br />
Making carry count for more<br />
“An LP source has come up with a unique partnership term he thinks GPs should find highly<br />
interesting – any return over 2x and the carried interest rate is 30 percent. Anything under 2x<br />
and you get 10 percent. Since most GPs are (outwardly) confident that they will return to LPs<br />
two times their money, it’s an offer to which they should have a hard time saying no. The LP<br />
wants to make one thing very clear: he’s happy to pay 30 percent carry if the returns are good<br />
enough. ‘If I get 2x net to me, I win,’ he says. As for the GPs, this reengineered carry term is a<br />
way to guarantee that ‘the good guys get paid more than the bad guys’, he says.”<br />
MAY<br />
The Private Equity Council looks wider for members<br />
“Convincing the hundreds of firms scattered across the US that they should join the effort may<br />
prove to be a challenge. Buyout firm GPs in particular have spent the last several decades getting<br />
on just fine without paying dues to a Washington lobbying outfit. Many still don’t accept<br />
that their years of benign regulatory neglect are over. Furthermore, many of them are used to<br />
interacting with their rivals only in auction settings. A person in the venture market noted that<br />
the very nature of venture capital investing requires GPs to frequently band together on deals,<br />
despite the fact that they may compete at other times. It is a more collaborative culture than<br />
what is often found among buyout guys.”
private equity annual review <strong>2010</strong> pa g e 93<br />
JUNE<br />
What’s behind the recent spike in exits?<br />
“Deals are the privilege of the funded. A<br />
private equity firm that fails to raise the<br />
next fund ceases to exist (although its<br />
end-of-life period is impressively protracted).<br />
A private equity firm that fails<br />
to raise the right size of fund becomes<br />
a different firm, with fewer people and<br />
fewer offices by dint of a smaller income.<br />
It’s a disruptive step down. This analysis<br />
is worth bearing in mind as sprouts<br />
and blossoms begin to appear across the<br />
frozen tundra of the deal market. Transactions<br />
are indeed beginning to happen,<br />
but GPs appear to be hugely focused on<br />
scoring exits. A cynic would say that some<br />
of these exits have been put on the fast<br />
track in order to ensure a more successful<br />
follow-on fundraising in the near future.”<br />
JULY/AUGUST<br />
On research into style drift<br />
“Confirming conventional wisdom, those<br />
firms that had been prodigious adders of targeted industries<br />
over the prior five years had a lower average performance over<br />
the subsequent years. And in a finding that will no doubt delight<br />
specialist firms, those GP groups that had diversity scores near<br />
1 (in other words, no industry diversity) tended to be the best<br />
performers. Overall, Gottschalg says his research confirms that<br />
‘it’s really good if you’re focused. It’s harder to be unfocused,<br />
and if you recently became unfocused, that’s the most difficult’.”<br />
SEPTEMBER<br />
On succession in private equity<br />
“One doesn’t often hear the term ‘retirement’ in private equity,<br />
at least not in the US. While a number of big-time hedge fund<br />
managers have announced their retirements in recent years, it<br />
is hard to think of any private equity founders who have simply<br />
walked away from the job. More often, these founders hold forth<br />
the promise of long (or excruciatingly long) succession plans, or,<br />
in too many cases, have no succession plans, somehow believing<br />
their investors will have no opinion about committing capital to<br />
a ten-year fund under the iron rule of a septuagenarian.”<br />
OCTOBER<br />
The finer points of LP co-investment<br />
“The vast majority of co-investment deals made available to limited<br />
partners – either directly from GPs or through third-party coinvestment<br />
programme administrators – have been in what could<br />
be defined as the ‘mega/large’ size category. This is perhaps not<br />
surprising – large deals require more equity, and therefore GPs<br />
“A GP doesn’t score<br />
many points by arguing<br />
that the management<br />
fee should be a wealth<br />
creator”<br />
are more likely to give LPs the opportunity<br />
to pony up additional cash. But there is at<br />
least one problem with this from the LP’s<br />
point of view. If it is accepted that the largest<br />
deals will tend to be the ones that are<br />
offered to LPs as co-investment opportunities,<br />
LPs should not necessarily want to<br />
inject further capital into deals to which<br />
they are already highly exposed. It could<br />
be that the benefit of reduced average fees<br />
for ownership of an asset is offset by the<br />
effect that increased ownership of the asset<br />
has on the diversity of the larger portfolio.”<br />
NOVEMBER<br />
How hold-at-cost valuation exaggerates<br />
performance numbers<br />
“End-to-end performance averages measure<br />
backwards over a specified time span<br />
to starting points populated by funds that<br />
are understating the fair value of their<br />
portfolio companies. The further back<br />
you go, the more pronounced the effect<br />
is. This problem goes away when viewing<br />
private equity fund performance through the prism of vintage<br />
years, which have long been thought of as the most useful way<br />
to think about returns. But in seeking to compare private equity<br />
to other asset classes, the time-horizon approach has frequently<br />
been used, often with the result of private equity appearing to<br />
be quite attractive indeed. As institutional investors learn more<br />
about how private equity has truly behaved over the years as an<br />
asset class, they won’t necessarily fall out of love with it, but<br />
they will likely wake up to the realisation that it’s harder work<br />
than anyone heretofore led them to believe.”<br />
DECEMBER/JANUARY<br />
Snow on Snow – the editor-at-large grades his predictions<br />
one year on<br />
“‘US public pensions will fade as a source of capital’. You now<br />
need to register as a lobbyist if you want to raise money from<br />
California institutions, thanks to the pay-to-play scandal. More<br />
broadly, US pensions are expected to continue to face tremendous<br />
pressure going forward. It is unclear what this means for their<br />
private equity allocations, but for the time being most of these<br />
very large LPs remain committed and solvent. Verdict: maybe<br />
not. ‘The public private equity firm will win fans’. It is clear that<br />
many more private equity firms will go public as soon as they<br />
have the chance. But few of these will remain pure-play direct<br />
private equity investors, as KKR’s radical business diversification<br />
indicates. These listings will be greeted warmly by investors, by<br />
the selling GPs, and by the firm employees who get a piece of<br />
the action, if not by LPs. Verdict: probably true.” ■
page 94 private equity annual review <strong>2010</strong><br />
l e v e r a g e d b u yo u t s<br />
M&A makes a comeback<br />
A surge in fourth quarter US deal activity made clear the<br />
large LBO was far from extinct, finds Pete Gallo<br />
The history books will likely recall <strong>2010</strong><br />
as a turnaround year for global M&A<br />
markets. And anecdotal evidence suggests<br />
the year’s final quarter may also<br />
have marked the return of larger private<br />
equity-led buyouts in the US market –<br />
proving wrong critics that had declared<br />
their demise.<br />
In terms of the big picture, global<br />
M&A activity weighed in at $2 trillion<br />
in <strong>2010</strong>, showing a significant increase of<br />
22.7 percent over the final tally for 2009.<br />
Deal count also grew at a brisk pace, rising<br />
21.3 percent for the year, according to data<br />
from data provider mergermarket.<br />
Even so, North America lagged Europe<br />
and Asia in the global resurgence. US deal<br />
values totalled $714.3 billion for the year,<br />
an increase of only 3 percent over 2009.<br />
(European M&A activity, by comparison,<br />
grew 37 percent year-over-year in <strong>2010</strong>,<br />
hitting $629.8 billion, while Asia hit a<br />
record $391.5 billion.)<br />
Private equity deals were no different:<br />
data provider Dealogic estimated the<br />
industry had been responsible for roughly<br />
$204 billion in deals globally last year, a<br />
92 percent increase compared to 2009.<br />
A total of 113 US buyouts valued at<br />
more than $500 million were announced<br />
in <strong>2010</strong> as compared to 39 for 2009,<br />
according to mergermarket. Those totals<br />
were boosted by a surge in fourth quarter<br />
activity, when a cumulative $76 billion was<br />
invested, the best fourth-quarter showing<br />
for the industry as whole since 2007 when<br />
buyouts totalled $139.2 billion.<br />
Analysis by Private Equity International<br />
found that six US deals exceeding $900<br />
million accounted for $16.1 billion, or<br />
roughly 21.1 percent of all fourth-quarter<br />
private equity-led buyout activity, globally.<br />
The bulk of these late-year deals<br />
involved the privatisation of publicly<br />
traded companies. For instance, in<br />
the fourth quarter the Carlyle Group<br />
reavealed a $3.9 billion all-cash bid for<br />
NYSE-listed CommScope, the wireless and<br />
communications-infrastructure company.<br />
Expected to close in the first quarter of<br />
2011, the $3.9 billion deal easily ranks<br />
among the largest private equity-led<br />
buyouts deals of <strong>2010</strong>. The Carlyle Group<br />
in October also announced a $2.6 billion<br />
momentum builds<br />
Some of the largest US LBOs took place in Q4<br />
Source: PrivateEquityInternational.com<br />
bid to acquire the NYSE-listed mobilecommunications<br />
company Syniverse<br />
Technologies. That buyout deal was also<br />
expected to close in early 2011.<br />
In another large take-private, Leonard<br />
Green & Partners in December offered $1.6<br />
billion to acquire NYSE-listed retailer JoAnn<br />
Stores through its Green Equity Investors V<br />
and Green Equity Investors Side V funds. It<br />
also was also involved in another mega retail<br />
deal in <strong>2010</strong>, offering $2.9 billion alongside<br />
TPG Capital to buy clothing retailer J Crew.<br />
And although it was a relative laggard in<br />
global M&A activity in <strong>2010</strong>, the US was<br />
however home to the largest private equityled<br />
buyout of the year: the $5.3 billion takeprivate<br />
of Del Monte foods by Kohlberg<br />
Kravis Roberts, Vestar Capital Partners and<br />
Centerview Partners.<br />
The uptick in deal activity is expected<br />
to continue in 2011. Whoever said the LBO<br />
was dead has surely changed their minds<br />
by now. ■<br />
Deal size Lead sponsor Target company<br />
$5.3 billion Kohlberg Kravis Roberts Del Monte Foods<br />
$3.9 billion Carlyle Group CommScope<br />
$2.6 billion Carlyle Group S syniverse Technologies<br />
$1.8 billion Bain Capital Gymboree Corp.<br />
$1.6 billion Leonard Green JoAnn Stores<br />
$900 million TPG Capital Marathon Petroleum
private equity annual review <strong>2010</strong> pa g e 95<br />
m i d - m a r ke t<br />
Defrosting the mid-market<br />
Mid-market firms in North America scrambled to stay busy in <strong>2010</strong>, with the majority of<br />
opportunities coming to market in the second half of the year, finds Graham Winfrey<br />
Assessing the North American mid-market<br />
in <strong>2010</strong> was a bit like tracing the path of a<br />
curveball.<br />
While the number of announced deals<br />
fell to 249 in <strong>2010</strong> from 333 in 2009, their<br />
combined dollar value rose 29 percent to<br />
$22.2 billion, according to Dealogic.<br />
Mid-market investor The Riverside<br />
Company maintained its reputation as one<br />
of the most active buyers in <strong>2010</strong> by making<br />
24 acquisitions on the year – 14 of which<br />
were in North America – but <strong>2010</strong> was still<br />
anything but typical in terms of the opportunities<br />
the firm saw.<br />
“The year was almost a tale of two cities,”<br />
says Riverside co-chief executive officer<br />
Stewart Kohl.<br />
“In the first half of the year there were<br />
not enough good opportunities. By the<br />
second half of the year, particularly as<br />
people were anticipating the [capital gains]<br />
tax law change that ended up being postponed,<br />
there were almost too many good<br />
opportunities. There were a tremendous<br />
number of excellent companies coming to<br />
market, unfortunately at surprisingly high<br />
purchase price multiples.”<br />
Companies Riverside acquired in <strong>2010</strong><br />
included Sunrise Windows, a manufacturer<br />
of energy-efficient replacement windows,<br />
email marketing company Mansell Group<br />
and Employment Law Training, a provider<br />
of workplace ethics and compliance eLearning<br />
solutions.<br />
“A lot of private equity folks who didn’t<br />
sell when the world was too good to be true<br />
and then couldn’t sell during the downturn<br />
[came] back to market” says Kohl, “particularly<br />
where there were companies that had<br />
performed well thought the downturn.”<br />
Collin Roche, principal at Chicago-based<br />
GTCR, agrees.<br />
“I think there was a reasonable backlog of<br />
opportunities that would have been pursued<br />
in 2008 and 2009 but got deferred given the<br />
Frozen markets: North America’s mid-market heated up as the year progressed<br />
“There was a reasonable<br />
backlog of opportunities<br />
that would have been<br />
pursued in 2008 and<br />
2009 but got deferred<br />
given the economic<br />
environment, the<br />
financing environment<br />
and differential price<br />
expectations”<br />
economic environment, the financing environment<br />
and differential price expectations<br />
between buyers and sellers,” he says. “From<br />
our perspective, it was a reasonably good<br />
time to be an investor and get things done.”<br />
In Canada, where the vast majority of<br />
businesses lie in the mid-market, private<br />
equity-sponsored M&A activity was on<br />
the rise in <strong>2010</strong>, with about C$4.9 billion<br />
invested, a 21 percent increase compared<br />
to 2009.<br />
“Mid-market business building … seems<br />
to be where people are interested these<br />
days, as opposed to big LBOs,” says Jeff Parr,<br />
co-chief executive officer of Toronto-based<br />
Clairvest Group.<br />
While neither Canada nor the US have<br />
witnessed mid-market activity return to<br />
levels seen prior to the global economic<br />
downturn, <strong>2010</strong> was nevertheless a step in<br />
the right direction, says to GTCR’s Roche.<br />
“I’d call it a partial return to normalcy.” ■
page 96 private equity annual review <strong>2010</strong><br />
c a r r y ta x<br />
Carrying on<br />
For decades the US has grappled with how tax authorities should treat carried interest<br />
Private equity’s growth into a multibillion<br />
dollar industry has made it a natural tax<br />
target for a government struggling to plug<br />
deficit holes.<br />
Politicians have in recent years argued<br />
over whether carry should be treated as<br />
compensation for services (federally taxed<br />
as ordinary income at a rate as high as 35<br />
percent) or whether it represents a quasiinvestment<br />
return for fund managers, to<br />
be treated under the more tax friendly<br />
long-term capital gains rate of 15<br />
percent. During such debate in 2009, the<br />
government estimated that more than $25<br />
billion in tax revenue would be created by<br />
reclassifying carried interest’s tax status.<br />
Republicans – who reclaimed power in<br />
the lower house of Congress in 2011—<br />
have been able to thus far block repeated<br />
attempts to raise and reclassify the current<br />
capital gains tax treatment of carried<br />
interest.<br />
Proposals under the Democratic<br />
leadership’s most recently blocked legislative<br />
efforts would have prevented GPs from<br />
paying taxes entirely at the capital gains rate<br />
on carried interest, and under certain rules,<br />
would have treated up to 75 percent of carry<br />
as ordinary income beginning this year. For<br />
assets and partnership interests held for at<br />
least five years, the ratio would change to<br />
a 50/50 split.<br />
Not one to back down from a fight,<br />
President Obama has continued the debate<br />
into 2011 by including tax hikes in carried<br />
interest as part of his 2012 budget proposal.<br />
He will be sure to find staunch opposition<br />
from the new Republican-led House of<br />
Representatives. ■<br />
An overview of government’s long standing debate over how tax authorities should treat carried interest<br />
1974: US Court of Appeals rules that future carried interest<br />
is a taxable event.<br />
1991: A similar case heard by the Court of Appeals reverses<br />
earlier decisions, saying a right to future fund profits is not<br />
in fact a taxable event.<br />
1993: US Treasury Department and IRS adopt rules<br />
formalising the 1991 court decision.<br />
2005: Treasury revisits the issue, reconfirming the 1993<br />
guidelines, but proposes greater regulation on how the<br />
award of future carried interest should be valued.<br />
June 2007: Democratic congressman Sander Levin<br />
introduces bill HR 2834, which proposed treating<br />
carried interest as ordinary income instead of the lower<br />
rates provided by capital gains. The bill eventually died<br />
in committee. Similar efforts in the Senate also fail to<br />
materialise.<br />
July 2007: Senate Finance Committee investigates the<br />
issue of carried interest. The department of Treasury testifies<br />
on behalf of a capital gains tax treatment. No new immediate<br />
bills addressing carry are introduced in either chamber of<br />
Congress.<br />
February 2009: President Obama submits his <strong>2010</strong> budget<br />
proposal which called for treating carried interest under<br />
ordinary income tax rates.<br />
May <strong>2010</strong>: House of Representatives votes to approve<br />
the “American Jobs and Closing Tax Loopholes Act” which<br />
would ultimately treat 75 percent of carry as ordinary<br />
income, with the remaining 25 percent under the more<br />
tax friendly capital gains rates.<br />
June <strong>2010</strong>: Senate Republicans defeat the act in a 52 to<br />
45 vote.<br />
September, <strong>2010</strong>: Democratic chairman of the Senate<br />
Finance Committee Max Baucus introduces the “Job<br />
Creation and Tax Cuts Act”, which reintroduces carried<br />
interest provisions pulled from the defeated June bill.<br />
October <strong>2010</strong>: US lawmakers go on recess without passing<br />
the tax reform package introduced by Baucus one month<br />
prior.<br />
November <strong>2010</strong>: Republicans retake control of the US<br />
House of Representatives, potentially setting back recent<br />
carry tax reform efforts.<br />
January 2011: Assuming no action on the matter by<br />
Congress, tax cuts enacted almost a decade ago expire<br />
– raising tax rates on ordinary income and capital gains.<br />
February 2011: US President Barack Obama included in his<br />
proposed budget that Congress require GPs to pay ordinary<br />
tax rates on the profits they receive as compensation instead<br />
of capital gains.
private equity annual review <strong>2010</strong> pa g e 97<br />
Leverage for sale<br />
f i n a n c i n g<br />
Last year there was a huge spike in US leveraged loan issuance, but financing was still<br />
hard to find in the mid-market, reports Graham Winfrey<br />
US leveraged buyout loan volume in <strong>2010</strong><br />
was nearly seven times that of 2009, a<br />
clear indication that the lending market<br />
has reopened for business.<br />
“The [loan] market is absolutely on<br />
fire,” Charles Smith, head of corporate<br />
finance at advisory firm Loughlin Meghji<br />
& Company, told <strong>PEI</strong> in November.<br />
Standard & Poor’s recorded approximately<br />
$35.4 billion of loans for large-cap<br />
and mid-market deals in <strong>2010</strong>, compared<br />
to just $5.3 billion in 2009. While <strong>2010</strong>’s<br />
volume came in just under 2008’s $36.6<br />
billion, it was a far cry from 2007’s total<br />
of $189 billion. Still, the return of lending<br />
has had a clear impact on private equity<br />
firms, many of which have recently been<br />
focusing on doing dividend and recapitalisation<br />
deals in an attempt to get money<br />
out of transactions executed in the past<br />
couple years.<br />
“The markets being on fire has created<br />
an absolute euphoria of activity around<br />
trying to get exits through dividends or<br />
recaps because they couldn’t do them<br />
through more traditional M&A sales,”<br />
Smith says. “What it also means – as it<br />
relates to the buyout business – is we are<br />
going to continue to see more and more<br />
resurgence of traditional buyout activity.”<br />
Despite the surge in leveraged loans,<br />
<strong>2010</strong> was still a tale of two markets in<br />
that financing was not as readily available<br />
for the mid-market as it was for large-cap<br />
companies.<br />
“Unfortunately for a lot of middle<br />
market private equity firms, a lot of the<br />
euphoria you’re seeing in the bond market<br />
and the loan market are for credits that<br />
are $50 million and above,” says Smith.<br />
“It’s only now starting to trickle down<br />
into the middle market.”<br />
Part of the reason for that was because<br />
Blechman: Gap in mid-market financing<br />
may narrow<br />
“In the lower middle<br />
market … there is<br />
confusion as to which<br />
banks and finance<br />
companies are still<br />
attracted to the market”<br />
regional banks that lent to mid-market<br />
companies in the past have retrenched in<br />
response to the economic crisis.<br />
“In the lower middle market leveraged<br />
finance space, there is confusion as to<br />
which banks and finance companies are<br />
still attracted to the market,” says Mitch<br />
Drucker, managing director at Garrison<br />
Investment Group, a mid-market-focused<br />
credit, distressed and asset based investor<br />
“We have seen some volatility in the<br />
earnings of these smaller companies,<br />
which has put pressure on their existing<br />
bank and asset based lines of credit.”<br />
Another reason banks have curtailed<br />
lending to mid-market companies is due to<br />
the regulatory issues that come along with<br />
making loans to highly levered businesses<br />
or companies with weak cash flows.<br />
“Banks don’t want to be cited by<br />
the regulators, which could hurt their<br />
capital base or their ratios, so they’re<br />
more prone to stay away from those deals<br />
where they’re concerned about any future<br />
volatility,” Drucker says.<br />
Private lending vehicles, on the other<br />
hand, don’t have the same regulatory<br />
concerns. “We look at it as a great<br />
opportunity in that market right now<br />
because of the lack of liquidity,” Drucker<br />
says. “There’s going to be a proliferation<br />
of private vehicles that look to capture<br />
that market.”<br />
That proliferation has already begun,<br />
according to David Blechman, managing<br />
director at distress- and turnaroundfocused<br />
Tower Three Partners.<br />
“I’ve seen an influx of middle market<br />
lenders,” Blechman says. “There is demand<br />
for lending into the middle market, so<br />
maybe that suggests that in 2011 those<br />
middle market companies will actually<br />
be able to get better access to capital.” ■
Events calendar 2011<br />
Renowned throughout the industry as the premier event provider, <strong>PEI</strong> run a full calendar of<br />
market-leading conferences across Private Equity, Real Estate and Infrastructure every year.<br />
For more information please visit www.peimedia.com/events<br />
Date<br />
20-21 January<br />
15-16 February<br />
15-16 March<br />
17-18 March<br />
11-12 April<br />
13-14 April<br />
3-4 May<br />
2 June<br />
9-10 June<br />
15-16 June<br />
15-16 June<br />
20-21 September<br />
September<br />
4 October<br />
5-6 October<br />
October<br />
October<br />
October<br />
1-2 November<br />
9-10 November<br />
November<br />
November<br />
Event<br />
The <strong>PEI</strong> CFOs and COOs Forum<br />
PERE Forum: Asia<br />
Emerging Markets Investor Forum<br />
Infrastructure Investor: Europe<br />
<strong>PEI</strong> Middle East Forum<br />
<strong>PEI</strong> Forum: Asia<br />
Private Fund Compliance Forum<br />
<strong>PEI</strong> Responsible Investment Forum<br />
PERE Forum: Europe<br />
<strong>PEI</strong> Investor Relations Forum<br />
<strong>PEI</strong> Africa Forum<br />
<strong>PEI</strong> Turkey Forum<br />
PERE Investors Forum<br />
Infrastructure Investor: India<br />
<strong>PEI</strong> India Forum<br />
<strong>PEI</strong> Brazil Forum<br />
Infrastructure Investor: Energy<br />
<strong>PEI</strong> Infrastructure Forum: Indonesia<br />
Emerging Markets Private Equity Forum<br />
PERE Forum: New York<br />
PERE Forum: Frankfurt<br />
Infrastructure Investor: New York<br />
Location<br />
New York<br />
Hong Kong<br />
New York<br />
Berlin<br />
Dubai<br />
Hong Kong<br />
New York<br />
New York<br />
London<br />
New York<br />
London<br />
Istanbul<br />
Amsterdam<br />
Mumbai<br />
Mumbai<br />
Sao Paulo<br />
London<br />
Jakarta<br />
London<br />
New York<br />
Frankfurt<br />
New York<br />
www.peimedia.com/events<br />
NOTE: This is a provisional calendar and dates, locations and events may be subject to change at the discretion of the organizers
<strong>2010</strong><br />
Europe themes<br />
private equity annual review <strong>2010</strong> pa g e 99<br />
100 First Round: A sideways look at the news<br />
102 In Europe: Back to life<br />
104 Mid-market crowding<br />
106 Europe’s exclusive billionaires club<br />
Apollo, CVC agree £888m take-private<br />
Cinven clears the way<br />
for the next generation<br />
Private equity-backed M&A sets new record<br />
‘Pass-the-parcel’ comes<br />
back into fashion<br />
Coller targets $5bn<br />
for Fund VI<br />
PE returns positive for fifth straight quarter<br />
Private equity rounds off year of recovery<br />
Litorina hits $378m<br />
hard cap in five months<br />
KKR reacquaints itself with Del Monte<br />
3i creates £4bn<br />
debt division<br />
Private equity-backed buyouts still chasing 2007 peak<br />
CalPERS does away with<br />
traditional asset allocations<br />
Private equity spends record amounts in October<br />
UK mid-market exits more<br />
than trebled in <strong>2010</strong><br />
Canadian PE ‘needs more<br />
foreign investment’<br />
EQT closes €350m credit opportunities fund<br />
Oakley’s maiden exit books 3x return<br />
Advent wins Priory in second<br />
mega deal with RBS<br />
Change Capital books<br />
French veteran to<br />
4.7x Republic exit<br />
lead BPE spin-out<br />
LPs demand focus on operations<br />
European firms set<br />
IPO record in <strong>2010</strong>
page 100 private equity annual review <strong>2010</strong><br />
f i r s t ro u n d<br />
<strong>PEI</strong>’s sideways look at the European private equity market in <strong>2010</strong><br />
Kids, eh?<br />
Tom Hicks Jr lets down Tom Hicks Sr<br />
Hicks Sr: not loved in Liverpool<br />
Public displays<br />
of disaffection<br />
UK private equity veteran Jon Moulton<br />
recently made headlines for saying more<br />
stringent private equity regulation at<br />
the EU level was unnecessary given<br />
the industry was already exposed to<br />
“clinically insane” levels of UK regulation<br />
(a charge the BVCA promptly distanced<br />
itself from). Though it received<br />
a fair amount of ink from the financial<br />
press, the episode was less likely to raise<br />
Piccadilly Circus: Moulton makes his mark eyebrows among private equity players<br />
given Moulton’s well known penchant<br />
for public (often controversial) outbursts.<br />
His next public “performance”, however, went beyond contentious sound bytes and prompted<br />
the Financial Times to call him “private equity’s prophet of doom”: in early March, on the day that<br />
his new firm, Better Capital, held an official launch party, Moulton took out a 45-second ad on the<br />
famed neon billboard in London’s Piccadilly Circus. Much like the electronic “clock” installation in<br />
New York’s Times Square which kept a running tab on the US national debt, Moulton’s featured<br />
a UK version dubbed “Debtmageddon”. The debt counter was accompanied by ominous quotes<br />
including ones from Aesop (“We hang the petty thieves and appoint the great ones to public<br />
office.”) and former US President Herbert Hoover (“Blessed are the young, for they will inherit<br />
the national debt.”). ■<br />
Top flight professional English football is among the most cash-generative sports in the world.<br />
No wonder top flight private equity investors have long been drawn to it. Success, however,<br />
can be elusive.<br />
It’s been a tricky time for Tom Hicks, the former Texas buyout titan and now proprietor<br />
of Liverpool Football Club. Not only has his co-ownership of the club with fellow mogul<br />
George Gillett been a fairly unhappy alliance thus far, but Hicks is also lacking in popularity<br />
among Kopites, the club’s army of ultra-passionate supporters.<br />
In January, Hicks’ approval ratings among the Anfield faithful dropped to the bottom of<br />
the table when his son, Tom Jr, replied to an email from a critical supporter in terms so foul<br />
that we don’t really want to repeat them here (if you must know what he said, Google will<br />
tell you). Suffice it to say that once the email had been made public, the writer didn’t last<br />
another day as a director on the club’s board. It was an electronic own goal.<br />
Followers of private equity history will recall that in 2004, when Hicks Sr retired from<br />
institutional private equity investment at the firm once called Hicks, Muse, Tate & Furst, he<br />
issued a press release which said he was looking forward to spending more time doing business<br />
together with his “older children”. Is it time to start headhunting among the younger ones? ■<br />
Poor<br />
visibility<br />
EU Parliament: no flights in, no flights out<br />
As this month’s <strong>PEI</strong> was going to press, news<br />
emerged that the meeting of the European<br />
Parliament’s JURI committee – which was<br />
due to vote on future transparency requirements<br />
for alternative investment fund managers<br />
– had been postponed because of the<br />
disruption caused by the cloud of volcanic<br />
dust hanging over Northern Europe. A<br />
transparency vote thwarted by a vast opaque<br />
cloud? Let’s hope JURI members appreciate<br />
irony. ■
private equity annual review <strong>2010</strong> pa g e 101<br />
Desperate times<br />
Desperate Housewives:<br />
popular among investment<br />
bankers<br />
A new and unflattering moniker has entered the lexicon of<br />
London’s investment banking community. Intermediaries<br />
looking to hawk businesses are finding eager buyers in the form<br />
of private equity GPs sitting on piles of unspent dry powder.<br />
These unfortunate GPs – dubbed “desperate housewives” –<br />
know that the clock is ticking for their uninvested capital and<br />
if they cannot extend the investment period of their fund, they<br />
risk being left on the shelf unable to raise another. They need<br />
to buy and will pay top prices.<br />
Says one London GP (who also insists his own firm’s next<br />
fundraising is sufficiently remote to make him – categorically<br />
– not desperate): “If you’re on the list, the bankers will call you<br />
every time they have a deal; if you’re not on the list, they probably won’t bother.”<br />
These GPs’ namesakes – the characters in the multiple award-winning comedy-drama<br />
Desperate Housewives – present an outward veneer of suburban domestic bliss. Their beautiful<br />
houses on Wisteria Lane, however, are home to countless dark and troubled storylines.<br />
Private equity funds desperate to get their remaining capital in the ground are most likely also<br />
presenting their LPs with an outward picture of perfection: business as usual on the investment<br />
front. But if LPs look a little closer under the bonnet and do not like what they see, these desperate<br />
housewives may not enjoy the long-running success of the television series, which launched in<br />
2004 and is still going strong. ■<br />
Revenge of the cleaners<br />
In June 2007, SVG Capital chairman<br />
Nicholas Ferguson famously noted that<br />
private equity professionals paid tax on<br />
their earnings at a lower rate than those<br />
who cleaned their offices. Cue a backlash<br />
from the press and, one suspects, some<br />
serious discontent among the highly taxed<br />
members of the cleaning industry. This<br />
discontent did not, however, escalate into<br />
anything more serious. Until now.<br />
The office cleaners for Terra Firmaowned<br />
music business EMI Group could be<br />
at the vanguard of a very subtle vendetta. It<br />
emerged in early October that a collection of<br />
photography and video footage – reportedly<br />
valued at £170,000 (€194,000; $271,000)<br />
– had been allegedly “disposed of ” by the<br />
cleaners, despite being held in a box marked<br />
“Not Rubbish, Do Not Remove”, said a<br />
report in London daily The Evening Standard.<br />
The owner of the lost materials, which<br />
included official photography and video<br />
Cleaners: one-up against<br />
the buyout brigade<br />
footage of pop group Blur at the height of their fame in the mid-’90s, was photographer<br />
Paul Postle. He is now suing EMI for damages. As Terra Firma boss Guy Hands navigates<br />
his firm’s law suit against Citi over various allegations about the bank’s behaviour in respect<br />
to Terra Firma’s investment in EMI, it is not known whether cleaners are planning any<br />
further attacks. ■<br />
Charm<br />
offensive<br />
Geldolf: CDC fan<br />
CDC Group, the UK government-owned<br />
fund of funds, frequently graces the pages of<br />
this publication. It plays a significant role in<br />
developing the private equity markets – and<br />
by extension the economies – of some of the<br />
world’s poorest geographies and has a unique<br />
view on emerging market GPs, particularly<br />
those in Africa. <strong>PEI</strong>, however, is not the only<br />
publication to have a long-running relationship<br />
with the company.<br />
Readers in the UK may be familiar with the<br />
work of fortnightly paper Private Eye, which<br />
seeks to take investigative journalism to the<br />
next level. Beloved by (most) hacks, it takes a<br />
no-holds-barred satirical approach to exposing<br />
the underbelly of politics, the media and the<br />
City. The paper has waged a long-running<br />
war against CDC, accusing the group of using<br />
public money to enrich the few rather than the<br />
many and funding “large scale tax avoidance”.<br />
The tussle got personal, or so “The Eye”<br />
reported in June, when two of its reporters<br />
gate-crashed a launch event for CDC’s annual<br />
development report and tried to distribute its<br />
own version of the development document.<br />
Rhyddid Carter, the normally cool-headed<br />
communications manager for CDC, confronted<br />
the pair and it seems tempers got a little<br />
frayed, with expletives peppering a heated<br />
exchange. The animated adult language used,<br />
unsurprisingly, was given top billing in Private<br />
Eye.<br />
Fortunately for Carter and colleagues,<br />
a somewhat higher profile guest was in<br />
attendance to steal the limelight. Musicianturned-campaigner<br />
Sir Bob Geldolf delivered<br />
a keynote speech, backing CDC’s work. “They<br />
are superb, they are excellent, and they are<br />
looked at and admired. CDC should be a mark<br />
of pride for this country,” he said. ■
page 102 private equity annual review <strong>2010</strong><br />
i n e u ro p e<br />
Back to life<br />
Extracts from <strong>PEI</strong>’s ‘In Europe’ column show a market<br />
reigniting. By Toby Mitchenall<br />
to b y m i tc h e n a l l<br />
As part of a Herculean revenue<br />
raising exercise it faces, many<br />
expect the government to size up<br />
some of its trading entities and ask<br />
which can realistically be sold off<br />
FEBRUARY<br />
In defence of the mega funds<br />
“Criticism of mega funds over the last 24 months could have been vastly overstated. If secondaries<br />
pricing can be taken as an indicator of LP appetite for certain vintages and strategies, faith<br />
in mega funds’ ability to pull through looks to be on the increase. At certain points last year<br />
secondary interests in mega-funds from the ’06 and ’07 vintages were being sold for as little<br />
as 30 cents in the dollar. ‘In March last year, you couldn’t give them away,’ says one LP. Now,<br />
however, the market has moved on and the same LP reports that he is receiving unsolicited<br />
inbound bids priced at a more modestly discounted 70 cents in the dollar for his large-cap fund<br />
interests. ‘I wish we had been smart enough to buy at the time,’ he laments.”<br />
MARCH<br />
Hot auctions in a cold economic climate<br />
“Survitec, Marken, Spotless Group, LGC Group: all these European businesses have recently<br />
changed hands between financial sponsors in competitive sale processes. A noticeable increase<br />
in the number of secondary buyouts has lent weight to the argument that private equity capital,<br />
having waited on the sidelines for much of 2009, can wait no longer. The clock is ticking on<br />
funds’ investment periods, and money needs to get into the ground. The overhang is ensuring<br />
the limited number of assets that have proved strong enough to weather the downturn are in<br />
high demand. They will not be acquired on the cheap.”<br />
APRIL<br />
Moving on from the year of storm and stress<br />
“Drawing on <strong>PEI</strong>’s musings from the European Private Equity & Venture Capital Association’s<br />
well-attended Investor Forum in Geneva, it seems clear that the paucity of 2009 is no longer<br />
the foremost concern for LPs and GPs. More pressing is the issue of what happens next. What<br />
structural changes lie in store for the industry, and how will they affect its ability to raise capital<br />
going forward? How many existing firms will be able to raise new funds? And how will institutional<br />
investors rate the attractiveness of private equity going forward, especially in Europe<br />
where it’s not just the market environment that must improve, but also the regulatory threat<br />
that needs to abate. 2009 was in many ways a write-off; now to the challenges of the future.”<br />
MAY<br />
Jon Moulton enjoying the public life<br />
“Now that Moulton has brought his personal profile to bear on a publicly listed vehicle, something<br />
unusual has happened. Better Capital, which raised £138.8 million (€159.7 million; $213.7<br />
million) through the placing of 142.4 million shares at 100 pence in London in December, is<br />
trading at a premium of around 16 percent to its net asset value as of press time. This is remarkable<br />
not simply because listed private equity firms just don’t trade at premia, but also because,<br />
having made two investments since launch, the fund is still mostly cash. This means investors<br />
buying shares at around 113 pence are – for the most part – betting on Moulton and his new<br />
team’s ability to capitalise on the current market conditions.”
private equity annual review <strong>2010</strong> pa g e 103<br />
JUNE<br />
What a stable UK government means for<br />
private equity<br />
“With a certain level of clarity over the future<br />
– and £6 billion public spending cuts due this<br />
year – opportunity now knocks for private<br />
equity firms. Firstly, the need to find efficiencies<br />
across the public sector opens the<br />
door for any portfolio companies that offer<br />
products and services that can help with this<br />
task. Secondly – and more pertinently – is the buying opportunity.<br />
As part of a Herculean revenue raising exercise it faces, many<br />
expect the government to size up some of its trading entities and<br />
ask which can realistically be sold off. Assets such as the Tote, a<br />
sports gambling group currently owned by the government, and<br />
Northern Rock, the banking group which was nationalised in 2007,<br />
would certainly be on the block.”<br />
JULY/AUGUST<br />
Solvency II and Basel III threaten the industry<br />
“The draft Solvency II Directive – scheduled to be introduced in<br />
2012 – would create a more stringent capital adequacy regime for<br />
insurers and reinsurers, with the goal of preventing these institutions<br />
from taking on overly “risky” investments. The directive calls<br />
for higher capital adequacy requirements, leading to higher capital<br />
charges against unlisted assets. Criticisms at this stage centre on<br />
the fact that all unlisted holdings are treated as being equally risky,<br />
when in fact risk profiles vary between asset classes (hedge vs.<br />
private equity) and strategies (buyout vs. venture capital). At the<br />
same time the Basel Committee on Banking Supervision is due to<br />
vote later this year on new capital adequacy proposals – dubbed<br />
“Basel III” – which would enforce similarly stringent capital adequacy<br />
requirements on the banking sector. Any noise around the effects<br />
of these two regimes has been drowned out by the rumbling juggernaut<br />
that is the AIFM directive.”<br />
SEPTEMBER<br />
Team up with a French sovereign wealth fund<br />
“The raison d’être of the FSI is clear: sovereign ownership of strategic<br />
assets, keeping French business French. As covered in this<br />
magazine previously, GPs on the ground in France consider the<br />
FSI to be an aggressive competitor in chasing deals. Last year it<br />
invested €800 million in 21 businesses of various sizes. The pairing<br />
with Apollo is, therefore, a curious one. Apollo also has very clear<br />
goals, but they all relate in some way to generating a return for<br />
investors, not protecting French industry. While the two entities<br />
are currently aligned in their aim to own Alcan, this situation could<br />
conceivably change. What if Alcan had to be restructured and jobs<br />
needed to be shed? What if it made fiduciary sense to locate certain<br />
business divisions outside France? It is doubtful that such measures<br />
would sit well with both sides of the partnership.”<br />
“The clock is ticking<br />
on funds’ investment<br />
periods, and money<br />
needs to get into<br />
the ground”<br />
OCTOBER<br />
On remunerating the ailing Candover<br />
team<br />
“Some LPs – and many public shareholders<br />
of Candover Investments – will be left with<br />
a sour taste in their mouths. If this is the<br />
team that got the funds into a hole, why<br />
should they be retained at all? Why should<br />
they be enriched, when investors’ capital has<br />
been eroded? Surely the assets could – and<br />
should – be transferred to a new manager with a more motivated<br />
and resourced team? But as one, more sanguine, Candover LP put<br />
it to <strong>PEI</strong>, any actions taken were designed to protect the interests of<br />
investors. To extract the value of what is left of LPs’ investments, the<br />
team needs to be both retained and motivated. These are the people,<br />
after all, who know the portfolio best.”<br />
NOVEMBER<br />
On a possible rise in the number of take-privates<br />
“The public markets have remained a marginal hunting ground for<br />
private equity firms. But will a new set of circumstances change all<br />
this? With funds ticking towards the end of their investment periods<br />
after what has been a relatively barren two years, private equity<br />
capital is more willing (let’s not say desperate) than ever to find<br />
opportunities. In secondary buyout deals, these willing buyers are<br />
finding equally willing sellers, but only the highest quality assets are<br />
finding their way onto the block and are often the subject of fiercely<br />
competitive – and hence expensive – auctions. Meanwhile, public<br />
stock markets have rebounded. With share prices looking less “bargain<br />
basement”, institutions may well be happier to entertain offers.<br />
If the same institutions fear a ‘double-dip’ recession threatens the<br />
share price in the short term, they may be even happier to cash out.”<br />
DECEMBER/JANUARY<br />
On 5 November: Guy Fawkes night<br />
“It was not Guy Fawkes but another Guy, Terra Firma’s founder,<br />
chief investment officer and figurehead Guy Hands, who occupied<br />
the headlines on 5 November this year. After just four hours<br />
of deliberation, a jury ruled that Citi investment banker David<br />
Wormsley had not tricked his long-time business associate and<br />
sometime friend Guy Hands into overpaying for music group EMI.<br />
At stake was a maximum payout of £1.5 billion (€1.7 billion; $2.4<br />
billion) in damages and considerable reputational risk. A win for<br />
Hands might have set an interesting precedent for other bankers<br />
to be sued where LBOs had gone awry. The ultimate verdict was<br />
unsurprising. Jurors were being asked by Terra Firma’s attorney to<br />
award against Citi purely on the basis of Hands’ testimony: nothing<br />
was offered in the way of documentary evidence. It always seemed<br />
like a long-shot at best or – at worst – a hopeless case for Terra<br />
Firma; a tactic to gain some bargaining leverage in debt renegotiations<br />
that went too far.” n
page 104 private equity annual review <strong>2010</strong><br />
m i d - m a r ke t<br />
Mid-market crowding<br />
Europe’s mid-market attracted the interest of a lot more<br />
players last year, as large-cap groups were compelled to<br />
deploy dry powder down market. Nick Donato reports<br />
Defining Europe’s mid-market became a difficult<br />
task over the course of <strong>2010</strong>. During<br />
private equity’s heyday any deal unable to<br />
break the billion-dollar barrier seemed like<br />
small change when viewed alongside the<br />
multi-billion blockbuster transactions in the<br />
back to normal<br />
headlines at the time.<br />
But with roughly half a trillion of dry<br />
powder still awaiting deployment, some of<br />
Europe’s biggest buyout names crept down<br />
into the mid-market arena to seek out<br />
opportunities as deal flow at the larger end<br />
Price multiple averages have bounced back, and then some, to pre-crisis peaks in the lower<br />
end of Europe’s mid-market<br />
Average deal size<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
2007<br />
2008 2009<br />
<strong>2010</strong><br />
n €10m – €100m n Over €100m<br />
Source: cmbor.com/Barcalys Private Equity/ Ernst & Young<br />
of the market continued to struggle to match<br />
pre-crisis peaks. And with banks still gunshy<br />
to support multibillion transactions, the<br />
stomping round of the traditional mid-market<br />
players began to feel a little more crowded.<br />
Firms not readily associated with Europe’s<br />
mid-market began to crop up in acquisitions.<br />
Deals such as TPG grabbing UK fashion chain<br />
Republic for £300 million and Blackstone’s<br />
buyout of ICS and Pulse, two staffing agencies<br />
for the UK’s healthcare industry both in the<br />
£100 million range, illustrate the point.<br />
“There’s been a real willingness for big buyout<br />
firms to at least take a look at these smaller<br />
deals”, says David Silver, managing director at<br />
mid-market financial services firm Baird, who<br />
explains dampened credit markets, a paucity of<br />
large deals and a strong desire to deploy capital<br />
were the primary reasons for the shift.<br />
pushing prices<br />
The increased competition in Europe’s midmarket<br />
in <strong>2010</strong> meant prices were pushed<br />
upward, says Charlie Johnstone, a director at<br />
UK mid-market firm ECI. “Suddenly assets<br />
which would traditionally have gone for a value<br />
of around £80 million were going for over a
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£100 million” adds Johnstone— who argues<br />
the phenomenon was primarily driven by a<br />
compression of capital to the smaller end of<br />
the market.<br />
Prices were also affected by the quality<br />
of company put forward for sale, says Mark<br />
Hallala a director at international legal and<br />
un-crunching credit<br />
fiduciary firm Ogier and a former mid-market<br />
fund manager. The need to return cash to<br />
investors meant that when the market for exits<br />
opened, firms put their best, most polished<br />
assets on the block. “A lot of firms were under<br />
pressure to complete some successful exits if<br />
they wanted to get on the fundraising trail in<br />
Following the credit pullback in 2008, debt/EBIT ratios are gaining ground on a leveragefuelled<br />
2007<br />
Average deal size<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
2007<br />
Source: cmbor.com/Barcalys Private Equity/ Ernst & Young<br />
2008 2009<br />
<strong>2010</strong><br />
n €10m – €100m n Over €100m<br />
the next few years,” he explains.<br />
The much feared “double dip” recession<br />
was staved off throughout <strong>2010</strong>, a development<br />
which gave trade buyers confidence to release<br />
capital for acquisitions and consequently<br />
injected further liquidity and competition<br />
in the mid-market. More stable business<br />
conditions meant trade buyers accounted for<br />
roughly 60 percent of the deal value in midmarket<br />
transactions (those with enterprise<br />
values less than $1 billion) in Europe last year,<br />
according to data provider Dealogic.<br />
Competition for deals often resulted in<br />
businesses being acquired at multiples similar<br />
to those done at the peak of the market, notes<br />
Gareth Taylor of investment bank Investec.<br />
Price multiples for deals in the lower-end of<br />
the mid-market (€10 million to €100 million)<br />
averaged 12.7x, a jump from an average of 9.9x<br />
in 2009, and even eclipsing the 11x average<br />
in 2007. And with debt making up a lower<br />
percentage for most of these transactions, “the<br />
buyers of these businesses will have to work<br />
extremely hard to achieve relatively modest<br />
rates of return down the line”, notes Taylor. n
page 106 private equity annual review <strong>2010</strong><br />
l a rg e b u yo u t<br />
Europe’s exclusive<br />
billionaires club<br />
Large buyout players in Europe have ended a bittersweet<br />
year with some regained swagger to their step<br />
Only a small group of GPs were able to boast<br />
being part of European buyout north €1 billion<br />
in <strong>2010</strong>. Continuing economic uncertainty<br />
and debt market constraints meant that<br />
mega deals such as Kohlberg Kravis Roberts’<br />
£11.1 billion buyout of pharmacy group Alliance<br />
Boots in 2007 remained only a distant,<br />
fanciful memory.<br />
During the peak years of 2006 and 2007<br />
buyout shops were averaging 35 billion-plus<br />
deals per year in Europe, which combined<br />
were worth approximately €175 billion in<br />
total value, according to data from the Centre<br />
for Management Buy-out Research, which<br />
is sponsored by Barclays Private Equity and<br />
Ernst & Young and published by <strong>PEI</strong>.<br />
rebound performance<br />
In <strong>2010</strong> private equity funds splashed<br />
leaders of the pack<br />
The Canada Pension Plan Investment Board and Onex Corp’s delisting of UK engineering company Tomkins led the charge in billion-plus<br />
transactions for <strong>2010</strong><br />
Buy-out Country Value (€m) Vendor Buyer<br />
Tomkins UK 3410 Public-Private Canada Pension Plan Investment<br />
Board and Onex Corp.<br />
Springer Science Germany 2500 secondary buy-out EQT Partners and & Business<br />
<strong>Media</strong> Government of Singapore<br />
investment Corp.<br />
Sunrise switzerland 2419 TDC A/S CVC Capital Partners<br />
RBS Worldpay UK 2390 Royal Bank of Scotland Advent International and<br />
Group<br />
Bain Capital<br />
Picard Surgeles France 1500 secondary buy-out Lion Capital<br />
Ontex Belgium 1200 secondary buy-out TPG Capital and<br />
GS Capital Partners<br />
Autobar Group UK 1158 secondary buy-out CVC Capital Partners<br />
Avolon ireland 1133 shareholders Cinven, CVC Capital Partners<br />
and Oak Hill Capital Partners<br />
Marken UK 1092 (Est) secondary buy-out APAX Partners<br />
Pets at Home UK 1070 secondary buy-out Kohlberg Kravis Roberts<br />
Source: CMBOR<br />
around €18 billion across 10 European<br />
deals with enterprise values in excess<br />
of the 10-figure marker. The numbers<br />
represent a mere fraction of the activity<br />
recorded in 2006-2007’s figures—still<br />
approximately only 20 percent on the<br />
period’s average – but give cause for celebration<br />
when contrasted with the more<br />
paltry €3 billion transacted over just two<br />
billion-plus deals in 2009.<br />
Top deals pushing averages up in Europe<br />
last year included private equity-backed<br />
Danish telecoms operator TDC selling<br />
Sunrise Communications, a Swiss telecoms<br />
company, to CVC Capital Partners for €2.4<br />
billion; and the €3.4 billion completed<br />
acquisition of Tomkins in the UK by the<br />
Canada Pension Plan Investment Board<br />
and Onex Corp.<br />
The bulk of these transactions were<br />
been limited to quality businesses that<br />
banks are already familiar with and involved<br />
“pass-the-parcel” secondary buyout deals,<br />
in which one financial sponsor passes an<br />
asset on to another, points out Gareth Taylor<br />
of investment bank Investec. In <strong>2010</strong>, 60<br />
percent of Europe’s billion-plus deals were<br />
secondary buyouts, according to CMBOR.<br />
Mark Hallala, a director at international<br />
legal and fiduciary firm Ogier and former<br />
European fund manager notes, notes that<br />
the subdued activity in the large buyout<br />
category can be put down to the scars still<br />
being carried by the banks post financial<br />
crisis. The banks’ subsequent bailout<br />
by taxpayers has left them exposed to<br />
government pressure to focus their lending<br />
activity on smaller domestic businesses<br />
to help stimulate economies, rather than<br />
large cross-border buyouts. “I don’t think<br />
they’ve let out the reins enough that they’re<br />
going to start taking huge risks overseas or<br />
saddling foreign companies with a heavy<br />
amount of debt again”, Hallala elaborates.<br />
Indeed stricter bank lending meant that<br />
in <strong>2010</strong> the average equity contribution to<br />
deals in the UK, Europe’s largest private<br />
equity market, was 68.1 percent of deal<br />
value: the highest proportion on record,<br />
according to CMBOR. n
<strong>2010</strong><br />
Emerging markets themes<br />
108 Asia Monitor: Growing up<br />
110 Greater China<br />
112 India<br />
114 Latin America<br />
116 Central & Eastern Europe<br />
118 Middle East & North Africa<br />
121 Sub-Saharan Africa<br />
China allows insurance firms to enter private equity<br />
Mubadala ups investment<br />
in Carlyle to nearly $2bn<br />
Actis does second Egyptian FIG deal<br />
CIC chair: GPs must move<br />
away from pre-IPOs<br />
Providence pays CHAMP<br />
$555m for Study Group<br />
PE returns positive for fifth straight quarter<br />
Bob Geldof-backed African<br />
MEP seals €600m<br />
fund targets $750mPolish cable TV exit<br />
ADIA ends search for<br />
private equity chief<br />
CIC chair: GPs must move away from pre-IPOs<br />
The sun sets on Shenzhen<br />
MEP seals €600m<br />
Polish cable TV exit<br />
Kingdom Zephyr closes Fund II on $492m<br />
Providence pays CHAMP<br />
$555m for Study Group<br />
TPG doubles up with<br />
second RMB fund<br />
Saudi to become the Middle East’s IPO ‘engine’<br />
Lone Star’s KEB sale hits roadblock<br />
Warburg Pincus agrees $106m Polish PIPE<br />
The sun sets on Shenzhen<br />
Managers eye<br />
‘emerging’ LPs<br />
for fundraising<br />
LPs demand focus on operations<br />
Shanghai Ace backs<br />
Blackstone RMB fund
page 108 private equity annual review <strong>2010</strong><br />
a s i a m o n i to r<br />
Growing up<br />
Extracts from <strong>PEI</strong>’s ‘Asia Monitor’ column show a region<br />
developing its own identity. By Jenny Blinch<br />
j e n n y b l i n c h<br />
Though private equity<br />
firms worldwide hang their<br />
reputation on their key men,<br />
the Chinese key man (singular)<br />
phenomenon has been<br />
exaggerated to the extreme<br />
FEBRUARY<br />
On the establishment of a Carlyle-managed RMB fund<br />
“For Carlyle, becoming an insider has been a long and painful journey. Back in 2007 the<br />
attempted buyout of state-owned Xugong, a construction machinery firm Carlyle had been<br />
negotiating to buy for three years, finally fell through. Cynics saw it as symbolising the futility<br />
of Western LBO shops trying to export their practices to China. Carlyle’s subsequent success<br />
in its latest partnership lends weight, however, to an alternative view: that in three years of<br />
negotiations over Xugong, Carlyle and the local officials developed a healthy respect for one<br />
another that laid the foundation for future engagement. It also reinforces the old adage that<br />
persistence pays – as Western GPs now busily launching RMB funds are no doubt inclined<br />
to acknowledge.”<br />
MARCH<br />
Australia’s tax office gets aggressive<br />
“Australia’s reputation as an investor-friendly destination, with a supportive government and a<br />
solid tax regime, has kept it at the forefront of Asia’s buyout market and enabled it to hold its<br />
place among the top investment destinations for private equity capital entering Asia, behind<br />
China and India. This despite lacking the alluring economic growth of some of its emerging<br />
neighbours. However, this perceived attractiveness has been put on the line – and with it<br />
foreign investor confidence – by the Australian Taxation Office (ATO), which is pushing for<br />
stricter rules on the tax paid (or not paid, according to them) on private equity transactions<br />
and private equity business in general. And once again, it all started with a US firm, in this<br />
case TPG, and a highly lucrative exit.”<br />
APRIL<br />
Western firms look East<br />
“In only the past two months, firms including US- and UK-headquartered fund of funds Northgate<br />
Capital and UK-based private equity investor network Pi Capital announced plans to<br />
move into Asia; and emerging markets specialist Aureos Capital stated its intention to set up<br />
a regional hub in Singapore as part of a rapid expansion in Asia. In the case of Quandrangle,<br />
however, moves to ramp up its Asian activities have come in tandem with steps to reduce the<br />
headcount in firm’s London office, which was opened in 2007. In fact, at the time of going<br />
to press, the firm’s website listed only one London employee: vice president Sebastien Briens.<br />
While at this stage Quadrangle appears to be an extreme case, it is likely only a matter of<br />
time before we see more Western firms shift their resources – along with their focus – from<br />
West to East.”
private equity annual review <strong>2010</strong> pa g e 109<br />
MAY<br />
The Mongolian opportunity<br />
“Although interest in Mongolia, which is rich in largely untapped<br />
resources including coal, gold, copper and iron ore, is coming<br />
from investors and mining companies around the world, the success<br />
of their investments there may depend to a large extent on<br />
the appetite of one Asian country: its resource-hungry neighbour<br />
China. Since the two countries signed a ‘Treaty on Friendship<br />
and Cooperation’ in 1994, China has become Mongolia’s largest<br />
trading partner and biggest importer of natural resources.<br />
China is, of course, a significant trading partner to other natural<br />
resource-rich regions and countries, such as Australia, Brazil<br />
and South Africa. However, the advantage Mongolia has lies in<br />
sharing a land border with China.”<br />
JUNE<br />
The rise of the Asian secondary buyout<br />
“Secondary buyouts are an attractive exit route, especially in a<br />
market like Australia where recent private equity-backed IPOs have<br />
performed poorly. However, while secondary buyouts offer GPs<br />
a relatively straightforward way to both deploy capital and return<br />
cash, such deals can make LPs wary. ‘For the LP, there’s always the<br />
concern that when a GP raises a large fund, it’s under pressure to<br />
invest money and will pay a high price,’ said one Singapore-based<br />
LP. ‘In general, it’s not usually been a good experience when one<br />
buyout fund is buying from another. The sellers – being private<br />
equity investors – always try to extract the best price, so it’s not<br />
easy to buy from them.’”<br />
JULY/AUGUST<br />
On the departure of TPG’s China boss<br />
“Weijian Shan is the latest in the long line of big-name Chinese<br />
finance professionals to strike out alone and launch private<br />
equity funds. Notable precedents include former Goldman<br />
Sachs China head Fang Fenglei, who launched his own firm<br />
Hopu Investment Management in 2007; and, most recently,<br />
Fred Hu, former Greater China chairman at Goldman Sachs,<br />
who retired this April amid a flurry of media reports that he<br />
was also setting up his own fund. Shan’s departure served to<br />
highlight once again the tendency of private equity firms in<br />
China, whether domestic or foreign, to build their businesses<br />
on the shoulders of one very prominent local business or finance<br />
professional. Though private equity firms worldwide hang their<br />
reputation on their key men, the Chinese key man (singular)<br />
phenomenon has been exaggerated to the extreme in a country<br />
where it’s almost impossible to do business without the right<br />
name to get you through the door.”<br />
SEPTEMBER<br />
Australian fundraising woes<br />
“Clearly, Australia is still a good place to invest money – the economy<br />
is growing and, while it may only be 2 percent of the world’s GDP,<br />
it is considerably more than 2 percent of the world’s investable<br />
universe. However, in the post-downturn environment it will be<br />
a case of survival of the fittest – and, based on portfolio performances<br />
coming out of the recent downturn, most insiders are<br />
pretty clear on which firms make the cut. ‘If there were a dozen<br />
managers, then there are six who have jostled themselves into a<br />
go-forward position. Then there are the six who are not credible<br />
competitors to good firms anymore,’ commented a fund of funds<br />
manager. As Darwinism slowly sets in, and LPs vote with their<br />
feet, the landscape of Australia’s domestic private equity market<br />
will evolve dramatically.”<br />
OCTOBER<br />
Chinese insurers get the green light for private equity<br />
“Though unsurprisingly the measure comes with a fair amount of<br />
small print, the news is nothing but good for China’s GPs and<br />
LPs alike. For domestic fund managers, the most obvious plus is<br />
the creation of yet another rich vein of capital to potentially tap<br />
into on the fundraising trail. According to China-focused private<br />
equity research body Zero2IPO, the new rules mean as much as<br />
RMB226 billion (€26.2 billion; $33.2 billion) would be allowed to<br />
enter China’s private equity market, given total Chinese insurance<br />
industry assets stood at RMB4.52 trillion at the end of June this year.<br />
But perhaps more significant than the capital itself, is the change<br />
the CIRC measure could bring about in the make-up of China’s<br />
domestic LP base, which until now has largely consisted of high<br />
net worth individuals (HNWIs) and government-related bodies.”<br />
NOVEMBER<br />
India struggles to define its market<br />
“China, as the indisputable king of the BRIC markets, is big and<br />
self-sufficient enough in terms of funding to afford the luxury<br />
of being able to ignore its emerging market peers. However,<br />
many Indian GPs (and there are many – up to 400 according<br />
to most estimates), rely on a largely foreign LP base, and<br />
therefore feel a keen sense of competition with China – and<br />
increasingly Brazil – in what is still a constrained fundraising<br />
environment. Perhaps because of this need to compete, much<br />
of the content of the Private Equity International India Forum<br />
in Mumbai sought to define the specific characteristics of the<br />
Indian market and bring uniquely Indian interpretations to<br />
familiar private equity terms.”<br />
DECEMBER/ JANUARY<br />
The relative merits of MENA<br />
“In MENA, meanwhile, oversupply of capital is hardly the problem.<br />
There are many reasons why so many investors shun it. According<br />
to a <strong>PEI</strong> white paper, most LPs see managers with questionable<br />
track records, a blinding lack of transparency, poor governance<br />
practices and scary politics. Ignorance also plays a part, if you<br />
believe those who know the region well. Take Saudi Arabia, for<br />
example. With a young and growing population of 27 million,<br />
the country has a large, diversified economy and a government<br />
that has worked hard to attract foreign investment.” n
page 110 private equity annual review <strong>2010</strong><br />
c h i n a<br />
Greater China<br />
A buoyant year on both the investment and divestment side saw several large<br />
deals transact, including TPG’s historic exit from Shenzhen Development Bank.<br />
Hsiang-Ching Tseng reports<br />
While <strong>2010</strong> saw dozens of investments and<br />
exits in China’s increasingly populous private<br />
equity market, the standout transaction of<br />
<strong>2010</strong> was surely TPG Capital’s exit from<br />
Shenzhen Development Bank (SDB).<br />
In May, the firm swapped its 16.76 percent<br />
stake in the bank in for a 4 percent stake in<br />
Chinese insurance giant Ping An, acquiring<br />
about 299 million newly issued Ping An<br />
shares in the process. TPG then reportedly<br />
sold around 160 million shares at HK$60.6<br />
per share just one week after the exchange,<br />
generating HK$9.7 billion (€919 million;<br />
$1.25 billion) in proceeds.<br />
The global private equity firm chose<br />
September to sell its remaining shares in<br />
Ping An Insurance, divesting what was left<br />
of the legacy of its $150 million investment<br />
in Shenzhen Development Bank (SDB) in<br />
2004 and raising another HK$9.1 billion. In<br />
total, the deal netted TPG a 16.5x return – a<br />
landmark return on a landmark deal, given<br />
the original investment, carried out by TPG’s<br />
then Asian affiliate Newbridge Capital, was<br />
the first time a foreign investor had assumed<br />
a controlling stake in a Chinese bank.<br />
Another global private equity heavyweight<br />
The Carlyle Group, on the other hand, finally<br />
got the go-ahead in November to divest its<br />
2006 investment in Taiwanese cable television<br />
operator Kbro to the country’s wealthy<br />
Tsai family. Carlyle had waited more than<br />
a year for a green light on the deal, which<br />
is worth around $1.19 billion, after its<br />
initial agreement to sell to Taiwan Mobile<br />
in September last year came up against<br />
regulatory hurdles.<br />
Also in Taiwan and also in cable television,<br />
a consortium led by food conglomerate Want<br />
Want agreed at the end of October to pay<br />
MBK Partners $1.4 billion for its 60 percent<br />
holding in Taiwanese cable broadcaster China<br />
Network Systems (CNS), in addition to<br />
Shenzhen Development Bank: an historic<br />
exit<br />
“GPs should think of new<br />
ways to satisfy LPs’ high<br />
expectations”<br />
assuming some $1 billion in debt. The Seoulheadquartered<br />
firm paid around $930 million<br />
in 2006 for its investment in CNS from family<br />
conglomerate Koo’s Group and Star Group, a<br />
subsidiary of Rupert Murdoch’s News Corp.<br />
investments<br />
On the investment front, there were several<br />
transactions in Greater China notable for<br />
their size. In March, a consortium of investors<br />
led by The Blackstone Group and Capital<br />
International pumped $600 million into<br />
a pre-IPO investment in Chinese agricultural<br />
company Dili Group Holdings. The investment<br />
bought the consortium a 30 percent<br />
stake in the company. Other investors in<br />
the consortium include Warburg Pincus and<br />
Atlantis Investment.<br />
Bain Capital struck a rare buyout<br />
transaction in China in July, when the Bostonbased<br />
firm paid $150 million for 100 percent<br />
stake of Chinese auto parts supplier Asimco<br />
Technologies. Bain bought Asimco from about<br />
30 shareholders including the private equity<br />
arm of American International Group (AIG)<br />
and Key Principal Partners, the private equity<br />
vehicle of Cleveland-based financial services<br />
firm KeyCorp. The deal was structured<br />
mostly as an equity-based transaction and<br />
included only around $10 million in debt.<br />
While foreign firms stand out as being<br />
involved in some of the larger transactions,<br />
China’s domestic GPs have made their mark<br />
in a growth capital-dominated market.<br />
In June, CITIC Private Equity Funds<br />
Management led a consortium of investors<br />
including Bohai Industrial Investment Fund<br />
and Warburg Pincus to invest RMB2.6 billion<br />
(€287.1 million; $391.2 million) in Chinese<br />
retail chain Red Star Furniture Group.<br />
In a PIPE transaction, Beijing-based New<br />
Horizon Capital and the Government of<br />
Singapore Investment Corporation (GIC)<br />
also agreed in June to invest RMB1.9 billion<br />
for a 10 percent stake in Shenzhen Stock<br />
Exchange-listed Tangshan Jidong Cement.<br />
Fund of Funds manager Axiom Asia Private<br />
Capital was also involved in the deal.<br />
There have, of course, also been numerous<br />
pre-IPO deals in China over the past year,<br />
mostly by homegrown GPs for whom the<br />
strategy is their bread and butter. However,<br />
several high-profile speakers at November’s<br />
<strong>2010</strong> Global Private Equity Beijing Forum,<br />
organised by the Beijing Private Equity<br />
Association, were outspoken in their criticism<br />
of pre-IPO plays.<br />
One such speaker was Jin Liqun, chairman<br />
of the board of supervisors of Chinese<br />
sovereign wealth fund China Investment<br />
Corporation (CIC), who said “GPs should<br />
think of new ways to satisfy LPs’ high<br />
expectations”. But with China’s capital<br />
markets still going up in value, many expect<br />
pre-IPO plays to prevail into 2011. n
private equity annual review <strong>2010</strong> pa g e 111<br />
c h i n a<br />
Banner year<br />
As fundraising in RMB continued to dominate in China in <strong>2010</strong>, the country’s offshore<br />
LPs have been feeling increasingly marginalised, finds Hsiang-Ching Tseng<br />
One of the key statistics to come out of<br />
China in 2009 was the fact that at $8.73<br />
billion, fundraising for RMB-denominated<br />
China-focused private equity funds overtook<br />
funds raised in USD ($4.27 billion) for the<br />
first time, according to China-focused private<br />
equity research body Zero2IPO.<br />
Despite a recovery in Western LPs’<br />
appetite for private equity commitments<br />
(especially to China), the trend looks to<br />
have continued into <strong>2010</strong>. In fact, the ranks<br />
of Chinese LPs are set to be swelled even<br />
further going forward since in August <strong>2010</strong><br />
China’s Insurance Regulatory Commission<br />
finally gave Chinese insurance companies the<br />
green light to invest in private equity. Though<br />
investment into the asset class is capped at no<br />
more than 5 percent of their last quarter’s<br />
total assets, the new rules mean as much<br />
as RMB226 billion (€26.2 billion; $33.2<br />
billion) could enter China’s private equity<br />
market, based on total Chinese insurance<br />
industry assets of RMB4.52 trillion at the<br />
end of June.<br />
But as spending power and funds raised in<br />
RMB have increased, so too has the feeling<br />
of marginalisation from offshore LPs who<br />
have invested in China-focused USD funds<br />
with prominent local managers managing<br />
both types of fund.<br />
In a country which has one (very strict)<br />
rule for the investment of foreign money,<br />
and another (much laxer) one for local<br />
money, it is not hard to see how conflict can<br />
arise. The LP Association of China (LAPCN),<br />
which was formed three years ago by LPs<br />
such as Pantheon, Morgan Creek Capital<br />
Management and Adam Street Partners,<br />
has identified four principle areas where<br />
conflicts of interest have arisen: deal<br />
allocation; resource allocation; timing of<br />
successor funds; and economic incentives.<br />
And given the opacity of investment in<br />
Huang: RMB funding is the future in China<br />
“We have to wake up<br />
to the reality that the<br />
RMB funding source is<br />
the future in China and<br />
returns from RMB funds<br />
are likely to be better<br />
in the near future”<br />
China, LPs feel they have no real way of<br />
knowing how much manager discretion is<br />
playing a role when it comes to choosing<br />
between their USD and RMB pools.<br />
“GPs say if it’s a restricted industry then<br />
we’ll use RMB – ok I’ll buy that. Or they’ll<br />
say the entrepreneur only wants RMB – but<br />
how do you know for sure? You have to take<br />
the GP’s word for it – it’s not practical for<br />
LPs to be checking up on every deal. So you<br />
always wonder... maybe that deal could have<br />
been done in USD?” explains Jason Zhang, a<br />
Beijing-based managing director at Morgan<br />
Creek Capital Management.<br />
Despite the strain this conflict has placed<br />
on many GP-LP relationships, offshore LPs<br />
acknowledge that the growth of China’s<br />
RMB industry is not only unstoppable, but<br />
natural.<br />
“For all these years, private equity in<br />
China has meant Chinese GPs managing<br />
USD funds,” reflects Vincent Huang, a Hong<br />
Kong-based partner at Pantheon. “We have<br />
to wake up to the reality that the RMB<br />
funding source is the future in China and<br />
returns from RMB funds are likely to be<br />
better in the near future. We cannot change<br />
this; we can at best try to align interests<br />
with the GPs.”<br />
The ultimate solution would be for the<br />
government to scrap Circular 142, a 2008<br />
law from the State Administration of Foreign<br />
Exchange which restricts the conversion<br />
of foreign currency for the purposes of<br />
investment, allowing foreign and domestic<br />
LPs alike to invest into the same fund.<br />
And in October, it seemed that Shanghai<br />
had come close to doing just this when<br />
it announced it had gained in-principle<br />
approval from China’s financial authorities<br />
to launch a Qualified Foreign LP (QFLP)<br />
programme.<br />
Similar to the Qualified Foreign<br />
Institutional Investor scheme already in<br />
existence, which allows approved foreign<br />
investors access to Chinese equities, the<br />
broad aim of the QFLP would be to allow<br />
approved foreign LPs access to the domestic<br />
private equity industry.<br />
However, although a cautious welcome<br />
was expressed by China’s foreign LP<br />
community, wholesale celebrations have yet<br />
to be seen as much of the detail around the<br />
QFLP scheme still needed to be clarified. n
page 112 private equity annual review <strong>2010</strong><br />
i n d i a<br />
Making a comeback<br />
Activity levels in the Indian private equity market bounced right back in <strong>2010</strong> – but so<br />
did valuations, writes Jenny Blinch<br />
Indian deals and exits dominated Asian private<br />
equity news in quantity, if not in size,<br />
throughout <strong>2010</strong>.<br />
“We will be at 2008 levels in terms of<br />
total private equity investment this year,”<br />
predicted Nitin Deshmukh, chief executive<br />
officer at Mumbai-based Kotak Private<br />
Equity, in October. “The numbers have given<br />
lots of confidence to investors and the big<br />
players are back in action.”<br />
But that’s not to say that everything looked<br />
rosy – the quality of the view depended on<br />
which end of the market a firm operates in.<br />
For those at the smaller end, things looked<br />
pretty good. In fact, 85 percent of the deals<br />
done by the end of August had taken place<br />
in the sub-$50 million bracket, according to<br />
data from Venture Intelligence, a research<br />
service focused on Indian Private Equity<br />
and M&A. However, a climb further up the<br />
deal spectrum to the $50 million-plus space<br />
reveals a less positive outlook.<br />
Valuations, the traditional bête noire of<br />
Indian private equity, again became an issue<br />
in <strong>2010</strong>, with any post-downturn respite<br />
in the aggressive pricing that has typified<br />
the Indian market since 2007 proving shortlived.<br />
Several sources said deals this year<br />
have been reaching as high as the mid-teens<br />
in terms of EBITDA multiples.<br />
One Delhi-based GP said two high profile<br />
deals transacted in mid-<strong>2010</strong> were agreed on<br />
EV/EBITDA multiples of between 11 and<br />
14 for the financial year ending 31 March<br />
2011. This, he said, took pricing back to<br />
2007 levels. The same deals, he added,<br />
would likely have transacted at 8x EV/<br />
EBITDA in late 2008 to mid-2009.<br />
However, deals still got done. Notable<br />
amongst the deals seen in <strong>2010</strong> were two<br />
secondary transactions. In April, Bain<br />
Capital paid $61 million for a 30.7 percent<br />
Lilliput Kidswear: part of the new breed<br />
of Indian secondary<br />
“The numbers have<br />
given lots of confidence<br />
to investors and the big<br />
players are back<br />
in action”<br />
stake in Lilliput Kidswear, a manufacturer<br />
and retailer of children’s wear, alongside<br />
TPG Growth, which invested $26 million.<br />
The duo’s deal provided an exit for domestic<br />
fund manager Everstone Capital, which had<br />
made three investments worth a total of<br />
$26.8 million in Lilliput since 2006.<br />
In August meanwhile, TA Associates<br />
paid a reported $36.3 million for a 16<br />
percent stake in Delhi-based pathology<br />
and diagnostics company Dr Lal Pathlabs,<br />
representing a partial exit for seasoned<br />
(if not actually local) Indian GP, Sequoia<br />
Capital. Sequoia had acquired close to<br />
one-third of the privately-owned Dr Lal for<br />
INR500 million (€8 million; $11 million)<br />
in 2005.<br />
Industry professionals noted that the<br />
secondary transaction looked likely to<br />
become an established feature of the market<br />
– in fact several GPs targeting deals in the<br />
sub-$30 million deal space reported to<br />
<strong>PEI</strong> that in the past year they have been<br />
approached by an increasing number of<br />
larger funds offering an exit route for some<br />
of their portfolio companies.<br />
In terms of sectors, clean energy and<br />
cleantech in general remained a core play<br />
for many firms in <strong>2010</strong>, with recent deals<br />
including the injection of $21 million in<br />
capital into clean power company Auto Mira<br />
Energy by Aureos Capital, the International<br />
Finance Corporation (IFC) and ePlanet<br />
Ventures in October.<br />
Infrastructure, as always, also proved a<br />
consistent theme in Indian private equity<br />
in <strong>2010</strong>, with deals ranging from the large<br />
to the small. At the larger end of the scale,<br />
3i along with one other unnamed buyer<br />
secured a 21.1 percent stake in the energy<br />
business of GVK Power and Infrastructure<br />
for a total of $260 million.<br />
And <strong>2010</strong> also saw India continue to<br />
attract interest from the big global players,<br />
despite the fact the average deal size would<br />
come in way under their radar.<br />
In October, Warburg Pincus edged out<br />
Bain Capital to acquire an undisclosed<br />
stake in engineering software designer<br />
QuEST Global for $60 million. The firm<br />
won a bidding war which had seen other<br />
reported suitors including Kohlberg<br />
Kravis Roberts and ChrysCapital fall by<br />
the wayside. n
private equity annual review <strong>2010</strong> pa g e 113<br />
i n d i a<br />
Going solo<br />
The trend of high profile spin-outs continued in the Indian private equity market in <strong>2010</strong>.<br />
Jenny Blinch reports<br />
As recently as 2008, the firms making up<br />
India’s private equity industry fell largely<br />
into two camps: foreign players on the one<br />
hand, and captive funds at large, established<br />
Indian institutions on the other.<br />
But in the last 18 months to two years,<br />
the country has gained some notoriety as a<br />
place where, when it comes to private equity<br />
teams, the only thing that can be relied<br />
upon is that senior professionals cannot are<br />
unlikely to stick around.<br />
Though the institutional firms, like<br />
ICICI Venture (part of the ICICI Group),<br />
IDFC Private Equity, and IL&FS Investment<br />
Managers (part of the broader IDFC and<br />
IL&FS groups respectively), are still very<br />
much present and correct, a trend of highlevel<br />
“spin-outs” has seen the Indian market<br />
evolve to encompass a sizeable number of<br />
independent start-ups<br />
“Many of these fund managers would<br />
have stepped out for greater independence<br />
in the decision-making process, better<br />
alignment of interest with LPs, and also<br />
the monetary perspective,” comments Sanjiv<br />
Kaul, a managing director at New Delhibased<br />
ChrysCapital.<br />
Not only are the economics at an<br />
independent firm better for the GPs running<br />
the fund, but in being so they are also more<br />
attractive to LPs – in fact, independence<br />
is something that is frequently sought by<br />
foreign LPs (if not necessarily by Indian<br />
LPs, who like the comfort offered by an<br />
established brand name).<br />
“The foremost advantage of an<br />
independent platform is that it aligns itself<br />
with only one constituency – the investors,”<br />
states Renuka Ramnath, founder, managing<br />
director & CEO of one of the first spin-outs,<br />
Multiples Alternate Asset Management.<br />
Although churn is never a good thing in<br />
a private equity market, the spin-outs seen<br />
Relan: The spin-outs will one day<br />
themselves generate spin-outs<br />
so far in India seem to have been received<br />
pretty equitably by the industry as a whole.<br />
“It’s a normal progression in terms of the<br />
evolution of the private equity industry and<br />
means an availability of GPs who are able to<br />
focus on a wide spectrum of sectors and deal<br />
sizes,” states ChrysCapital’s Kaul.<br />
This is certainly true. With each<br />
successive fund, many of India’s private<br />
equity stalwarts have climbed higher up the<br />
deal spectrum in terms of size. Meanwhile,<br />
much of the deal flow in the country remains<br />
at the smaller end of the scale.<br />
As Menka Sajnani, vice president, Asian<br />
Private Equity, Auda Alternative Investments,<br />
puts it: “Spinouts are a reflection of Indian<br />
entrepreneurialism, but they are also all<br />
raising sub-$500 million funds and that is a<br />
reflection of the private equity landscape –<br />
it’s hard to do bigger deals in India.”<br />
But as the number of new independents<br />
– and therefore new funds – rises, some are<br />
beginning to question whether they will all<br />
be successful.<br />
“Many LPs have already made<br />
commitments in India, so are reluctant to<br />
increase the number of GPs they support. It<br />
will be a challenge and it will be interesting<br />
to see how many are eventually successful in<br />
raising their targeted fund raisings,” states<br />
Nitin Deshmukh, chief executive officer at<br />
Kotak Private Equity, who estimates that in<br />
total there are over 25 India-focused funds<br />
currently in the market.<br />
“What LPs are looking for is differentiated<br />
strategies – most managers in India do deals<br />
across a wide spectrum – including PIPEs<br />
and pre-IPOs. One question high up in the<br />
minds of LPs is, ‘are managers differentiating<br />
themselves at all?’” states Jayanta Banerjee,<br />
ex-ICICI president and founding partner at<br />
Pravi Capital.<br />
It won’t just be the fundraising success<br />
of the new firms that is being watched –<br />
their investment performance will also be<br />
closely monitored, not least of all by other<br />
professionals who may one day want to spin<br />
out themselves.<br />
“The performance of the current breed<br />
of independent fund managers will in a<br />
way set the stage for the next generation<br />
of professionals to create their own funds,”<br />
comments Multiples’ Ramnath.<br />
All concerned are aware the cycle is here<br />
to stay – and that they themselves may one<br />
day lose professionals in the same way.<br />
“Some of the independent firms will<br />
start losing people and they will set up on<br />
their own. We have seen of the teams that<br />
have been set up in the past splintering,”<br />
says CX Partners’ Relan matter-of-factly.<br />
“I am cognizant of this risk at CX partners,<br />
and we have tried to ensure both through<br />
ownership distribution and empowerment<br />
that we mitigate it. It will be interesting<br />
to see if we succeed: people always have<br />
ambitions to run their own fund.” n
page 114 private equity annual review <strong>2010</strong><br />
l a t i n a m e r i c a<br />
Momentum builds<br />
Private equity investment in Latin America accelerated dramatically in <strong>2010</strong> with no<br />
signs of slowing down. By Graham Winfrey<br />
In <strong>2010</strong>, Latin America continued to shine<br />
as one of the most attractive regions for<br />
emerging market private equity investment<br />
in the world. Brazil’s expanding<br />
middle class and macroeconomic stability<br />
in the wake of the economic crisis made<br />
it an ideal region in which to invest, and<br />
private equity opportunities increasingly<br />
presented themselves in the less penetrated<br />
countries such as Mexico, Peru,<br />
Colombia and Chile.<br />
According to data from the Latin<br />
American Venture Capital Association<br />
(LAVCA), investments in the region in<br />
the first half of <strong>2010</strong> reached $3.8 billion,<br />
surpassing the $3.3 billion put to work in<br />
all of 2009. Total funds raised for Latin<br />
America during the first six months of the<br />
year reached nearly $3.1 billion, putting<br />
<strong>2010</strong> on a similar track to the recordbreaking<br />
year of 2008, when $6.8 billion<br />
was raised.<br />
In May, global mid-market firm Advent<br />
International closed its fifth Latin Americafocused<br />
fund on $1.65 billion, taking the<br />
title for the region’s largest ever private<br />
equity fund. The distinction did not last<br />
long, however, as Buenos Aires-based<br />
Southern Cross broke the record again in<br />
September by closing its fourth buyout<br />
fund on $1.68 billion.<br />
Notable deals struck in <strong>2010</strong> include<br />
The Carlyle Group’s first ever investment<br />
in Brazil, a $250 million investment<br />
for a majority stake in tour and travel<br />
company CVC Brasil, and London-based<br />
Apax Partners’ Brazilian debut, a $1<br />
billion transaction for a 54 percent stake<br />
in IT company, Tivit. Energy investment<br />
giant First Reserve in May invested $500<br />
million in Brazil-based Barra Energia, an<br />
independent exploration and production<br />
company. Emerging markets specialist<br />
Goncavles: market isn’t overheating<br />
“There are some high<br />
profile deals being<br />
closed, but the overall<br />
activity is still 60 percent<br />
of what it was in the<br />
late ‘90s”<br />
Actis also made its Brazilian debut with<br />
a $58 million investment in supermarket<br />
operator Companhia Sulamericana de<br />
Distribuição.<br />
The surge of investment activity was<br />
certainly welcome to Brazil’s growing<br />
economy – the 10th largest in the world<br />
– but toward the end of the year, the<br />
question on many investors’ mind was:<br />
are things heating up too fast?<br />
Alvaro Goncalves, founding partner of<br />
Sao Paulo-based mid-market firm Stratus<br />
Group, didn’t think so when <strong>PEI</strong> spoke to<br />
him in November. While there has been<br />
a sharp rise in interest from global firms<br />
such as Apax and Carlyle, the majority of<br />
Brazil’s businesses lie in the mid-market,<br />
under the radars of private equity’s largest<br />
players.<br />
“There are some high profile deals being<br />
closed, but the overall activity is still 60<br />
percent of what it was in the late ‘90s,”<br />
Goncalves said. “Overheating is when<br />
people start to make mistakes, backing<br />
things they shouldn’t, and I don’t see that<br />
at all here at this point. The middle market<br />
is still severely underserved.”<br />
In June, Stratus invested $40 million<br />
in Unnafibras, a producer of recycled<br />
polyester fibres used by the textile,<br />
automotive parts and furniture industries.<br />
Among the firm’s specialist fund<br />
offerings is infrastructure investment, a<br />
huge theme with a number of large global<br />
players entering Brazil.<br />
“[Infrastructure] will be one big play<br />
that I think will be a major trend across<br />
the region,” said Guido Padovano, head of<br />
the Latin America alternative investments<br />
team at PineBridge Investments.<br />
Padovano considers the main strategies<br />
in the region to be in sectors such as<br />
agribusiness and mining, and in internal<br />
consumption-driven investments such as<br />
retail, healthcare, business services and<br />
non-banking financials. “I think this will<br />
continue to be the major investment thesis<br />
for private equity for the next five to 10<br />
years in a country like Brazil,” he says.<br />
The Latin American private equity<br />
market will likely stay hot in 2011.<br />
Blackstone-backed Patria is planning to<br />
launch its fourth fund in early 2011, a<br />
source told <strong>PEI</strong> in an earlier invterview,<br />
targeting slightly more than the third fund,<br />
which closed on $700 million. n
private equity annual review <strong>2010</strong> pa g e 115<br />
l a t i n a m e r i c a<br />
Looking beyond Brazil<br />
Brazil wasn’t the only country attracting private equity<br />
interest in Latin America last year, finds Graham Winfrey<br />
While much of the recent deal flow in Latin<br />
America has targeted Brazilian businesses,<br />
some managers have broadened their gaze<br />
to other countries in the region.<br />
“We will continue to invest primarily in<br />
… Brazil, Mexico and Argentina, but are<br />
looking to broaden our geographic focus<br />
to include other markets such as Uruguay,<br />
Chile, Peru, Colombia and the Caribbean,”<br />
Ernest Bachrach, managing partner and<br />
co-head of Latin America for Advent<br />
International, told the Latin American<br />
Venture Capital Association in May.<br />
In May, DLJ South American Partners<br />
led an investor group in a $370 million<br />
investment for a 25 percent stake in Grupo<br />
Santillana de Ediciones, a publisher of<br />
educational text books in Latin America<br />
and Spain. Among the DLJ-led consortium<br />
were a number of other GPs, pension funds<br />
and DLJ limited partners, such as Albright<br />
Capital Management, Honeywell Capital<br />
Management and Partners Group.<br />
DLJ made the investment from its $300<br />
million debut fund raised in 2006, which<br />
has a primary focus on Argentina, Chile<br />
and Brazil.<br />
Carlos Garcia, co-managing partner<br />
of DLJ South American Partners, said the<br />
team’s debut fund was originally raised to<br />
cover the whole region, but with a specific<br />
focus on Argentina, Brazil and Chile.<br />
“The strategy had to be adjusted,” he<br />
says. “We continue to be excited about<br />
Brazil and Chile. We added into that<br />
category Colombia and Peru,” Garcia<br />
says. These latter markets are attracting<br />
increased attention from private equity<br />
firms as their regulatory regimes have<br />
become more accommodating.<br />
Emerging markets-focused Aureos<br />
Mexico city: the next stop for private<br />
equity?<br />
Capital is a mid-market private equity firm<br />
that invests in Mexico, Peru, Colombia<br />
and Central America. The firm closed its<br />
first Latin American fund on $184 million<br />
in August 2009 and makes investments of<br />
between $2 million and $10 million in<br />
small- to medium-sized businesses.<br />
“We provide a diversified complimentary<br />
Latin America play to investors who already<br />
have a significant Brazilian exposure,” says<br />
regional managing partner Erik Peterson.<br />
The firm’s top three invested sectors are<br />
TMT, financial services and services.<br />
“The investment opportunities that we’ve<br />
seen and where we’ve been building our<br />
portfolio in Latin America are focused<br />
mainly on the growing middle class and<br />
local consumption plays,” Peterson says.<br />
The firm also has a Central America<br />
Growth Fund, from which it invested in<br />
Costa Rican outdoor advertising company<br />
Publimovil Costa Rica.<br />
As is the case with all private equity<br />
firms investing in emerging markets,<br />
establishing a local presence is crucial for<br />
originating the best deals and managing<br />
local operations. In addition to Aureos’<br />
Latin America regional headquarters<br />
in Costa Rica, the firm has offices in<br />
Colombia, Costa Rica, El Salvador, Mexico<br />
and Peru.<br />
In October, Conduit Capital Partners<br />
chief executive Scott Swensen told <strong>PEI</strong><br />
sister publication Infrastructure Investor<br />
the firm had plans to open an office in<br />
Mexico City, the second office for the Latin<br />
America-focused energy infrastructure<br />
fund manager, after its New York<br />
headquarters.<br />
Swensen said Conduit has been investing<br />
in Mexico for 10 years but decided “we<br />
would see even more deal flow from having<br />
a local presence on the ground”. Recent<br />
regulatory changes in Mexico convinced<br />
the firm that now was a good time to open<br />
the office.<br />
In 2009, the Mexican government for<br />
the first time allowed alternative asset<br />
managers to raise money from local<br />
pensions through a new type of security<br />
called a CKD. CKDs, or certificados de<br />
capital de desarrollo, are debt-like listed<br />
securities through which Mexican pensions<br />
are allowed to participate in private<br />
investment funds. Conduit plans to raise<br />
$150 million under the CKD program.<br />
Swensen said opening up a new office is<br />
“generally a 12-month process” and hopes<br />
to open doors in Mexico City sometime<br />
in 2011. n
page 116 private equity annual review <strong>2010</strong><br />
c e n t r a l a n d e a s t e r n e u ro p e<br />
Parting the CEE<br />
Investors unable to distinguish between the various<br />
countries making up Central and Eastern Europe risked<br />
missing out on some star performers. By Nicholas Donato<br />
Investors can too easily miss the nuances<br />
inherent in Central and Eastern Europe—<br />
a region which in parts shares much the<br />
same genetic code as its peers in Western<br />
Europe. For those viewing the region from<br />
outside Europe in particular, the region<br />
is the subject of much misunderstanding.<br />
“People like easy and simplified models<br />
for seeing the world”, said Brian Wardrop,<br />
a partner at CEE-focused shop Arx Equity<br />
Partners, in a November interview. This<br />
meant when the financial crisis hit,<br />
“investors tended to lump CEE in one<br />
basket”. At the time, Western GPs which<br />
had dabbled in the region when markets<br />
were benign, could be seen grimacing at<br />
severe recessions occurring in Hungary<br />
or the Baltic states for example, without<br />
fully appreciating the deal opportunities<br />
still present in countries like Poland or<br />
the Czech Republic, observed Wardrop.<br />
International media reports too would<br />
simplify Eastern Europe’s trouble spots<br />
as symptomatic of the greater region,<br />
said fund investor Petr Rojicek of Alpha<br />
Associates during a May roundtable<br />
discussion. As a result, the press largely<br />
ignored the fact that each country in the<br />
bloc contains its own story with different<br />
macroeconomic dynamics and prospects,<br />
he pointed out.<br />
breakout countries<br />
Years from now the crisis may be looked<br />
back on as a wakeup call to those who<br />
pigeonholed CEE’s multifarious markets.<br />
In 2009 GDP growth figures across the<br />
region varied from modest expansion in<br />
Poland of 1.4 percent to cataclysmic contractions<br />
of as much as -18 percent in Latvia,<br />
according to data from the European Bank<br />
for Reconstruction and Development. The<br />
Rojicek: cutting CEE states into<br />
autonomous markets<br />
bank’s estimates for <strong>2010</strong> GDP growth rates<br />
show more harmony among CEE economies,<br />
but breakout stars are beginning to<br />
take their place centre-stage.<br />
“It was in <strong>2010</strong> certain countries<br />
really began solidifying their reputations<br />
to investors— whether for good or bad,”<br />
says Przemek Szczepanski of Syntaxis<br />
Capital, a CEE-focused mezzanine<br />
specialist. Szczepanski is quick to highlight<br />
Poland, Slovakia and the Czech Republic<br />
as names garnering the most attention<br />
from investors due to their strong macro<br />
performance. Both Poland and Slovakia<br />
are forecast to grow roughly 3.8 percent<br />
in 2011, according to the EBRD, while<br />
the Czech Republic is projected to grow<br />
2.8 percent in 2011, according to the<br />
Organisation for Economic Co-operation<br />
and Development.<br />
“After the fall of the iron curtain, it’s<br />
those countries following an economic<br />
path away from state control that have<br />
experienced the most success,” says<br />
Matthew Strassberg, a partner at CEEfocused<br />
firm Mid Europa. Strassberg<br />
praises Poland’s level of domestic<br />
consumption and Slovakia’s strong export<br />
market with core Europe. However, he<br />
balances his assessment of the region last<br />
year with criticism for Hungary’s structural<br />
deficit while also pointing to Bulgaria and<br />
Romania as examples of a more volatile<br />
political and economic landscape.<br />
But in spite of all their differences,<br />
the countries comprising CEE do share<br />
some important characteristics, point<br />
out market sources. Broadly speaking<br />
business owners in CEE are less familiar<br />
with minority investors, argues one GP<br />
based in the region. Unlike their Western<br />
counterparts, corporate executives in<br />
CEE are sometimes shocked by the level<br />
of reporting, auditing or due diligence a<br />
private equity stakeholder will demand of<br />
them, he elaborates.<br />
An important factor that distinguishes<br />
the CEE from other emerging markets<br />
around the world is the governance<br />
standards. As members of the European<br />
Union, the bulk of CEE states are held<br />
accountable to a higher collective acting<br />
as a check against any rogue political<br />
developments.<br />
It is questionable as to whether the<br />
“emerging market” moniker is even<br />
suitable for the bloc, when one considers<br />
the fact that emerging markets are often<br />
characterised as lacking GPs who hold<br />
track records spanning multiple decades<br />
or as suffering from unstable political<br />
and legislative environments. There are a<br />
number of GPs in the region that have been<br />
investing for multiple decades.<br />
Should the CEE’s star players continue<br />
to decouple from their poorer performing<br />
counterparts, new acronyms may just<br />
have to separate the emerging from the<br />
emerged. n
private equity annual review <strong>2010</strong> pa g e 117<br />
c e n t r a l a n d e a s t e r n e u ro p e<br />
Success and succession<br />
Retiring entrepreneurs continue to provide a valuable<br />
source of deals in the region, finds Nicholas Donato<br />
In 1989 the fall of the soviet empire would<br />
be embodied by the demolition of the Berlin<br />
wall, which separated socialist East Germany<br />
from the free market capitalists to the west.<br />
What was perhaps unknown at the time was<br />
an eventual flourishing of entrepreneurism<br />
and business activity the iron curtain’s<br />
eradication would produce in Central and<br />
Eastern Europe.<br />
Today a “proportion of the individuals<br />
who started up a company or who privatised<br />
existing companies following the fall of<br />
communism are now in their 50s and facing<br />
succession issues”, observed Brian Wardrop,<br />
co-managing partner at CEE-focused private<br />
equity firm Arx Equity Partners, in a prior<br />
interview.<br />
Indeed an examination into four core<br />
countries of the CEE bloc (Hungary, Czech<br />
Republic, Romania and Poland) shows<br />
deal flow sourced from family and private<br />
businesses on a general upward trend over<br />
the past decade, according to the Centre<br />
for Managament Buy-out Research, which<br />
is sponsored by Barclays Private Equity and<br />
Ernst & Young and published by <strong>PEI</strong>. In <strong>2010</strong>,<br />
almost half (43 percent) of all deals came<br />
from family and private sources.<br />
Notable transactions illustrating the<br />
trend last year include mid-market specialist<br />
Bancroft Private Equity injecting €20 million<br />
into family-owned Dumagas Transport, a<br />
Romanian road transportation company; and<br />
Warsaw-headquartered private equity firm<br />
Enterprise Investors acquiring Hungarybased<br />
online insurance broker netrisk.hu<br />
for €23 million.<br />
As partners and owners in these companies<br />
approach retirement age, there is often one<br />
partner who wishes to continue managing the<br />
business and private equity has been able to<br />
provide the necessary capital to buy out the<br />
other partners, said Arx’s Wardrop.<br />
For example, last year Arx worked with<br />
40-year-old Robert Seifert, chief executive<br />
officer of Czech Republic-based Krkonošské<br />
vápenky Kuncice (KVK), a producer of<br />
mortar and adhesives, in the €20 million<br />
leveraged buyout of the company’s other<br />
owners, all of whom were in their 60s.<br />
still struggling<br />
The boost in deal activity from family and<br />
private sources came at a time when overall<br />
activity was grim in the region. Unlike most<br />
private equity markets around the globe,<br />
deal activity in the region continued to<br />
drop rather than bounce back to life. In the<br />
first 10 months of <strong>2010</strong>, funds dedicated to<br />
Central and Eastern Europe deployed $1.8<br />
billion in capital, according to the Emerging<br />
Markets Private Equity Association. The<br />
figure is on pace to represent a drop from<br />
2009, when roughly $3.3 billion of capital<br />
was deployed in the bloc, and still well below<br />
the $8.3 billion peak posted in 2007.<br />
Bright spots in the region, few as they<br />
were, came from those sectors able to<br />
family affairs<br />
Deals<br />
benefit from a rise in domestic consumer<br />
demand and international trade. Poland,<br />
which accounts for roughly 45 percent of<br />
the bloc’s GDP according to International<br />
Monetary Fund estimates, has promising<br />
deal opportunities in retail and domestic<br />
service industries due to a rise in disposable<br />
income, says Matthew Strassberg, a partner<br />
at CEE-focused firm Mid Europa.<br />
Some of the biggest deals coming out<br />
of Poland last year were in fact retail and<br />
domestic services related, such as Eton<br />
Park Capital Management’s €159 million<br />
acquisition of listed Polish press distributor<br />
Ruch SA; and IK Investment Partners’<br />
approximate €50 million buyout of Polandbased<br />
diversified food and drink business<br />
Agros Nova. The two deals were the first<br />
and third largest in the country respectively<br />
last year, according to CMBOR.<br />
Manufacturing and trade were the<br />
other major factors boosting CEE’s<br />
<strong>2010</strong> performance, says Jacek Siwicki,<br />
president of CEE-focused heavyweight<br />
firm Enterprise Investors. “CEE has a well<br />
educated and cheap labour force which has<br />
resulted in significant trade with Western<br />
Europe”, observes Siwicki—who adds<br />
trade is especially an important element<br />
for those countries without strong domestic<br />
consumption. n<br />
Family and private business owners are the source of the lion’s share of private<br />
equity deals in the CEE<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Family &<br />
Private<br />
Source: CMBOR<br />
Foreign<br />
parent<br />
Local<br />
parent<br />
Privatisation<br />
Public<br />
buy-in<br />
Public to Receivership Secondary Unknown<br />
Private<br />
Buy-out
page 118 private equity annual review <strong>2010</strong><br />
m e n a<br />
Can MENA Private Equity 2.0<br />
get started now?<br />
Private equity in the region is set for a transformational<br />
shake-out. According to onlooking limited partners,<br />
that is entirely a good thing, writes Philip Borel<br />
<strong>PEI</strong>’s research team spoke to more than 50<br />
LPs from around the world from July to<br />
September <strong>2010</strong>, with the aim of identifying<br />
their attitudes towards private equity in the<br />
Middle East and North Africa. We captured<br />
their post-global financial crisis thinking on<br />
capital allocation, manager selection and<br />
due diligence policies for the region for a<br />
resulting white paper, The Final Frontier: An<br />
Investor Perception Analysis of MENA Private<br />
Equity.<br />
The majority of private equity investors<br />
we spoke to for the white paper expressed<br />
caution as to the likelihood of their<br />
launching a first-time investment effort<br />
in MENA in the near future. Likewise<br />
LPs that are already active in the region<br />
described their appetite for expansion in<br />
the region as currently limited. As our<br />
findings relating to investors’ allocation<br />
planning for MENA demonstrate, there<br />
will be some new entrants, and an<br />
increase in average allocation of private<br />
capital competition<br />
LPs’ mean percentage allocation to the asset class by region underscores MENA’s role as the<br />
‘final frontier’ in attracting institutional commitments<br />
Total private equity capital<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
Source: <strong>PEI</strong> <strong>Media</strong><br />
1.0%<br />
Mean allocation in <strong>2010</strong><br />
1.6%<br />
21.8%<br />
17.9%<br />
4.0%<br />
4.1%<br />
Mean allocation in 2012<br />
MENA Asia CEE Latin<br />
America<br />
“Groups that didn’t<br />
really know what<br />
they were doing<br />
were purged from<br />
the system”<br />
2.2% 3.2% 3.2% 3.7%<br />
Sub-Saharan<br />
Africa<br />
74.6%<br />
70.2%<br />
Developed<br />
markets<br />
equity capital can be expected in the<br />
next two years also. However, even those<br />
institutions that are expecting to drive this<br />
modest upward trend are bound to take<br />
great care as they proceed, and work hard<br />
in their due diligence to protect against<br />
downside risk.<br />
The white paper, which was sponsored<br />
by Al Masah Capital, helped illuminate<br />
why international investors remain<br />
vigilant. MENA private equity is – rightly<br />
– seen as one of the youngest and least<br />
institutionalised segments within the asset<br />
class globally. While the moment of its<br />
creation may be hard to pin down with<br />
much precision, most practitioners agree<br />
that there is little more than five years of<br />
relevant activity for students of alternative<br />
investment history to look back upon.<br />
Also, while MENA as an economic<br />
region has attractions that limited partners<br />
do recognise, such as its promising macropicture,<br />
it is not a priority for LPs to<br />
look for new investments in the region,<br />
regardless of how interested in emerging<br />
markets opportunities they may be in<br />
general. As one European respondent<br />
pointed out: “To go beyond markets like<br />
China and even further into the emerging<br />
markets, including MENA, we’d need to<br />
identify the managers we’d want to work<br />
with. To do this we would need more staff.”<br />
hope, not expectation<br />
What is more, almost all private equity<br />
firms operating in the region today were<br />
created during a frenzied investment boom,<br />
amidst huge optimism and exuberance. In<br />
hindsight, it wasn’t the ideal moment for<br />
the birth of MENA private equity: when<br />
the regional version of the global financial<br />
crisis finally struck in 2009, the fallout hit<br />
many of the first-generation general partner
page 120 private equity annual review <strong>2010</strong><br />
groups and their investment portfolios very<br />
hard indeed.<br />
With that in mind, it is not surprising<br />
that of those LPs we interviewed who<br />
have invested with some of the pioneering<br />
groups, not many were able or willing to<br />
issue a positive score card. Only a couple<br />
said performance to date had been “as<br />
expected”. Others said it was too early<br />
to tell what these early investments would<br />
be able to deliver. And one London-based<br />
investment advisor, commenting on the<br />
performance of MENA funds he has<br />
backed so far, said: “We are in hope rather<br />
than expectation. There are people who<br />
say they could achieve returns above 15<br />
percent, but there are others who say the<br />
IRR will be lower.”<br />
creative destruction…<br />
Needless to say that for any MENA managers<br />
failing to engineer a satisfactory result<br />
from their existing portfolio it will be<br />
extraordinarily difficult to persuade existing<br />
investors to make fresh capital available<br />
for a new round of deal-making – let alone<br />
expand their investor base and find new<br />
limited partners going forward. Instead,<br />
the word doing the rounds in investor circles<br />
is that of consolidation and a significant<br />
manager shakeout. LPs, in other words, are<br />
expecting the make-up of the MENA GP<br />
community to change dramatically in the<br />
coming years.<br />
What is most interesting about<br />
investors’ opinions about this weeding<br />
out of unsuccessful managers is that it<br />
is widely seen as a much-needed and<br />
overwhelmingly positive development,<br />
one that will allow MENA private equity<br />
to start over and make a fresh attempt<br />
at creating an institutionally viable<br />
private equity industry in the region.<br />
According to many LPs in our sample,<br />
the resetting of MENA private equity<br />
is happening right now, affording the<br />
region an opportunity to emerge with<br />
a stronger, revitalised and ultimately<br />
more appealing GP community than<br />
before. Everything else being equal, and<br />
amid reduced competition for assets, this<br />
“We are starting to see<br />
managers that have the<br />
right characteristics”<br />
community should be expected to present<br />
an altogether more attractive investment<br />
opportunity to the institutional buy-side<br />
than the preceding generation.<br />
Josh Lerner, Jacob H Schiff Professor<br />
of investment banking at Harvard Business<br />
School and a regular visitor to the region,<br />
describes the positive significance of the<br />
moment thus: “There’s been a sort of<br />
cleansing effect from the latest financial<br />
crisis, where a lot of the groups that didn’t<br />
really know what they were doing were<br />
purged from the system, which means the<br />
groups that did survive – the successful<br />
groups – will have a lot less competition<br />
and presumably are in a position to do<br />
better as a result.”<br />
Many of the investment professionals<br />
we interviewed made similar comments.<br />
Here is how an international fund of funds<br />
manager put it: “One of the challenges<br />
we have faced has been trying to foot the<br />
rhetoric and the reality coming out of<br />
the region, speaking specifically perhaps<br />
about a number of the Dubai-based<br />
managers where there was a great deal<br />
of excitement and talk and I think perhaps<br />
unbridled optimism from a number of<br />
new managers established in the 2006-<br />
2007 time frame. What the crisis has<br />
done is, it has allowed everybody to<br />
look with the light of day at what really<br />
has remained, which is a smaller group<br />
of well-established managers that are<br />
likely to continue to be the foundation<br />
of the development of the private equity<br />
industry here.”<br />
… and a new dawn<br />
Now that the debris has surfaced and is<br />
being swept away, limited partners with<br />
faith in the notion that MENA has the<br />
potential to add value to a diversified portfolio<br />
may soon have an opportunity to (re-)<br />
visit the survivors of the recent storm, and<br />
also to take an exploratory look at new<br />
fund managers.<br />
A Tokyo-based investor, who has<br />
no prior experience of investing in<br />
the region, said: “Now would be good<br />
timing to start investing because of the<br />
shakeout. We are still watching carefully<br />
with interest.“<br />
And another fund of funds noted: “We<br />
are starting to see managers that have the<br />
right characteristics. The macroeconomic<br />
climate is also interesting, but for us,<br />
the managers are the most important.<br />
Whether we invest in MENA will come<br />
down to the credibility of the managers.”<br />
An important role in the rebuilding<br />
of the industry across the region will<br />
of course fall to those firms that have<br />
come through the past two years with<br />
their business models, reputations and<br />
investment teams intact. We asked<br />
limited partners to name the MENA<br />
private equity fund managers that they<br />
considered to be among the market<br />
leaders at the moment. Those who<br />
answered the question most frequently<br />
cited Abraaj Capital, Actera Group, The<br />
Carlyle Group, Citadel Capital, EFG<br />
Hermes, Foursan, Gulf Capital, Tuninvest<br />
and Turkven as among the groups they<br />
expected to remain active and relevant<br />
going forward.<br />
If the majority view of the investors<br />
we surveyed is correct and the post-crisis<br />
consolidation will pave the ground for<br />
a smaller but revitalised and ultimately<br />
more prosperous private equity industry<br />
to emerge, then the time for serious due<br />
diligence on existing and new managers<br />
to commence is not far away. n
private equity annual review <strong>2010</strong> pa g e 121<br />
s u b - s a h a r a n a f r i c a<br />
Limitless opportunities<br />
A number of factors suggest the next 10 years could see African private equity come<br />
into its own. Toby Mitchenall reports<br />
There is a sense among Africa’s private<br />
equity professionals that the shake-out of<br />
the global financial crisis may have set the<br />
industry back in the short-term, but in the<br />
long-term it will provide the launch pad for<br />
the next stage of the industry’s development.<br />
That is not to downplay the effects of<br />
the crisis. Private equity investment in<br />
sub-Saharan Africa slowed dramatically;<br />
in 2009 private equity transactions across<br />
the region totalled around $1.4 billion: 52<br />
percent lower than 2008 and down nearly<br />
60 percent from its 2007 peak, according<br />
to data from the Emerging Markets Private<br />
Equity Association.<br />
While this may appear bad, however, it<br />
compares well with the relative slowdown<br />
in more developed private equity markets.<br />
The UK in 2009, for example, recorded a<br />
steep year-on-year decline in deal activity<br />
of 74 percent.<br />
Fundraising – as it did in markets<br />
throughout the world – suffered as many<br />
limited partners struggled to keep their<br />
portfolios in good health, became increasingly<br />
averse to illiquidity and in many cases lost<br />
their appetite for more “exotic” investments<br />
(a category into which Africa often falls). The<br />
$974 million raised by sub-Saharan private<br />
equity funds in 2009 was 57 percent lower<br />
than the previous year’s figure, which topped<br />
$2 billion.<br />
Yet again, however, the hit taken by the<br />
private equity market in Africa appears less<br />
severe than most other emerging markets,<br />
and certainly the developed markets. One<br />
salient reason for this could be the continued<br />
support of development finance institutions,<br />
which use private equity managers as a<br />
means to boost economic activity and,<br />
in turn, development. Since 1992, 117<br />
Africa-focused private equity managers have<br />
attracted backing from mostly European<br />
DFIs.<br />
And fundraising conditions appear to<br />
be improving. In the first half of <strong>2010</strong>,<br />
already more capital had been raised than<br />
2009 in its entirety. Significant closes for<br />
two pan-African funds buoyed the industry:<br />
Kingdom Zephyr Africa Management<br />
raised $492 million for its second fund and<br />
Emerging Capital Partners rounded up $613<br />
million for its third vehicle. Neither quite<br />
reached target, but both represented the<br />
largest funds each firm had raised to date.<br />
African private equity practitioners can<br />
once again start looking forward. “Investors<br />
have taken note of the significant progress<br />
made in Africa over the last decade and as<br />
they look for new frontiers with promising<br />
growth prospects and the potential for<br />
making significant returns, Africa probably<br />
presents the last frontier,” says Kofi Bucknor,<br />
managing partner of Kingdom Zephyr.<br />
bright future<br />
While it may not be able to keep pace with its<br />
emerging market counterparts in the BRIC<br />
acronym in terms of GDP growth, Africa is<br />
growing much faster than developed economies.<br />
According to analysis from the African
page 122 private equity annual review <strong>2010</strong><br />
Development Bank, real GDP growth across<br />
the continent was expected to reach 4.5 percent<br />
in <strong>2010</strong> and projected to hit 5.2 percent in 2011.<br />
Given the diversity the continent offers<br />
in terms of both regional growth rates and<br />
approaches to private equity investment, there<br />
is scope for managers to find market segments<br />
to generate outsized returns. In sub-Saharan<br />
Africa (excluding South Africa), investments<br />
typically take the form of development capital,<br />
focusing on financing fast-growth companies.<br />
South Africa itself boasts a well established,<br />
mature buyout market; while in the North<br />
African markets – which are also relatively well<br />
developed – investments focus more on smaller,<br />
family-run organisations.<br />
In conversations with GPs focused on<br />
Africa, it becomes clear that the opportunity<br />
set presented by the continent tends to hang on<br />
a number of recurring themes: some uniquely<br />
African, others more widely prevalent in<br />
emerging markets.<br />
“One of the reasons [investors] are<br />
interested [in Africa],” says Hurley Doddy, chief<br />
executive of Emerging Capital Partners, “is that<br />
the same type of growth in the consumerrelated<br />
businesses that we’ve seen in China,<br />
India and Eastern Europe is happening in Africa<br />
at a similar type of pace.” The emergence of<br />
a “middle class”, with discretionary money<br />
to spend and a desire for consumer-goods<br />
is proving a huge driving factor behind<br />
investment theses.<br />
“Private equity in Africa has traditionally<br />
been resource heavy,” adds Graham Thomas,<br />
managing director of principal investments at<br />
Standard Bank Group, “and while resources<br />
will continue to be important, we think there<br />
will be a shift in focus to consumer-driven<br />
businesses.”<br />
Building on the theme of a growing middle<br />
class, the proliferation of consumer financial<br />
services has been a long-time favourite of<br />
private equity firms targeting Africa. Despite<br />
the shocks felt by banks during the financial<br />
crisis, particularly those in Nigeria, the vastly<br />
under-banked population provides an attractive<br />
investment proposition. “There is such a low<br />
penetration of financial services across the<br />
continent and the middle class is growing<br />
so rapidly, that this will remain a key sector<br />
Chigwende: looking to the ‘next<br />
generation’ of entrepreneurs<br />
“Africa probably<br />
presents the last<br />
frontier”<br />
for private equity for some time to come,”<br />
says Sven Soderblom, portfolio director for<br />
Southern Africa and Latin America at CDC<br />
Group.<br />
Meanwhile, telecoms, media and<br />
technology, the sector that gave the continent<br />
its “poster child” private equity investment –<br />
the 2006 exit of mobile phone business Celtel<br />
International for $3.36 billion – continues<br />
to draw attention. Following the boom in<br />
mobile telephony, investors are now eyeing<br />
the opportunity presented by the rollout of<br />
high-speed broadband connections and the<br />
related infrastructure needs.<br />
“Key sectors of interest for us are financial<br />
institutions, telecoms and related services,<br />
infrastructure and retail,” says Marlon<br />
Chigwende, head of private equity for Africa<br />
at Standard Chartered Bank. “These industries<br />
play to the continent’s strength in natural<br />
resources and the general rise of the African<br />
consumer.”<br />
first mover advantage<br />
From an investor’s perspective, the continent<br />
benefits from a lack of competition – both in<br />
terms of private equity capital and well-established<br />
corporates. The scarcity of private equity<br />
capital means that businesses can be acquired<br />
at significantly lower multiples than in other<br />
– more heated – emerging markets. “Fewer<br />
competitors, means fewer auctions, which<br />
means a better return on investment,” says<br />
Peter Schmid, head of Africa for Actis.<br />
Furthermore, the fragmented nature of<br />
many African markets – and lack of dominant<br />
corporates – means that if a private equity firm<br />
acquires a market leader in any particular<br />
segment, it can rapidly take market share.<br />
Likewise it can be rolled out across borders<br />
into other markets across the region.<br />
There are still a number of challenges<br />
facing the industry, and areas which it needs<br />
to address. “In order for it to succeed, and<br />
attract long term sustainable capital inflows,”<br />
says Standard Bank’s Thomas, “the industry<br />
will need to professionalise, and exercise<br />
discipline to convince investors that investment<br />
performance is repeatable, and not just a few<br />
lucky deals.”<br />
Despite the widespread optimism<br />
among the region’s general partners and<br />
principal investors, the Africa story remains<br />
a challenging sell to the global institutional<br />
investor community. When Kingdom Zephyr<br />
hit the road to raise its latest fund, it came<br />
close to its $500 million target. At <strong>PEI</strong> Africa<br />
Forum in June, Kofi Bucknor summarised<br />
the general LP reaction as follows: “Interest<br />
is growing exponentially. Are people ready<br />
to commit? Not in a big way, but that could<br />
change very quickly.”<br />
That change will only come if the current<br />
generation of funds with capital to deploy can<br />
turn the compelling African private equity<br />
story into equally compelling results. n
private equity annual review <strong>2010</strong> pa g e 123<br />
l p r a d a r : y e a r i n re v i e w<br />
Showing their strength<br />
Limited partners have been flexing their muscles and<br />
making demands, according to extracts from <strong>PEI</strong>’s<br />
‘LP Radar’ column. By Christopher Witkosky<br />
c h r i s to p h e r w i t ko s k y<br />
The industry will continue to<br />
see institutions, especially<br />
those with the resources to<br />
build strong in-house teams,<br />
looking for more unique<br />
investment structures<br />
FEBRUARY<br />
US public pensions scale back their commitments<br />
“For the first time ever, the California Public Employees’ Retirement System recently committed<br />
less to a new Blackstone fund than to its predecessor: it committed $500 million compared<br />
to $750 million in 2006. While $500 million is still a huge amount, Blackstone has most likely<br />
received similar treatment from other long-standing LPs. The firm has accordingly lowered<br />
the target for its sixth fund from $20 billion when it first launched to $15 billion in early 2009.<br />
<strong>Media</strong> reports in the last month suggest that Blackstone will cap the fund at $9 billion. Blackstone’s<br />
experience may not spell the end of the ‘big ticket’, but it does suggest that in the new<br />
fundraising reality LP commitments will be smaller and harder to get.”<br />
MARCH<br />
The South American fundraising opportunity<br />
“Brazil has become increasingly friendly to private equity over the last decade. The country’s<br />
huge pension system is authorised to invest in private equity, but the pensions demand more<br />
control than many GPs are comfortable with, including having veto rights over deal decisions.<br />
This has kept foreign GPs from targeting Brazil for capital. GPs have expressed concerns that<br />
the major Brazilian pensions may end up suffering from backing under-qualified managers, the<br />
only managers willing to consent to LP controls.”<br />
APRIL<br />
OPERS wades in over Hugo Boss<br />
“The Ohio Public Employees’ Retirement System, which has about €110 million invested with<br />
London-based private equity heavyweight Permira, has threatened to re-think its relationship<br />
with the firm if its portfolio company Hugo Boss doesn’t reconsider closing a production plant<br />
in the city of Brooklyn, Ohio. This is a startling show of force on the part of the pension and,<br />
in an era when LPs are increasingly becoming more aggressive in their interactions with fund<br />
managers, should be of concern to GPs. Like many other businesses, private equity-backed<br />
companies have needed to cut costs through the downturn, but the Ohio situation shows the<br />
decision may not be an easy one when it involves killing jobs in the backyards of important LPs.”<br />
MAY<br />
The LPs’ desire for directs<br />
“GPs are structuring these accounts at just the right time, as more and more LPs are looking for<br />
opportunities to co-invest alongside trusted GPs. The industry will continue to see institutions,<br />
especially those with the resources to build strong in-house teams, looking for more unique<br />
investment structures where they can have more control over investment decisions and pay
page 124 private equity annual review <strong>2010</strong><br />
lower fees. Firms that seek to cash in on this growing trend should<br />
be prepared with creative ways to work with LPs. ‘As plan sponsors<br />
get more comfortable with the asset class, they have started<br />
venturing off and doing much more on their own,’ says a fund of<br />
funds source.”<br />
JUNE<br />
Investor relations is a lot about education<br />
“A vital part of a general partner’s job is the education of institutional<br />
investors, even institutions with which the GP has enjoyed<br />
a long relationship. Turnover at institutions like public pensions<br />
is fairly heavy – or at least heavy compared to the long tenure<br />
of the senior executives at some of the world’s biggest private<br />
equity firms. New board members at pensions or foundations<br />
often have no experience with alternative investments, and no<br />
understanding of the long hold periods, say, or the J-curve. Part<br />
of the importance of on-site visits for GPs is being able to answer<br />
questions from these newbies, and possibly dispel some of the<br />
misinformation new board members may bring to the table about<br />
private equity.”<br />
JULY/AUGUST<br />
On the increasingly public US pension board meetings<br />
“In the wake of pension pay-to-play scandals and the financial downturn<br />
that hammered pensions’ private equity portfolio, the big<br />
institutions’ answer has been to open the windows and let the<br />
public see more of what goes on inside. All this openness means<br />
GPs need to be – at the very least – aware they are being recorded<br />
and that members of the public, or the media, can call up their<br />
performances and listen to every word. An interesting side-effect<br />
of this drive for transparency is the potential conflict it creates<br />
with Securities and Exchange Commission rules on private equity<br />
fundraising. ‘Regulation D’ bars managers from soliciting commitments<br />
via an ‘advertisement, article, notice or other communication<br />
in the press’. How the SEC would feel about a GP pitching their<br />
next fund in a live internet broadcast has not yet been tested, but<br />
could prove a contentious issue.”<br />
SEPTEMBER<br />
Throwing good money after bad to rescue a fund<br />
“In deciding whether to invest additional capital to rescue original<br />
commitments, are LPs in fact throwing good money after bad? Is<br />
recapitalising a fund actually worth the financial investment, time<br />
and energy involved or is allowing liquidation the best option<br />
for all? In the case of Fortress, it seems the additional capital<br />
committed by LPs to support investments in the 2004 Fund III<br />
may be paying off. In September, 2009, Fund III was generating<br />
a -1.21 percent internal rate of return. By 31 March <strong>2010</strong>, the<br />
fund was being held at a return multiple of 1.03x and producing<br />
a 1.24 percent IRR.”<br />
OCTOBER<br />
LPs keep the purse strings tight<br />
“Disquiet among investors is not consigned to the rhetoric of<br />
the conference circuit. Developments at two firms over the<br />
summer illustrate how serious LPs are about getting the most<br />
they can from the asset class. Elevation Partners – the mediafocused<br />
firm led by rock star Bono – was recently denied a<br />
fund extension by LPs, while energy-focused firm ArcLight is<br />
finding fundraising tough going, with LPs demanding more distributions<br />
before committing capital to the new fund. ArcLight<br />
raised about $2.1 billion for both its third fund in 2006 and<br />
its fourth fund in 2007. It’s not clear how much ArcLight has<br />
raised for its fifth fund, but sources say the firm is switching<br />
placement agents amid the fundraising. MVision, which was<br />
helping ArcLight raise the fund, is off the assignment, sources<br />
say. The cases of Elevation and ArcLight make clear that limited<br />
partners want to see results before placing more capital with<br />
firms they’ve backed in the past.”<br />
NOVEMBER<br />
On the ILPA guidelines’ first birthday<br />
“The guidelines codified what many LPs had been thinking, and<br />
even asking for, on a more informal basis for years: ideas LPs<br />
have long pursued like cutting back management fees and making<br />
sure those fees were not major profit centres for firms; directing<br />
100 percent of deal fees back to the fund; repaying LPs all<br />
contributed capital plus a preferred return before GPs begin to<br />
receive carried interest. Over the course of the last year, the<br />
guidelines have inspired discussions between LPs and GPs about<br />
fund terms and conditions. Many funds that have come to market<br />
this year have found LPs looking to negotiate on fees and other<br />
terms before making any kind of commitment.”<br />
DECEMBER/JANUARY<br />
How much information can LPs handle?<br />
“LPs, of course, want all the information they can get from GPs.<br />
Details about underlying portfolio companies are vital to help<br />
an LP understand its exposure to various sectors, strategies,<br />
geographies and leverage levels, among other things. In this way,<br />
an LP is not looking at his private equity holdings in terms of<br />
funds or GPs, but in terms of portfolio companies. This level<br />
of detail gives LPs a competitive advantage, participants in our<br />
LP roundtable agreed, but that does not mean it needs to be<br />
communicated to the wider public. For some LPs, however,<br />
this may be more detail than they are ready to accept. Many<br />
institutions invested in the asset class are under-staffed, and<br />
have alternatives teams that are seeing too many PPMs. They<br />
simply don’t have time to really dig into micro-details. Through<br />
due diligence, they figure out which managers to trust with<br />
their capital.” n
private equity annual review <strong>2010</strong> pa g e 125<br />
i n d u s t r y c o m m e n t<br />
In their own words<br />
Selections from expert commentaries published on PrivateEquityInternational.com<br />
retail comes back<br />
Scott King, senior managing director,<br />
Sun Capital Partners<br />
Retail was positioned for a strong year after many companies<br />
spent 2009 “regrounding” themselves, “recharging batteries”, and<br />
focusing on cutting costs, improving their offerings, enhancing<br />
executive at store level and streamlining operations.<br />
Though consumer confidence had not yet come back and the<br />
country was still fighting through a recession, private equity<br />
had a golden opportunity to find quality companies that just<br />
needed a bit of direction.<br />
“For some retailers, the trouble with performance is not cyclical<br />
but about fundamental economics that don’t work, and thus they are<br />
fighting an uphill battle. Generally, what we find is that management<br />
of struggling retailers are in need of a fresh set of eyes to evaluate<br />
their core business and provide a roadmap.”<br />
“Often times, private equity firms are in a better position than<br />
strategics to do so. Why? Because they bring a broader base view and<br />
experience to the retail world, a strong operational skill set and a<br />
different sense of urgency to driving results as they hold companies<br />
for a limited time, generally between five and seven years.”<br />
credit markets on fire<br />
Greg Mondre, managing director,<br />
Silver Lake Partners<br />
Credit markets stormed back in<br />
<strong>2010</strong>, the Federal Reserve kept<br />
interest rates near zero and confidence<br />
in the market returned.<br />
The dynamics led to two things:<br />
sponsor-backed companies<br />
aggressively amended capital<br />
structures and extended debt<br />
maturities and multi-billion buyouts<br />
returned.<br />
“Projecting ahead, GPs will<br />
attempt to drive more exits and<br />
return of capital to LPs. In contrast to last year, expect to see the<br />
completion of large sponsor-backed IPOs in 2011 as solid fundamental<br />
performance will replace deleveraging stories,” Mondre wrote.<br />
“As a result of higher PE marks, successful return of capital by<br />
GPs and rising equity portfolios for LPs, top quartile managers<br />
will have reasonable success raising follow-on funds. In terms of<br />
new deal activity, franchise businesses, high growth companies and<br />
corporate divestitures will continue to attract heavy sponsor activity.<br />
However, the bar will, and should be, raised on the standard of new<br />
buyouts given current valuation and leverage levels. Note that the<br />
S&P 500 has increased over 75 percent since reaching bottom in<br />
early 2009 with positive fundamentals in 2011 already priced in<br />
for many companies.”<br />
europe heats up<br />
Buchan Scott, partner, Duke Street<br />
European private equity got back<br />
on track last year, with successful<br />
fundraisings and exits from precredit<br />
crunch acquisitions demonstrating<br />
that private equity was<br />
set to play a big role in Europe’s<br />
economic recovery.<br />
“Private equity’s share of the UK<br />
M&A market has bounced to the heady<br />
levels of 2006, up to a handsome<br />
73 percent in <strong>2010</strong>, against just 28<br />
percent last year. In the UK, average<br />
deal values, according to KPMG, are<br />
back to 2006 levels of around £180 million. In Q2 <strong>2010</strong>, 95 deals fetched<br />
average multiples of more than 11x EBITDA. In France, private equity’s<br />
M&A share is up to 64 percent in the third quarter of <strong>2010</strong>, according<br />
to CF News, with a large proportion of high profile deals also trading<br />
at 11x EBITDA, according to Argos Mid-Market Index for June <strong>2010</strong>.”<br />
“Naturally, some countries are more pre-disposed to private<br />
equity than others. Post-downturn, the UK and France have<br />
been the most active players in Europe. France in particular, has<br />
had a good downturn. Its socialist legacy has meant that it never<br />
became overheated or overly cooled as a market. The huge weight<br />
of civil servants and the low household debt levels are strong shock<br />
absorbers for French consumer demand.”
page 126 private equity annual review <strong>2010</strong><br />
“Expect to see the completion of large sponsor-backed<br />
IPOs in 2011 as solid fundamental performance will<br />
replace deleveraging stories”<br />
healthcare sea change<br />
Dan Mendelson, chief executive officer,<br />
Avalere Health<br />
Private equity professionals wondered<br />
last year just how the outcome<br />
of the mid-term elections<br />
in the US would affect the fate of<br />
healthcare reform in the US, and<br />
how that in turn would change<br />
the private equity opportunity in<br />
the sector.<br />
“Full repeal of the Healthcare<br />
Reform Bill won’t happen. That<br />
said, dominance in the House will<br />
enable Republicans to shape the<br />
substance and pace of reform. Many important payment systems,<br />
including rates for Medicare Advantage health plans, will be<br />
modified through Republican engagement in regulation … the<br />
implementation of cost control measures will continue.<br />
“Reform is meant to create local health care delivery systems<br />
that are more efficient and force a focus on healthcare quality.<br />
Republicans will influence these developments but are unlikely<br />
to disrupt them.<br />
“Because of the changes, attractive investment opportunities<br />
going forward included companies specialising in cost reductions,<br />
evidence-based medicine and reimbursement management. As<br />
government push cost and risk onto providers, there will be<br />
opportunities for consolidation in local provider markets. Finally,<br />
government reimbursement reduction has hit certain healthcare<br />
sub-sectors disproportionately hard over the last few years. Many<br />
of these sub-sectors have nowhere to go but up.”<br />
nothing ventured<br />
Ted Mott, chief executive officer, Oxford Capital<br />
Partners<br />
UK pensions are underfunded by some £2 trillion and need to<br />
take a bit more risk – in terms of investing in earlier growth stage<br />
businesses – to be in a position to benefit from great returns.<br />
“Part of the solution is for UK pension funds to increase<br />
their exposure to earlier growth stage businesses, often those<br />
which are venture-backed by experienced professional teams.<br />
European emerging companies are today on a par with the best<br />
in the US or Asia. These ‘sunrise’ businesses have the potential<br />
to deliver the huge growth which is unachievable from their<br />
established ‘sunset’ cousins. Consider the likes of Autonomy,<br />
Sage, Shire Pharmaceuticals and Vodafone, all of which were<br />
venture-backed start-ups in recent years; businesses in which<br />
pension schemes could have had earlier and more profitable<br />
participation.<br />
“For the majority of pension schemes, a small allocation to<br />
venture investment could help to transform the fund’s future<br />
performance. What’s more, it could also transform the fortunes<br />
of the country, too; we need our best early stage businesses –<br />
many of which are starved of cash – to be encouraged to grow,<br />
to lift the economy out of the mire.”<br />
watch the fund size<br />
Mike Chalfen, partner, Advent Venture Partners Funds<br />
often find they can raise more<br />
capital than they had initially<br />
planned, and while this sounds<br />
like a good thing, general partners<br />
should be careful not to fundraise<br />
beyond their mandate.<br />
“A fund that raises more<br />
capital than it originally plans<br />
might be forced by the sheer<br />
weight of capital to look for larger<br />
investments, possibly more than<br />
an investee needs, probably at<br />
higher prices, often in larger companies – in other words to change<br />
their strategy. If that fund’s team has little experience of these<br />
larger deals, deployment pace for the new, larger fund can be slow.<br />
“This scenario highlights a conflict that is common across the<br />
industry: does a GP’s asset gathering strategy (which drives fees)<br />
distort the investment strategy (which drives returns)? It’s certainly<br />
a question that any investor contemplating committing capital to<br />
a private equity fund should ask.<br />
“The top of the private equity market in 2006-2007 saw the creation<br />
of too many bloated funds. The current private equity overhang is<br />
clearly to be regretted for most stakeholders relying on investment<br />
returns as opposed to firm income to create wealth.” n
private equity annual review <strong>2010</strong> pa g e 127<br />
g lo b a l d e a l s<br />
signs of life<br />
d a ta ro o m<br />
Both the volume and value of global buyouts increased for the first time since 2007<br />
700,000<br />
3000<br />
Value $m<br />
525,000<br />
350,000<br />
2250<br />
1500<br />
No. of deals<br />
175,000<br />
750<br />
Source: Dealogic<br />
0<br />
‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11<br />
YTD<br />
0<br />
g lo b a l e x i t s<br />
mass exodus<br />
Global exits saw significant increases across corporate acquisitions, IPOs and secondary<br />
transactions<br />
700 n Corporate Acquisition n IPO n Secondary Transaction<br />
600<br />
Transactions<br />
500<br />
400<br />
300<br />
200<br />
100<br />
0<br />
Source: Pitchbook<br />
2000<br />
2001<br />
2002<br />
2003<br />
2004<br />
2005<br />
2006<br />
2007<br />
2008<br />
2009<br />
<strong>2010</strong><br />
p e r f o r m a n c e<br />
gaining ground<br />
Long term private equity performance has been dented since 2008, but only by<br />
a slim margin<br />
End-to-End IRR as of 09/30/2008<br />
By Investment Focus Quarterly 1 YR 3 YR 5 YR 10 YR Since Inception<br />
& Style<br />
Total (8.35) (6.87) 11.60 15.94 12.25 12.92<br />
Buyout (8.93) (8.04) 13.14 18.55 13.30 13.38<br />
Venture Capital (4.14) (0.02) 10.24 10.64 8.74 12.01<br />
End-to-End IRR as of 09/30/<strong>2010</strong><br />
By Investment Focus Quarterly 1 YR 3 YR 5 YR 10 YR Since Inception<br />
& Style<br />
Total 6.57 19.46 1.64 9.82 8.06 11.77<br />
Buyout 7.26 20.81 0.56 10.59 10.61 12.35<br />
Venture Capital 4.65 11.11 2.86 6.76 (1.13) 9.20<br />
Source: State Street Private Equity Index
page 128 private equity annual review <strong>2010</strong><br />
l p a t t i t u d e s<br />
new relationships<br />
When asked if they planned to grow their private equity programmes over the next two<br />
to three years, limited partners in North America – which have some of the most mature<br />
programmes in the world – stood out as the geographic group least likely to do so<br />
European LPs 42%<br />
North American LPs 10%<br />
Asia-Pacific LPs 44%<br />
0 20 40 60 80 100<br />
Source: Coller Capital<br />
n i c h e f u n d r a i s i n g<br />
secondary setback<br />
Fundraising for secondary managers slumped to $6.9 billion in <strong>2010</strong>, half a billion shy of<br />
the $7.4 billion raised in 2008<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
2000<br />
2001<br />
2002<br />
2003<br />
2004<br />
2005<br />
2006<br />
2007<br />
2008<br />
2009<br />
<strong>2010</strong><br />
$bm<br />
Source: Probitas Partners<br />
n i c h e f u n d r a i s i n g<br />
turnaround rebound<br />
Global fundraising for both distressed and turnaround investments more than doubled<br />
2009 levels<br />
60<br />
n Distressed n Turnaround<br />
50<br />
40<br />
$bm<br />
30<br />
20<br />
10<br />
0<br />
2003 2004 2005 2006 2007 2008 2009 <strong>2010</strong><br />
Source: Probitas Partners
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