THE ANNUAL REVIEW 2010 - PEI Media

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page 126 private equity annual review 2010 “Expect to see the completion of large sponsor-backed IPOs in 2011 as solid fundamental performance will replace deleveraging stories” healthcare sea change Dan Mendelson, chief executive officer, Avalere Health Private equity professionals wondered last year just how the outcome of the mid-term elections in the US would affect the fate of healthcare reform in the US, and how that in turn would change the private equity opportunity in the sector. “Full repeal of the Healthcare Reform Bill won’t happen. That said, dominance in the House will enable Republicans to shape the substance and pace of reform. Many important payment systems, including rates for Medicare Advantage health plans, will be modified through Republican engagement in regulation … the implementation of cost control measures will continue. “Reform is meant to create local health care delivery systems that are more efficient and force a focus on healthcare quality. Republicans will influence these developments but are unlikely to disrupt them. “Because of the changes, attractive investment opportunities going forward included companies specialising in cost reductions, evidence-based medicine and reimbursement management. As government push cost and risk onto providers, there will be opportunities for consolidation in local provider markets. Finally, government reimbursement reduction has hit certain healthcare sub-sectors disproportionately hard over the last few years. Many of these sub-sectors have nowhere to go but up.” nothing ventured Ted Mott, chief executive officer, Oxford Capital Partners UK pensions are underfunded by some £2 trillion and need to take a bit more risk – in terms of investing in earlier growth stage businesses – to be in a position to benefit from great returns. “Part of the solution is for UK pension funds to increase their exposure to earlier growth stage businesses, often those which are venture-backed by experienced professional teams. European emerging companies are today on a par with the best in the US or Asia. These ‘sunrise’ businesses have the potential to deliver the huge growth which is unachievable from their established ‘sunset’ cousins. Consider the likes of Autonomy, Sage, Shire Pharmaceuticals and Vodafone, all of which were venture-backed start-ups in recent years; businesses in which pension schemes could have had earlier and more profitable participation. “For the majority of pension schemes, a small allocation to venture investment could help to transform the fund’s future performance. What’s more, it could also transform the fortunes of the country, too; we need our best early stage businesses – many of which are starved of cash – to be encouraged to grow, to lift the economy out of the mire.” watch the fund size Mike Chalfen, partner, Advent Venture Partners Funds often find they can raise more capital than they had initially planned, and while this sounds like a good thing, general partners should be careful not to fundraise beyond their mandate. “A fund that raises more capital than it originally plans might be forced by the sheer weight of capital to look for larger investments, possibly more than an investee needs, probably at higher prices, often in larger companies – in other words to change their strategy. If that fund’s team has little experience of these larger deals, deployment pace for the new, larger fund can be slow. “This scenario highlights a conflict that is common across the industry: does a GP’s asset gathering strategy (which drives fees) distort the investment strategy (which drives returns)? It’s certainly a question that any investor contemplating committing capital to a private equity fund should ask. “The top of the private equity market in 2006-2007 saw the creation of too many bloated funds. The current private equity overhang is clearly to be regretted for most stakeholders relying on investment returns as opposed to firm income to create wealth.” n
private equity annual review 2010 pa g e 127 g lo b a l d e a l s signs of life d a ta ro o m Both the volume and value of global buyouts increased for the first time since 2007 700,000 3000 Value $m 525,000 350,000 2250 1500 No. of deals 175,000 750 Source: Dealogic 0 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 YTD 0 g lo b a l e x i t s mass exodus Global exits saw significant increases across corporate acquisitions, IPOs and secondary transactions 700 n Corporate Acquisition n IPO n Secondary Transaction 600 Transactions 500 400 300 200 100 0 Source: Pitchbook 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 p e r f o r m a n c e gaining ground Long term private equity performance has been dented since 2008, but only by a slim margin End-to-End IRR as of 09/30/2008 By Investment Focus Quarterly 1 YR 3 YR 5 YR 10 YR Since Inception & Style Total (8.35) (6.87) 11.60 15.94 12.25 12.92 Buyout (8.93) (8.04) 13.14 18.55 13.30 13.38 Venture Capital (4.14) (0.02) 10.24 10.64 8.74 12.01 End-to-End IRR as of 09/30/2010 By Investment Focus Quarterly 1 YR 3 YR 5 YR 10 YR Since Inception & Style Total 6.57 19.46 1.64 9.82 8.06 11.77 Buyout 7.26 20.81 0.56 10.59 10.61 12.35 Venture Capital 4.65 11.11 2.86 6.76 (1.13) 9.20 Source: State Street Private Equity Index
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