THE ANNUAL REVIEW 2010 - PEI Media

More documents

Recommendations

Info

page 92 private equity annual review 2010 s ta t e s i d e : re v i e w o f t h e y e a r Shaping an industry Extracts from PEI’s ‘Stateside’ column chronicle a shifting relationship between LP and GP d av i d s n o w An LP source has come up with a unique partnership term he thinks GPs should find highly interesting – any return over 2x and the carried interest rate is 30 percent. Anything under 2x and you get 10 percent FEBRUARY Real estate investors turn their back on the blind-pool fund A desire among investors for some control over how money is invested is, of course, a direct affront to the traditional blind pool limited partnership, which stipulates that the GP has total authority over investment decisions within agreed upon parameters. If LPs don’t like what they’re getting from their GPs they can band together to replace the manager (very difficult), sell their interests on the secondary market (a fraught process) or default on their commitments (painful financially and harmful to the reputation). What disapproving LPs can’t do is say, ‘Hold on Mr. GP – I don’t like that deal and so I’d prefer not to back it.’ Limited partnerships are set up as very serious legal obligations to prevent exactly this kind of flake-out from happening.” MARCH GPs grapple with ILPA’s guidelines “It’s not hard to guess which of the suggested ‘best practices’ some GPs find most objectionable. The call for management fees to merely cover ‘normal operating costs for the firm’ as well as the preference for the European-style, LPs-get-all-their-money-back-first waterfall distribution formula would, if made the industry norm, seriously challenge the business models of big, established US firms. But a GP doesn’t score many points by arguing that the management fee should be a wealth creator. So instead some GPs are finding other fights to pick with the ILPA Principles, among them that the guidelines may represent a ‘collusion’ among LPs, and that the guidelines risk ‘piercing the GP veil’.” APRIL Making carry count for more “An LP source has come up with a unique partnership term he thinks GPs should find highly interesting – any return over 2x and the carried interest rate is 30 percent. Anything under 2x and you get 10 percent. Since most GPs are (outwardly) confident that they will return to LPs two times their money, it’s an offer to which they should have a hard time saying no. The LP wants to make one thing very clear: he’s happy to pay 30 percent carry if the returns are good enough. ‘If I get 2x net to me, I win,’ he says. As for the GPs, this reengineered carry term is a way to guarantee that ‘the good guys get paid more than the bad guys’, he says.” MAY The Private Equity Council looks wider for members “Convincing the hundreds of firms scattered across the US that they should join the effort may prove to be a challenge. Buyout firm GPs in particular have spent the last several decades getting on just fine without paying dues to a Washington lobbying outfit. Many still don’t accept that their years of benign regulatory neglect are over. Furthermore, many of them are used to interacting with their rivals only in auction settings. A person in the venture market noted that the very nature of venture capital investing requires GPs to frequently band together on deals, despite the fact that they may compete at other times. It is a more collaborative culture than what is often found among buyout guys.”
private equity annual review 2010 pa g e 93 JUNE What’s behind the recent spike in exits? “Deals are the privilege of the funded. A private equity firm that fails to raise the next fund ceases to exist (although its end-of-life period is impressively protracted). A private equity firm that fails to raise the right size of fund becomes a different firm, with fewer people and fewer offices by dint of a smaller income. It’s a disruptive step down. This analysis is worth bearing in mind as sprouts and blossoms begin to appear across the frozen tundra of the deal market. Transactions are indeed beginning to happen, but GPs appear to be hugely focused on scoring exits. A cynic would say that some of these exits have been put on the fast track in order to ensure a more successful follow-on fundraising in the near future.” JULY/AUGUST On research into style drift “Confirming conventional wisdom, those firms that had been prodigious adders of targeted industries over the prior five years had a lower average performance over the subsequent years. And in a finding that will no doubt delight specialist firms, those GP groups that had diversity scores near 1 (in other words, no industry diversity) tended to be the best performers. Overall, Gottschalg says his research confirms that ‘it’s really good if you’re focused. It’s harder to be unfocused, and if you recently became unfocused, that’s the most difficult’.” SEPTEMBER On succession in private equity “One doesn’t often hear the term ‘retirement’ in private equity, at least not in the US. While a number of big-time hedge fund managers have announced their retirements in recent years, it is hard to think of any private equity founders who have simply walked away from the job. More often, these founders hold forth the promise of long (or excruciatingly long) succession plans, or, in too many cases, have no succession plans, somehow believing their investors will have no opinion about committing capital to a ten-year fund under the iron rule of a septuagenarian.” OCTOBER The finer points of LP co-investment “The vast majority of co-investment deals made available to limited partners – either directly from GPs or through third-party coinvestment programme administrators – have been in what could be defined as the ‘mega/large’ size category. This is perhaps not surprising – large deals require more equity, and therefore GPs “A GP doesn’t score many points by arguing that the management fee should be a wealth creator” are more likely to give LPs the opportunity to pony up additional cash. But there is at least one problem with this from the LP’s point of view. If it is accepted that the largest deals will tend to be the ones that are offered to LPs as co-investment opportunities, LPs should not necessarily want to inject further capital into deals to which they are already highly exposed. It could be that the benefit of reduced average fees for ownership of an asset is offset by the effect that increased ownership of the asset has on the diversity of the larger portfolio.” NOVEMBER How hold-at-cost valuation exaggerates performance numbers “End-to-end performance averages measure backwards over a specified time span to starting points populated by funds that are understating the fair value of their portfolio companies. The further back you go, the more pronounced the effect is. This problem goes away when viewing private equity fund performance through the prism of vintage years, which have long been thought of as the most useful way to think about returns. But in seeking to compare private equity to other asset classes, the time-horizon approach has frequently been used, often with the result of private equity appearing to be quite attractive indeed. As institutional investors learn more about how private equity has truly behaved over the years as an asset class, they won’t necessarily fall out of love with it, but they will likely wake up to the realisation that it’s harder work than anyone heretofore led them to believe.” DECEMBER/JANUARY Snow on Snow – the editor-at-large grades his predictions one year on “‘US public pensions will fade as a source of capital’. You now need to register as a lobbyist if you want to raise money from California institutions, thanks to the pay-to-play scandal. More broadly, US pensions are expected to continue to face tremendous pressure going forward. It is unclear what this means for their private equity allocations, but for the time being most of these very large LPs remain committed and solvent. Verdict: maybe not. ‘The public private equity firm will win fans’. It is clear that many more private equity firms will go public as soon as they have the chance. But few of these will remain pure-play direct private equity investors, as KKR’s radical business diversification indicates. These listings will be greeted warmly by investors, by the selling GPs, and by the firm employees who get a piece of the action, if not by LPs. Verdict: probably true.” ■
Page 1 and 2:
THE ANNUAL REVIEW 2010 PE portfolio
Page 3 and 4:
private equity annual review 2010 p
Page 5 and 6:
Passion for achievement. www.mvisio
Page 7 and 8:
1119 The answer, my friend, is blow
Page 9 and 10:
Actis is a private equity investor
Page 11 and 12:
ENGINEERING SUCCESS Kuwait Pakistan
Page 13 and 14:
page 10 private equity annual revie
Page 15 and 16:
This announcement appears as a matt
Page 18:
Page 21 and 22:
Page 23 and 24:
INSIDE THE LIMITED PARTNER A COMPEN
Page 25 and 26:
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
10 Ten Top Years for Clifford Chanc
Page 33 and 34:
Alex Cho Investment Solutions Asia,
Page 35 and 36:
Winners Equity 2001, 2002, 2003, 20
Page 37 and 38:
www.capvis.com 2010 Thank you! For
Page 40 and 41:
Page 42 and 43:
Page 44 and 45: page 42 private equity annual revie
Page 72 and 73: Capital purSuit! Putting the fun ba
Page 78 and 79: Lexington Partners is a leader and
Page 80: page 78 private equity annual revie
Page 83 and 84: private equity annual review 2010 p
Page 91 and 92: 2010 North America themes 90 First
Page 93: private equity annual review 2010 p
Page 101 and 102: 2010 Europe themes private equity a
Page 107 and 108: Gimv is a listed investment company
Page 109 and 110: 2010 Emerging markets themes 108 As
Page 122 and 123: page 120 private equity annual revi
Page 130: page 128 private equity annual revi
show all

THE ANNUAL REVIEW 2010 - PEI Media

Create successful ePaper yourself

Delete template?

Save as template?