FCPI and FIP funds raise less in 2010 - Unquote

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egulation unquote Private equity: If it isn’t broken... Speaking in front of a student audience at the London School of Economics last month, Blackstone president and COO Tony James addressed the potential need for further regulation of the industry. Greg Gille reports “Which problems do you want to fix?” was James’ candid answer when asked about the need for further private equity regulation. Having systematically rebutted Poul Nyrup Rasmussen’s jabs at the industry, the Blackstone COO implied that further regulation would not only be unnecessary, but also counter-productive: “You would be trying to superimpose the will of a government bureaucrat over the judgement of much more talented people.” James spent the best part of 90 minutes highlighting the “necessity” of private equity and its positive impact on the economy. Regarding job losses, he reminded the audience that the main goal of an investor was to grow its portfolio companies, which most of the time results in more jobs being created down the line. “Who shed jobs and went under during the crisis? General Motors, airlines, steel producers... none of them were owned by private equity,” noted James. He was just as unapologetic on debt levels, stressing that it was in the interest of industry players – investors, banks and bond buyers alike – to regulate over-leverage by themselves. According to James, the image of companies saddled with too much debt is a thing of the past, as most of the value creation is now derived from operational improvements: “Lots of available cheap credit is ultimately bad for private equity returns: the bonus goes to the seller since the price gets pushed up.” Leaving the debate on external regulation aside, James also addressed an issue voiced from within the industry itself: should larger funds discount their management fees to attract investors? The Blackstone executive dismissed the idea and instead noted that such funds performed better than the rest of the industry: “Why pay more for a Tiffany’s ring than a ring from M&S? What industry can you name where the best provider charges the same as the average?” James did not mince words when questioning LP allocations, criticising those who make what he perceives as poor investment decisions. “Why do LPs back firms that are not top quartile? Investors perpetuate hundreds of mediocre GPs and I don’t know why. I suspect it is because of relationships,” he said. Having defended the industry in unequivocal terms, James however admitted that private equity wasn’t the most attractive asset within the wider Blackstone Group: “Private equity is not our largest, most profitable or fastest growing business, but it is a good business.” He conceded that real estate was a much more profitable division – with less competition, a much broader pool of assets to invest in, and less downsides compared to corporate securities. Private equity has nevertheless been kind to the asset management group, even amidst the recent economic turmoil: according to James, Blackstone didn’t realise any losses during the financial crisis, with all of its funds remaining above costs. 10 UNQUOTE MARCH 11 ENTIRE CONTENTS COPYRIGHT 2011 INCISIVE MEDIA INVESTMENTS LTD www.unquote.com/france
unquote IPO comeback PE-backed IPOs: Set for a comeback? The difficulties encountered by private equity-backed IPOs in 2010 reignited the debate on the public markets’ cautious attitude towards such assets. Greg Gille reports Hearing that the global financial crisis dealt a crushing blow to private equity-backed IPOs will not be a surprise. According to unquote” data, flotations of PE-backed European companies fell by 93% between 2007 and 2008, from 62 to just four. The situation has somewhat improved since then, with unquote” recording 22 listings last year. Nevertheless, this figure remains a far cry from the one witnessed during the market heyday. What is more, a number of 2010 listings saw share prices tumble on public markets in the months following their IPO. The worst performing private equitybacked listings took place in the UK, with companies such as Cambria Automobiles Holdings, Promethian Technologies Group and Ocado experiencing sustained price falls throughout the year. This phenomenon led many observers to comment on a lack of appetite for PE-backed assets, partly rooted in the image of private equity funds taking a company private, saddling it with debt and re-listing it to make a swift exit. William Belcher, capital markets partner at Taylor Wessing, indeed advised PE shareholders to consider longer lock-in periods to attract public investors, as they are generally seen as an incentive for management to stay involved and ensure a smooth transition process. Panellists at the seminar however dismissed the idea of a general mistrust of PE-backed assets. “I wouldn’t single out the PE community for the breakdown of trust with public markets” said one participant, before pointing at pricing issues as a factor in the counter performance of many recent IPOs: “Ocado constitutes a pivotal event – pragmatism on pricing is key.” The share price range suggested by Ocado’s management was indeed widely criticised for being unrealistic prior to the IPO, given that the company had yet to post a profit. Craig Fraser, head of research at Arbuthnot Banking Group, highlighted the importance of carefully assessing the value of a business before listing it: “Don’t even think about an IPO before you have undergone a full and proper valuation based on forecast earnings and use of funds.” Pricing is not the only key to investors’ hearts though, with a strong business model being equally important: “Premiums can also be obtained if you can demonstrate attractive characteristics such as a dynamic growth story, a market leading position and a strong management team. Consider these points carefully; otherwise you may not get value for money,” Fraser continued. The recent listing of US-based hospital operator HCA – the largest private equity-backed IPO since the financial crisis – apparently ticked all the boxes, and might encourage GPs to consider the public markets as a viable exit route in the coming months. Panellists however pointed at a sustained period of instability for global markets in 2011 in light of the ongoing events in the Arab world and Japan, and the negative effect this could have on IPOs. At a time when most GPs are rushing to return money to investors before going fundraising again, it remains to be seen whether exiting via the public markets will be a bet worth making – especially as corporate buyers are currently displaying a strong appetite for M&A opportunities. ENTIRE CONTENTS COPYRIGHT 2011 INCISIVE MEDIA INVESTMENTS LTD UNQUOTE MARCH 11 11 www.unquote.com/france
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FCPI and FIP funds raise less in 2010 - Unquote

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