Executive summary - Udo Bullmann

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privatised with a view to stimulating a degree of competition in national markets and facilitatingthe development of European common markets (see table below). These infrastructure sectorsare still at an early stage of the transformation process from government public servicemonopolies to private competitive markets, so that the services markets are still highlymonopolized, requiring direct regulation to ensure that monopoly power is not exploited andpublic service objectives and standards are maintained.Table. 1 Private equity funds have increased their investments tenfold in state-ownedcompaniesYEAREurope:Millions inEUR 15Globally:Millions inEUREurope:Numbers oftransactionsGlobally:Numbers oftransactions2000 564 1129 14 172001 1623 1638 18 202002 1221 1473 11 142003 2088 2273 18 272004 7294 7650 18 302005 2336 2926 24 402006 5950 10671 22 46TOTAL 21706 27760 125 194Source: Published in Mandag Morgen the 22.nd of January based on figures from ThomsonFinancialAs infrastructure operators are typically conservatively managed and generate significant stablecash flows for reinvestment, they have characteristics that are especially attractive to LBO funds.3.1 The attractiveness of public utilitiesThe transitional position of many infrastructure operators between public sector and privatemarket operation makes many of them attractive to LBO funds looking for investmentopportunities in highly imperfect markets, especially if the infrastructure operator is fullyprivatised and the management is receptive to a co-operative leverage buyout. The specialconsiderations associated with the use of public resources such as rights-of-way, special rightssuch as the power of eminent domain and the provision of special obligations such as universalservices raise a particular risk of possible political intervention with respect to hostile takeovers.Typical characteristics of infrastructure operators that LBO funds find attractive are thefollowing,• significant stable cash flows from a customer base that considers the service a necessity15 The exchange rate used is 100 EUR = 745,41 DKR. (source the 25th of January:http://www.nationalbanken.dk/dndk/valuta.nsf/side/Valutakurser!OpenDocument)
and has few, and sometimes no alternatives;• a significant degree of monopoly power in the primary market(s);• infrastructure providers do not maximise short-run profits because primary considerationsin decision making are given to long-term investment needs, stable financial structuresand public service responsibilities;• industry specific governance/regulation is limited to certain service performanceobjectives in basic services and does not extend to ownership, financial policies, pricingfor most services, or profit control;• infrastructure providers use significant public resources and special rights (e.g., land,rights-of-way, eminent domain, radio spectrum, etc.) that are undervalued, or evenunvalued assets;• financial structures and policies are geared to risk-optimisation for long term investmentsin capital intensive fixed assets; significant cash flows provide internally generated capitalnecessary to meet ongoing long term investment requirements in infrastructure assets;• infrastructure operators are typically characterised by conservative management, oftencarried over from the prior government service model, and management policies andpractices of largely untested and varying efficiency;• public stockholders attracted to infrastructure providers have been investors looking for astable long term return with regular dividends and reduced market risk.The attraction to Private Equity Funds of each of these individual characteristics ofinfrastructure operators will vary depending on individual circumstances, but collectively theydemonstrate that infrastructure operators are likely to become more significant targets in thefuture as the privatisation of publicly owned infrastructure continues and the scrutiny ofinfrastructure operators by Private Equity Funds deepens. For Private Equity Funds, the marketrisks of infrastructure operator takeovers are relatively small and the possibilities for enormousfinancial gains are great. Most infrastructure managers are likely to be receptive to bids giventheir custodial management style, the diversity and relative passivity of the public stockownership, and the possibilities for large personal gains for the management. A more serious riskis whether the Private Equity Funds are likely to provoke political responses to their plans fromconcerns about the implications for the long-term development of public infrastructure services.TDC case, DenmarkTDC was taken over by a group of five foreign private equity firm specialists - Apax Partners;Blackstone Group; Kohlberg Kravis Roberts; Permira; and Providence Equity - in the largesttakeover in Europe to date. For about 10.5bn, they purchased 88.2% of TDC shares It wasfinanced by slightly more than 80% debt. Capital management fees are not specified, butexperience suggest they will be in the tens of million of euros. The 2005 Annual Report notessignificant TDC credit rating downgradings by the Standard and Poor and Moody Investorservices as a result of the leverage buyout. The acquisition increases TDC’s net debt to totalassets ration from 18% to about 90% at interest rates substantially higher than those for thepreviously established debt. TDC’s debt ratio is now 97% of capitalization. The new ownershave been deliberately vague about why they have taken over TDC and what their plans are,stating only that they expect to own TDC for about five years. The evidence to date suggeststhat the TDC takeover has nothing to do with improving the efficiency of TDC. The new ownershave no expertise in telecom and are relying virtually entirely on the previous management. Thediversified stockholders were long term investors that left the management of the company to themanagers. The immediate cash payout of almost half TDC’s assets suggests a pretty clear case of
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HEDGE FUNDSAND PRIVATE EQUITY -A CR
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The need for long-term investmentTh
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On the basis of a coherent analysis
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The pension fundsWhere does all the
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3. The target company is merged wit
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Societies’ response - current nat
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In most of the case studies, PE inv
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huge tax advantages when the rate o
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known to bank supervisors. Those da
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provide transparency with respect t
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The demand for change and better re
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industrial policy, focusing on know
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AcknowledgementsThis report has bec
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The situation we are facing now is
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market to promote the knowledge-eco
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Our desire to separate the single s
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Typically a single strategy HF oper
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In most European countries, fund ma
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It should also be signalled that:
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Institutional investorsCurrent and
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leverage in order to benefit from s
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1.6 The costs, the management fees
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only remaining way to boost returns
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A majority of hedge funds have limi
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Our analysis is that these concerns
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Average annual returnsTremont HF in
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1.11. Tendency of crowdingDespite t
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• Corporate governance:“In the
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Onshore FoHFsCountryUnitedKingdomGe
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ItalyBank ofItaly•Specializedasse
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1.14 Societies’ response - curren
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Investments are often in individual
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employed 21 . Leverage effect expla
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Investments are sold off to other c
Page 70 and 71: Private Equity: European trends in
Page 72 and 73: time because of the longer holding
Page 74 and 75: Bain CapitalPartners 74.7 9Thomas H
Page 76 and 77: Sources of new funds raised (2005)C
Page 78 and 79: The private equity manager virtuall
Page 80 and 81: The fund structuring arrangements f
Page 82 and 83: ownership transfers. But buyout cap
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Page 88 and 89: UCITS (Undertakings for Collective
Page 90 and 91: Article 49Within the framework of t
Page 92 and 93: open and secure retail markets and
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Page 96 and 97: In its Communication on worker info
Page 98 and 99: est practices, promoting innovative
Page 100 and 101: - Work to ensure more consistent an
Page 102 and 103: destabilising the financial markets
Page 104 and 105: & LBOs invest. It increases financi
Page 106 and 107: In particular, incumbent managers o
Page 108 and 109: long-term competitiveness of the ac
Page 110 and 111: It also leads to further weakening
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Page 116 and 117: areas after recapitalisation 11 . I
Page 118 and 119: Furthermore, the funds in many case
Page 122 and 123: asset stripping, and the offering o
Page 124 and 125: dividend to Valentia.The second pub
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Page 128 and 129: eturns well below those achieved by
Page 130 and 131: investment funds - in the UK alone
Page 132 and 133: 4.2 The issue of pension fundsThe p
Page 134 and 135: One year earlier the British Financ
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Page 138 and 139: 5.3 Short sellingHistorically, hedg
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Page 142 and 143: implications associated with the li
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Page 146 and 147: I talk to have got a prayer in the
Page 148 and 149: The main reason for the lack of inf
Page 150 and 151: 7. The need for change to ensure a
Page 152 and 153: clearly destructive must be prevent
Page 154 and 155: European Union.Part III is going to
Page 156 and 157: 2. Market transparency - a common i
Page 158 and 159: International Settlements in Switze
Page 160 and 161: 3.2 The main beneficiaries of regul
Page 162 and 163: within jurisdictions with enhanced
Page 164 and 165: In our view, if we want to promote
Page 166 and 167: investors.The EC should set up an i
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widely differing impacts of PE acti
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estrict investment to specific asse
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Clearly the governance authorities
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paid. There is therefore a need for
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5. Our immediate proposalsIn the pa
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isks are honestly and clearly commu
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Corporate governance provisionsLong
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ANNEX 1 - Case studiesANNEX 1 - Cas
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1. Company description ............
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AA1. Company descriptionThe Automob
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Autoteile Unger1. Company descripti
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Bulgarian Telecommunications Compan
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Deutsche Börse1. Company descripti
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DIS1. Company descriptionThe DIS De
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DT-GROUP1. Company descriptionDT Gr
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(2005 €610m) resulting in an EBIT
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FRANS BONHOMME1. Company descriptio
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Friedrich Grohe AG1. Company descri
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3. LBO exit (secondary LBO, IPO, li
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industrial sector level. A compromi
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Linde1. Company descriptionLinde is
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2.5 Protection of minority sharehol
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marketing outside Germany and to bo
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2.3 Effects on job creation, invest
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Peguform1. Company descriptionThe h
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PICARD1. Company descriptionPicard
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STORK1. Company descriptionThe indu
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TDC1. Company descriptionTDC is the
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TELECOM ITALIA GROUP1. Company desc
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2.5 Corporate governance and econom
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same way like some institutional in
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Viterra1. Company descriptionViterr
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Glossary 1Absolute returns: The ret
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Hurdle rate: A rate of return that
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Stock option: An individual's right
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