Executive summary - Udo Bullmann

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Bain CapitalPartners 74.7 9Thomas H.Lee Partners 53.4 6GoldmanSachs 51.2 5Carlyle 50.0 14 Carlyle 14.9 8ApolloManagement 44.9 7 Cinven 12.4 6KohlbergKravisRoberts 44.5 3AllcoAlpInvestPartners 20.8 3EquityPartners 11.1 3ApaxPartners 19.7 11 Onex 11.0 1GoldmanSachsInternational 17.3 3 Carlyle 8.0 6CVC.CapitalPartners 7.5 4Hellman &Friedman 12.2 3MerrillLynch 35.9 3ContractedServices 11.3 1CerberusCapitalThomas HManagement 28.6 4 Lee Partners 11.3 1IndustryIndustrytotal 402.6 1,157 total 272.6 1,564Note: Financial Times December 27 2007.KohlbergKravisRoberts 5.2 4GoldmanSachsCapitalPartners 4.0 2AllianzCapitalPartners 3.9 2MBKPartners 1.7 3Industrytotal 48.0 271The figures provide a substantial justification for the debate about the phenomenon of everlarger deals, a trend which is supported by banks’ willingness to leverage transactions, aswell as increasing institutional investor’s appetite for the sector.As illustrated in an annexe to this report our case studies document the need for change insociety’s strategies vis a vis the LBOs. Like its private equity counterpart, the leveragedfinance market experienced a pause in activity in the 2001-2002 economic recessions, asinstitutional appetite for debt declined. According to Rating agency Standard & Poor’s theleveraged loan market has increased significantly in 2006, posting record volumes andEurope’s largest-ever buyout. In the first-quarter of 2006 leveraged loan volume was $44.4billion. The comparable figure for first-quarter 2005 was $25.5 billion, and first-quarter 2004volume totalled $20.0 billion. The prior record for first-quarter volume was $24.2 billion in2001 24 .The increase in aggressive take-overs from LBOs is mirrored in the fact that leverage ratiosalso continue to rise. Pro forma average total debt to EBITDA for European leveraged loanborrowers was 5.9x in first-quarter 2006. The median was also 5.9x, but the third quartile24 Source: http://www.finfacts.com/irelandbusinessnews/publish/printer_1000article_10005973.shtml48
threshold (25% of the “population” was greater than this level) was 6.7x. In 2005’s firstquarter, these figures were generally a full turn lower, at 4.8x for the average, 4.7x for themedian, and 5.9x for the third quartile. Even the fourth-quarter 2005 numbers are a half turnlower, at 5.3x for the average, 5.1x for the median, and 6.1x for the third quartile 25 . As wecan see, the debt factor increased from average 4.7 to 6.7. In 2006 this developmentcontinued. Recent data of leverage buy-outs in Europe have shown that relaxed attitudes inthe markets, or the banks’ need to get liquidity to work, are tempting borrowers to take on alot of debt. The rising debt levels in companies owned by private equity funds have beenfuelled by unprecedented demands for risky loans and bonds from hedge funds and otherinvestors. Now, the average ratio of leverage rating is almost six times higher, according toStandard & Poor Leveraged Commentary and Data.S&P is not denying that LBO activity is pushing up the average transaction size for loans.Fifteen percent of first-quarter transactions included $1 billion or more of senior debt, andnearly half of those deals were huge transactions, at $2 billion or more 26 .This huge amount of debt is in itself creating risks for financial systems, of which weshould be aware.According to The Economist the global private equity activity in the first half of 2006 tookon cheap credit to buy companies for 300 billion dollars. This means that for the whole of2006 they could in theory borrow enough money to buy a fifth of all listed on America’sNASDAQ, or nearly a quarter of Britain’s FTSE 100 27 .2.7 Who invest in LBOs?It is pension funds and insurance companies who are the new investors in LBOs. As shownin the European Commission Expert Group Report on Private Equity in July 2006, fundsraised from pension funds and insurance companies represented, in 2005, around one third ofall funds raised in Private Equity in Europe.25 Source: http://www.finfacts.com/irelandbusinessnews/publish/printer_1000article_10005973.shtml26 Source: http://www.finfacts.com/irelandbusinessnews/publish/printer_1000article_10005973.shtml27 The Economist September 23rd 200649
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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
Page 24 and 25: industrial policy, focusing on know
Page 26 and 27: AcknowledgementsThis report has bec
Page 28 and 29: The situation we are facing now is
Page 30 and 31: market to promote the knowledge-eco
Page 32 and 33: Our desire to separate the single s
Page 34 and 35: Typically a single strategy HF oper
Page 36 and 37: In most European countries, fund ma
Page 38 and 39: It should also be signalled that:
Page 40 and 41: Institutional investorsCurrent and
Page 42 and 43: leverage in order to benefit from s
Page 44 and 45: 1.6 The costs, the management fees
Page 46 and 47: only remaining way to boost returns
Page 48 and 49: A majority of hedge funds have limi
Page 50 and 51: Our analysis is that these concerns
Page 52 and 53: Average annual returnsTremont HF in
Page 54 and 55: 1.11. Tendency of crowdingDespite t
Page 56 and 57: • Corporate governance:“In the
Page 58 and 59: Onshore FoHFsCountryUnitedKingdomGe
Page 60 and 61: ItalyBank ofItaly•Specializedasse
Page 62 and 63: 1.14 Societies’ response - curren
Page 64 and 65: Investments are often in individual
Page 66 and 67: employed 21 . Leverage effect expla
Page 68 and 69: 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 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
Page 84 and 85: equity value chain. The main areas
Page 86 and 87: of the table but that less mature c
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
Page 94 and 95: offeree company must give its views
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
Page 112 and 113: If HFs and LBOs have brought uncert
Page 114 and 115: the social responsibilities of comp
Page 116 and 117: areas after recapitalisation 11 . I
Page 118 and 119: Furthermore, the funds in many case
Page 120 and 121: privatised with a view to stimulati
Page 122 and 123: asset stripping, and the offering o
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dividend to Valentia.The second pub
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***The three country case studies o
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eturns well below those achieved by
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investment funds - in the UK alone
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4.2 The issue of pension fundsThe p
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One year earlier the British Financ
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the fund exceeds the highest value
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5.3 Short sellingHistorically, hedg
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global financial markets. In 1998 t
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implications associated with the li
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The classic source of leverage is l
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I talk to have got a prayer in the
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The main reason for the lack of inf
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7. The need for change to ensure a
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clearly destructive must be prevent
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European Union.Part III is going to
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2. Market transparency - a common i
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International Settlements in Switze
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3.2 The main beneficiaries of regul
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within jurisdictions with enhanced
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In our view, if we want to promote
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investors.The EC should set up an i
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Alternative investment fund manager
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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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