Time for Private Equity to Pull the Trigger?

06-Oct-2009, CNBC.com

The famous World War II General George S. Patton used to say that he didn't judge a man by how high he climbed, but by how high he bounced after hitting the bottom.

It's probably worth considering this as we explore the world of private equity funds and the role they're playing in the biggest stock market rally in a least two generations.

PE firms have stumped up a measly 5 percent of the $1.46 trillion worth of deals this year (a figure down more than third from last year), their smallest contribution since at least 2000, according to Mergers & Acquisitions Report.

And it's not like there's a wave of cash waiting to get put to work, either. London-based research group Preqin says that, globally, PE funds have raised $38 billion in the last three months, 45 percent less than in the second quarter and a fraction of the $208 billion raised just prior to the credit crisis in the second quarter of 2007.

Here in the UK, the figures are even more bleak, with only 31 deals in Q3 with a value of just £556 million ($890 million) -- the slowest pace in a quarter of a century.

To make matters worse, previous (mostly leveraged) deals made with private equity cash are starting to come unglued: there have been 17-sponsored insolvencies in the UK so far this year, up 55 percent from 2008 and the highest total since the tech-bubble bursting aftermath of 2001.

In the US, the 62 PE-related Chapter 11 filings have already outpaced last year's total, the most recent being Colony Capital-backed  Station Casinos, which blew-up around $2.7 billion in equity.

The industry itself , especially in Europe, is going through some major upheavals, with respected veteran John Moulton stepping down from Alchemy Partners after a clash over strategy. Damon Buffini will give up his role as chairman at Permira and Guy Hands is no longer chief executive at Terra Firma (although he is chairman and chief investment officer).

So why the crisis of confidence and transactions?

To begin, the credit crunch isn't just about mortgages: with only $262 billion in syndicated loans sold thus far this year bank lending to the financial sector is only a fraction of its former self (one third of the second quarter in 2008, to be exact). That lack of juice squeezes the profitability of PE-sponsored deals, which typically rely on a big portion of borrowed money to complete.

Technical moves in the corporate bond market, along with record sales in Europe thus far this year, have also made life tough for PE funds. Companies themselves can fund acquisitions based on the yield of their own cash flows, their financing costs and the free-cash-flow yield of their target (a big part of the reason Kraft will be able to cobble together the $17.6 billion needed to buy Cadbury).

There are nascent signs of a PE recovery, though. Blackstone Group (+5.92%) is said to be close to making a $3 billion bid for the theme parks owned by Anheuser-Busch InBev, including Busch Gardens and SeaWorld. (Blackstone is a co-owner of the Universal theme park in Orlando, Florida, along with NBC Universal, a subsidiary of General Electric (+3.1%) and the parent of CNBC.)

PitchBook Data, a PE-focused research firm, estimates the private equity "overhang" (the difference between cash raised by the PE industry and cash invested) at around $400 billion.

With European shares valued at two-year lows (on a forward Price/Earnings basis) and expected to grow earnings by 25 percent in 2010 (compared to a 22 percent decline in 2009), PE firms could source a plethora of potential targets and keep a tidy bid premium into the current (albeit stalled) equity rally. 

And despite the conventional wisdom that mergers don't make money, many recent deals are fairing quite well: Towers Perrin studied 204 transactions of $100 million or more - made between September 2008 and May 2009 - and found that the buyers outperformed non-buying peers by 6.3 percent.

General Patton once said that courage was fear holding on just a minute longer. Private equity investors might paraphrase it to suggest that success is reticence investing just a little bit sooner.

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Q3'09 Sees PE Fundraising and Investment Steadily Rebounding

28-Oct-2009, Zero to IPO

The research results from Zero2IPO Research Center show that the total amount of newly raised PE funds targeting at Asian market (Including Chinese mainland) in Q3'09 continuously rose. In Q3'09, there were six PE funds available for investment in Chinese mainland fulfilling their fundraising for US$2.47B, drastically down by 86.8% year-on-year. In this case, although the gross amount of newly raised funds slightly increased quarter on quarter, the funds still faced the difficulties in fundraising. This also clearly mirrored the changes in PE upstream supply chain, for example the transformation of the attitude of investors from the imprudence in the past into the caution for the time being.

The reasons behind the phenomenon are as follows: first, the booming PE market with a lot of successful stories in the past two years sounded a magnet for investors, while GP-invested enterprises showed vulnerability to different extent after the outbreak of financial crisis. Second, the funds raised in 2008 failed to fully make investment, due to industry recession and GP investment slowdown. Generally speaking, a fund is expected to start the second round only when investing 80.0% of the total fundraising.

In Q3'09, five growth funds completed fundraising for US$270.86M, accounting for 83.3% and 11.0% of the total in terms of the number and amount of funds. The number of growth funds in Q3'09 increased one compared with that in Q2'09, while the amount raised drastically dropped 84.5%. There was another buyout fund worth US$2.20B completed in the quarter, constituting 89.0% of the total fundraising amount in Q3'09.

In terms of currency, all of the six PE funds targeting at Asian market (Including Chinese mainland) in Q3'09 were RMB funds for the first time, which further supports the research results of Zero2IPO Research Center on the development trend of RMB PE funds in recent years. That is, along with the funding injecting into Chinese multi-layer capital market, RMB funds on Chinese PE market are doomed to be more developed and finally take the lead. After the social security fund said to enlarge its investment in PE funds and China Securities Regulatory Commission lowered the access threshold for stockbroker direct investment in Q2'09, local governments, headed by Shanghai and Beijing Municipal Government, constantly staged new policies and gradually removed the policy barriers in the foundation of RMB funds in China. This in turn incurred another round of upsurge in the fundraising of RMB funds.

Moreover, there was no USD funds raised in Q3'09, because more and more GPs delayed fundraising and more funds were discarded amid the persistent depression of global economy. According to the statistics from Preqin, a world-famous research institution, Q3'09 saw a sharp drop of 55.0% in the aggregate fundraising amount of PE funds worldwide compared with that in the preceding quarter, staying at the lowest level since 2003. Certainly, to reduce alternative investment is only an expedient for institutional investors, and Q4'09 and 2010 will see a rebound in this respect. In fact, there were still a number of large-scale USD funds set up and starting fundraising, such as CDH China Growth Fund.

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Venture Capital Performance as of Q2 2009 Impacted by Poor Exit Market, According to Cambridge Associates and the NVCA

10-Year Venture Returns Decline Significantly, as 1999 Activity Begins to "Roll Off" Calculation

ARLINGTON, VA, October 27, 2009-- While venture capital performance remained largely unchanged for most time horizons for the period ending June 30, 2009, there was notable deterioration in the 10-year returns, according to the Cambridge Associates U.S. Venture Capital Index�, the performance benchmark of the National Venture Capital Association. The 10-year return fell to 14.3 percent from 26.2 percent in the previous quarter -- and from 33.9 percent a year earlier. The reason for the drop: Returns for the first half of 1999, when the exit market was especially active and profitable, are no longer included in the 10-year calculation. The absence of late 1990 exit activity is expected to impact returns for subsequent quarters as well.

Despite the decline in 10-year returns, the venture capital index continued to outperform other major market indices during Q2 2009 across all time horizons.

             US Venture Capital Index Returns for the Periods ending

                     6/30/2009, 3/31/2009 and 6/30/2008



For the                   1        3        5        10      15       20
 
period ending   Qtr.     Year    Years    Years    Years    Years    Years

               ------   ------   ------   ------   ------   ------   ------

June 30,

 2009             0.2    -17.1      1.3      5.7     14.3     36.3     22.7
 
March 31,

 2009            -2.9    -17.5      1.3      5.8     26.2     34.2     22.5

June 30,

 2008             0.4      4.7     13.3     11.5     33.9     33.4     21.9



                              Other indices at June 30, 2009
 


DJIA             12.0    -23.0     -6.3     -1.7     -0.4      8.1      9.0

NASDAQ

 Composite       20.1    -20.0     -5.5     -2.2    -3.74      6.6      7.5

S&P 500          15.9    -26.2     -8.2     -2.2    -2.22      6.9      7.8
 


Source: Cambridge Associates LLC

Note: Because the US Venture Capital index is cap weighted, the largest

vintage years mainly drive the index's performance.

"We are now entering a period of time when the stark differences between today's exit market and the exit market ten years ago will be manifested in the return numbers in a meaningful way," said Mark Heesen, president of the NVCA. "Without a stronger IPO market, and by stronger I am suggesting a multiple of 8 to 10 times the current volume, these longer term performance numbers will continue to deteriorate over the next few years. Venture capital may still outperform the other major market indices, but by far less than the industry did in the last decade."

Said Peter D. Mooradian at Cambridge Associates, "The exit environment certainly needs to improve for the venture industry to generate strong returns for investors. But we believe that a sustained and meaningful industry shakeout emanating from the 2008 financial crisis will improve the competitive environment and entry valuations, another important component of the return equation."

Vintage Year Return Ratios

The following chart illustrates the relationship between the dollars contributed to venture capital funds by limited partners and the dollars distributed back to them by vintage year. The chart also incorporates the Net Asset Value (NAV) of the portfolio at 6/30/09 for an overall ratio. For example, the 1998 vintage year funds have already returned in cash 1.29 times the amount of contributions received from LPs. If you account for the current NAV of existing portfolio, the ratio increases to 1.45 times. However, it is important that the NAV is unrealized and will change as companies exit the portfolio, are revalued, or are written off. The 1995 vintage year funds have the most positive ratio, returning 5.98 times the cash contributed by LPs, a number which rises to 6.06 should those funds realize the value of what is currently in the portfolio. Later vintage years have yet to return significant cash to LPs as most funds do not begin return dollars until after year 5.

                        Vintage Year Return Ratio Chart



              LP Distributions/   Current NAV/   LP Distributions and NAV/

Vintage Year  LP Contributions  LP Contributions      LP Contribution
 
              ----------------- ---------------- -------------------------

1981-1994                  3.23             0.01                      3.24

1995                       5.98             0.07                      6.06
 
1996                       4.36             0.08                      4.45

1997                       2.79             0.10                      2.89

1998                       1.29             0.16                      1.45
 
1999                       0.62             0.26                      0.88

2000                       0.46             0.47                      0.92

2001                       0.37             0.61                      0.98
 
2002                       0.39             0.64                      1.02

2003                       0.31             0.78                      1.09

2004                       0.14             0.84                      0.98
 
2005                       0.09             0.83                      0.92

2006                       0.03             0.89                      0.92

2007                       0.00             0.84                      0.84
 
2008                       0.00             0.87                      0.88

Overall                    1.11             0.42                      1.53

Additional Performance Benchmarks

To view the full, comprehensive report, which includes tables on additional time horizons, vintage years and industry returns, please visit the Cambridge Associates or NVCA Websites.

Cambridge Associates derives its U.S. venture capital benchmarks from the financial information contained in its proprietary database of venture capital funds. As of June 30, 2009, the database is comprised of 1,281 venture funds formed from 1981 through 2009 with a value of approximately $89.5 billion.

The National Venture Capital Association (NVCA) represents more than 400 venture capital firms in the United States. NVCA's mission is to foster greater understanding of the importance of venture capital to the U.S. economy, and support entrepreneurial activity and innovation. According to a 2009 Global Insight study, venture-backed companies accounted for 12.1 million jobs and $2.9 trillion in revenue in the U.S. in 2008. The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members. For more information about the NVCA, please visit www.nvca.org.

Founded in 1973, Cambridge Associates delivers a range of services, including investment consulting, outsourced portfolio solutions, independent research, and performance monitoring and tools across all asset classes, to approximately 850 institutional and private clients worldwide. The firm has advised clients on alternative assets since the 1970s and compiles the performance results for more than 2,000 private partnerships to publish the Cambridge Associates U.S. Venture Capital Index� and Cambridge Associates U.S. Private Equity Index�, which are widely considered to be the industry-standard benchmark statistics for those asset classes. In total, the firm has over 950 employees serving its client base globally and maintains offices in Arlington, VA; Boston; Dallas; Menlo Park, CA; London; Singapore, and Sydney, Australia. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.

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Managing with the Brain in Mind

Neuroscience research is revealing the social nature of the high-performance workplace.

Although a job is often regarded as a purely economic transaction, in which people exchange their labor for financial compensation, the brain experiences the workplace first and foremost as a social system. Like the experiment participants whose avatars were left out of the game, people who feel betrayed or unrecognized at work — for example, when they are reprimanded, given an assignment that seems unworthy, or told to take a pay cut — experience it as a neural impulse, as powerful and painful as a blow to the head. Most people who work in companies learn to rationalize or temper their reactions; they “suck it up,” as the common parlance puts it. But they also limit their commitment and engagement. They become purely transactional employees, reluctant to give more of themselves to the company, because the social context stands in their way.

Leaders who understand this dynamic can more effectively engage their employees’ best talents, support collaborative teams, and create an environment that fosters productive change. Indeed, the ability to intentionally address the social brain in the service of optimal performance will be a distinguishing leadership capability in the years ahead. (Continuar leyendo). By David Rock. Strategy+Business© Seguir leyendo

Small World (Private Equity Central Net)

 By Marc Raybin, Editor in Chief

"Bigger is better."

That saying may be true for some things, like football players and birthday cakes, but not everyone buys into that truism.

"If you look at the economics of around how venture funds operate, the observation is the larger the venture fund is, the more dependent that venture fund is on a larger exit in order to generate returns," explains Robert Ackerman, managing director and founder of Allegis Capital. "That plays against the backdrop of a dearth of IPOs or, at a minimum, the unpredictability of IPOs."

Ackerman contrasts that to smaller sized venture capital funds, like his. He says managers of smaller funds have more control over their ability to generate better returns in terms of the multiples times investment. That's because these returns can be generated through smaller exits than what are needed by the so-called mega-funds.

"It's not rocket science," he says. "It's just math."

Ackerman is not alone in his assessment when it comes to the beauty of being a smaller venture capital fund.

David Jones, chairman and managing director of Chrysalis Ventures out of Louiseville, agrees.

"If you do not have to put that much capital to work and you can focus on less capital-intensive businesses, you can drive good venture returns without a huge IPO market," Jones says.

Even in a crummy market, you can find buyers at a good price. Chrysalis has had two exits at more than $150 million each since the market tanked more than a year ago. That's pretty good for a firm that typically invests in companies needing only $10 million to $20 million in equity.

Ackerman is a seed and early stage investor. He focuses on companies that are typically in the idea stage. Looking out as many as eight years, Ackerman does not have the luxury of banking on a robust IPO market. Rather than rely upon the up-and-down nature of the public sphere, Ackerman looks to other avenues.

In fact, Ackerman operates with the assumption the IPO market simply does not exist. If he takes out of the sphere of possibilities, then he is free to concentrate on other avenues to exit.

"Our contention is that with smaller funds, where you are more disciplined with valuation, where you are more disciplined around the things you are investing in, you can generate returns from M&A exits," says Ackerman. "The job at the end of the day is to consistently generate returns."
Managers like Ackerman and Jones can afford to have the smaller exits that mega-funds cannot afford to do.

Ackerman does not think there are sectors in particular that are better served in the small market than being in the larger market, however, he does point to several capital-intensive spaces that are particularly hard hit when the IPO market is weak. Telecommunications, semiconductor, and equipment tend to require more investment than do other sectors.

Having said that, there are downsides to being smaller. Jones says small firms do not get rich off management fees. The return is in, well, the return. That is not such a bad thing, he says, as the interests of the general partners are aligned with those of the limited partners.

"Venture is clearly an environment where small is beautiful," Ackerman says.

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Peru will grow most among Latin America's top economies the next two years, the IMF forecasts. (LBC)

BY JOACHIM BAMRUD

Peru will have the fastest-growing GDP among Latin America's top economies both this and next year, the International Monetary Fund predicts in its latest World Economic Outlook released today.

Meanwhile, the fund revised up its forecasts for Brazil, the region's top economy, and it now predicts that Mexico, Latin America's second-largest economy, will leave recession next year.

Peru's GDP should expand by 1.5 percent this year and 5.8 percent next year, the IMF says.

BRAZIL AND MEXICO

Brazil's economy will likely fall by 0.7 percent this year. That's better than the IMF predicted earlier when it estimated a decline of 1.3 percent. Next year, Brazil's GDP should grow by 3.5 percent.
Mexico, however, will likely see a 7.3 percent decline this year before recovering next year with a 3.3 percent growth, the IMF says. All in all, Latin America's economies are expected to see 2.5 percent fall this year and a 2.9 percent expansion next year. Previously, the IMF had estimated a 2.6 percent decline in 2009 and a 2.3 percent expansion in 2010.

ARGENTINA AND VENEZUELA

Argentina, Latin America's third-largest economy, will see a GDP decline of 2.5 percent this year, but recover slightly next year with a 1.5 percent expansion. Venezuela, the fourth-largest economy, will see a decline of 2.0 percent this year and a further fall of 0.4 percent next year. That would make it the only country among the nine that will continue in recession into 2010. Colombia, the fifth-largest economy, should see a 0.3 percent GDP decline this year. Next year, its economy will likely expand by 2.5 percent, the IMF forecasts.

CHILE AND PANAMA

The fund expects Chile's economy to fall by 1.7 percent before growing at 4.0 percent next year. That's lower than the 5.0 percent 2010 forecast announced by Chile's finance minister Andres Velasco today. Panama, the 13th-largest economy in Latin America, will likely expand by 1.8 percent this year and 3.7 percent next year. Ecuador should see a 1.0 percent decline this year and 1.5 percent growth next year, while Uruguay's economy likely will expand by 0.6 percent in 2009 and 3.5 percent in 2010. Among smaller economies, Bolivia will post the highest growth this year (2.8 percent), followed by Haiti (2.0 percent). Next year, Paraguay will see the highest growth among smaller economies - 3.9 percent, the IMF forecasts.

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FMI: La recesión mundial ha terminado (Maximize)

La recesión más profunda desde la Segunda Guerra Mundial ha terminado, informó el Fondo Monetario Internacional (FMI), que elevó hoy sus previsiones de crecimiento mundial, pero alertó de que la salida de la crisis será lenta. En su informe "Perspectivas Económicas Mundiales" da cuenta que, según sus nuevos cálculos, el mundo se contraerá 1,1% en 2009 (en julio había estimado 1,4%) y que en el 2010 crecería 3,1% (su anterior proyección fue de 2,4%).

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Are You Killing Enough Ideas?

Right at this moment, in a conference room or at an executive off-site meeting, a group of senior leaders of a large global company are wondering why they aren’t innovating enough. They’re probably focusing on a few specific questions: “Why don’t we have enough good ideas? How can we tell which idea is going to be the next big thing? Why is it so hard to get an idea from the drawing board into the market?” Most telling of all is the question: “Why do we still waste resources on ideas that people don’t believe in?” In other words, even though an idea has been effectively “killed,” it still remains on the agenda, with nobody fully willing to learn from the mistake, put it to rest, and move on to other endeavors. (Continuar leyendo) Strategy+Business. Booz & Co. 2009. Seguir leyendo