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DIGEST 116
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PE Eyes Multi-billion Investment in Germanowned Oil & Gas Unit
New Study Reveals Emerging PE Trends and
a Major Shift
PE Outperformance: Insight into Returns at
Top US Pension Funds
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Insurance Industry M&A Trends Downwards:
A Global Multi Year View
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PE Industry Sees Recovery But Increasing
Competition
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Quote of the Week: Seismic Strategy Shifts
November 08, 2013

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PE EYES MULTI-BILLION INVESTMENT IN
GERMAN-OWNED OIL & GAS UNIT
This week’s deal of the week is a big one. KKR, the US private equity giant, is teaming with the international arm of Kuwait Petroleum Corp to jointly bid for German utility RWE’s oil and gas unit DEA,
according to a breaking news item on Reuters, which cited unnamed sources. The deal is potentially
worth up to EUR 5 billion. Besides KKR, Reuters says it had found out that Blackstone is also likely
to submit a bid. Potential strategic bidders include BASF’s Wintershall and Britain’s Centrica. Oil and
energy deals are a hot ticket in private equity, as we have reported recently in the DealMarket Digest.
(Image source DEA)
NEW STUDY REVEALS EMERGING PE
TRENDS AND A MAJOR SHIFT
Private equity leaders are predicting major changes in industry dynamics. New skills will be required,
new types of funds, and investment banks may play a less dominant role in several segments of PE,
are some of the trends underway.
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New research from Investec Fund Finance, which was based on interviews with high-level professionals such as buyout executives and advisers , highlights important areas for action which may lead to a
stronger private equity industry in the coming years.
The study says that the key challenges facing PE fund managers right now are 1) a highly competitive
fundraising market, 2) pressure to generate returns in a low-growth environment and 3) consolidation.
These forces drive a need to to “think hard about how to survive”, says Investec.
In addition to market forces, a string of incoming regulatory measures are having an effect which will
make it necessary to better communicate the PE industry’s role to society more important.
As far as the types of funds that will be successful in fundraising, the study said that specialist funds
are in demand, as well as fund managers that can demonstrate ability to add value or make operational improvements to portfolio companies for greater returns. Financial engineering is slowly falling out
of favor. There was also quite a bit of discussion about the challenges and benefits of going the deal by
deal route or pledge funds (aka sponsorless funds or deal-by-deal funds, which we’ve covered in the
Digest here ).
Duke Street has been quite successful on this front, according to the report. One bold prediction is that
within the next decade the private equity landscape will change dramatically and large, listed asset
managers that have evolved from the likes of Blackstone Group and Kohlberg Kravis Roberts, may
begin to replace the investment banks in certain product lines. The conclusion is summed up in this
excerpt: “This evolution will lead to an increasingly polarised private equity market with the multifaceted giants at one end and smaller niche funds behaving like corporate partners for entrepreneurs
at the other…The large groups will come with multiple products as well as liquid and less liquid funds.
They will help big institutional investors to get more co-investments alongside and therefore be stable
long term clients, despite lower returns on their funds. This will be offset by the cost savings of the coinvestments.”
PE OUTPERFORMANCE: INSIGHT INTO
RETURNS AT TOP US PENSION FUNDS
PEGCC or the Private Equity Growth Capital Council, an advocacy group for the PE industry, released a
new study about US public pension funds and their private equity portfolios. It took 10-year time horizons and looked at publicly available info on 146 pension funds with assets greater than USD 1 bn.
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Top 3 Pension Funds by PE Returns:
Massachusetts Pension Reserves Investment Trust (PRIT) was number one, followed by the Los Angeles County Employees Retirement Association and the Teacher Retirement System of Texas. The
rankings are based on 10-year and 5-year annualized returns by pensions’ private equity investments.
agreement with Sobeys, a major Canadian retailer, to sell the net assets of Canada Safeway.
Top 10 Pensions by PE Allocation:
CalPERS has invested the most capital (USD
34.2 billion) with CalSTRS and the Washington State Department of Retirement Systems coming in at second and third greatest
amounts (USD 22.6 billion and USD 16.1 billion, respectively) to private equity funds.
Pension Returns by Asset Class:
Private equity delivered a 10 percent annualized return to the median public pension over
the last 10 years, more than any other asset
class, says PEGCC. By comparison, the median public pension received a 6.5 percent annualized return on its total fund during the same period.
PEGCC noted that PE are reported net of management fees and carried interest. Performance calculations for other asset classes include returns that are both gross and net of fees on marketable securities.
INSURANCE INDUSTRY M&A TRENDS
DOWNWARDS: A GLOBAL MULTI YEAR
VIEW
Overall M&A activity in the insurance industry is
trending downwards this year, according to Clyde
& Co, an insurance provider, which publishes regular reports on M&A dealmaking based on Thomson
Reuters data. Deals are slow to get done due to
“stubbornly soft” pricing – and overall the number
of transactions has continued to decline as the bar
chart here shows.
The report says that The US remains the most active
country overall with 30% of global M&A activity, but
in the last 12 months its activity has fallen by around
40%. Outside the US, Latin America continued to ininterest investors, with Brazil and Argentina leading the activity, with targets in Chile and Mexico proving to be attractive. Europe is the second most active region with deals in the UK actually increased in
the last 12 months. There were transactions in Spain, France, Germany and Italy, frequently driven by
the ongoing problems in the Eurozone and fall-out from the global financial crisis, as insurers sold off
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non-core and sub-scale assets as part of turnaround programs. Probably the most dominant trend
in the deals, , according to Clyde& Co, that have taken place in the last year has been the search for
growth – whether that is by expanding into those less mature markets with greater potential, or by
diversifying through acquisition into new sectors or distribution channels.
PE INDUSTRY SEES RECOVERY BUT
INCREASING COMPETITION
It is a long slow recovery for the PE, says SEI, but rising allocations and more active Secondary Market are the bright spots. SEI’s latest study, “Key Course Adjustments for Breaking Through: Five Ways
Private Equity Managers Can Optimize Their Competitive Advantage,” identified the aforementioned
positive industry trends. But it also notes “a Darwinian climate of intensifying competition” in which
many funds will struggle to survive even as new ones come forward. The survey says that buy/sell
dynamics are out of balance in certain segments. PE funds have a “glut” of assets, but are “starved
for quality acquisitions and viable exit opportunities in certain strategies”, which will make it hard for
some managers to achieve returns and raise new funds, it said.
Further Key Findings
A “mountain of dry powder.” The industry’s oversupply of assets is driving up valuations of potential
acquisitions at a time when rising equity markets are having the same effect. More than 6 out of 10
survey respondents said the industry’s surplus of cash is resulting in more competitive bidding situations, and 45 percent said it is raising sellers’ price expectations. It is also making new fundraising
more difficult, according to nearly half of the managers surveyed.
Rising performance pressures. Investors and consultants see performance as the second most important factor in fund selection. But many funds are being “hobbled by unprofitable investments and the
stiff competition for acquisitions”. (Image Source: SEI)
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QUOTE OF THE WEEK – SEISMIC STRATEGY
SHIFTS
“A seismic shift in strategies has been apparent in the latest generation of fundraising efforts. In today’s “new normal”, the old ways are rightfully being questioned and even
threatened by innovative and reactive strategies.”
Who said it: Alice Murray, feature writer Unquote
Context: Unquote has a very interesting report about fundraising trends and innovations in PE. This quote kicks it
off. Topics discussed include the innovations amongst PE
fundraisers, such as the “fundless” fund model (or dealby-deal investing model) where momentum is growing with
Duke Street Capital as the leading name in this emerging
PE business model. Unquote, which tracks a range of data in the global PE industry, says it is recording a high number of successful closes for relative newcomers, even as some big brands take much
longer and miss their targets. The first time funds highlighted in the report are quite small, less than
half a billion dollars, we note. Other new trends noted that come as a result of the tough fundraising
market are more investor-friendly terms, such as early-bird discounts and special agreements over
co-investment rights or early liquidity options.
Where we found it: Unquote
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Editor: Valerie Thompson, Zurich
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