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DealMarket Digest Issue116 - 8th November 2013

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

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DealMarket Digest Issue116 - 8th November 2013

  1. 1. DIGEST 116 1 2 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 3 Insurance Industry M&A Trends Downwards: A Global Multi Year View 4 PE Industry Sees Recovery But Increasing Competition 5 Quote of the Week: Seismic Strategy Shifts November 08, 2013
  2. 2. 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. 2 www.DealMarket.com/digest
  3. 3. 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. 3 www.DealMarket.com/digest
  4. 4. 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 4 www.DealMarket.com/digest
  5. 5. 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) 5 www.DealMarket.com/digest
  6. 6. 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 6 www.DealMarket.com/digest
  7. 7. The Dealmarket Digest empowers members of Dealmarket by providing up-to-date and high-quality content. Each week our in-house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global. To receive the weekly digest by email register on www.dealmarket.com. Editor: Valerie Thompson, Zurich DealMarket DealMarket launched in 2011 and is growing fast. Just one year after launch, DealMarket counts more than 61,000 recurring users from 154 countries, and over 3,000 deals and service providers promoted or listed on the platform. DealMarket is an online platform enabling private equity buyers, sellers and advisors to maximize opportunities around the world – a one-stop shop for Private Equity professionals. Designed by Private Equity professionals for Private Equity professionals, the platform is easy to use, cost effective and secure, providing access, choice and control across the investment cycle. DealMarket’s offering includes • DealMarketPLACE, brings together buyers, sellers, and PE advisors from around the world. PLACE gives access to deals (direct invest ments, funds, and secondaries), investors, and PE service providers. Searching and postingis free. (no commissions). PLACE PRO is the exclusive deal exchange platform made for engaged professionals and companies with a truly unique value added proposition. • DealMarketSTORE offers affordable access to industry-leading thirdparty information and services on demand; and • DealMarketOFFICE is a state-of-the-art deal flow management tool, helping Private Equity investors to capture, store, manage and share their deal flow more efficiently. DealMarket was voted the “Best Global Private Equity Platform for 2012 and 2013” by Corporate LiveWire. www.DealMarket.com/digest