DIGEST 126

January 31, 2014

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KKR Leads Billion Dollar Insurance Buyout in US

Global M&A Up Slightly in 2H2103 and PE Ex-its Improve

Feminine Alpha: New PE and Hedge Fund Study on Performance and Prospects E.European and Gulf States Dominate Fron-tier Markets Ranking

Quote of the Week: Drivers behind Billion Dollar Startup M&A4

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KKR LEADS BILLION DOLLAR INSURANCE BUYOUT IN US This week’s buyout of the week looks to be the acquisition of Sedgwick Claims Management Services by KKR, which has agreed to buy from Hellman & Friedman LLC and Stone Point Capital LLC for USD 2.4 billion, according to Bloomberg. This is a secondary transaction with PE investors selling to an-other PE fund manager. Sedgwick Claims Management Services, said in a statement that it is leading provider of technology-enabled employee compensation/insurance claims and productivity manage-ment solutions. It sees an alignment between its innovative approach and KKRs.

GLOBAL M&A UP SLIGHTLY IN 2H2103 AND PE EXITS IMPROVE

Merger and Acquisition activity in the second half of 2013 was in a “strikingly similar posi-tion” to the same period in 2012, says merger-market’s latest report on dealmaking. Value declined 3.3% year-on-year (YoY) to USD 1.2tn, while volume edged up 3.2% to 7,177 deals. Exit activity increased globally in the latter half of 2013 by 19% YoY by volume to 910 deals. Value paints an “equally encouraging” picture, in-creasing 11% to USD 161.9bn over the same period.

Trade sales were on the upswing, giving second-ary buyouts a bit of competition on the exit front. Analysts said that because private equity firms typically look to sell for premiums in order to recoup their initial investments, this trend points to corporates being in better financial positions,

or being more bearish about the prospects of transformative acquisitions, than they were in previous months.

The report highlighted Sysco Corporation’s USD 8.2bn announced acquisition of US Foods from Clay-ton, Dubilier & Rice and Kohlberg Kravis & Roberts. The deal sees the two firms exiting their initial investment of USD7.2bn in 2007. Outlook for 2014 is not showing an uptick in exit activity yet but deal-making trends suggest that private equity firms are seeing returns on their pre-crisis investments, and are in an increasingly strong position to re-invest capital over the coming month. (Image source: mergermarket)

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Although there are not a lot of them, women-owned or managed funds continue to perform ahead of the industry benchmark, according to a report released this week advisory and ser-vices firm Rothstein Kass. The study, entitled “Women in Alternative Investments: A Mara-thon, Not a Sprint”, says that since June 2007, its specialized WAI Index (see graphic), which tracks performance of female led funds, re-turned 6 percent, while the S&P 500 gained 4.2 percent and the HFRX Global Hedge Fund Index dropped -1.1 percent during the same period. The report said that performance comparisons are “more difficult” in the private equity area but a small sample of women-owned or man-aged private equity funds reported net returns of 14.8 percent in 2012, topping the Cambridge Associates LLC private equity fund index num-ber of 13.8 percent. “Our research shows

FEMININE ALPHA: NEW PE AND HEDGE FUND STUDY ON PERFORMANCE AND PROSPECTS

women-owned and managed funds continue to demonstrate strong performance during what has been a difficult period for many alternative investment funds,” said ,” said Meredith Jones, director at Rothstein Kass and head of the Rothstein Kass Institute, in a statement. (Image Source: Rothstein Kass Institute)

Other findings • There is broad optimism about the opportunities available for alternative investment firms in 2014

• Respondents are targeting above-average returns in 2014, as more than 50 percent of those polled hope to generate returns of 10 percent or more next year.

• Women typically occupy operational, financial or compliance roles and females hold the highest per centage of C-level jobs within the financial suite, at 39.7 percent.

• Increased competition for deals was cited as the primary concern of private equity and venture capi tal investors (31.4 percent. VC funds were most concerned about exit opportunities (43.7 percent) and much less concerned about competition (3.1 percent).

• There is no consensus on outperforming strategies for 2014. While long/short strategies took first place overall at 30.1 percent, responses varied widely among the various demographic groups.

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E.EUROPEAN AND GULF STATES DOMI-NATE FRONTIER MARKETS RANKING

Private equity investors like to keep their eye on the momentum, regardless if it is in a sector, sub-seg-ment, or at the higher macro level, so a report on Bloomberg ranking the economies in both Emerging and Frontier Markets is worth a read. The leading Frontier Market (FM) economies are all Gulf nations, then Eastern European and it is not until position 12 that an Asian economy appears, namely Vietnam. The gains for the Gulf nations is mainly attributed to the high price of oil petroleum products which means more cash for investment in oil rich countries. Qatar and the U.A.E. have progressed to a point that MSCI said on June 11 it would upgrade them from frontier to emerging status in May, for example, says Bloomberg.

Other non-European and non-Gulf states in the FM ranking are Argentina at position 14 and Nigeria at position 15. Three Asian nations led the Emerging Markets ranking, with China in the number one spot for the third consecutive year, followed by South Korea and Malaysia. The research was conducted by Bloomberg Markets is based on 19 measures of the investing climate, from forecasts of gross domes-tic product growth for the next two years to the ease of doing business.

ASIAN AND US PE INVESTORS TARGET EU-ROPEAN PE DEALSBack in 2009, private equity firms outside Europe represented only 76 deals but that figure nearly doubled to 136 deals in 2010 and has remained consistently high since, reaching a record 169 deals last year, according to Financial News citing data provider Mergermarket. Large global players, such as Blackstone Group and Kohlberg Kravis Roberts, are now being joined by smaller foreign players in the European lower mid-market. The average size of deals in Europe by foreign firms has changed dramatically since the boom era. Data reflects the trend with average deal size of USD 206 million, which is less than a third of the USD 696 million average size recorded in 2006, says the report. I

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QUOTE OF THE WEEK - DRIVERS BEHIND BILLION DOLLAR STARTUP M&A“Every once in a while, however, a $1 billion or even multi-billion M&A deal for a venture-backed, rela-tively young company pops up, such as the recent Nest/Google announcement. These deals defy con-ventional valuation logic since the acquired companies are early in their revenue curve or sometimes even pre-revenue. Where do these billion-dollar deals come from and what factors are involved in their creation?

Who said it: Glenn Solomon, Partner with GGV Capital

In Context: In an article providing guidelines on entry into the billion dollar M&A club, published on the GGV blog (featured in TechCrunch), Solomon also describes drivers of outlier billion dollar M&A valuations. To put a billion plus price tag in context, he pointed out that the average valuation for ven-ture-backed M&A deals is USD 161M in the US. So such mega valuations are truly outliers. The three drivers are 1) “Rocket Ship Riding”, where fast early growth drives a decision to pay a premium for potential growth. Google’s near USD 1 bn acquisition of Waze and Facebook’s buyout of Instagram are examples. 2) “Fear of Losing Out” Acquisition prices can be driven up to bil-lion dollar levels when an acquirer develops the fear, real or not, that they might lose an opportunity, either to a competitor or to the target itself. Examples are Google paying USD 3.1 bn for DoubleClick in the face of Microsoft’s rumored pursuit of the target. And 3) Lottery Pick on Draft Day a seemingly ran-dom event where management at a larger, established tech company want to bring in a new team who are perceived to have skills and abilities to drive innovation.

Where we found it: Techcrunch

Interest from private equity firms in Asia is also evident with 12 deals in Europe last year, worth USD 2.8 billion. This was the same number as the previous year, making it the joint highest year for deals since the finan-cial crisis. Again, targeted is the mid-market, with the average size coming in at USD 230 million. China was mentioned as a leader in this segment, targeting Western technologies to bring them back to China to fuel domes-tic growth. “Chinese private equity firms are deploying their capital to generate returns

out of Asian growth, and they see the important role that European companies can play in that Asian growth,” says the report. (Image source: Intralinks/mergermarket)

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