DIGEST 131

March 7, 2014

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How New European Rules Affect Private Equity Teams

PE outlook for Europe

EY’s Top 10 VC Dealmakers Worldwide Global Telecom M&A Hits 13 Year High

PE Drives Robust Returns for Ontario Pension Fund

Quote of the Week: Venture Capital? Make Way for Geek Guilds4

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HOW NEW EUROPEAN RULES AFFECT PRIVATE EQUITY TEAMS The private equity media has many headlines and stories regarding a new AIFM Directive governing alternative investment funds active in the EU, but eFinancialNews has a practical article about how it may affect the “day job” for private equity professionals. The Alternative Investment Fund Managers Directive comes in to effect in July. Here is a quick summary of FN’s findings.

• Less money for managers: The costs of complying with the directive is likely to affect private equity firms’ bottom line, giving them less profit to distribute to senior managers. The cost of getting com pliant with the new regulation is estimated to be about USD 300,000 for an average fund, as well as ongoing fees for firms to market funds to investors in other EU countries.

• Firms will have to structure deals differently: Dividend recaps, a practice where private equity own- ers of businesses take equity out of the portfolio company as a dividend as part of a wider refinanc ing, may need to be restructured so as to avoid activity seen as “asset stripping”.

• Only a small number of managers may have to defer their bonuses: The Directive is likely to affect only the very largest fund managers who operate wide range of strategies or that operate like a hedge fund, for example.

• You will see different people at the water cooler: More regulatory and compliance professionals will have to be hired.

PE OUTLOOK FOR EUROPE

There is more research coming out on Europe’s private equity market than other regions, such as MENA or Asia Pacific at the moment. So this week a new Roland Berger study is on our radar. The sur-vey reports an upbeat outlook for the European private equity market this year with 82% of the market participants expecting to increase the number of PE acquisitions after a dip in activity and volume in 2013. Germany and Great Britain are especially promising. The report said that even economically weaker markets, such as the European countries along the Mediterranean, are expected to experience a slight rise in private equity activities – with the exception of Greece.

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GLOBAL TELECOM M&A HITS 13 YEAR HIGH

E&Y has an information-packed report on the state of Global Venture Capital Market in 2013/14. We highlight here the top ten VC dealmakers world-wide. Number one in terms of volume is KPCB, fol-lowed by Accel Partners, and Andreessen Horowitz. In terms of number of investments, which must be considered given that early stage deals are much smaller in size than the later stage investments, the leader is a relative newcomer to VC, namely 500 Startups (a next generation incubator fund whose typical first deal is USD 250K). Number two is Sequoia, followed by Andreessen Horowitz. The list is dominated by US investors, which is not surprising, only the European team at Index Ventures made the top 10 list. It is worth noting that two corporate venture funds are moving the needle of the Top 10 charts at E&Y, namely Google Ventures and Intel Capital, both of which operate internationally. (Image source: EY)

Summary of Survey Predictions• Focus on consumer goods, retail, pharmaceuticals and SMEs• Active portfolio management is imperative – a passive strategy will not be affordable• Growth will be in Germany and Great Britain; France, Italy & Spain and Portugal will recover slightly.• Most transactions expected in the consumer goods, retail, pharmaceuticals & healthcare industries; biggest drop in the energy sector• Transactions with a volume of up to EUR 250 million will dominate the market

ERNST & YOUNG’S TOP 10 VC DEALMAKERS WORLDWIDE

With telecommunication industry M&A on an upswing this year, historical records are being broken, says Dealogic Market Insights. A quick look at the graph above makes clear how extraordinary 2014 is compared to recent years. Fourteen M&A deals of greater than 1 billion dollars were announced so far this year, up from 11 such deals in 2013 Year To Date and the highest activity since 2000 when 30 USD 1bn+ deals were announced. Total activity for global Telecom M&A stands at 142 deals, up slightly.

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from 140 deals in 2013 YTD, the two lowest YTD levels since 1997 YTD (132 deals), compared to record YTD activity in 2000 (396 deals). The volume is USD 182.0bn, which is two times the volume for the same period in 2013 (USD 67.2bn) and the highest YTD volume since 2000 (USD 189.7bn). The deals highlighted in the report are Time Warner Cable’s acquisition by Charter Communications Inc and Verizon Communications stake in Verizon Wireless

PE DRIVES ROBUST RETURNS FOR ONTARIO PENSION FUND

Keeping an eye on the smart money amongst institutional investors, DealMarket Digest notes that Omers, the Canadian pension fund manager, earned 6.5% return last year on investments. The overall figure is relatively low due in part to a restructuring of its portfolio, but when breaking out that return figures, TechVibes found that PE actually delivered USD 1.4 billion on USD 7.1 billion in investments, a robust 23.6 per cent rate of return. That’s up from 19.2 per cent in 2012. Where does Omers invest? It has investments in software and IT outsourcing companies, retirement homes, and snack foods. (Im-age source: Omers Pension Fund)

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QUOTE OF THE WEEK - VENTURE CAPI-TAL? MAKE WAY FOR GEEK GUILDS“YCombinator is a VC fund that looks and operates like a guild of geeks, and hardly looks anything like a traditional fund comprised of VC partners with MBAs or finance degrees. They are operators, through and through.”

Who said it: Dave McClure, Founding Partner 500Starups

In Context: Dave McClure sees “significant changes” in the venture capital industry, in particular he see the emergence of Mega VC funds with over USD 1B under management (such as Andreessen Horowitz, Greylock, Accel, Se-quoia, Benchmark, Kleiner, and Khosla); and smaller, more nimble “Micro VC” funds (typically less than USD 100M) like Rocket Internet, Y Combinator and his own venture fund, 500Startups. The Micro VC is what is really new, and some-times are also known as super angel funds. He said that traditional VCs will always be needed but they need modernize a bit and embrace the same digital techniques and disruption in the same way that technology companies do. For example, they should be evaluating and using tools like Angel List, Gust, CapLinked, Trusted Insight, Second Market, and many others now emerging as a result of the JOBS Act and financial services in-novation. He also talks about the “full service VC fund” that employs business development, HR and other professionals to support portfolio firms. He closes by admonishing investors to seek startups and venture deals beyond borders. “Entrepreneurs can be found in every corner of the globe, and emerging market consumers and businesses are growing and connected everywhere,” writes Mc-Clure.

Who we found it: 500hats blog

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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 notewor-thy news items, scoping trends and currents events in the global private eq-uity 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:  Pro-fessional, Accessible, Transparent, Simple, Efficient, Effective, and Global. To receive the weekly digest by email register on www.dealmarket.com.Editor: Valerie Thompson, Zurich

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