DIGEST 137

April 17, 2014

1

23

Cravings for Direct Co-Investment Still Strong Narrow Niches and Big Returns

Australian PE Backed IPOs Outperform The Traits of Family Wealth Managers That Make Money…. and Lose it CEOs Get M&A Fever Again

Quote of the Week: Betting on Justice4

2www.DealMarket.com/digest

CRAVINGS FOR DIRECT CO-INVESTMENT STILL STRONG

HarbourVest announced closing its latest co-in-vestment vehicle at USD 1 billion, which is about 260 million dollars more than it had committed to its last such vehicle, raided in 2007 Direct, a USD 734 million fund. The news shows that cor-porate pensions, public pensions, endowments, and foundations from around the globe have a strong appetite for the co-investment strategy.

Elsewhere, FN says that aggregate global pri-vate equity co-investment fundraising reached USD 6.2 billion across 26 funds last year, cit-ing Preqin. “This was a huge jump from the 12 funds that raised USD 2.7 billion in 2012 and the highest year since 2007, when 28 funds raised USD 10.9 billion,” said FN. (Image source. Har-bourvest)

NARROW NICHES AND BIG RETURNS One of the top performing PE funds in the world today is Vista Equity Partners, ac-cording to Preqin data. Its founder Robert F. Smith is featured in the NY Times this week. What makes Vista special and apparently very successful (it has delivered a 31 percent average annu-al rate of return since 2000- even during the downturn) is its focus on enterprise software, a uniform transforming ap-proach to creating growth and quality products in the companies it acquires, and a novel hiring methodology. Some of the other top-performers, according to Preqin data (which we reported here), are Veritas Capital, a firm which specializes in defiance industry investments, Wynnchurch Capital, specialized in growing niche manufacturing, industrial services, and supply chain ventures, and Inflexion, a UK fund that in its own words specializes in potentially high-growth niche businesses. Long ago, before Carlyle became a gi-ant alternative investments company, it established its reputation as a specialized buyout fund, target-ing highly regulated aerospace, healthcare, telecommunications and defense industry companies and spinoffs. It looks like the smart money is on sector

3www.DealMarket.com/digest

AUSTRALIAN PE BACKED IPOS OUT-PERFORM

specialization and narrow niches pursued over a long period of time (at least two or more cycles). Yale Alumni recently heard this same view at a recent event and Finnish academics heard it here. The performance of these PE funds confirms the attraction o f the mid-market for PE and suggests a greater role for PE in a wide range of industries and service companies, one niche at a time. It could mean lot more success stories, like what happened with a tiny mid-west manufacturer of sports mouth-guards doing less than USD 10 million in sales once two sets of private equity investors got their hands on it, according to the Star Tribune. They grew it to almost USD 100 million in turnover a year. Now, a third PE fund owns, Shock Doctor, and it plans to take it to the next milestone: a billion in turnover. That’s not the financial engineering that PE may be known for. It sounds like hard work, hu-man and operational excellence, along with a good deal of enterprising activity. (Image source: Oregon State website )

At DealMarket Digest, we like to highlight news that goes against conventional thinking about PE (both negative and positive perspectives). Today under the heading of myth-busting, we picked up on the news about an Australian study that shows that “contrary to market perceptions”, initial public offer-ings that are backed by private equity firms have outperformed other floats in the market. It said that PE-backed floats listed between 2003 and February 2014 posted an average return of 95 per cent since listing, compared with a 2.2 per cent decline for floats that were not backed by private equity. There has traditionally been skepticism about PE-backed floats, as we have reported here. The study was undertaken by AVCAL an Australian buyout industry lobby group, said the report. The journalist did not seek commentary from less involved capital market analysts for the article. The AVCAL study is available here. It used a number of time periods for its analysis, weighted returns and absolute return scenarios were part of the analysis. (Image source: AVCAL)

4www.DealMarket.com/digest

CEOS GET M&A FEVER AGAIN

TRAITS OF FAMILY WEALTH MANAGERS THAT MAKE MONEY… AND LOSE IT

Todd Ganos, founder of Integrated Wealth Coun-sel, has published in Forbes a four part series of articles on family office wealth management. We digested the articles here and included a graphic from SEI Investments Management Corporation that shows a Diversified Portfolio in light green compared to large cap basket in dark green and other index-based investment pools in orange. • Make Money by keeping assets intact and pooling family capital

• Lose Money by investing only in public equities and stock picking

• Make Money by disciplined portfolio manage- ment by diversifying and understanding asset allocation strategies (what percentage of investments goes into equities, real estate, commodities, hedge funds, and bonds)

• Lose Money by taking the short term-view and being impatient. Money is lost when man-

agers forget that diversification is a long-term investment strategy that should not be judged by short-term metrics.

• Global M&A activities grew in the first three months of the year by 23% compared to the same period last year, up to USD 804.5bn compared to USD 655.8bn. The Dealogic data show that the size of individual M&A deals is expanding, while total number transactions are on the decline. It looks like CEOs are spending larger, and more willing than they have been to do giant-sized deals.

• According to The Deal Pipeline, Comcast Corp.’s USD 67 billion bid for Time Warner Cable puts into the shadow last year’s “blockbuster” take over of HJ Heinz (at USD28 billion).

5www.DealMarket.com/digest

• Strategic buyers have led the way in the first quarter this year, outspending private equity players, it said. There are fewer PE deals in the first quarter and they are smaller, too. A desire to boost market share and margins in the face of stalling organic growth is causing some strategics to pay a higher premium for a fast-growing company that will give them an edge on competition, as was the case with Facebook’s WhatsApp acquisition, say analysts quoted in the article.

• As for PE, there are “plenty of potential targets”, especially in rivals’ portfolios. According to the re search from Preqin, cited in the article, there are more than 4,000 in the US alone, companies ac quired between 2006 and 2011 that may be ready to exit

• One last data point from the latest summary is that this past quarter was the “highest quarter on record” for the Telecoms sector. It is not clear to us if Dealogic’s records extend back in time to M&A frenzy that took place globally during the tech bubble days of ’99. (Image source: Dealogic)

QUOTE OF THE WEEK - BETTING ON JUSTICE“This emerging finance sector will experience significant growth. From an asset class development perspective, litigation finance today is where private equity was in the early 1980s… Few, if any, litiga-tion finance firms have the combination of litigation, business, and finance talent that Longford Capital offers.”

Who said it: William H. Strong, chairman of Longford Capital and former co-CEO Morgan Stanley Asia Pacific Region

In Context: Bill Strong is quoted here talking about Longford Capital, a com-pany he just joined this month. Longford is a trailblazer in the US for a new type private equity investment segment, which backs promising lawsuits, accompanying claims to conclusion, staking its fund’s millions on a favorable outcome. In its own words Longford Capital says it makes equity investments in meritorious, business-to-business legal claims with USD 25 million to more than USD 1 billion in controversy. Typically, it funds attorneys’ fees and other costs necessary to pursue claims in return for a share of a favorable settlement or award. It can invest in business-to-business contract claims, antitrust and trade regulation claims, intellectual property claims (including patent, trademark, copyright, and trade secret), fiduciary duty claims, fraud claims, claims in bankruptcy and liquidation, domestic and international arbitrations, and a variety of others. It’s one of PE’s new areas of specialization, and niches are seen as a success factor these days, as this Forbes article makes clear. The demand for litigation finance is growing and is already established in the UK and Australia. The US market for this type of finance began less than five years ago, according to Longford. (Image source: National University of Singapore)

Where we found it: Longford Press Release

www.DealMarket.com/digest

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

DealMarketDealMarket 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 third- party 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.