DIGEST 145

June 13, 2014

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PE and SWF Bid for India’s Essar Unit Aegis

Indian PE Tipped to Grow in Coming Decade

Legendary VC Innovation Impact Probed

More Direct LP Deals? Norway’s SWF Advised to Copy Canadian Model

US Public Pensions Increase Alternative Assets Holdings

Quote of the Week: M&A Drivers

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PE AND SWF BATTLE To ACQUIrE INDIA’S ESSAr UNIT AEGISIndia’s Essar Group is reportedly reviving an attempt to buy Aegis, an outsourcing subsidiary, for 1.5 USD billion. The size makes it the buyout of the week. According to an article in an IT outsourcing trade publication, Essar is negotiating with private equity firms such as KKR, Blackstone, Warburg Pincus, General Atlantic and Temasek, according to the report which cited unnamed sources for the news.

INDIAN PE TIPPED To GroW IN CoMING DECADE

Over the next 10 years, the size and nature of private equity in India is expected to be similar to other developed markets, growing to over USD 40 billion in 2025, according to PWC, which recently surveyed private equity professionals in India. PE investment in India and China started around the same time but the markets evolved differently. Investments into India grew at a moderate pace reaching USD 2.6 billion by 2005, but flows into China “rocketed” from 2004 onwards, reaching 9.6 billion USD in 2005, largely driven by investments in the financial sector, which attracted almost two-thirds of all capital inflows. (See charts above).other findings:• Growing middle class is attractive. Apart from urban consumerism, PE fund managers believe that over the next four to five years, rural consumption will grow too. Together with the welfare schemes announced by the government, this is likely to put more incomes in the hands of rural India.• PE managers believe that there are a number of Indian businesses that are globally competitive as a result of market liberalization.• The revival of the investment cycle, spurring manufacturing growth is likely to give a fresh impetus to these businesses. A majority of the respondents see opportunities for them to invest in scaled busi nesses as they grow in India and globally.

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LEGENDAry VC INNoVATIoN IMPACT ProBED

For those that like academic research on private equity, you can get the latest Coller Institute newsletter sum-mer issue now. One of the studies in this edition is an award winning PhD paper on measuring the impact of VC investments in high tech business to find out if it really does drive the commercialization of innovative scientific and technological discoveries, as well as eco-nomic growth, which is a long-held belief in places like

Silicon Valley and other technology hubs. The researcher found empirical evidence that VC financing has a positive, causal effect on the diffusion of knowledge and described two mechanisms that ensure that diffusion, but she warned that it is not and should not be the only way of financing innovation so that society benefits.

The researcher notes that VC was not involved in the early development of the Internet, which traces its roots back to US military research and development through DARPA and colleagues at CERN. The innovation was underway long before there was widespread commercial adoption and the entry of VC investors (who entered the fray with their Netscape investment). The researcher said, “If you were to decide that you are only going to finance innovation with VC, then innovation would be focused on those areas that will have high short-term rewards. We would have a world full of apps, but what would that mean for innovation over the long term?” Overall, the study results suggest that VC brings about “knowledge spillovers”, and “affects the direction of aggregate innovative activity”.

MorE DIrECT LP DEALS? NorWAy’S SWF ADVISED To CoPy CANADIAN MoDEL

• PE funds are in particular keen to support global Indian businesses as long as they continue to lever age India’s low-cost manufacturing and service base. • Investors are hoping for valuations in India to get “more realistic”. • Consumer sectors are in focus, followed by sectors such as financial services, and infrastructure in the next two to three years. (Image source: PWC)

The Canadian Pension Plan has a track record in making direct PE investments and its strategy is slowly making it on the smart money radar. The latest evidence of its winning ways is the news in PI Online that Norway’s pension authority commissioned a review of its USD 870 billion sovereign wealth fund and the advisory team recommended that the fund should take more risk and should adopt a cost management model that was pioneered by the CPPIB. It is not clear from the report in PI Online if the recommendations extended to private equity and other illiquid assets, or the kind of direct private equity investing that the CPPIB has pioneered, rather the focus was on the mode and portfolio strategy recommended. It did say that the overhaul of investment activity should begin with another illiquid asset, real estate.

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A new study from PEW Charitable Trust found that alternative asset holdings in US pension funds doubled over the past six years. The study is generating a good deal of media attention these past few weeks. The alternative assets referred to are private equity, real estate, and hedge funds. The research organization ex-pressed concern about the trend and suggests that State pension funds should be better moni-tored by the public. It is concerned about in-transparency, high fees, and risk of alternatives compared to bonds and fixed income assets. The media covered it because private equity and hedge funds are political and regulatory topics in the US at the moment as policymakers seek to remove a range of potential conflicts of interest issues from the financial markets. (Image Source: PEW)

US PUBLIC PENSIoNS INCrEASE ALTEr-NATIVE ASSETS HoLDINGS

QUoTE oF THE WEEk: M&A DrIVErS“The drumbeat for buybacks and dividends has quieted down. Boards are in an era where they don’t want to just be good custodians. You don’t get credit as a CEO or board member for being that any more. Now investors want growth and efficient use of capital.”

Who said it: Andrew Bendar, Perella Weinberg Partners, an independent advisory and asset manager

In context: The M&A market is climbing to levels not seen since 2007 and Bloom-berg probed the trend in a feature article. Apparently publicly traded companies are under pressure to make acquisitions, large ones. Andrew Bendar, an M&A advisor that has been through a few cycles, commented that the difference between now and the last M&A boom is that this one is driven by large publicly traded companies, while the last one was driven by private equity investors who were able to tap into easy debt markets. Bendar said that the stock market is rewarding acquisitive CEOs in most cases with more demand for their company’s shares, driving market caps up. (Image source: BloombergTV)

Where we found it: Bloomberg

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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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