Despite current market travails, investors in TMT are not going to ‘unplug’. Investing intelligently in this $1 trillion industry (which is growing at around 4% a year) is continuing at pace. Economic conditions and valuation issues dominate buyers’ concerns, and volume is down, but motivated buyers are still getting deals across the line and deal flow is strong, both geographically and in most sub-sectors. Minority stakes are also becoming more common.

Despite current market travails, investors in TMT are not going to ‘unplug’. Investing intelligently in this $1 trillion industry (which is growing at around 4% a year) is continuing at pace. Economic conditions and valuation issues dominate buyers’ concerns, and volume is down, but motivated buyers are still getting deals across the line and deal flow is strong, both geographically and in most sub-sectors. Minority stakes are also becoming more common.

Key drivers include:

• Digital transition still has a lot of runway ahead – predictions of £40bn of spend between now and 2015
• Increase in mobility – Apps / anytime, anywhere accessibility of content and services – is driving consumption and innovation
• Online advertising growth driven by video / TV / targeted advertising
• Pace of evolution in devices / connectivity / content and services accelerating massively

However, investors need to be wary in this fast-moving market:

• The impact of cloud computing is yet to be felt – huge potential but uncertainty in equal measure re revenues and security
• Much of tomorrow’s software and service provision relies on high capacity infrastructure, which is costly to build and takes time
• Technology must be increasingly agile and able to adapt as consumers become increasingly itinerant

As long as politicians in Brussels continue to struggle to find a solution to the eurozone crisis, macroeconomic fears will cast a long shadow over the Italian economy. For private equity in the country, however, there are some positive signs in the market that should not be ignored.

As long as politicians in Brussels continue to struggle to find a solution to the eurozone crisis, macroeconomic fears will cast a long shadow over the Italian economy. For private equity in the country, however, there are some positive signs in the market that should not be ignored.

First, the government’s €1.2bn private equity fund has now begun making investments, bringing much-needed capital into the market. Second, 2011 has actually seen a positive trend for distributions, with a number of exits, including Stirling Square Capital Partners’ sale of aerospace components business Microtecnica for €330m, Riverside Europe’s exit of pump manufacturer Robuschi, and Investindustrial’s disposal of construction giant Permasteelisa.

While market participants are cautious of talking about exits, next year is likely to see a number of additions to this list.

There are clearly reasons to be concerned, however, with areas such as fundraising remaining a huge challenge. Investors remain wary of committing capital to a country where the outcome looks so binary, and in addition, regulatory changes have made it more expensive for certain LPs to hold private equity assets, reducing demand further.

However, for investors in the secondary market – where interests in existing funds are bought and sold – this creates opportunities, with deal flow involving Italian funds increasing and bigger portfolios beginning to be sold.

“Because of the financial crisis there is negative sentiment about Italy at present, and there is chance that the Italian market might remain under-served by secondary capital in the medium term,” said Giuseppe Salamone, an Associate Investment Director at Greenpark Capital. “However, private equity is a long-term game. In Italy there are still interesting opportunities, good managers and good companies – especially those that can expand into overseas markets. We anticipate a significant rise in deal flow in the coming 12 months, with great opportunities on offer for those who are able to originate intelligently.”

Of all the regions in Europe, it could be argued that the private equity industry in Central and Eastern Europe should have the most cause for concern regarding the turmoil currently engulfing the eurozone. Despite a fairly strong showing from a macro perspective since the onset of the financial crisis, the past three years have not been kind to private equity in CEE.

Of all the regions in Europe, it could be argued that the private equity industry in Central and Eastern Europe should have the most cause for concern regarding the turmoil currently engulfing the eurozone. Despite a fairly strong showing from a macro perspective since the onset of the financial crisis, the past three years have not been kind to private equity in CEE.

Now, the industry faces something of an inflection point, with a fundraising pipeline of some €8bn over the next three years, and sluggish demand from investors to fulfil it. Industry practitioners raise a number of concerns:

• The larger capital flows, from the US and Asia, seem to be jumping over the region altogether in many cases, instead being absorbed by Western Europe and Asia. One study showed that Asia was receiving 10 times as much capital as CEE.
• A recent „optimal portfolio structure“ exercise indicated a 10% allocation to CEE, out of an overall 25% emerging markets allocation. That’s just 2.5% in total!
• Pension funds and funds of funds are becoming much less active, and in a recent straw poll, 100% of industry practitioners forecast either low or very low appetite for investment in the region.
• Domestic limited partners are not as able to invest in their home countries, making the region somewhat unique in being unable to sustain itself in even the most basic way. This has to change.
• New competition has emerged in the shape of Turkey, which is attracting much of the attention once reserved for CEE.

However, this paints and unduly negative picture, and there are several reasons to believe the market will emerge strongly from the current uncertainty:

• First, the economic performance of many countries should remain strong, with 10 of the 11 CEE governments running within the EU’s fiscal guidelines. In Western Europe the figure is 4 of the 14. In addition, consensus earnings growth for CEE is 20% in 2011.
• Second, LPs tend not to invest in regions, but in managers. CEE’s private equity firms have strong, long-term track records and supportive investors, suggesting they will be able to raise again. Any shake-out will likely only include two or three firms.
• Government agencies remain strongly committed to the region.
• At the larger end, LPs in Asia, Australia, and Latin America – such as large banks, insurers and SWFs – tend to see CEE as a necessary component of a larger European portfolio, suggesting a rise in capital flows from these regions.
• Consolidation and buy-and-build is still an emerging idea in CEE and will likely provide huge opportunities for outperformance in the next decade, particularly in growing sectors such as healthcare and retail.
• CEE returns over longer time horizons continue to be strong, having beaten those in China and Russia over 5- to 10-year periods.

While the picture is mixed, and there is likely to be little visibility on the fate of CEE until well after Europe’s macro issues are fixed, it is clear that there are a number of positive drivers that will encourage investment in the region.

“Markets will remain muted for some time, as politicians seek to put out fires across Europe,” comments Armando D’Amico, Managing Partner of Acanthus Advisers. “However, there remain investors – such as larger emerging market LPs who are in the process of building European portfolios – where appetite for CEE funds is actually increasing. As overall demand for private equity funds falls off, it will become more and more important for GPs to build relationships with these groups.”

The German private equity community has painted a pessimistic outlook for the industry over the next nine months, as sovereign debt woes, sluggish economic growth and low demand continue to put the brakes on an economic recovery.

The German private equity community has painted a pessimistic outlook for the industry over the next nine months, as sovereign debt woes, sluggish economic growth and low demand continue to put the brakes on an economic recovery.

Delegates at a German industry summit today nailed their colours to the mast, with just 14% predicting a rise in deal activity over the next nine months. Forty-three percent, meanwhile, forecast a fall in activity and a similar number expected a flatline.

Valuations were also expected to remain low, with 67% of respondents forecasting average EV multiples of 5-7x Ebitda. A further 26% said multiples would sit between 7x and 9x Ebitda.

In terms of fundraising, the view was only marginally more positive, as 26% expected a slight rise in LP appetite for the DACH region, while 33% predicted a fall and 41% said appetite would remain the same.

Delegates were split, however, on the impact of the eurozone crisis on investor demand for the region, with 38% claiming to have noticed material evidence of a reduction in appetite, while 52% said there had been no such effect.

The research was conducted by “unquote at the DACH Private Equity Congress in Munich today, and throws into stark contrast the challenges facing the market. Data released this week showed that European deal private equity deal activity was down 36% in the third quarter, while aggregate deal value fell a massive 49%.

Despite these falls, buyout values remain on track to beat 2010 figures thanks to a strong first half of the year.

Renewed uncertainty in Western economic zones may create opportunities for private equity managers who know their onions!

Renewed uncertainty in Western economic zones may create opportunities for private equity managers who know their onions!

• Lack of certainty makes it harder for trade buyers to get the level of certainty management teams require – the downside as individuals of getting it wrong is worse than in a private equity portfolio fund manager structure
• Motivated sellers will accept significantly lower multiples in a less certain environment – debt markets are also helping to put a lid on valuations
• PLC management increasingly disenchanted with inability to make use of listing to raise capital – P2P volumes may increase
• Even in a more credit-constrained environment, for the right transactions (growth / development capital) debt can be injected after the event once market conditions improve – private equity funds in that space are potential beneficiaries
• But placing bets in a less certain environment requires higher level of specialist knowledge, and favours private equity firms with deep industry experience – there is a requirement to take out the noise and focus on what is important
• The European communications sector has its own favourable dynamics – it is an increasingly large and diverse industry ($1 trillion of value) yielding an increasing variety of investment opportunities. The pace of evolution is driven by development of devices (smartphones, tablets, gaming consoles, set-top boxes, PCs); connectivity (broadband, Wi-Fi, 3G); content and services (social media; apps; consumer) and compounding by changing end-user behaviour and business models

Central and Eastern Europe has suffered since the onset of the global economic crisis, as investors have perceived other emerging markets – including the BRIC countries – as higher growth and lower risk. This is set to change.

Central and Eastern Europe has suffered since the onset of the global economic crisis, as investors have perceived other emerging markets – including the BRIC countries – as higher growth and lower risk. This is set to change.

• CEE actually weathered the financial crisis well. Its largest economy, Poland, was hailed as a ‘green island’ and was the only European country not to fall into recession, while others have bounced back rapidly.
• Consensus earnings growth for CEE in 2011 is around 20%.
• Unemployment is expected to reduce across the board, and the outlook is surprisingly good even in some of the smaller economies.
• Ten out of 11 CEE economies comply with EU criteria in terms of GDP and public debt – in Western Europe the figure is 4 out of 14.
• Bank financing in the larger economies is abundant, while mezzanine is filling funding gaps elsewhere.

For private equity, this benign outlook is just part of the reason to expect growth in the coming years.

• Currently, private equity investment is just 0.11% of the region’s GDP – compared with 0.75% in the UK. This shows that the region has significant long-term untapped potential.
• Investors willing to recognise CEE as a truly attractive region of Europe are likely to be rewarded – private equity returns are higher where competition for the best assets is lower.
• Private equity investment in the region is already growing strongly, particularly for growth capital, which rose by almost 50% to €525m in 2010 – accounting for 41% of the total CEE investment value.
• Exit activity is also encouraging, with divestments at cost of initial investment in 2010 reaching €300m – more than double the amount in 2009 and not a million miles from the 2007 peak of €453m. Exits are driven by strong demand from trade buyers, in contrast to the rest of Europe, where secondary buyouts dominate.
• For mezzanine providers, the picture is equally positive. Mezz gives more downside protection than private equity, with big equity cushions, deals are euro denominated, removing currency risk, and returns of 18-22% are possible.


Overall, the fundamentals in Central and Eastern Europe are strong. With many of the region’s larger players heading out on the fundraising trail in the coming months, it is likely that the next two years will see CEE re-establish itself as an emerging global power.

Turkey sits at the confluence of where the troubled West meets the vibrant East. As its neighbour Greece threatens the economic stability of the eurozone, will Turkey’s nascent private equity industry be derailed?

Turkey sits at the confluence of where the troubled West meets the vibrant East. As its neighbour Greece threatens the economic stability of the eurozone, will Turkey’s nascent private equity industry be derailed?

• Today’s announcement that Cerberus and Garanti are to invest up to $1bn in Turkey is the latest sign of the country’s appeal to foreign investors.
• Turkey is one of ten “growth markets” poised to dominate the world’s economic expansion in the next few years thanks to rising productivity and population (80 million) with a rapidly growing middle class.
• The country has been very stable over the past 10 years, with GDP rising more than threefold in the last eight years. Exports have risen more than tenfold in the past decade.
• 2,500 medium-sized companies account for about 75 per cent of economic output - companies in need of expansion capital and operational expertise, with succession issues beginning to create investment opportunities.
• There have only been 125 private equity deals since 1995, but volumes are beginning to pick up. In particular, exits in Turkey are still in the immature stage - expect to see more in the next three years.
• Most of the funds raised are done with commitments from international LPs, but local investors including HNWIs are starting to back local funds - another five years could see the country become a ‘must have’ item in portfolios.
• Unlike in some regions, the asset class is generally well regarded; it is well respected by regulators, and better understood by vendors, managers and entrepreneurs.

Private equity is a relatively new phenomenon in Turkey but is poised to grow rapidly, given the new money flowing into the country. Cerberus’s huge commitment is the latest sign of this. But in light of ongoing turmoil in Greece and further afield, will the market live up to its undoubted promise?

As economic uncertainty continues – extending now well beyond four years since the onset of the credit crunch – senior teams at some private equity firms have become increasingly unstable as the promise of carry from current funds becomes ever more remote. However, when key men do depart, as seen at a number of firms in recent months and years, the matter is rarely as straightforward as a simple LPA breach:

As economic uncertainty continues – extending now well beyond four years since the onset of the credit crunch – senior teams at some private equity firms have become increasingly unstable as the promise of carry from current funds becomes ever more remote. However, when key men do depart, as seen at a number of firms in recent months and years, the matter is rarely as straightforward as a simple LPA breach:

• Key man clauses are often legally fragile, or in some cases entirely unenforceable, leading to investor impotence and discontent
• Where clauses are strong, sometimes they weight individuals too strongly, allowing certain professionals in effect to hold firms to ransom on major decisions
• In some cases LPs may have a different opinion to GPs over who the key man actually is - arrangements must therefore accurately reflect the strengths of the team
• Succession, of course, is necessary and requires careful planning well in advance to ensure key man clauses are appropriate
• However, team changes can be a good thing, especially when they are the result of pro-active management to achieve optimal team-wide motivation - for example, if certain senior team members have earnt substantial carry from previous funds and may not have the desire to begin another ten year cycle

With many firms looking to go fundraising soon, getting teams in order in advance – and thinking through any likely senior changes that may occur over the next decade – will be crucial to convince LPs to re-up or make new commitments.

Central and Eastern Europe has suffered since the onset of the global economic crisis, as investors have perceived other emerging markets – including the BRIC countries – as higher growth and lower risk. This is set to change.

Central and Eastern Europe has suffered since the onset of the global economic crisis, as investors have perceived other emerging markets – including the BRIC countries – as higher growth and lower risk. This is set to change.

• CEE actually weathered the financial crisis well. Its largest economy, Poland, was hailed as a ‘green island’ and was the only European country not to fall into recession, while others have bounced back rapidly.
• Consensus earnings growth for CEE in 2011 is around 20%.
• Unemployment is expected to reduce across the board, and the outlook is surprisingly good even in some of the smaller economies.
• Ten out of 11 CEE economies comply with EU criteria in terms of GDP and public debt – in Western Europe the figure is 4 out of 14.
• Bank financing in the larger economies is abundant, while mezzanine is filling funding gaps elsewhere.

For private equity, this benign outlook is just part of the reason to expect growth in the coming years. Currently, private equity investment is just 0.11% of the region’s GDP – compared with 0.75% in the UK. This shows that the region has significant long-term untapped potential. Overall, the fundamentals in Central and Eastern Europe are strong. With many of the region’s larger players heading out on the fundraising trail in the coming months, it is likely that the next two years will see CEE re-establish itself as an emerging global power.

It has long been suggested that the balance of power is shifting from away from private equity firms in the great LP / GP debate. Now, however, it appears buyout houses are having to cope with the increasing influence of company management.

It has long been suggested that the balance of power is shifting from away from private equity firms in the great LP / GP debate. Now, however, it appears buyout houses are having to cope with the increasing influence of company management.

• There is growing evidence to suggest that management teams are beginning to pressure GPs and drive deals through.
• Longer hold periods were inevitable as a result of the economic crisis, but management are now keen to oust inert owners and bring in new blood.
• Management in certain cases see a misalignment of interest if GPs no longer hope to recoup their full investment in a business.
• The trend can be seen as cyclical to an extent, with peaks in management proactivity coming every five to seven years.
• The latest research shows that the value of private equity exits in Q2 has already more than doubled the previous record quarter – a testimony to the growing power of management teams.

For providers of flexible financing that are able to offer management teams a viable means to reach the next stage in their growth plans, without further dilution, while simultaneously achieving a smooth exit for previous owners, the opportunities over the next two years will be enormous.

Data from Preqin shows that exits in April and May 2011 totalled $57.9bn – twice the level seen in the whole of Q4 2006.

Amid signs that Facebook may have reached saturation point in the countries where it first enjoyed explosive growth* valuations are under increasing scrutiny. The debate continues about where value lies and whether the best bets will be on data led/broadband based models which create the best promise for future projected income or those where Average Revenue Per User (ARPU) can already be identified but where growth rates may not be as great.

Among data based models, the best annualized ARPU is still in Telecom – not as sexy as Facebook etc but at least the data revenue portion of ARPU is getting to around 10-15% now. And since mobile is the name of the game for social networking and social gaming, mobile operators are going to always be in the mix.

Wherever value is clearest it is also clear that in the US, where LinkedIn Corp. and Groupon Inc. are leading a surge in Web-company initial share sales, a deepening chasm is emerging between the PE/VC sponsor have and have-nots. In Europe there are very few sponsors who have enjoyed success in the TMT space over both up and down cycles and who’s record is attractive to entrepreneurs.

Equus will be delighted to link you with additional data and relevant clients.

The recent HEC and Dow Jones “Private Equity Fitness Ranking” – an annual measurement of private equity houses’ likely future performance – throws up an interesting weighting on industry sector focus. Of the ten criteria relevant to future “fitness”, three contain an element of sector specialisation.

In addition to a firm’s ability to take advantage of cheap debt financing, time the market to benefit from market trends over a holding period*, time the market to exit at high valuations**, maintain deal flow when other private equity firms are decreasing their investing pace, flexibility to take advantage of investment opportunities of different sizes*** and increase in the scale of the firm, the study measured three important criteria:

1. Level of industry focus measured as a Herfindahl-type measure of industry concentration for all investments made by a firm.
2. Change in level of industry focus measured by the difference between investments made 6 to 11 years ago and the same measure for investments made in the past 5 years.
3. Level of strategic uniqueness / differentiation as measured by the “strategic overlap” with other private equity houses.

As such, those firms with a true track record of success in a given sector are seen as better placed to deliver strong returns in the future.

* measured as the average percentage difference between the level of the MSCI index at entry and exit, over all investments made by a firm.

** measured by the average percentage difference between the level of the MSCI index at the date of the exit and the average level of the MSCI index over the period 182 days prior to and after the exit, over all investments made by a firm.

*** measured by the coefficient of variance in the amount of equity invested over the investments made by a firm in the past five years.

There is nothing more important in a GP’s armoury than its team. However, in the mid-market, limited partners have historically focused almost solely on the select few individuals at the top of each private equity firm. This is now changing.

• Larger firms are increasingly becoming the template for the mid-market in terms of team structure, with large, institutionalised – and to a certain extent, interchangeable – teams seen as desirable.
• The vast number of firms heading out on the fundraising road in the coming two years is having a knock-on effect, leading to expanding investor relations functions.
• LPs now want to see experience in all roles, including IR, and positions such as FD and COO.
• The growing need to deal with complex regulation and greater levels of disclosure requires greater levels of professionalism at all levels, particularly the back office function.

Increasingly, LPs will consider this kind of attention to less glamorous roles almost as important as the historic focus on the “key man”. Those firms which are fully prepared at all levels – and not merely relying on the charisma and track record of a few key individuals – will be best placed to convince investors of their long-term credentials.

According to the latest data from S&P, it seems as though defaults in Europe are back under control, with an average default rate of 4% - well down from the 13.6% seen in late 2009*. However, the bulk of debt restructuring in Europe is yet to come:

According to the latest data from S&P, it seems as though defaults in Europe are back under control, with an average default rate of 4% - well down from the 13.6% seen in late 2009*. However, the bulk of debt restructuring in Europe is yet to come:

• The boom in high-yield, which has allowed many overleveraged portfolio companies to refinance loans, is only for larger companies, with the mid-market unable to raise this type of capital.
• Between 2011 and 2013, covenants and refinancings for mid-market portfolios will be tested against a backdrop of continuing sub-par growth and lending capacity.
• Senior debt remains sponsors' preferred option - indicating the desire for a buffer in the event capital structures become overleveraged due to poor performance, and that investors remain concerned over future insolvencies.
• Choices for portfolio companies remain:
     - Expensive refinancings.
     - Forward start arrangements.
     - New money injections.
     - Cash-rich corporate acquirers.
• The UK is expected to be the country where the largest number of debt restructurings will take place, closely followed by Spain.

Most companies now have very limited scope to implement further cost-saving measures to preserve liquidity, leaving them vulnerable to another round of restructurings, defaults, insolvencies and liquidations.

Amid the doom and gloom surrounding wider M&A activity both in 2009/10, the business services sector proved to be a notable highlight. Further deals are expected. Many of the recent deals in this sector have featured a cross-border element, and this internationalisation of business services M&A is becoming a notable feature in the sector.

Amid the doom and gloom surrounding wider M&A activity both in 2009/10, the business services sector proved to be a notable highlight. Further deals are expected. Many of the recent deals in this sector have featured a cross-border element, and this internationalisation of business services M&A is becoming a notable feature in the sector.

Since private equity buyers have been noticeably absent, strategic buyers have been quick to take advantage of decreased competition and many have picked up high-quality assets at lower multiples than in the pre-downturn period.

With a large number of deals in advanced stages of negotiation, activity in business services is unlikely to slow down in 2011. Baird, the global investment bank, is one of the only advisers with a dedicated team specialising in business services – a team that won Support Services Adviser of the Year in the Acquisitions Monthly Awards in December – and advised on all of the above transactions.

Today’s Debtwire’s report notes that Europe’s wall of maturing debt has been repeatedly flagged as a significant issue by market participants in recent months. But TPG’s David Bonderman recently dismissed concerns surrounding the much discussed debt financing wall, saying that it is simply going to go away, owing to the robustness of credit markets, and particularly in the US, the bond market. Additionally, he suggested, input prices are rising, particularly for food and energy, which will impact inflation and, for levered companies, inflation is your friend.

Today’s Debtwire’s report notes that Europe’s wall of maturing debt has been repeatedly flagged as a significant issue by market participants in recent months. But TPG’s David Bonderman recently dismissed concerns surrounding the much discussed debt financing wall, saying that it is simply going to go away, owing to the robustness of credit markets, and particularly in the US, the bond market. Additionally, he suggested, input prices are rising, particularly for food and energy, which will impact inflation and, for levered companies, inflation is your friend.

More recently, pundits have suggested that debt syndication for larger buyouts is perfectly possible, but for the smaller end of the market it’s a much longer, trickier and more expensive process.

Two thoughts:
• Now we know that the years of investment ill-discipline, strategy drift and over-reliance on leverage have had little impact on LP appetite for new product at the larger end of the market, does the sheer size of portfolio company investments mean that they also get a free pass, while the mid-market gets hammered both by the debt markets and by LPs’ desire to reduce the number of relationships they take forward?
• The US’s well developed high-yield market may allow it rapidly to work through the problems presented by existing debt structures and ramp up its exit and investment volumes while Europe lags, reliant as it is on the tail of CLO funds plus the Basle and Solvency-constrained banks to reluctantly and expensively solve the problem over a much longer time frame.

So are we looking at US / large buyout as the winner, and European mid-market the loser?

While opinions differed widely over how much the balance of power has shifted in favour of LPs, there was a consensus that investors are reducing in number their GP relationships. This means fewer, but larger, commitments.

While opinions differed widely over how much the balance of power has shifted in favour of LPs, there was a consensus that investors are reducing in number their GP relationships. This means fewer, but larger, commitments.

For those GPs occupying the middle ground, “soft” factors – such as transparency, open communication and humility – will make the difference between success and failure. Calling LPs only just before your fund launch, having not engaged with them for years, for example, will be an instant turn-off, and anything other than market standard terms will also be a deal-breaker. Finally, LPs delivered a clear message to buyout houses – get your GP commitment up, or lose ours.

Valuations, particularly in the large buyout space, have bounced back enormously, while the mid-market is seeing exits in real volume at good multiples, confounding expectations that mid-market portfolio companies would be exponentially hit during the crisis. The relationship between GPs and LPs is at last improving, albeit with some irritations around paying fees on undrawn capital and a lack of investment by GPs when prices were low.

Incredibly, the pendulum has already swung sufficiently that good funds are becoming oversubscribed but the market will have to wait a while longer before it becomes clear whether this is a real, long-term recovery.

Smiling faces predominate at Super Return this year, which marks a welcome change from last. There is a sense of cautious optimism – or as one keynote had it, paranoid optimism – given continuing fears of double dip recession, Middle East tension, high oil prices and sovereign debt concerns. For private equity, more optimism surrounds investments and exits, debt availability and terms, but less, perhaps, around fundraising. But there is also a clear sense that the industry is still going through a significant period of change, and will need to continue to be vigilant and adapt to what confronts it over the coming period.

Smiling faces predominate at Super Return this year, which marks a welcome change from last. There is a sense of cautious optimism – or as one keynote had it, paranoid optimism – given continuing fears of double dip recession, Middle East tension, high oil prices and sovereign debt concerns. For private equity, more optimism surrounds investments and exits, debt availability and terms, but less, perhaps, around fundraising. But there is also a clear sense that the industry is still going through a significant period of change, and will need to continue to be vigilant and adapt to what confronts it over the coming period.

Overall, the view is that economies are recovering worldwide, with China, Brazil and India looking particularly positive. For the EU, however, more of an L-shaped outlook appears likely. Regulatory constraints are now largely known, and the industry can plan and deal with them. Public and media attention is focused on other things and that gives some useful breathing space. The business community is somewhat more accepting of private equity, and recognises that buyout houses are well run and that the model works – a view which has changed even from three years ago.

Exit activity is likely to be well above last year, distributions are coming back and hesitancy on new investments has for the most part gone away. Fundraising is up and likely to increase, but will lag investments and exits for some time – necessarily so. Longer-term allocations to the asset class are expected to improve, not least because public pension funds will have to chase alpha driven because of a need to close the gap between annuity requirement and valuations. The GP and LP relationship was felt to have improved, with fewer issues on transparency and alignment.

However, there was a sense that there were good reasons to be paranoid, to temper any untoward optimism. The impact of Middle East turmoil on emerging markets is yet to be understood. The impact of social networking, meanwhile – something that is changing our communication landscape massively and rapidly – is as yet unknown. Workers now use social media to protest takeovers, job cuts and factory closures. Other concerns surround the fact that the EU banks still have not sorted out their debt problems, and whether the EU can continue to subsidise the euro for ever.

There was a question over the willingness of sovereign wealth and pension funds to continue to support the standard private equity model which, unlike most business models, has not changed for 40 years, and a sense that they may prefer to move to managed accounts, direct investing or more co-investment activity. There was at the same time, however, a recognition that the most important thing is to focus on is the returns and to worry less about the sharing of returns.

The overwhelming view for now is that the industry has more or less dodged the bullet – most portfolio companies came through the recession and most funds will continue to exist. While poorly performing firms have suffered, rates of return in the upper quartile continue to more than make up for the illiquidity issue.

But there is also an increasing urgency to recognise that GP and LPs will need to work together to face common problems, and to be more transparent with government, the media and the public. There will be, inevitably, another recession. Equally inevitably, there will be another black swan event. But the sense at Super Return was that, after a torrid few years, that the sun is out again and this remains a great industry to be a part of.

The increasingly competitive nature of the mid-market in Europe is developing into a real issue for LPs, as they reflect on where to allocate money in the future. Prices are higher than average, and for those companies with good growth outlooks and strong management teams, GPs could be looking at prices of more than 10 times earnings, which perhaps shows that institutional memory is not as good as it should be.

The increasingly competitive nature of the mid-market in Europe is developing into a real issue for LPs, as they reflect on where to allocate money in the future. Prices are higher than average, and for those companies with good growth outlooks and strong management teams, GPs could be looking at prices of more than 10 times earnings, which perhaps shows that institutional memory is not as good as it should be.

Partly, this trend is being driven by a combination of scarcity of deals and the debt markets coming back. GPs can now get around 5.5 turns of debt and that, combined with a “use it or lose it” mindset, has provoked some unhelpful market dynamics. Cynics might conclude that if a GP wants to get its management fee at the higher level before it tails off, it might be motivated to get money out of the door with less than total discipline. However, more healthy GP/LP relationships would mitigate that through sensibly agreed extension periods.

With the existing undrawn capital, US money targeting Europe and expected fundraisings it was agreed that there will be enormous competition over the next few years. The expectation is that we will see more secondary and tertiary buyouts, with debt increasingly available for high-quality businesses. It is clear that the GP has to have a clear value play to make a secondary work, as the business – which will already have been operationally optimised – will need a dynamic new strategy to allow for growth. Participants agreed that it is worth remembering that these companies are not static, and will change significantly during a single sponsor’s ownership and massively over several ownership periods.

The financial crisis has impacted GP strategies to some extent, and teams have had time to reflect on models during the lull in 2009 in particular. A global mindset is increasingly a focus, as is industry sector focus and finally the much talked about operational improvement. It is all about helping great companies to professionalise and to live up to ambitious business plans. A strategy for more conservative capital structures is a refrain for most, despite noises to the contrary in the financial media. Additionally, most are not planning for larger funds.

Industries that have had a lot of pressure on them are often ready for a rebound, so the best businesses in each sector are great bets. Additionally, consolidation plays are particularly attractive at prices that are more justifiable than for simple platforms. There is little expectation that in Europe a rising tide will lift all boats, so investment choice is more important than ever. There is also a focus on pricing in risk from the uncertainties of the macro environment. The view is that macro factors are becoming increasingly important and that few sectors have any real degree of insulation. Right now there is a focus on oil prices as a result of the issues surrounding the north African/Arab states, but so many other issues may make an impact on individual companies.

Predictions for 2011 included fundraising getting a lot easier, at least for good funds, particularly as rising equity markets have removed the denominator problem and distributions are happening again. Private equity will finally and clearly demonstrate that it outperforms other asset classes and as a result the right managers will get the right level of capital. Lastly, corporate and social responsibility will get real traction as an important criterion for manager choice in the industry.

In an interesting session on day three at Super Return it was agreed that all the macro signs suggest that private equity should not outperform wider markets, however, the room was nonetheless full of optimists. The level of optimism has also risen significantly since last year, when average expected returns were from private equity were 8%, while this year the expectation going forward is an average of 17.5%. Interestingly, historic data show that the average return over 20 years is around 12%.

In an interesting session on day three at Super Return it was agreed that all the macro signs suggest that private equity should not outperform wider markets, however, the room was nonetheless full of optimists. The level of optimism has also risen significantly since last year, when average expected returns were from private equity were 8%, while this year the expectation going forward is an average of 17.5%. Interestingly, historic data show that the average return over 20 years is around 12%.

In terms of default levels it was agreed that cov lite has been helpful in giving the industry the time to work through. Reference was made again to the idea that private equity has benefited from three very valuable “get out of jail” cards in the last four years. One was US TARP, which allowed for debt buybacks; a second was the European banks’ amend and extend policy, which increased the time available to resolve problems; and the last was the low interest rate policy. It was conceded that while many firms have worked tirelessly to support businesses in trouble, the plain fact is that sponsors may have had less to do with recovery than these important elements.

From a fundraising perspective, the next peak is not expected to be this year but either 2012 or 2013, which is interesting given that demand in 2011 will be at an historic high, suggesting that many will be frustrated and pushed into next year. Also, with recent fundraising taking around 20 months on average, some of the frustration may simply be a process rather than appetite issue.

Around 73% of delegates believed that private equity genuinely added value some of the time, and 11% said it did so all of the time. The conclusion was that the GP’s art must be in picking companies where private governance will be better for the business than public market governance. Good GPs should work out what level of engagement will create the best outcome.

The room also felt that the banks do not care that they are lending at too high a level again, with cov lite terms – this is because they are remunerated to lend, but also reflects how short people’s memories are. The fact that the banks ultimately felt little pain means that the investment and lending environment has bounced back at a speed that has surprised everyone. The irony was not lost on the room that as a GP, if you want to syndicate a €2bn deal, it is achievable and will get done quickly, but a small deal that will end on the bank’s balance sheet is still very difficult.

Most felt that private equity had a significant excess of funding over talent. The conclusion was that LPs should push for more talent and GPs should continually reassure LPs about the quality of their team. It was interesting that most agreed that specialisation is highly correlated to returns, so talent should be specific to industry sectors or niche investment strategies.

Overall it was agreed that private equity is making a strong comeback, and that reports of its death have been greatly exaggerated.

Deal flow in the secondaries market has changed significantly since 2009, with financial sellers now out there in droves, driven by regulatory change.

Deal flow in the secondaries market has changed significantly since 2009, with financial sellers now out there in droves, driven by regulatory change.

In the Outlook for Secondaries panel at Super Return yesterday, chaired by Marleen Groen of Greenpark Capital, panellists agreed that almost every market participant is a potential seller of something. The mantra is that LPs are continuing to commit to the asset class, but are also actively changing allocation models and making adjustments to existing portfolio structures.

From a volume point of view, the discussion centred on the fact that – with $1.3trn raised globally in the past five years and with more acceptance of secondaries as a tool – the 2% of total market volume traditionally traded through the secondaries market may reach nearer 5% or 6%. This would represent a sea change in volumes.

With the amount of deal flow available, it was agreed that secondaries funds could become choosier about which assets they will buy, and that with more diverse deal flow there would be something for everyone, resulting in less direct competition.

Pricing, however, is different depending on what the deal looks like on a risk / return basis, with some plain vanilla funds being pretty much perfectly priced, while some more complex deals are attracting more discounted valuations. It was also agreed that there would be a huge backlog of portfolio companies which may need a secondary solution – either from ‘zombie’ GPs who want to sell assets or from strong GPs who want to get rid of tail ends in order to focus on the more vibrant end of their businesses.

Overall, it was agreed that the secondaries market was now accepted in the GP community, with even the most notoriously difficult GPs having become relaxed about transfers. Nonetheless, it was felt that it was vital to have relationships built over time and that new market entrants will find GPs less trusting.

Finally, there was a suggestion that LPs would start to look at further segmentation of their portfolios, with growing exposure to secondaries, rather than being swept into fund of funds allocations. To achieve that, secondaries funds will need to ensure that the quality of their networks is strong and that they maintain discipline in pricing and execution.

Ever since the start of the economic downturn, when overcommitted LPs were forced to radically scale back private equity investments, debate has raged over whether a permanent shift in the GP / LP dynamic was taking place.

Ever since the start of the economic downturn, when overcommitted LPs were forced to radically scale back private equity investments, debate has raged over whether a permanent shift in the GP / LP dynamic was taking place.

Opinions still differ widely, with some investors insisting they are no longer prepared to put up with arrogant and overpaid private equity executives, while others admit that they still have no bargaining power in areas such as fees and terms.

But while a consensus may never emerge, an undeniable truth exists that LPs are reducing the number of their GP relationships, making fewer, but larger, commitments. This means that, while the dynamic may not change with the best-performing GPs, LPs now at least have the ability to say no to those at the other end of the spectrum.

The argument was brought into full focus on the LP Perspectives panel at today’s Super Return conference in Berlin. Research from Acanthus Advisers, which moderated the panel, showed that in the past two years, just 6% of capital raised in the mid-market has gone to those GPs ranked lowest against metrics such as team strength and strategy differentiation. This is less than half the proportion seen in earlier years, and is a clear sign that LPs are deserting those funds that have fallen short of expectations.

For those GPs occupying the middle ground, the picture is less clear cut, and – in the words of some of Europe’s leading LPs – “soft” factors, such as transparency, communication and humility, could make the difference between success and failure.

The Industrial Services sector has seen a high level of M&A activity in recent months – most recently Investcorp’s sale of technical services group Moody International to Intertek for $730m. This is set to continue strongly, as various themes drive growth:

The Industrial Services sector has seen a high level of M&A activity in recent months – most recently Investcorp’s sale of technical services group Moody International to Intertek for $730m. This is set to continue strongly, as various themes drive growth:

• Ageing industrial plants requiring greater maintenance, as expenditure on industrial infrastructure has slowed in last few years
• Increased focus on safety / compliance issues, especially post Gulf of Mexico crisis
• Increased focus on plant / building energy efficiency, particularly due to carbon reduction commitments and increasing fuel costs

Industrial services businesses operate across the full spectrum of services to industry including training, testing, inspection, assurance, integrity, safety, maintenance, consultancy, and efficiency.

Private equity players are likely to become increasingly active in the sector, owing to its strong growth dynamics.

The predicted wave of private equity-backed insolvencies following the Lehman crash never materialised, thanks in large part to banks’ reluctance to realise losses and the knock-on effects on the value of their wider portfolio. As a result, “amend and extend” became the mantra of the asset class.

The predicted wave of private equity-backed insolvencies following the Lehman crash never materialised, thanks in large part to banks’ reluctance to realise losses and the knock-on effects on the value of their wider portfolio. As a result, “amend and extend” became the mantra of the asset class.

However, as financial restructurings begin to reach their peak – which most investors expect to occur in 2011-13 – the need for a longer-term solution to balance sheet and cashflow issues will become ever more apparent.

• In 2010, under 10% of restructurings ended up in senior lender ownership, reflecting rising valuations, mezzanine creditor fight-backs and private equity dry powder. But this could now change.
• Given the economic woes of a large number of countries, and the likely increases in interest rates this year, the availability of debt finance for private businesses will decrease, and prices will increase, fuelling the need for more genuine restructurings, and potentially massive and frequent debt write-offs and debt-for-equity swaps.
• In addition, mezzanine investment levels sit at a fraction of their 2008 peak and CLO issuance remains almost non-existent. Regulatory developments such as Basel and Solvency II, meanwhile, will further reducing borrowing options.
• However, high-yield remains strong, and issuance is shifting towards companies with a weaker credit profile, leading to expected deal flow in distressed debt.
With the a growing number of refinancings looming on the horizon, and with banks less likely to “amend and extend” as 2011 wears on – combined with the price of debt rising and availability falling – only the best businesses will get financed.



For those lenders which have addressed capacity issues and can navigate upcoming regulatory developments – for example, by moving to managed account structures – opportunities will be there to pick up the best investment prospects on favourable terms.

Recent, private fundraisings for social networking and online sites in the US have been reminiscent of the dotcom bubble. Facebook, which was valued at $50 billion last month is now valued at more than $80 billion; and with investors currently paying up to $60 a share, has a nominal valuation of $136 billion. Considering that 2010 revenues were around $2 billion, that is an extraordinary valuation. By comparison, Amazon trades at around 2.2x revenues, with sales of $34 billion in 2010 and a valuation of around $75 billion.

Recent, private fundraisings for social networking and online sites in the US have been reminiscent of the dotcom bubble. Facebook, which was valued at $50 billion last month is now valued at more than $80 billion; and with investors currently paying up to $60 a share, has a nominal valuation of $136 billion. Considering that 2010 revenues were around $2 billion, that is an extraordinary valuation. By comparison, Amazon trades at around 2.2x revenues, with sales of $34 billion in 2010 and a valuation of around $75 billion.

Clearly, the potential risks for investors in such businesses are considerable. Facebook is beginning to monetise its offer, but whether it can do so at the rate, or to the extent, that investors predict is another matter. So far, companies such as Facebook, Twitter, Groupon and Zynga Game Network have avoided the public markets, raising money from big institutions and sophisticated investors. But LinkedIn is said to be planning a $175 million IPO, and Groupon is considering an IPO that could value it at $15 billion – and these will enable retail investors to jump on the bandwagon.

Given that the private equity model requires a proven track record and sustainable revenues, will we see the asset class getting involved in any meaningful way? Can any private equity firm, other than a specialist in web-based B2C businesses, sensibly invest in a Facebook or a Twitter? However, as an undoubted growth sector, more and more private equity firms are looking online; emphasised by today’s news that AXA and Primera are set to buy the travel website Opodo.

What is certain is that unsophisticated investors who jump on the bangwagon risk getting their fingers burnt – as happened in 2000. Only those buyout houses with in-depth sector knowledge will have the experience necessary to back businesses with a genuinely compelling proposition, and avoid those that are more hype than hyper-growth.

Following the recent announcement that the UK economy has slipped back into reverse gear, with GDP for Q4 2010 shrinking by 0.5%, it is becoming ever clearer that the only route out of the economic malaise is via the private sector.

Following the recent announcement that the UK economy has slipped back into reverse gear, with GDP for Q4 2010 shrinking by 0.5%, it is becoming ever clearer that the only route out of the economic malaise is via the private sector.

• Public sector cuts for 2011 are forecast to result in as many as 330,000 jobs losses over the next four years.
• As government spending accounts for a large proportion of GDP, this will have a potentially huge impact on the economy.
• At the same time, however, private businesses are showing signs of strong performance, with private equity firms providing continued support and access to capital.
• According to the latest research, 80% of the largest private equity-backed business expect to record Ebitda growth of 10% or more in 2011.
• At the same time, fewer than 1 in 20 private equity investors expect lower levels of investment in the coming year – highlighting the asset class’s ability to back UK businesses.
• Total job creation in the private sector is forecast to reach close to 800,000 in the next five years, comfortably outstripping public sector losses.

With government spending facing continued cuts, at least until the next general election, private equity houses – who still have large sums of capital to invest – will be crucial to the continued growth of the private section, providing growth capital and supporting job creation.

There is increasing scrutiny of the rights and wrongs of secondary buyouts (and their offspring, tertiary and quaternary), which continue to rise in volume.

There is increasing scrutiny of the rights and wrongs of secondary buyouts (and their offspring, tertiary and quaternary), which continue to rise in volume.

• The contention is that for those LPs invested in funds that happen to be on both sides of a secondary, associated fees can destroy a significant part of their value.
• Additionally, where capital overhang and funding lifespans encourage buyouts, at the same time as fundraising cycles create compelling incentives for exits, a false and over-priced market will be created
• This may be great for the exiting fund, but is less good for the acquiring fund; LPs in both may see ultimate value over time impacted.

But few LPs have gone on the record to criticise secondary buyouts, and in this environment, inactivity is perhaps a greater concern.

• Different stages of a businesses’ corporate development require different backers with deeper pockets, an international capability or deep industry sector competence. A secondary buyout will also allow for management change, and reward and recommitment.
• Furthermore, an active corporate transfer market is a fundamental part of a healthy economy – especially where volume is not being supplied by the IPO market or trade buyers. By contrast, PE had its busiest quarter in Q3 2010 since Lehman’s demise.
• The consistent friction costs in public market trading more than matches the episodic fees born by investors in private equity funds.
• Notwithstanding the 2009 lacuna, private equity has over the last decade been a more consistent provider of capital to growth companies, while institutional investors have almost exclusively traded second-hand shares, rather than providing fresh capital for growing businesses.