Private Equity Deskbook 2008
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Private Equity Deskbook March 2008 2008 © Probitas Partners Contents Introduction ......................................................................... 1 From Liquidity Crisis to Credit Crisis ........................... 2 Credit Developments .......................................................... 5 Overall Fundraising in 2007: A Look Back .................... 7 Investment in Management Companies & Sovereign Wealth Funds .................................................. 11 The Buyout Market ............................................................ 13 The European Market ....................................................... 19 The Mezzanine Market & Current Income Vehicles ................................................. 21 The Venture Capital Market .......................................... 23 Asia & The Emerging Markets ........................................ 28 The Secondary Market ..................................................... 30 The Infrastructure Market ............................................ 34 Private Equity Regulations & Taxation ....................... 35 Conclusion ........................................................................... 38 Funds In or Coming to Market ....................................... 40 Introduction Probitas Partners is a leading independent knowledge, innovation and solutions provider to private markets clients. It has three integrated global practices that include placement of alternative investment products, liquidity management, and portfolio management. These services are offered by a team of employee owners dedicated to leveraging the firm’s vast knowledge and technical resources to provide the best results for its clients. On an ongoing basis, Probitas Partners offers research and investment tools on the alternative investment market as aids to its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team’s Probitas Partners appreciates receiving broad knowledge of the market. Accurate any corrections or updates which will data is elusive in private markets. Probitas help keep this listing as up to date as Partners shares this data in an effort to possible; improve professionalism, consistently raise • Information on private equity real estate the bar on professional services, and assist funds is captured separately in our Real all participants in their investment, portfolio Estate & Hard Asset Deskbook; management and fund raising endeavors. • Probitas Partners relies upon its Included within this 2008 Private Equity knowledge of the investment pace of Deskbook is our listing of Funds in or Thought previous funds, informal discussions to Be Coming to Market over the Next 12 with institutional investors and general Months. A few important user notes on the partners, and its knowledge of emerging listing: managers. Specifically, we do not seek • The list does not track funds smaller than confirmation of these estimates with $100 million or €70 million, as these general partners in order to avoid SEC are not often targeted by institutional public offering prohibitions. investors; For the same reason, Probitas Partners does • Information is collected from various data not include in this listing information on sources, but dynamically and accurately funds it is currently offering; qualified tracking when funds are launched and investors seeking information on Probitas when they are finally closed is a difficult Partners’ placed funds should contact business. We constantly interact with Probitas Partners directly in order to have investors and other industry sources in the most complete picture of all institutional an effort to keep the data updated, and funds currently in the market. 1 Confidential & Trade Secret ©2008 Do not circulate or publish. From Liquidity Crisis to broadly, from those financial institutions with Credit Crisis sub-prime and hung-loan problems, to other companies coping with the follow-on impacts A sharp dislocation in the private equity on the consumer sector of a weak housing buyout market occurred in the latter half market. Stock markets in North America and of 2007 as problems in the U.S. sub-prime Western Europe that reached a peak in late mortgage markets developed into a full- June or early July, traded down in a volatile blown global liquidity crisis. As the sub-prime summer as the initial ramifications of the contagion spread, credit spreads on corporate liquidity crisis were digested, only to rebound loans increased suddenly, dramatically in the fall. Once it was clear that the impact impacting financial institutions’ ability to would be more widespread, these markets syndicate loans which they had committed fell again late in the year. to underwrite. Many of these commitments had been issued in support of large buyout In the emerging markets, the liquidity crisis transactions backed by private equity funds. was at first shrugged off as a problem for The backlog of some $390 billion in “hung” the U.S. only, but as the year progressed the loans that built up during the summer failed problems became global. Chart I details the to clear during the fall. As a result, several fall in stock indices from their 2007 peaks until transactions were cancelled while others January 31, 2008, reflecting the significant remained in limbo, and debt support for new declines experienced across world markets. transactions dwindled. These steep stock market declines, especially With the turn of the new year, the liquidity those experienced in January of 2008, begin to raise more issues for private equity for the crisis began to turn into a credit crisis. upcoming year: The impact of the liquidity crisis was • Public Market Impact On Private Equity significant; it impaired the ability of large Portfolio Allocations: As noted in buyout funds to execute new transactions Chart I, public equity markets globally as well as recapitalize or exit current have declined significantly from their investments. But the impact was not uniform recent highs. Many institutional investors across private equity. Middle market buyouts, set their allocations to private equity as both in the U.S. and Europe, had always a percentage of their overall portfolio. been more conservatively financed and, as a For most investors, their largest exposure result, were much less affected. The venture continues to be to publicly traded stocks. capital sector, where leverage is rarely used, As happened in 2000 when the bursting seemed untouched and the mezzanine sector of the Internet Bubble resulted in a major saw renewed interest as competitive sources correction in the stock market, institutional of leverage dried up. investors are beginning to find themselves at or over their allocation to private equity With the New Year, the liquidity crisis turned as the denominator in their allocation into a credit crisis. The downturn in the equation declines precipitously. There are mortgage market began to spread more several obvious impacts likely to result Confidential & Trade Secret ©2008 Do not circulate or publish. 2 as a consequence of an overallocated investors use this market for portfolio condition: management purposes. A prolonged slump in public market values is likely o Fundraising: Many institutional to lead to increased secondary sales to investors with large existing portfolios manage allocation levels and make room are already finding themselves for new commitments. overallocated to private equity. If public markets remain in their current range Institutional investors are beginning to find themselves or continue to drop, these investors are likely to cut back on or stop making new at or over their allocation to private equity as the commitments, as they did from 2001 denominator in their allocation equation declines through 2003. This could significantly impact the ability of fund managers precipitously. seeking new and expanded relationships • A Bad Time To Exit —But A Good Time To to attract capital, and could also impact Invest? Historically, periods of tumbling the size of follow-on commitments made stock markets and increasing corporate to established fund mangers raising new defaults have been bad times to exit private vehicles. equity investments, but good times to make o The Secondary Markets: Over the new investments. Pricing competition last several years the Secondary tends to ease as sellers’ expectations Market for private equity has become soften and buyers’ investment discipline much deeper as more institutional reasserts itself. Funds raised in 2008 (and Chart I Stock Market Declines from 2007 Peak Values Stock Index Peak Date 2007 High Close on 1/31/08 % Decline S&P 500 7/13/07 1,552.5 1,378.55 -11.2% NASDAQ 10/31/07 2,859.1 2,389.86 -16.4% FTSE 100 (London) 10/12/07 6,730.7 5,879.8 -14.0% DAX (Frankfurt) 6/20/07 8,090.5 6,816.7 -15.3% BSE (Mumbai) 12/12/07 20,375.9 18,361.7 -13.4% Hang Seng (Hong Kong) 11/1/07 31,492.5 25,122.4 -25.5% NIKKEI 225 (Tokyo) 7/9/07 18,261.9 13,629.2 -25.6% Source: Probitas Partners 3 Confidential & Trade Secret ©2008 Do not circulate or publish. funds raised in 2007 that have lots of dry • Global Impact: Early in the liquidity crisis, powder) should be facing an environment much was made of the fact that the of reduced acquisition multiples —though sub-prime mortgage debacle was a problem groups that are highly reliant on leverage for the U.S., but not necessarily the rest of to drive returns will find the market