Coming to America Cut-Throat Competition and Political Upheavel Have Done Little to Rein in European Private Equity’S US Ambitions
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17 NOVEMBER 2016 realdeals.eu.com THE INDEPENDENT VOICE OF EUROPEAN PRIVATE EQUITY Coming to America Cut-throat competition and political upheavel have done little to rein in European private equity’s US ambitions. P1_RD378.17.11.16.Cover.indd 9 11/11/2016 15:43 A Different School of Thought. In today’s competitive market, it is rare to find a private equity firm who appreciates a growing company’s unique qualities and actively supports its vision for building a strong business. Baird Capital partners closely with management teams to grow promising companies into standout businesses. We invest in smaller, high-potential companies across the Healthcare, Industrial Solutions, and Technology & Services markets. Our global platform of deep sector knowledge, investment experience and operational expertise has enabled us to invest in nearly 300 portfolio companies. Discover a unique approach to private equity. Visit bairdeurope.com Baird Capital Partners Europe Limited are authorised and regulated in the UK by the Financial Conduct Authority. (Registered number 150154) ©2016 Robert W. Baird & Co. Incorporated. Member SIPC. MC-47235. EDITORIAL ISSUE 378 / 17 NOVEMBER 2016 CONTENTS Editorial Nicholas Neveling 04 ALPHA BITES First-time funds impress; Britain’s Trumped domestic deal slump 06 E R BORN IN THE USA Why European private equity firms are heading stateside Private equity fund structures usually shield it from macro-level shifts, but when the world order is so 10 THE EXIT ROUTE TraDE-OFF Private equity may have hoards of dry dramatically upended even buyout firms should worry. powder, but trade buyers are putting their money where their mouths are Well, it has been quite the fortnight hasn’t it? Just a few weaknesses, appears to have held up tolerably? 14 QUALITAS TRIES SOMETHING NEW months after the the UK voted to leave the European Unemployment in the US, for example, is less than 5 per Union, Donald Trump has won the White House running cent and in the UK joblessness is at an 11-year low. Qualitas is to try its hand at being an a populist, anti-globalisation campaign. There is obviously something that has broken, but LP after raising its first fund of funds; Normally private equity, unlike equities, fixed income what exactly? A comment piece in this issue from Investcorp’s seed investment and cash, is shielded from the volatility that accompanies consultant Andros Payne on the idea of secular global events and macro-economic shifts. Firms can stagnation (see page 16) offers one possible explanation. 16 SIGNS OF LIFE usually ride out the storm and wait for markets to settle. The argument he outlines is that productivity in Nordic Capital’s float of Convatec The financial crisis is a good example of this. Rather industrialised nations is depressed because of high debt shows that IPOs are still an option; than sparking the buyout bloodbath that many predicted levels, restricted access to education, reduced workforce Andros Payne on what secular the asset class was able to sit tight and come out the participation and growing wealth inequality. According other side – in possibly even better shape than before to sociologist and economist Robert Gordon, these stagnation means for buyouts the crash. forces reduce the average historical rate of productivity The US election result, and to a lesser extent the growth from 2.8 per cent to 0.7 per cent a year. When 18 Q&A: GEOFF COOK, JERSEY FINANCE Brexit referendum, however, have torn down the world wealth generated by technology companies is Jersey Finance’s chief executive order under which private equity has thrived for so long. concentrated among a relatively small population of tech explains how the fund management Globalisation is a dirty word. Free trade agreements are workers, there is not enough money going around to plug industry is evolving at risk of going out the window. Protectionism and the widening productivity gap. This then leads to a isolationism are the order of the day. painful reset of expectations, as productivity stalls for BRIDGING THE VENTURE GAP For private equity firms that have created so much the first time in more than two centuries and living 20 value by taking their portfolio companies and their own standards stagnate. Take into account the pension time A new fund of funds hopes to build businesses international, the game is changing bomb as baby boomers leave the workforce, and it is the scale the Europe’s venture capital fundamentally. And the insurrection is far from unclear where the money to cover all of this is coming industry so desperately needs over either. from. The rise of populism suggests that the re-setting In the Netherlands Geert Wilders’ Freedom Party process is already underway. 22 DEALS IN brIEF (which wants to shutdown all Mosques in the country) But as disruptive and worrying as recent events may A round up of deals from the past and in France Marie Le Pen’s Front National (which seem, it is important to pause and take a breath. Tough fantasises about a “Frexit”) are emboldened and soon to times lie ahead, but private equity can certainly adapt to few weeks contest elections. the change. There are consequences for private equity firms The asset class will not be unaffected, but it is less 24 PEOPLE beyond these macro shifts too. Private equity has never exposed to volatility than, say, equities. In times of Tim Franks will lead KKR’s EMEA been a crowd pleaser and will serve as the perfect target uncertainty investors could well see private equity funds consumer and retail team from for the populists to bash around. On the campaign trail that invest in real assets as the best place to put their February; Zoe Clements to lead Trump pledged to tear down carried interest tax breaks. money. Macro shocks may impact private equity, but less Palatine Private Equity’s impact In the UK, financiers and the “liberal elites” were so than other asset classes that don’t have the same investment business constantly attacked by the Brexiteers. micro-focus and long-term activist management style. As private equity and the “establishment” tries to It is also worth remembering that private equity’s come to terms with this huge change (I recall chairing a success has not been built on shifts in forex rates or who 26 A NEW DIRECTION FOR LEVEL 20 panel earlier this year where all the speakers, myself is in office. It success flows from a methodology designed The not-for-profit organisation for included, agreed that Brexit and a Trump Presidency to navigate change. Maybe things won’t be so bad for women in European private equity were impossible), one has to ask why people have been private equity after all. Let’s hope so, but don’t for a has a new chair, a formalised so determined to tear down a system that, for all its minute think it will be easy. structure and bold plans 27 VULTURE Tattoos and mid-life crises; Barrack (not Obama) and Trump; dealmakers scraping the barrel For buyout firms that have created value by taking their “”portfolio companies global , the game is changing realdeals.eu.com { 3 P3_RD378.17.11.16_LeaderKJ.indd 3 11/11/2016 17:01 alphabitesnews Our unique take on industry goings-on. First-time fund performance shatters long- held assumptions New data shows debut funds have consistently outperformed established vehicles. Investors have traditionally shied first-time fund, up from 39 per cent in away from backing first-time funds, but 2013, while just 41 per cent would not new data showing that debut vehicles commit to firms raising their first fund, have consistently outperformed funds down by 15 per cent from 2013. run by established managers suggests “Traditionally, first-time funds have that attitudes could be changing. faced difficulties when securing capital Preqin found that over the vintage commitments from investors, due to years from 2000 to 2012 debut vehicles the nature of traditional closed-end posted superior median net IRRs to all fund due diligence which often relies other funds in every year bar 2004. on track record, firm and investment Some years have seen a history,” Preqin’s head of large disparity in terms of investor products Leopold the returns generated by Peavy said. “However, as first-time funds. Among the marketplace 2002 vintage funds, for becomes ever example, first-time 16.9% competitive investors funds saw a median net IRR of first-time funds of 2002 are growing more net IRR of 16.9 per vintage, compared to 10.8% for willing to commit to cent, compared to 10.8 successor funds managers setting out on per cent generated by Source: Preqin their first fundraising successor funds. process. Many investors Preqin’s analysis, which have been rewarded for covered the whole private capital choosing this strategy.” space including private equity, private Old habits, however, die hard. It is debt, real estate, infrastructure and understandable that investors natural resources, is yet another sign committing to ten-year closed-ended that attitudes to first-time funds are funds still place a heavy emphasis on Investors are growing more willing to changing and that performance track record and team stability in their commit to managers setting out on their persistence in alternative assets is not due diligence. Backing new managers, as apparent at it used to be. Investors many of whom are trying out new first fundraising process. Many have been have also warmed to first-time funds as strategies or entering nascent markets, rewarded for choosing this strategy the pressure to find attractive is not without its risks. Evidence of investment opportunities has increased.