Privcap Special Reports

PRIVCAP/ SPECIAL REPORTS JANUARY 2014

Golden Days

Ahead?

Snow’s Notes: Boom 2.0/ 5 Healthcare Dealmaking/ 9 Ever-Emerging India / 10 The Future Looks Large to Hamilton Lane/ 12 10 Fundraisings & IPOs to Watch / 18 Debt: State of the Market / 29

Premium ContentPrivcap Exclusively Special for Report Privcap •Subscribers Outlook 2014Only /| www.privcap.comJanuary 2014 / 1 On Privcap.c0m Videos in this special report

This special report includes the following new video On Camera programs. Watch them at Privcap.com What Do The Facts Say? With Mike Ryan of Hamilton Lane What does data about PPM flow, zombies and deal multiples say about the state of the PE market? Mike Ryan of Hamilton Lane answers.

The Debt Roundtable Two industry veterans, Ben Marzouk of Monroe Capital and Joe Burkhart of Saratoga Investment, predict what’s to come for debt markets in 2014.

Hamilton Lane: Outlook 2014 Erik Hirsch of Hamilton Lane shares his view of the capital raising Erik Hirsch: The Hamilton Lane CIO tells market and the lessons of 2013. Privcap that private equity has an NAV “challenge.” Click here to watch. The Outlook for India New Silk Route Partners’ Parag Saxena explains why 2014 may be the year India finally “emerges.”

Healthy Returns Mike Liang of Baird Capital on the global health care sector.

COMING SOON on Privcap How to Subtract Value Via Bad Stories of Impact Success Tax Moves How investments and business initia- Two tax experts discuss transfer pricing tives in the emerging markets have and qualified stock purchases, and how impacted those societies. getting these wrong can end up subtracting value from a private Carve-Outs: Plan of Action equity deal. How are plans of action devised and executed in priavte equity carve-out Fund Formation in the deals? Experts from Wolf, Sun Capital, Post-Financial Crisis Era and Grant Thornton explain. Experts from Catalyst Investors, Blue Wolf Capital Partners and MVision weigh in on the best way to secure capital and build relationships in the current climate...

Privcap Special Report • Outlook 2014 | January 2014 / 2 On Privcap.com

In Case You Missed It... Must-see thought leadership from Privcap.com

Investing in Digital Europe Happy Management, Happy Measuring ‘Impact’ in PE: Philipp Freise of KKR on Europe’s tech Carve-Out Challenging, but Progressing scene and how his firm helped German How private equity investors align division Private equity firms increasingly are focused broadcaster ProSiebenSat.1 become a management with the investment ob- on impact and ESG—but how do firms digital competitor. jectives of a corporate carve-out. Featur- measure and report these non-financial ing Adam Blumenthal, Ed Kleinguetl and results? Experts from Siguler Guff, Aaron Wolfe. Global Environment Fund and EY share insights.

Valuation Challenge: Exploring Exits in African Pension Liability and the Sun Downward Facing Debt Private Equity Capital Court Case: What it Means for PE How do you value a portfolio company New research explores the issues of value when its publicly traded debt is creation and exits in African PE. A key court case might put GPs on the down? Privcap asked three valuation Michelle Essome of the AVCA and hook for pension liabilities as well as raise experts from StepStone, McGladrey and Mike Rogers of EY explain findings of taxes on carried interest, according to tax W Capital to weigh in. the joint study. and liability experts from Arsenal Capital and McGladrey.

About Privcap Special Reports Upcoming Reports Privcap Special Reports are exclusively for subscribers to Privcap, the definitive channel for February: All About Operating Partners thought leadership in private capital. Each month Privcap focuses on a critical theme and March: New Frontiers in Capital Formation produces a “bundle” of thought-leadership content in multiple formats—a digital report, April: Private Equity Performance video interviews and panel discussions, and audio programs. We capture the market May: All About Co-Investment intelligence of leading authorities, whose expertise forms the core of each report. Privcap June: Energy Game Change Special Reports help market participants better understand opportunities and practices in

private capital, as well as gain deep insights into the people with whom they may become long-term investment partners.

Privcap Special Report • Outlook 2014 | January 2014 / 3 PRIVCAP SPECIAL REPORTS In This Issue

Snow’s Notes: 05 Diminished Expectations The PE party is set to return in 2014, writes Privcap CEO David Snow

A Four-Star Tour of the Globe 07 Privcap talks to General David Petraeus and Vance Serchuk of KKR Global Institute

Healthy Returns 09 Global forces are at play in the health care sector, says Baird Capital’s Mike Liang

What the Future Holds for India 10 Will 2014 be the year that India finally “emerges?” 30 With Parag Saxena of New Silk Route Partners 07

Outlook 2014: Hamilton Lane 12 What the coming year holds for GPs and LPs, with PRIVCAP SPECIAL REPORT CIO Erik Hirsch AND Privcap LLC David Snow Co-founder and CEO A deep dive into deal data, with researcher Gil Torren Co-founder and President Michael Ryan Matthew Malone Editorial Director

Content 10 Fundraisings, 10 IPOs Ainslie Chandler Senior Journalist 18 Privcap’s list of major fundraising and Tanya Klich Associate Editor PE-backed listings to watch for in 2014. Kathleen O’Donnell Media Coordinator Cameron Faulkner Media Coordinator Roundtable: Debt Markets Design 30 What the new year holds for debt markets, with Ben Cecilia Salama Design Coordinator Marzouk of Monroe Capital and Joe Burkhart of Allison Fleming Production Saratoga Investment Contributors Tom Stein Tim Devaney Experts Weigh In 32 The key trends for the year, with FFL’s John Roach and Contacts Aaron Money and Catalyst Investors’ Gene Wolfson Editorial David Snow / From the Archives [email protected] / 646.233.4558 33 Related content from Privcap.com Matthew Malone / [email protected] / 203.554.7261 From Our Sponsors Sponsorships & Sales W.P. Carey: Solutions Financing Gill Torren / [email protected] / 646.233.4559

Privcap Special Report • Outlook 2014 | January 2014 / 4 OUTLOOK 2014 / SNOW’S NOTES PE BOOM 2.0 The coming upcycle will be powered by surging capital and lowered expectations

One after another, unmistakable signs of recovery Coller also found that the majority of LPs expect and renewed vigor are being seen in the private their portfolios to perform in roughly the same equity market. Indeed, market insiders are becom- range over the long term. In prior cycles, returns in ing unafraid to say they expect a major cycle of the low teens were not something that most inves- growth in the asset class. tors openly aspired to, and they certainly aren’t put forth as targets by GPs. But the diminished investor A case can be made that the coming upcycle will expectations, coupled with rising allocations, indicates be even more pronounced than the previous one, real momentum behind new fundraising – investors which crested in 2007. While the next boom may accept private equity as it really is, and they want a Market be bigger, it will be driven by different factors and lot more of it. analysis by have different characteristics than prior cycles: Privcap CEO A key number to watch will be the stand- Popularity–The number-one driver of private equity ard hurdle rate of 8 percent—the IRR above David Snow growth will be its popularity with investors relative which GPs get carry. For now, most market to other asset classes. The evidence is overwhelming participants believe this is the right rate. If GPs that, in the long term, even average private equi- genuinely believe they can deliver 11 percent-plus ty has performed well relative to public markets. returns, they won’t push for a lower hurdle. If you PE looks even better on a relative basis coming out see GPs seeking to negotiate this down, it will be of the Great Recession. A recent Coller Capital sur- the clearest indication yet that private equity’s vey found that even post-recession, about half of performance premium has meaningfully compressed. LPs reported their overall PE program annualized performance at between 11 percent and 15 percent. Denominator–Even LPs not planning on increasing This is down from the 2007 results, but still strong their allocations will need to make new commitments on an absolute basis. based on the expansion of their overall portfolio. With stock markets at all-time highs, private equity

“THE NUMBER-ONE DRIVER

OF PRIVATE EQUITY GROWTH WILL BE ITS POPULARITY RELATIVE TO OTHER ASSET CLASSES.” -DAVID SNOW

Privcap Special Report • Outlook 2014 | January 2014 / 5 OUTLOOK 2014 / SNOW’S NOTES

means a more complex mix of ownership structures.

Defined Benefit, HNW and retail investors–The popularity of private equity is driving the creation of vehicles that expand the population of investors who can participate in the asset class. Some of these formats have existed for a while now, but there is a new urgency from both demand and supply sides to get these ready for prime time. In addition to private-bank feeder funds and the like, new public vehicles are being created to house “alternatives”, although to date there hasn’t been much headway on creating a mutual fund-like vehicle to house reg- ular-way private equity. Otherss, like Pantheon Ventures, are targeting the defined-contribution pension market as a potential major new source of capital, once the structural issues are solved. Then there’s crowd- sourcing and all the online capital-matching services being launched, wild-card elements that will first play meaningful roles in the startup and VC world before making a dent in the mature-PE world.

It’s too soon to know which of the new capital-formation channels will be most successful, but it’s safe to say that the voluminous capital that will be formed for private equity in the coming cycle will have a very different mix of sources than in the prior cycle.

All of these trends paint a picture of a more efficient, democratized boom in which a greater number of as a percentage of the portfolio also needs to expand. participants share the economic benefits. It’ll be a bigger party, but perhaps not quite as much champagne per partier as in the old days./ An ocean of cash–Thanks to the unprecedented amounts of capital put to work during the mid-2000s, and thanks to the protracted downturn that followed, the PE industry now oversees record AUM. That capital is now coming back to LPs in record exit waves, and the waves have just begun. The cash will largely be committed back to private equity GPs, albeit with a different roster of names. The largest GPs with the strongest track records will grow to sizes heretofore unseen. At the same time, a new wave of smaller and emerging managers will be funded by investors who better understand how to allocate to the right “first-time” funds and sector specialists.

Direct investments–During the course of the next upcycle, more capital may be formed for private equity than ever before, but it won’t all flow through co-mingled, blind-pool limited partnerships, aka funds. In November, CalPERS confirmed a policy that allows the pension to deploy as much capital in co-investment situations as it does into funds. This doesn’t mean that half of CalPERS capital will necessarily end up in direct situations, but it certainly

Privcap Special Report • Outlook 2014 | January 2014 / 6 OUTLOOK 2014 / GEOPOLITICS

Click to watch this video at privcap.com

A FOUR-STAR TOUR OF THE WORLD

Privcap interviews General David Petraeus and Vance Serchuk of KKR Global Institute n 2013, four-star general and former CIA director David Petraeus joined KKR to become chairman of the KKR Global Institute, an initiative meant to bring greater political and macroeconomic analysis I to the investment firm’s activities. In December, Privcap interviewed Petraeus alongside Vance Serchuk, the executive director of the Institute, to learn where they see opportunity in 2014. General David Petraeus

Privcap Special Report • Outlook 2014 | January 2014 / 7 OUTLOOK 2014 / GEOPOLITICS

Vance Serchuk and General David Petraeus speak with Privcap’s David Snow

NORTH AMERICA KKR just did the largest-ever private equity deal in Serbia. The story in Serbia is of coura- Petraeus: geous decisions on the part of political lead- “You have a market of roughly 500 mil- ership there to confront difficult issues so lion people. The demographics are good that they can move forward towards the EU.” compared to those of say Japan, or China, which is facing a downturn. . . We have a JAPAN number of other advantages: The manufacturing revolution, the IT revolution and the life-sci- Petraeus: ences revolutions are also endeavors in which “The challenges now are carrying through the the United States and North America at large meaningful reforms in the labor sector with are in the lead. So the prospects are quite good.” the agriculture economy...while still retaining the support of the people. But recognizing that, Serchuk: [Abe] has an opportunity that no other prime “In the West most countries got rich be- minister has had in recent decades, and there fore they got old. For the Chinese the dan- are several years without another election.” ger is that they’re going to get old before they get rich. Because the average Serchuk: age in the United States is going to stay “Tensions and the concern about China. . . has lower, that’s actually a huge advantage.” spurred a greater willingness to contemplate otherwise really, really unthinkable reforms.” MEXICO

Petraeus: THE MIDDLE EAST “Following ten years of double-digit increases in the cost of labor in China, Mexican la- Petraeus: bor is now only a bit more expensive than Chi- “Saudi Arabia, Qatar, the UAE, Kuwait, Bahrain, nese labor.” Jordan, Morocco. . . in each of these countries there have been far more reforms than I think most people recognize. You have to understand Serchuk: the culture. You have to understand the “Remember the political reforms have made conflicting tensions in these countries to progress but they’re not done yet. . . Exactly appreciate how much, say, King Abdullah in what will the parameters of energy reform Saudi Arabia has really done in a state where itself be? Still very much open to question.” there is a lot of conservative sentiment.”/ EUROPE

Serchuk: “What’s so striking is that you can see the extraordinary, magnetic, attractive power of the European Union on the eastern periphery. Privcap Special Report • Outlook 2014 | January 2014 / 8 OUTLOOK 2014 / LIANG Q&A

Click to watch this video at privcap.com The Global Search for Healthy Returns The Affordable Care Act has brought healthcare into sharp focus in the U.S. But many of the sector’s opportunities lie in other markets. Baird Capital’s Mike Liang explains.

Liang One of the reasons healthcare has been such a challenging area is not just that Obamacare, or the [Affordable Care Act], is leading to so many different questions, but also because of the regulatory environment, the reimbursement environment, and what’s happening in Europe. All of these things are leading to questions and uncertainty. The way we look at it, you have to mitigate the risk, but there are actually a lot of interesting opportunities there. Some examples are in the healthcare IT and the services area

Privcap Is the opportunity to expand to emerging markets primarily a market opportunity? Are there also opportunities to Mike Liang have new bases of operations as we saw with manufacturing? Privcap Obamacare is the most popular topic in Liang healthcare at the moment but what are some I do think it’s primarily driven by market other big issues shaping the sector? opportunity, just the volume of procedures or products that can be used in those areas, Mike Liang, Baird Capital even if at a lower price point, still leads I think Obamacare is going to lead to a lot of to very big opportunities. At the end of interesting investment opportunities: New the day, I’m an investor. We’re looking to health information exchanges, a lot of make investments in big areas that have healthcare IT, [and]disease management-type high growth and can eventually sell to re- businesses But I think [it is] just one small part turn money back to our investors. I always of how we look at the whole investment world. tell our companies that if we’re able to show market penetration in some key areas, while obviously not taking our eyes off the ball on Privcap the U.S. and Europe, that’s going to be even So what are some of the key themes that you more attractive for our businesses at the see or that Baird Capital is focused on? time that they’re ready to sell./

Privcap Special Report • Outlook 2014 | January 2014 / 9 OUTLOOK 2014 / INDIA

Click to watch this video at privcap.com

EMERGING markets from 1999-2000; a huge sum Misc Notes: INDIA Sugg. Photo: http://www.istockphoto.com/stock-photo-5312639-stone-crushers-in-india.php?st=13aaab7 Caption: A coal-powered plant in West Bengal, India India is a large, important market and one that has attracted of money was raised and quickly invested. much hopeful private equity capital over the past ten years. Investors make poorer judgments when And yet many investors feel disappointed that the asset class capital is plentiful than when it is scarce. in India hasn’t performed better on average. Privcap sat Privcap down with Parag Saxena, founding partner and CEO of To what extent has it been the managers New Silk Route Partners, a South Asia-focused private equity themselves lacking the skills to extract val- firm with $1.4 billion under management, to learn about the ue from their portfolio companies? challenges facing the Indian market and what lies ahead for Saxena this critical growth opportunity. Another reason for underperformance in India is a lack of operating talent. New Silk Route immediately built a deep operating Privcap team, so if a company ever ran into trouble, What does the future hold for private equity we could run it ourselves. Today, more than in India? It is a huge market that is poised for half our portfolio consists of companies growth, yet has underperformed. that we run through a majority ownership. That’s a formula I would advocate to the Parag Saxena, New Silk Route Partners overall industry: roll up your sleeves and ac- India attracted a great deal of money from tually think like an engineer working in a 2006 to 2008. The demographics are attrac- plant or a salesman selling a product. You tive. The rising consumer and GDP per capi- cannot sit far above the activity, looking at ta spurs demand for better food, healthcare, monthly expense reports and cutting costs. education, and communications. Compa- You have to get down to the ground level. nies have to meet those demands. Privcap But India has failed to meet expectations, What are the macroeconomic factors influ- primarily because of a lack of exits. Data on encing India’s performance? 50 funds in India show that less than ten percent of the capital invested during the Saxena 2006 to 2008 period by growth capital or The Indian currency has dropped very steep- larger firms has been returned. There was ly in the last year. But for the past 15 years, occasional success in early stage companies. the Indian rupee has been at a stable level, Otherwise, exits have been modest. The at roughly 45 rupees to a dollar. So if you same scenario happened in the U.S. venture were lucky to get 50 rupees for every dollar,

Privcap Special Report • Outlook 2014 | January 2014 / 10 OUTLOOK 2014 / INDIA then you make a ten percent profit. What has ac- next two years? tually happened is the rupee has at one time hit 70 rupees to the dollar. This is a big headwind and it’s Saxena not clear when it’s going to go away. Currency prob- This year, the economy hit record highs, and fully lems are usually straightforward. The U.S. dollar has recovered from the drop in 2008. What should declined because we are importing much more than typically follow this is public listings from the best we sell. The same issue is happening in India, except companies, so we should start seeing IPOs. That it got exacerbated in a very short period of time after won’t take away from the fact that the currency is several power plants popped up. still much weaker, so you do need a 35-45 percent gain to show a meaningful profit. Hopefully, we’ll start India is very oil poor and natural gas poor, but it’s to see more offerings take place. Investors will have very coal rich. So owners have set up these power to start pricing in rupee depreciation. The crowds plants expecting to use coal. But the central govern- initially neglected to do this because they expect- ment, through poor governance, has not distributed ed India to turn a corner and achieve a surplus in coal licenses at a sufficient rate. So the plants have exports versus imports. imported coal from Indonesia and Australia. India has growth, but they have to fuel that growth with Privcap energy. The economy hasn’t been able to sell products How is public policy impacting the private equity opportunity in India?

Saxena “INDIA HAS GROWTH, There is a cloud over the Indian market, and that is next year’s national elections, in May. There is little BUT THEY HAVE TO difference between the two leading parties. This time, however, several regional parties have the po- FUEL THAT GROWTH tential to form a coalition and reform government. Uncertainty keeps investment activity at a standstill WITH ENERGY until the industry is clear on the cards [it will be .” dealt]. By then, people will understand the landscape -PARAG SAXENA and then refocus on the positives. India is still the second -largest country in the world by population. The reforms have been pro-business and should lead to at the same rate it is buying up coal from overseas. It five percent-plus growth in GDP. [So] overall, people takes years to set up a new industry to create these with strong operating skills will succeed in India./ exports.

Privcap How will the Indian IPO market evolve during the

Parag Saxena

Privcap Special Report • Outlook 2014 | January 2014 / 11 OUTLOOK 2014 / KEYNOTE

Click to watch this The Great video at privcap.com NAV Challenge By Tanya Klich Erik Hirsch of Hamilton Lane predicts that capital formation will surge in the asset class, but that private equity will face a challenge in turning its collection of portfolio companies back into cash

Privcap What is your outlook for private equity fundraising in 2014?

Erik Hirsch, Hamilton Lane The fundraising environment has been really strong in 2013, but that gets lost in the shuffle, because there’s a focus on who doesn’t raise the capital they wanted or who’s not reaching their hard cap. In the fundraising channel, there are a number of firms that are having immense success. If you look at the global economic landscape, the reality is, this is a winning asset class. It’s providing better returns and lower volatility than the public market, and in many cases it’s providing returns with Erik Hirsch Privcap less risk. That is the perfect package for investors today. You see a large amount of inflows, and But GPs are reporting weak statistics. Why is I think that trend from 2013 into 2014 will your outlook still bullish? absolutely continue. Hirsch Privcap This asset class does a poor job of data collection What will be the main source of capital inflows? and data transparency. This plagues us on benchmarks, deal statistics, and fundraising. Hirsch It continues to be the bane of the asset class. The broader market is not tracking It’s always a mix. There’s never one thing that nontraditional fundraising. drives inflows. Overall, plan sizes are growing, because the public markets are doing well. As Privcap a result, private equity is always pegged to this as the percentage of overall allocations grow. How will nontraditional fundraising channels

So the public markets largely drive growth in impact fundraising? private equity. Secondly, there’s a lot of liquidity coming out of private equity portfolios and Hirsch coming back to investors in the form of cash, so Five years ago, most LPs accessed private equity they’re able to reinvest that. The third piece— as a traditional LP; they went right into a which is critical—is, investors’ allocations to fund. Today there are more choices. The the asset class is not staying flat; it’s actually traditional GP/LP relationship continues to increasing. So many LPs are dialing up their exist, but there is the rise of separate accounts. allocations, and we expect that trend continue. LPs ask GPs to form a customized, unique

Privcap Special Report • Outlook 2014 | January 2014 / 12 OUTLOOK 2014/ KEYNOTE

in real data context starts to paint a very different picture.

Privcap Many private equity investments have not been exited. Why should we pay attention to this?

Hirsch We should all keep an eye on this rise in net asset value [NAV], because it’s reporting good news: Underlying portfolio companies are actually do- PRIVATE EQUITY HAS ing well, and the valuations are expanding. A look “ at historical performance would show that we CONSISTENT PERFOMANCE have recently reached a record level of NAV. The asset class has never converted enough NAV to WITHOUT THE FRAUD what LPs want, which is cash. So as private equity ISSUES THAT PLAGUE OTHER expands, as capital flow and deal flow increases, and as companies continue growing, growing, ALTERNATIVES, SO IT’S growing—what you have to believe in order for this asset to continue to be successful is that the BECOMING THE DARLING broader marketplace can absorb that NAV and OF THE PORTFOLIO- can convert it into cash. ALLOCATION MODEL Private equity has seen more distributions in .” 2013 than throughout the entire history of the -ERIK HIRSCH asset class. That’s a fantastic thing. However, as a percentage of the NAV picture, we’re nowhere near record levels. So GPs always wonder, why aren’t LPs sending all this cash being captured. The even bigger piece is the back? And the answer is, it’s complicated, co-investment market. There is a lot of market because while the cash is coming back, and that’s chatter about LP appetite for more co-investment terrific, they look at it as a percentage of their activity. When they go into direct deals and by- overall program—and that paints a very different pass the fund structure, that’s also not getting picture. This is one of those pieces that we spend a captured. So our data suggest that 2013 is poised lot of time talking about: fundraising and distribu- to be the fourth-best fundraising year ever, solely tion. Private equity doesn’t focus enough on net based on traditional fundraising. Now, if we add asset value and how to ultimately convert it to cash. the separate account piece—the secondaries and

the co-investments—2013 is poised to be the second- or third-best fundraising year ever. Putting it

Privcap Special Report • Outlook 2014 | January 2014 / 13 OUTLOOK 2014/ KEYNOTE

View Erik HIrsch’s full interview on Privcap.com Privcap As the market continues to gain momentum, are we heading toward a golden era for capital formation in private equity?

Hirsch ERIK HIRSCH BIO If you’re a CIO of a big pension today, your job is very difficult. You’re having a hard time Responsible for managing Hamilton Lane’s primary hitting your actual rate of return. You’re nervous funds, secondaries, and co-investments; about a massive allocation to the public mar- negotiations of investments; and reporting on kets, given recent performance and volatility. You’re struggling to hit an eight percent–plus industry trends rate of target return using a heavy fixed-income component. The real estate market Serves as a member of advisory board of Roark, continues to be sluggish, and hedge funds are Texas Pacific Group, Carlyle, Apollo, Blackstone, disappointing. There are numerous issues, Leonard Green, Kelso, and Kohlberg Partners so where do you turn? Private equity has consistent performance without the fraud issues that plague other alternatives, so it’s Former corporate-investment banker at Brown becoming the darling of the portfolio-allocation Brothers Harriman & Co. in the mergers and model. This will all lead to a lot of fundraising in acquisitions department the next year./ Began career as a municipal financial consultant at Public Financial Management

Served as a member of advisory board of American Securities

B.A. from the University of Virginia

Privcap Special Report • Outlook 2014 | January 2014 / 14 OUTLOOK 2014/ DATA

Click to watch this video at privcap.com What Do the Facts Say?

Global private equity advisory firm Hamilton Lane keeps track of data in many forms. The firm’s head of research, Michael Ryan, shares several charts illustrating important trends.

Michael Ryan, Hamilton Lane

Mike Ryan’s commentary: “We’re on track to receive a little over 650 PPMs this year which, is about in line with last year. It’s up about 20 percent from three years ago, so we definitely see some pick up from the depths of the recession. In terms of where that’s coming from, there’s actually been a fair amount of consistency. A little less than half of what we see is focused in North America. . . The one notable exception we have seen this year is a bit of a drop off in Asia-Pacific but it’s too early to tell if that’s just gotten pushed into the first quarter Incoming PPMs! Hopeful GPs On the Rise of next year. Or maybe some funds are waiting for some exits before they go back on the road.” 2013 was among biggest ever for fund marketing 800 700 600 500 400 300

Number of PPMs 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Hamilton Lane Year

Privcap Special Report • Outlook 2014 | January 2014 / 15 OUTLOOK 2014 / DATA

400 Lots of Little Guys Most 2013 Funds Marketed Were Less Than 350 $500m in Target Size Mike Ryan’s commentary: “Some people might find it interesting to find that well over 80 percent of the funds that we review 300

are under a billion dollars in their target size, s d 250 and most of those are actually less than n u F

half a billion. And so we really spend a lot of f o our time in the small and mid-market trying 200 to find not only managers that have been be r

the best historically but those who will be m

u 150

the best going forward. And a full 30 percent N of the funds that we’re looking at are first-time funds.” 100

0 Smaller than Between Between Between Above $5B $500M $0.5B and $1B $1B and $3B $3B and $5B Fund Size Source: Hamilton Lane

20 Rise of the Zombies NAV of Underperforming 10-Year-Plus Funds, by Year

Mike Ryan’s commentary: “We define zombie funds 15 strictly as funds that are at least 10 years old, that have still remaining value and have had a negative or zero IRR to date. So these are funds that are past their natural life but refuse to die. In terms of volume, of the funds that we track that have raised prior to 2002, about 13 percent fall into the zombie category. In terms of net asset 10 value, it’s a little under $20 billion. That’s about 1 percent of the overall net asset value of the private equity industry today. ”

0 2005 2006 2007 2008 2009 2010 2011 2012 Zombie Fund ($B) NAV Year

Source: Hamilton Lane

Privcap Special Report • Outlook 2014 | January 2014 / 16 OUTLOOK 2014 / DATA Hamilton Lane’s Periodic Table Michael Ryan commentary: “Our periodic table ranks Ranking PE sub-strategies vs. other asset classes the performance of each strategy by vintage year, so we can see how it looks across time. We can see that within vintage years European buyout might be the best performing strategy for three vintage years in a row and then, in other parts of the cycle, it’s not as strong. In an industry where we always talk about the primary importance of manager selection. . . [the periodic table] also highlights how our allocations from vintage year to vintage year and across cycles can really have a big impact on performance.”

S=-D.GDM/T876=/.U/L=2,-IF/71/HDI28<=/V=8-/R/WF/.U/X!/!"#$ !""" !""# !""! !""$ 2004!""% 2005!""& 2006!""' !""(2007 2008!"") 2009!""* !"#"2010 2011!"## 9:/ +,-./ 56.786/ +,-./ 5-.B2A/ EDF2-=FF=G/ 5-.B2A/ EDF2-=FF=G/ H=I2,-=/ L=86/ :=M.IG8-1/ ;8-<=>?=<8/!&3 @2A=-/!'3*4 0,1.,2/!'3(4 0,1.,2/%#3!4 0,1.,2/!*3%4 +C,D21/!!3"4 E=72/)3%4 +C,D21/#!3&4 E=72/#'3&4 J8KD286/#(3'4 +F282=/$%3!4 N.N/%)3$4 )4 L=86/ +,-./ EDF2-=FF=G/ +,-./ 56.786/ H=I2,-=/ 5-.B2A/ 56.786/ :=M.IG8-1/ L=86/ 9:/:?OE/(3)4 9:/:?OE/##3&4 +F282=/!"3#4 0,1.,2/$'3"4 E=72/!"3'4 0,1.,2/!#3$4 0,1.,2/!'3*4 J8KD286/#&3$4 +C,D21/#%3!4 0,1.,2/#'3'4 N.N/#'3$4 +F282=/!%3#4 9:/ 9:/ EDF2-=FF=G/ +,-./ 56.786/ :=M.IG8-1/ H=I2,-=/ ?=PP8IDI=/#'3! ;8-<=>?=<8/!"3 9:/:?OE/#*3%4 9:/:?OE/#*3!4 ;8-<=>?=<8/#"3 9:/:?OE/#%3!4 9:/:?OE/#'3%4 E=72/!*3&4 0,1.,2/#(3'4 0,1.,2/(3$4 N.N/#"3'4 J8KD286/#&3(4 4 "4 %4 9:/ :=M.IG8-1/ ?=PP8IDI=/#!3( :=M.IG8-1/ EDF2-=FF=G/ EDF2-=FF=G/ EDF2-=FF=G/ L@Q/#%3)4 9:/:?OE/!%3%4 ;8-<=>?=<8/#&3 @2A=-/)3'4 @2A=-/#$3'4 @2A=-/#&3!4 N.N/#(3"4 4 N.N/&3)4 E=72/#"3'4 E=72/##3(4 E=72/*3"4 &4 9:/ 5-.B2A/ L=86/ 56.786/ H=I2,-=/ H=I2,-=/ :=M.IG8-1/ H=I2,-=/ L@Q/!#3#4 @2A=-/#'3'4 L@Q/#!3$4 ;8-<=>?=<8/#%3 9:/:?OE/*3*4 +C,D21/#$3%4 +F282=/&3&4 0,1.,2/)3&4 J8KD286/&3#4 J8KD286/*3&4 N.N/#$3&4 J8KD286/)3"4 #4 9:/ 9:/ L=86/ H=I2,-=/ EDF2-=FF=G/ 56.786/ H=I2,-=/ L=86/ 5-.B2A/ @2A=-/##3)4 9:/:?OE/#!3$4 L@Q/)3"4 ;8-<=>?=<8/%3) ;8-<=>?=<8/)3" +F282=/!"3*4 J8KD286/#3!4 E=72/&3%4 0,1.,2/)3"4 J8KD286/#$3"4 +F282=/#!3!4 +C,D21/)3$4 4 4 9:/ ?=PP8IDI=/##3' L=86/+F282=/R EDF2-=FF=G/ 5-.B2A/ 56.786/ EDF2-=FF=G/ @2A=-/#&3)4 @2A=-/%3'4 ?=PP8IDI=/(3"4 ;8-<=>?=<8/(3! ?=PP8IDI=/%3'4 9:/:?OE/(3)4 4 &3$4 E=72/#"3)4 +C,D21/%3(4 0,1.,2/#!3#4 E=72/#"3*4 4 H=I2,-=/J8KD286/R :=M.IG8-1/ EDF2-=FF=G/ +,-./ 5-.B2A/ 9:/:?OE/*3*4 ?=PP8IDI=/*3*4 ?=PP8IDI=/'3#4 L@Q/##3#4 ?=PP8IDI=/(3*4 @2A=-/#3'4 "3'4 N.N/)3(4 E=72/'3*4 0,1.,2/$3!4 +C,D21/(3'4 9:/ :=M.IG8-1/ H=I2,-=/ ?=PP8IDI=/#"3% +,-./ +,-./ 56.786/ ;8-<=>?=<8/*3* 9:/:?OE/'3&4 L@Q/!3*4 L@Q/%3'4 N.N/&3%4 J8KD286/'3"4 4 0,1.,2/$3*4 0,1.,2/"3&4 0,1.,2/'3(4 4 9:/ H=I2,-=/J8KD286/R H=I2,-=/ L=86/+F282=/R :=M.IG8-1/ 5-.B2A/+C,D21/R ?=PP8IDI=/#3'4 @2A=-/$3'4 ;8-<=>?=<8/*3" L@Q/"3!4 L@Q/!3%4 "3!4 J8KD286/$3#4 %3'4 N.N/'3"4 #3(4 4 +,-./ L=86/ +,-./ +,-./ +,-./0,1.,2/R L@Q/R%3!4 0,1.,2/&3(4 +F282=/"3!4 0,1.,2/$3#4 0,1.,2/'3)4 $3!4

L=86/+F282=/R @2A=-/R#!3'4 L=86/+F282=/"3*4 L=86/+F282=/%3&4 @2A=-/R&3!4 "3&4 Privcap Special Report • Outlook 2014 | January 2014 / 17

EDF2-=FF=G/E=72 +,-./0,1.,2 56.786/0,1.,2 5-.B2A/+C,D21 ?=PP8IDI= H=I2,-=/J8KD286 L=86/+F282= L@Q :=M.IG8-1/N.N 9:/;8-<=>?=<8 9:/:?OE @2A=- !"#$%&'()*+,-."/(0*/&(1#/2(3/4&5.+&/.(6*.*7*5&8(95(":(;<=>@=(AB"48(?>@=C OUTLOOK 2014/ FUNDRAISING & IPOs

10 TO WATCH Money in, money out That’s how the private equity capital ‘round trip’ works. The successful launch and completion of these 10 fundraisings, will speak volumes about the health of the PE market. And these 10 possible IPOs will help convert today’s massive portfolio company NAV into cash for limited partners.

Fundraisings Efforts From: Possible PE-Backed Listings From: Apollo Global Management Aleris Corp Charterhouse Capital Partners Formula One Doughty Hanson Aptalis First Reserve Momentive Performance Materials Goldman Sachs ISS A/S Hopu Investment Management Barminco Levine Leichtman Capital Partners Biomet Northstar Group Avaya TPG Capital Toys ‘R’ Us Unison Capital Shuanghui International Holdings

Privcap Special Report • Outlook 2014 | January 2014 / 18 OUTLOOK 2014 / IPOs The Year Ahead After a surge in listings during 2013, what does 2014 hold for the PE- IPOs backed IPO market? By David Haarmeyer

“This is almost a biblical opportunity to reap gains and ply with a receptive stock market and “you have a great sell,” claimed Apollo Group’s Leon Black last April at the IPO year,” Rogers adds. Milken Institute Conference. He went on to say that Fueling the IPO market have been low interest rates “the financing market is as good as we have seen it. It’s and an expansionary monetary policy, according to back to 2007 levels.” The rest of the year held true to University of Florida professor Jay Ritter, who tracks Black’s observation, becoming a near-record year for IPOs. With the Dow up more than 20 percent and PE-backed IPOs, following closely behind the market’s Nasdaq up around 30 percent for the year, taking the peak in 2007 (see Chart 1). opportunity to recapitalize makes sense, he says. The Among the wave of private equity portfolio companies pipeline for IPOs shouldn’t dry up anytime soon, in that came to the market in 2013 were Dollar Gener- Ritter’s view, given the substantial capital that buyout al (KKR), Antero Resources (Warburg Pincus), Quin- groups have invested in companies. tiles Transnational Holding (Bain and TPG), SeaWorld The revival in the stock market also helped drive a 55 Entertainment (Blackstone), Endurance International percent increase in the value of follow-on offerings Group Holdings Inc. (Warburg Pincus and GS Capital from 2012 (see Chart 2). In part, this reflects a growing Partners), Pinnacle Foods (Blackstone), and The Con- number of PE-backed companies, higher stock market tainer Store (Leonard Green & Partners). Thanks to the valuations as well as the sale of smaller stakes at the rising stock market, valuations were often higher than time of listing. According to Ritter, “the median float the PE firms anticipated. of buyout-backed IPOs in 2013 was 22.6 percent, which There have been a number of signs pointing to an IPO is the lowest in at least a decade and down from the resurgence in 2014. Mike Rogers, global deputy private peak of 36.6 percent in 2005.” And in his view, this is in equity leader at EY, notes that “the growing backlog response to “higher valuations, as the issuer is able to of investments with longer average holding periods raise the same amount of capital by selling a smaller translates into a growing number of operationally im- percentage.” proved companies” ready to be sold. Combine this sup-

CHART 1: On the Upswing? An increase in PE-backed IPOs in 2014 could eclipse the 2007 high point

PE-‐Backed IPOs

Proceeds Number of PE-‐backed IPO

$70.0 250 $60.0 200 $50.0 $40.0 150 $30.0 $Billion 100 $20.0 50 $10.0 $0.0 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

2013-‐Annualized

Source: EY Privcap Special Report • Outlook 2014 | January 2014 / 19 OUTLOOK 2014 / IPOs CHART 2: Follow-On Liquidity? PE-backed follow-on offerings have been an important source of returns for investors

PE-‐Backed Follow-‐Ons

Proceeds Number of PE-‐backed IPO $120.0 350

$100.0 300

250 $80.0 200 $60.0

$Billion 150 $40.0 100

$20.0 50

$0.0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: EY

Will They List? Which of these notable PE-backed portfolio companies will lift off from the IPO deck in 2014? On the following pages we profile 10 private-equity owned companies, which, assuming no unforeseen dips in the market or economic shocks across the globe, will likely target an IPO. These firms have a few things in common that make them good candidates:

A relatively long holding period by their PE owners (on average, over seven years) Eight out of the 10 had planned earlier IPOs, and more than a few had been on a dual track to either be sold via trade sale or taken public A heavy debt load (on average, more than $3 billion)—and hence a top priority for use of proceeds Six of the 10 have more than one owner—suggesting club deals may not be conducive to getting to the market quickly

Privcap Special Report • Outlook 2014 | January 2014 / 20 The Year Ahead OUTLOOK 2014/ IPOs for IPOs SILVER LINING cent stake in the racing group for $1.6 billion to Waddell After shelving an earlier attempt, could it be Aleris & Reed, Norges Bank, and BlackRock. CVC retains a 35.5 Corporation’s year to float? percent stake in the company, and at 21 percent, Waddell 1 & Read holds the second-largest interest. The estate of Beachwood, Ohio–based Aleris Corporation, a global Lehman Brothers is the next-largest owner with a 15.3 aluminum-product manufacturer and recycler, has had a percent stake. Bambino, the family trust of Ecclestone, turbulent history and attracted more than a few private holds 8.5 percent, and Ecclestone himself has 5.3 percent. equity investors. Having passed on an earlier public offering attempt, Aleris and its majority owner, Oaktree Cap- Formula One Group holds the rights to commercially de- ital Management, are hoping for continued strength in velop the FIA Formula One World Championship, which the stock market and recovery in commodities markets. has been held each year since 1950. This includes the right to stage and promote events, to sell broadcast footage, In 2006, Aleris was taken private by TPG in a deal worth and to offer sponsorship and hospitality packages. The $3.3 billion. In 2009, with the onset of the global finan- majority of the group’s revenue comes from fees paid to cial crisis, the company filed for bankruptcy. In May 2010, host and televise F1 races, which have grown in popu- Aleris emerged from bankruptcy with the help of a $1 bil- larity and in number. Revenues for 2012 were estimated lion debtor-in-possession financing from its new owners, to be more than $2 billion, thanks to multimillion-dollar Oaktree Capital Management (59.7 percent), Bain Cap- contracts with groups such as BSkyB and BBC. ital’s Sankaty Advisors (21.4 percent), and Apollo Global Management (18.9 percent). CVC has refinanced F1’s debt several times and has returned around $3.7 billion to its investors from dividends. The company was formed in 2004 with the merger of Most recently, in July 2013, it refinanced a $2.5 billion loan one of the country’s biggest aluminum producers, Com- to reduce borrowing costs. monwealth Aluminum, with one of the biggest recyclers, IMCO Recycling. Aleris is a global leader in the production F1 is in a strong economic position, given it is a rare glob- and sale of aluminum rolled and extruded products, real sports property with a strong and growing worldwide cycled aluminum, and specifications alloy manufacturing. appeal. As the company has a number of interested buy- For the nine months ended September 2013, Aleris gen- ers, healthy revenues, and relatively low debt, an IPO will erated revenues of $3.3 billion and reported a loss of $8 provide F1 increased cachet and permanent capital. million. A 2014 IPO would follow CVC’s attempt last year to float Aleris is in a highly cyclical and capital-intensive business. the company in Singapore, in a deal that was expected to When it filed for an IPO in 2011, it indicated that it planned raise around $2.5 billion. Weak markets were said to derail to use the proceeds from the IPO to fund operations and those plans. This time around, markets have improved, invest in facilities in China. Access to permanent capital but the dark clouds over the man dubbed “F1 supremo” would help provide financial stability, refinance the firm’s threaten what could be Singapore’s biggest 2014 IPO. $1.2 billion in long-term debt, and give owners liquidity. Originally planned for 2011, then moved to 2012, then FEELING BETTER shelved, a 2014 Aleris IPO would be particularly timely Debt-financed acquisitions mean Aptalis Phar- for Oakwood, which has been looking to cut its major- 3 ma’s owners are likely to list the drugmaker ity stake. Back in 2012, the pricing for the $500 million Bridgewater, New Jersey–based Aptalis makes drugs to planned offering put the firm’s market value around treat gastroenterology and cystic fibrosis. It is approach- $1.7 billion. Last May, Dutch aluminum-products maker ing its sixth year as a TPG portfolio company in an indus- Constellium NV went public. It was 32 percent owned by try that has seen a flurry of private equity M&A activity. Apollo. An IPO would help pay down debt, finance R&D, and create permanent capital. With a number of potential suit- IN POLE POSITION ors, a trade sale is also possible. Only legal action stands in the way of Formula In 2008, TPG Capital took Axcan Pharma Inc. private in a 2 One going public transaction valued at $1.3 billion. In 2011, Axcan combined The only thing standing in the way of a big payday fThe with Netherland’s Eurand, a global specialty pharmaceu- only thing standing in the way of a big payday for CVC tical company, to become Aptalis Pharma. TPG is an ac- Capital Partners and other owners of London-based For- tive participant in the pharma industry, picking up gener- mula One (F1) is the legal fate of its 83-year-old chief ex- ics maker Par Pharma for $1.9 billion in September 2012. ecutive, Bernie Ecclestone. As one of the world’s greatest Aptalis has manufacturing and commercial operations sports and media franchises, F1 is a highly sought-after in the U.S., Canada, and Europe and markets more than property. Yet the legal battles of Ecclestone, over an al- 40 projects in more than 50 countries. In the first nine leged bribe at the time of the sale of an interest to CVC, months ending June 30, the company had revenues of could derail a lucrative IPO. around $530 million. With a number of its major products In 2006, London-based CVC purchased more than 60 off-patent, Aptalis’s business is vulnerable to competition percent of Formula One from the family trust of Eccle- from generic drug manufacturers. stone and three banks: JP Morgan, Lehman Brothers, Aptalis carries a heavy debt burden, following the com- and German lender BayernLB. In 2011, CVC sold a 21 per- pany’s mainly debt-financed acquisition of Eurand. In

Privcap Special Report • Outlook 2014 | January 2014 / 21 OUTLOOK 2014/ IPOs

$604 million in the quarter. September 2013, it arranged a $1.25 billion loan to refinance debt and pay a $400 million dividend to TPG. In addition to providing an exit for Apollo, an IPO or sale Paying down its debt, providing additional liquidity to its would help to pay down Momentive’s rising debt load, owners, and financing R&D investment are at the top of which hit $7 billion for the combined operations at Sep- its use-of-proceeds list. tember 2013. Additional capital is also necessary for future consolidation plays and for competing with chem- After its efforts to sell the company earlier in 2013 fell ical giants such as Dow Corning and Wacker Chemie, through, in October Aptalis appointed bankers to pre- which are much less levered. pare the company for an IPO. TPG’s reported $4 billion price tag was thought to be high for potential suit- An IPO attempt in 2014 would be Momentive’s second ors such as Sun Pharmaceutical Industries and Salix try. In April 2011, it filed for an $862 million listing, but withdrew it in August 2012. The prime culprit was “ane- mic global economic conditions.” The slowly improving HOPING FOR MOMENTUM A heavy debt burden is among the driving forces economic outlook suggests this may be the year for behind a Momentive Performance Materials Apollo to cash in on the industry’s up cycle. 4 listing READY TO CLEAN UP Momentive Performance Materials is a world leader in After some shelved attempts at going public, specialty chemicals and materials and is one of Apollo Europe’s recovery means an ISS listing could be in Global Management’s many bets in the cyclical chemical 5 the pipeline for 2014 industry during the global financial downturn. Colum- bus, Ohio–based Momentive is made up of two sepa- The long-awaited IPO of integrated-facility services pro- rate operations—Momentive Performance Materials vider ISS A/S is anticipated for 2014. With a few previous and Momentive Specialty Chemicals—with the latter an attempts to list and two failed trade sales, ISS’s majority add-on that Apollo combined with its original invest- owners know the script. A public listing would take the ment in 2010. company, Denmark’s second-largest, to the next phase of its global expansion. In 2006, Apollo Management LP purchased Momen- tive General Electric Advanced Materials for $3.8 billion. ISS was taken private by Goldman Sachs Capital Part- The deal included former GE joint ventures of GE Bayer ners and EQT in 2005 for about $3.9 billion (€2.9 billion). Silicones and GE Toshiba Silicones. In 2010, Apollo com- In August 2012, Ontario Teachers’ Pension Plan and bined Momentive with Hexion Specialty Chemicals Inc., KIRKBI Invest A/S invested €500 million for a 26 percent a resin maker it formed in 2005 through a merger of interest. Certain members of the board and executive Borden Chemical, Resolution Products, and Bakelite. management hold about one percent. The 2012 investment valued ISS at €5.8 billion including debt, with the Momentive Specialty Chemicals Inc., which serves the proceeds used to pay down debt. global wood and industrial markets, saw its third-quarter 2013 total revenues increase six percent to $1.25 billion. ISS operates in more than 50 countries, providing clean- The materials side of the business, which manufactures ing, maintenance, security, catering, and property ser- silicone, silicone-based derivatives, quartz, ceramics, and vices for commercial buildings. With weak growth and other specialty materials for industrial applications, also difficult macroeconomic conditions in Europe in recent saw a six percent increase in sales on the year prior, to years, the company has pushed into emerging markets.

SNAPSHOT OF PE-BACK IPOS IN 2013 -Global PE-Backed IPOs jumped by nearly 160% by value in 2013 (to $57 billion) and nearly 65% by number (181), from the prior year -For 2013, October saw the most IPOs (26) and highest value ($12.9 billion) -Financials were the most active sector in terms of proceeds, raising $11.7 billion, while Health Care saw the greatest number of IPOs, with 32 -A record 345 PE-backed IPOs raised a record $109 billion in follow-on offerings in 2013—a 55% increase by value from 2012 -Europe saw a significant resurgence in PE-backed IPOs—increasing 660% by value to $17.6 billion and 467% by number to 34 -Nearly 60 PE-backed companies are in the pipeline to raise $14 billion

Privcap Special Report • Outlook 2014 | January 2014 / 22 OUTLOOK 2014/ IPOs

Revenues for the third quarter of 2013 were €2.6 billion, hand. The four mega-buyout groups which purchased down 3.6 percent from a year ago. the company in 2007 have grown the business and are ISS is committed to deleveraging and putting in place a looking to exit. As Biomet’s global businesses continues simpler stable long-term capital structure. It has made to recover in line with the IPO market, the timing looks partial redemptions with proceeds from divestments. In good. early 2013, ISS refinanced US$4.1 billion in loan facilities, In 2007, the private equity consortium of Blackstone which are now due in 2018. Paying back debt and provid- Group, Goldman Sachs Capital Partners, Kohlberg Kravis ing liquidity for investors are key drivers for going public. Roberts, and the Texas Pacific Group took Biomet private, ISS is no newcomer to the listing process. In 2007, IPO paying $11.4 billion. They were joined by one of Biomet’s plans were dropped and an $8.2 billion IPO in 2011 was founders, Dane A. Miller. pulled when U.K. rival G4S made an offer, which fell apart. So did a €6.5 billion follow-up bid from Apax. With Founded in 1977, Biomet went public in 1982 and made a a recovering European economy and a stronger balance number of acquisitions that enabled it to enter new mar- sheet, an estimated £5 billion (€6 billion) float looks likEly. kets. In the recent fiscal half year, 56 percent of the firm’s $1.5 billion in revenues came from the large-joint recon- COMMODITY CONUNDRUM struction business, followed by 19 percent from sports, Could a debt refinancing be enough to unearth extremities, and trauma. The company is challenged by a slower European market and legal issues around one of mining-services group Barminco’s buried IPO? 6 its hip-replacement products. The IPO stars are lining up for Western Australia–based Fresh capital from an IPO would help pay down the firm’s mining-services company Barminco Ltd. With an im- $5.9 billion in debt and provide liquidity for its four own- proved balance sheet, fewer problem contracts, and a ers. Maintaining high R&D spending to drive product in- shift away from its lackluster domestic market, the firm’s novation is seen as essential to gain market leadership, prospects of tapping the public investors should be bet- and acquisitions remain a key vehicle for gaining market ter than its 2010 attempt. However, the renewed con- share. fidence is tempered by falling commodity prices and an uncertain outlook for the mining industry. Biomet is expected to follow a dual-track strategy of preparing for an IPO but of also being shopped to po- In a management buyout valued around $200 million, tential buyers. An earlier analysis suggested that an Sydney-based Gresham Private Equity bought a 70 per- IPO may yield a value higher than Alcon’s $2.5 billion cent stake in Barminco in August 2007, with Peter Bart- raised in 2002, which would make it one of the larg- lett, the firm’s founder, holding the remaining 30 percent est in the medical-device industry in the past 20 years. stake. Gresham is backed by Australia’s largest conglom- erate, Wesfarmers Ltd., but with only three portfolio companies and no plans for a new fund, it may have a COMMUNICATIONS TITAN limited life in private equity. Capital concerns make Avaya a candidate for list- Established in 1989, Barminco’s primary underground ing in the coming 12 months mining business, in gold, copper, silver, and nickel, has 8 been in Australia. With the domestic market peaking, Avaya, the Santa Clara–based telecom-equipment and the company has made a big push to diversify into West communications giant, has experienced a few financially Africa, South Africa, and Egypt. Today almost 20 percent difficult years. But after numerous acquisitions to broad- of Barminco’s A$825 million in revenue flows from Africa, en its product base, the company is on the IPO path. A and its sights are on Southeast Asia and Latin America. high debt burden and fierce competition are driving the need for permanent capital, and the failure to close a As a highly levered private-equity-backed firm in a cap- merger with Oracle in 2013 makes a public offering the ital-intensive business, Barminco has more than a few next-best attractive option. uses for a capital infusion. Addressing the firm’s A$400 million in debt was part of the motivation for the US$545 In 2007, Silver Lake and TPG Capital took Avaya private million IPO planned for in 2011, which fell through. for $8.4 billion, the largest leveraged buyout of a comput- er-networking company at that time. The deal was ex- With the refinancing of its debt, Barminco addressed one pected to give what was then the world’s biggest maker of the issues which forced it to pull its 2011 planned IPO. of corporate-phone-network equipment the ability to The turnaround in the global IPO market should address better innovate and compete with Cisco Systems Inc. in weak market conditions. And how well KKR’s planned the market for Internet-based systems. end-of-year IPO of its mining-service company BIS In- dustries fares should reveal investor sentiment for the In 2000, Lucent spun off its enterprise communications sector. group that became Avaya and later that year went public. After going private in 2007, Avaya bought a string of startups and has been aggressive in launching new prod- IN RECOVERY MODE ucts. The company’s sales, which hit $1.15 billion in the Biomet could be among 2014’s biggest medical-device third quarter of 2013, are split roughly equally between 7 sector’s IPOs products, such as phones and video-conferencing de- Warsaw, Indiana–based Biomet, a medical-engineering vices, and services for the communications networks of company, could become one of the largest IPOs of the medical-device sector if a suitor doesn’t step up before- Privcap Special Report • Outlook 2014 | January 2014 / 23 OUTLOOK 2014/ IPOs

companies. MEATY DEAL With more than $6 billion in long-term debt and about Debt and an offshore expansion are adding weight to the $2 billion of that coming due in 2017, Avaya has a seri- likelihood of a Shuanghui International Holdings listing ous need of fresh capital. In addition, its higher debt levels 10 Shuanghui International Holdings, the Chinese meat pro- put it at a disadvantage against competitors that have cessor, is poised to make a $6 billion splash on the Hong stronger balance sheets. With Avaya soon to hit its sev- Kong stock exchange in mid-2014. With the $4.7 billion enth year as a portfolio company, its owners Silver Lake purchase of Smithfield Foods last summer, the com- and TPG are keen for an exit. pany’s increased debt load is becoming an important Avaya’s owners have looked at exiting a few times. In 2011, IPO catalyst. The offering would also help ramp up the the company filed for a $1 billion IPO, about 20 percent of group’s international expansion. the firm. The offering was taken off the table. In the first The top three owners of Shuanghui are: (1) CDH, one half of 2013, Avaya held discussions with hardware and of the China’s longest-established private equity funds, software giant Oracle about a deal, but the talks fizzled. which owns about one-third of the company; (2) Heroic Zone, a vehicle owned by senior management and staff, TOYING WITH THE MARKET which owns another third; and (3) the Kerry Group, which Some hurdles remain if Toys ‘R’ Us is to be the next retailer has a stake of just over seven percent. Other owners in- 9 to go public clude Goldman Sachs, with about five percent; New Ho- As Toys ‘R’ Us limps into the 3Q with a loss, the Wayne, rizon, a Chinese private equity firm set up by the son of New Jersey–based Toys ‘R’ Us’s decision on whether Wen Jiabao, China’s former president, which owns about to pull the trigger on the long-awaited IPO of an early 4.2 percent; and Temasek, the Singaporean sovereign high-profile “club deal” is likely to turn on the perfor- wealth fund, with almost three percent. mance of holiday sales. Last March, the world’s largest Using joint ventures as well as offshore and onshore specialty toy chain nixed an earlier IPO attempt, given entities, Shuanghui’s chairman, Wan Long, engineered its leadership vacuum and deteriorating sales. With dis- a management buyout in 2010 that freed the company ruptive competitive and technology forces continuing to from state ownership. The purchase of Smithfield, the shake up the retail sector, the pressure to exit is high. world’s biggest hog producer, will allow Shuanghui to di- Toys ‘R’ Us first went public in 1978 and was taken pri- rectly sell the Virginia-based company’s pork products in vate in 2005 by an investment group that included Bain China, one of the world’s biggest pork markets. The com- Capital Partners, KKR & Co., and Vornado Realty Trust. pany will also gain an array of brand names, as well as Diverging interests have created challenges. Vornado, food and safety knowledge, which it can leverage in its whose goal was to monetize the real estate value of the home market and throughout Asia. stores, has been more pressed than others to exit early. Paying back debt and refinancing the Smithfield deal, Founded in 1948, Toys ‘R’ Us has grown to become the as well as providing liquidity for owners to exit, are the primary uses of IPO proceeds. Both the Shuanghui and nation’s largest toy retailer with 877 Toys ‘R’ Us and Ba- Smithfield operations have limited dividend-paying ca- bies ‘R’ Us stores and more than 685 international stores. pacity, so servicing additional long-term debt is not a via- During the past 10 years, it has seen new competition in ble option. Paying back CDH, which financed the Smith- the form of big-box retailers such as Walmart and online field acquisition, is said to be a top priority. competitors such as Amazon.com. New CEO Antonio Urcelay faces a highly competitive global toy market in As an IPO is likely to command a higher value at an ex- which the U.S. business, valued at $22 billion, grew just change closer to its home market, the Hong Kong stock two percent last year. exchange is likely beat out New York. The IPO could be a record-setting Hong Kong deal, as the combined value In 2010, when it was first preparing to launch an IPO, the of Shuanghui and Smithfield is estimated at around $20 company said it would use the targeted $800 million offering to retire debt, which today stands at around $5 bil- billion./ lion. A lower debt burden would free up capital to expand internationally and remodel U.S. locations. Last year saw a number of planned or executed PE- backed IPOs of retail companies. The price of the Con- tainer Store offering in November more than doubled on its first trade day, and luxury retailer Neiman Marcus was bought by two PE groups before its IPO was launched. Strong holiday sales and a rebound in fourth-quarter results could see Toys ‘R’ Us get swept up in early 2014 IPO activity.

Privcap Special Report • Outlook 2014 | January 2014 / 24 OUTLOOK 2014 / FUNDRAISING The Year Ahead Ten private equity fundraisings Fundraising to watch in 2014 By David Snow

any hopeful GPs will be attempting to The biggest firms, however, have advantages not en- raise private equity funds in 2014. What joyed by up-and comers—strategic diversity and well- are their chances of success? Anyone oiled IR functions. Most of the mega-firms have added raising a fund this year is wise to pay new fund strategies, in some cases carving out spe- attention to the fundraising landscape generally, and cific sector focuses from what used to be global, mul- certain bellwether fundraisings in particular, to get a ti-sector singe funds. If a firm’s next U.S. private equi- better sense of their own chances of success. ty fund is smaller, perhaps the Asian real estate fund will make up for the shortfall. In addition, the largest According to Hamilton Lane, the number of PPMs in firms have the benefit of armies of IR professionals circulation today is at or near a post-recession high, who have maintained ties with investors throughout with some 650 GP groups on the fundraising trail. Not the Great Recession, making sure their capital partners all of these groups will raise capital. In fact, the odds are understand the Herculean efforts that the GPs were against many of them. undertaking to preserve and create value, and arguing that the same skills will be even more effective in an Ten private equity fundraisings That LPs are reducing the number of relationships they up-market. have with private equity firms is a well established fact. to watch in 2014 A great number of mighty mega-firms will continue Below, we outline ten fundraisings that are worth to exist, but will manage smaller follow-on funds. This watching this year. shouldn’t be surprising—the league table of the largest private equity firms is always changing. Some firms that were dominant in the 1980s and 1990s no longer exist. It should therefore be assumed that some firms that dominated in the 2000s will not in the unfolding current decade.

Ten Funds to Watch FUND FIRM TARGET SIZE OF CLOSE OF PRIOR FUND PRIOR FUND Apollo Investment Fund VIII Apollo Global Management $17.5bn $14.7 2008

Charterhouse Capital Partners X Charterhouse Capital Partners N/A €4bn 2009

Doughty Hanson VI Doughty Hanson €3.5bn €3bn 2007

First Reserve Fund XIII First Reserve $5bn $9bn 2008

GS Capital Partners VII Goldman Sachs N/A $20.3bn 2007

Hopu Master Fund II Hopu Investment Management $2bn $2.5bn 2008

Levine Leichtman Capital Partners V Levine Leichtman Capital Partners $1.5bn $1.2bn 2008

Northstar Pacific Partners Northstar Group $1bn $820m 2011

TPG Partners VII TPG Capital $8bn to $12bn $19.8bn 2008

Unison Capital Partners IV Unison Capital ¥100bn ¥140bn 2009

Privcap Special Report • Outlook 2014 | January 2014 / 25 OUTLOOK 2014 / FUNDRAISING

Ten Fundraisings to Follow

ALL HAIL APOLLO Apollo Investment Fund VIII targets $17.5 billion 1Will the eighth private equity fund from the ambidex- trous Apollo Global Management be the biggest fundraise of 2014? Indications so far show surging demand for the fund and no competing efforts to knock Leon Black and team from the top post. Apollo’s balance sheet and its credit-market expertise gave it an edge in the economic downturn as it navigat- ed its portfolio companies through turbulent times and took advantage of opportunities to enter equity ownership through debt doors. A brilliant example was Apol- lo’s investment in Netherlands-based LydonellBasell In- dustries – the firm began acquiring distressed debt in Lyondell in 2008 and converted that to an equity position. It is now selling off its position and has reportedly reaped some $7 billion in value on a $2 billion investment. “Apollo has produced consistent distributions, which Pension domination: Charterhouse’s LPs, by type of investor LPs love,” says a placement agent who is watching the Source: Charterhouse effort for Fund VIII carefully. “If they can produce good According to a source at a separate European buyout returns in tough cycles, LPs believe they can do very firm, limited partners in Europe, Asia and the Middle East well in up cycles.” are enthusiastic about participating in what is seen as a While the vintage year 2008 isn’t far enough away for sustainable restructuring and recovery across Europe. truly meaningful performance information, to date But US LPs–an important source of capital for the firm– Apollo Fund VII is showing a very attractive net IRR of are more hesitant, though warming to the opportunity. 23.6 percent, according to investor CalPERS. Its 2001 Charterhouse, not unlike a number of other major GP vintage fund is even stronger at 37.7 percent, while a franchises, has gone through some gut-wrenching 2006 vintage vehicle is barely cracking 8.1 percent – leadership changes. When managing partner Gordon it’s hard to outperform when you put billions to work Bonnyman stepped down in 2010, he originally selected leading up to a recession. three co-managers to lead the firm, but that was re- Limited partners have been overheard saying they duced to a single managing partner, Lionel Giacomotto, don’t find mega-funds attractive in today’s market, yet according to reports. The firm has also gone through a Apollo has reportedly lifted its target for Fund VIII from change in ownership structure, several high-level de- $15 billion to $17.5 billion. Apparently, these LPs are will- partures, and a lawsuit from a former partner. ing to make an exception for Apollo. The firm’s current fund has not surprisingly had trouble deploying its €4 billion through the recession, and THE EUROPEAN X FACTOR Charterhouse has asked its LPs for an investment-pe- Charterhouse Capital Partners looks towards riod extension. Whether the firm can put a dent in the Fund X 2 remainder of Fund IX will determine if it goes to market Having completed its first LBO in 1982, Charterhouse is with Fund X in 2014. one of the few firms to have participated in the entirety Charterhouse’s historic returns have been solid to stel- of Europe’s private equity history. If LPs support its next lar. Fund IX is showing a largely unrealized net IRR of fund, the longstanding relationship will continue. 8.3 percent – not worrying if one factors in the J-curve Charterhouse’s credentials are reinforced by its long effect. The first close of that fund was “on 80 percent of history of successful investments across Europe, de- the money, as Lehman was falling apart,” says a place- spite a center of gravity in London. Complicating its next ment agent who followed the effort. fundraise is a mixed view on Europe’s recovery, a chal- If Charterhouse can show its team is still aligned and lenged leadership transition, and the performance and humming, it can lay claim to a rare ability to navigate Eu- deployment of Fund IX. Privcap Special Report • Outlook 2014 | January 2014 / 26 OUTLOOK 2014 / FUNDRAISING

rope’s large, variegated and strengthening opportunity. energy space and decades of deep experience. It has also been hit by turnover and disappointing recent fund per- DOUGHTY HANSON 2.0 formances. Fund XI, which raised $7.8 billion in 2006, is A veteran firm seeks €3.5bn without one showing a 4.3 percent net IRR, according to CalPERS. The founder next fund, which drew $9 billion in 2008–to date the larg- 3 est energy investment fund ever raised–is showing a four The London-based, pan-European private equity percent net IRR (although the fund is too young for that firm Doughty Hanson had a strong 2012, after it began figure to be very meaningful). with an unexpected tragedy—the death of co-founder Nigel Doughty. As the firm noted in a 2012 wrap-up The minutes from a Washington State Investment report to investors, the firm’s two most recent funds Board meeting in 2012 summarize the challenges facing were showing strong performances despite the gen- (and the continued attraction to) the First Reserve team. erally weak conditions across Europe. In comments made by Fabrizio Natale, an investment Doughty’s passing prompted a rethinking of the firm’s officer of the state pension–and long-time First Reserve ownership structure. “We decided to move to a part- backer– the firm has a “diversified approach to energy in- nership model under which the investment team will vesting, [an] experienced team with extensive energy in- become partners in the business,” wrote co-founder vesting expertise. . . [and a] strong historical performance Richard Hanson. “As a result, ownership of the firm will of earlier funds”. be spread widely among our 27-strong private equity The board members learned of First Reserve’s “smaller, team and other senior executives. This creates very more appropriate fund size” and how it has “refocused on strong alignment between the Doughty Hanson team its core, strengthened the team and processes.” The pen- and our investors.” sion agreed to commit $400 million to the fund, which is The ownership change will likely be welcome by in- now reportedly seeking a reduced target of $5 billion. vestors who increasingly want to see broad economic participation in all aspects of the firm and funds. GOLDMAN, BY HALF “Before, that organization had always been tightly con- The silent giant is plotting its next move in a trolled by Doughty and Hanson,” says a fund due-dili- complex regulatory and investment environment gence specialist. 5 No one is worried about Goldman Sachs—the firm has In an increasingly institution- a habit of winning in ways that leave the competition al market, the firm is set up scratching their collective head. And yet market observ- to tackle the European op- ers, well aware of the firm’s big footprint as a principal portunity from an array of investor, are wondering how the firm can possibly match regional hubs. Its deal teams its previous private equity fundraising goal given market are supplemented by ESG (en- realities and the daunting Dodd-Frank regulations. vironmental, social, governance) risk-screening and its Goldman Sachs is, after all, a bank. And Dodd Frank makes it value-enhancement function exceptionally difficult to conduct substantial principal is making a real performance investing from under the roof of a bank. Few private contribution, according to the equity programs are bigger than Goldman’s. The firm firm. The firm’s last fund was raised in six months. A similar fundraising success this time around will say a lot about investor faith in the future of Europe and the future of a rea- Nigel Doughty ligned Doughty Hanson team.

FUEL EFFICIENT First Reserve right-sizes for Fund XIII 4 Few firms are investing out of a fund with the Ro- man-numeral X in its name. Greenwich, Connecti- cut-based energy veteran First Reserve is one of them. Are investors interested in the global energy investment opportunity? Profoundly. Will First Reserve be the dominant manager of their capital for this opportunity? Less so than has historically been the case.

The firm has an unparalleled global network in the Goldman HQ

Privcap Special Report • Outlook 2014 | January 2014 / 27 OUTLOOK 2014 / FUNDRAISING

raised just north of $20 billion in 2007 – still one of Hopu is among dozens of Chinese GPs on the fundraising only two PE vehicles to exceed$20 billion (Black- trail—but with a proven ability to close and exit large stone’s 2006 fund is the other). deals with large capital partners, it has a huge advantage. It is hard to learn much about Goldman’s plans, but the head of the private equity program, Richard Fried- man, made some candid comments at a 2012 conference that gave a hint about the scope of the group’s future activities. “Today, a $20-billion fund wouldn’t make sense,” he said, according to a Dow Jones report. “We’ve all had to readjust our strategies to do smaller deals.” Friedman speculated that the firm’s next private equity fund would be between $7 billion and $10 billion—half the size of the 2007 vehicle. Friedman added, “We’re holding off on raising a new fund until we get clarifi- cation on the new rules.” Goldman’s fund-formation abilities are formidable, but much of the capital from the prior fund came from Lauren Leichtman Goldman partners themselves. According to an an- nouncement in 2007, $9 billion of Fund VI came “from STRUCTURED FOR SUCCESS the firm and its employees” and a substantial amount Levine Leichtman nears $1.5bn of the remainder came from high net worth clients. 7 Los Angeles-based Levine Leichtman Capital Partners Will the passed hat at 200 West Street raise as much for the is a well established “structured equity” firm that also next effort? Will there even be a Goldman Sachs Fund offers other strategies, including an SBIC fund and VII, or will it be some independent entity, following on a California-focused investment program. Its fifth a long line of investment bank spinouts? The answers structured equity fund is among the largest in the to those two questions will speak volumes about the middle market and will be closely watched as an indi- state of Goldman, the market, and the new regula- cation of demand for private equity investment strat- tions governing both. egies that include fixed-income securities. The firm’s existing fund, raised in 2008, is showing a strong HOPU SPRINGS ETERNAL performance at 26.8 percent net IRR. Reportedly the China’s most-connected deal team eyes firm is well on its way to a final close at or above its another $2bn target – a July SEC filing indicates that Levine Leicht- 6 man had raised some $1.27 billion. The new fund will The standard rules of team and track record don’t seem to apply to China’s most sought-after private be the firm’s largest yet. equity firm. After Goldman honchos Fang Fenglei and Richard Ong SOUTHEAST ASIAN FRONTIER and KPMG China co-chairman Dominic Ho founded TPG-backed Northstar goes for $1bn Hopu Investment Management in 2008, the trio did a 8 Investors have been increasingly interested in oppor- spate of deals, then went their separate ways. Ong left tunities beyond the BRICs, and with a population of in 2011 to set up RRJ Capital; Ho retired. The firm report- 600 million, Southeast Asia appears to be incredibly edly decided to “wind down” its portfolio, but times underpenetrated by private equity. Northstar Group quickly change. Fang decided to raise a second fund. will test investor appetite for that opportunity with a In the mature private equity markets, having two fund that reportedly has a hard cap of $1 billion. founders leave in the middle of an investment period tends to sour investors on everyone involved. But in The Singapore-based firm is also evolving in a way China, access is perceived as an incredibly important that will make many Western-based firms envious— investment attribute—and Fang clearly has access in that’s toward greater dominance as a fund investor as spades. Will investors give him credit for having lined opposed to a club-deal leader. The firm’s investment up the $1 billion in capital from Singapore’s Temasek activity to date has seen it oversee a greater volume for Fund I and struck deals with Bank of China and of co-investment capital than capital from its own China Construction Bank? The answer appears to be fund. Among its investment partners have been TPG, “yes.” Government of Singapore Investment Corporation Hopu’s second fund is reportedly at $1.1 billion. The firm has (GIC) and China Investment Corporation (CIC). done new deals with Temasek as a co-investor. The Hopu team now reportedly includes Bi Mingjian from TPG liked its experiences with Northstar so much China International Capital and Cliff Chau from China that it agreed to a share swap in the firm—TPG Investment Corp. owns a 20-percent stake in the firm and North-

Privcap Special Report • Outlook 2014 | January 2014 / 28 OUTLOOK 2014 / FUNDRAISING

star owns a 5 percent stake in TPG. With the global brand and fundraising muscle of TPG behind it, it is likely that $1 billion is a modest beginning for a private equity franchise that has a vast, underpenetrated and growing economic region to play in.

TPG’S TIME AND MONEY 9 Building LP Support For Fund VII During the past five years, no firm has raised more capital for direct private equity investing than TPG. Its record of success can be seen in the quick-succession closes on $15 billion in 2006 and $19.8 billion in 2008, as well as its successful, Carlyle-like forays into multiple strategies and geographies. When you raise that much capital, a large number of influ- Unison HQ ential institutions pay close attention. The top two metrics they follow: Can all that capital be put to work JAPAN ALSO RISES in an effective manner within a reasonable amount Unison Looks to Fund IV of time? And can the GP team find opportunities that Do you have a private equity allocation to the world’s generate attractive returns without undue risk? 10 third-largest economy? For many LPs, the answer is For TPG’s most recent two funds, the answers to both no. An expected fundraising effort from the Japan’s questions remain uncertain. According to the most largest local PE firm is set to serve as a test of LP-ap- recent CalPERS figures, TPG V is generating a negative petite for deploying capital into a post-“Abenomics” 1.4 percent net IRR, and the massive TPG VI, closed at environment. the beginning of the economic downturn, is showing Led by former Goldman banker John Ehara, Unison has a an 8-percent net IRR. Like many mega-firms, TPG track record of closing large deals in a country that has seen some of its pre-recession vintage deals suf- has utterly defeated other powerful global private fer, especially a disastrous investment in Washington equity firms. Mutual. Protracted economic doldrums in the country, coupled What’s more, the firm, led by James Coulter and David with a stubborn lack of PE deal volume growth, “led Bonderman, has reportedly asked its LPs to give it many investors to turn away from Japan,” says Kelly more time to deploy the most recent fund, extending Deponte of Probitas Partners. However, according the investment period into early 2015. An extension to a recent survey from Probitas, investor interest in would somewhat relieve the pressure to start collect- Japan has roughly doubled in the past year, due no ing capital commitments for Fund VII before more doubt to a perception that the policies of Prime Min- much-needed good news starts to flow from either ister Shinzo Abe are creating a fresh environment for of the recent mega-funds. restructuring and growth. If any groups are to benefit from this perception change, Unison will no doubt be among the first./

James Coulter

Privcap Special Report • Outlook 2014 | January 2014 / 29 OUTLOOK 2014/ DEBT

Click to watch this video at privcap.com Debt 2014 In 2014, debt is poised to play a pivotal role in the performance of private equity. Our panel discusses the outlook for PE debt pricing, availability and covenants in 2014

Privcap Ben Marzouk, Monroe Capital Joe, how are private equity deals being financed Some of these banks are not playing in the today? lower end of the middle market because they like size. They’re risk averse and they want to Joe Burkhart, Saratoga Investment Corp make sure that they’re lending to companies At Saratoga, we focus on the lower end of the that have stability. Usually stability equates middle market, which we define as business- with large companies, so they do feel uncom- es with less than $10 million in EBITDA. And fortable leveraging up smaller companies But the main thing we’ve taken note of partic- one of the things that’s going on today is that ularly this year is the lack of available senior while some of the banks have left that mar- bank financing for that part of the market. So ket the number of [Business Development if you looked at deals maybe four or five years Companies] has tripled over the past couple of ago that would rely on traditional bank that years. more and more they’re now turning to firms like Saratoga and Monroe to provide non-bank Privcap financing. Ben, is there a company size that is the dividing line for certain types of financing? Privcap Why are the banks withdrawing from that part Marzouk of the market? We see the dividing line as probably 12.5 to 13 million dollars in EBITDA, why that line exists Burkhart I’m not really sure. But most finance compa- If you look at the statistics today, there are nies or banks feel comfortable lending, lending fewer banks than at any time in the history to companies in excess of $15 million dollars in of the United States [since they began keeping EBITDA, which creates a nice market position records]. You’re seeing regulatory frameworks or a nice market for BDCs like Saratoga and being put in place that make it too expensive Monroe. to exist as a small bank today. Burkhart It’s also based on revenue. If you have a business with less than $30 million, you really have “EVERYONE IS FIGHTING FOR THE SAME DEALS. to search around for traditional financing. ONCE THERE IS A GOOD DEAL OUT THERE Privcap Let’s talk about covenants? Are they required? EVERYONE IS WILLING TO LEND How many of them and how big a loan should AND WILLING TO COMPROMISE ON you look for if you want fewer covenants? TERMS AND CONDITION. IF THEY CAN’T Burkhart The terms and conditions have never been COMPROMISE ON TERMS AND CONDITIONS lighter, [not] since the last credit cycle. Most of THEY’RE CERTAINLY COMPROMISING ON the covenants tend to focus around total debt to EBITDA fixed-value coverage, and a book value THEIR INTEREST MARGIN AND PRICING ON test. There are all sorts of other covenants used, THE DEAL.” but those are probably the three main ones that we utilize. And while there are covenants, there Privcap Special Report • Outlook 2014 | January 2014 / 30 OUTLOOK 2014/ DEBT are also covenant waivers. We’re constantly being asked to amend when a borrower misses. And we’re more happy to do that when there is a technical default versus a payment default. But that’s happening, nonetheless.

Marzouk For the smaller end market you are going to have … three or four covenants because they are smaller and you have to monitor them and watch them a little bit more carefully. Once you start getting above that $13 to 15 million in EBITDA, everything is different. In the second half of 2013 you found that [sometimes] there will only be one covenant. And that’s usually a net total leverage covenant. And that’s the only thing they can implement at this point in time because it’s so competitive out there. Everybody has to put money out there. Ben Marzouk and Joe Burkhart Privcap Burkhart M&A activity was down sharply in 2013, how has that affect- ed lending conditions and what do you predict will happen This is about as hard of a private equity environ- in 2014? ment as I’ve ever seen. Today, [at closings] it’s less ‘great job guys’; it’s ‘let’s go do the hard work’./ Marzouk Right now, everyone is fighting for the same deals. Once there is a good deal out there everyone is willing to lend and willing to compromise on terms and conditions. If they can’t JOE BURKHART compromise on terms and conditions they’re certainly com- Managing Director of Business Development promising on their interest margin and pricing on the deal. Saratoga Investment Corp Burkhart A lot of the activity from this year was also refinancing, which Joe Burkhart leads the Company’s new business isn’t really good for anyone in this industry because it means efforts, working the Saratoga team to increase deal your pricing goes down. And so while you did see a flurry of flow, strengthen the firm’s investment-origination activity a lot of that was just re-pricing of debt that already platform and increase the assets under management. existed. Prior to joining Saratoga, Mr. Burkhart was the Managing DIrector of Tatum’s private equity practice. Marzouk And in addition to a lot of dividends being taken out, a lot of [recapitalizations]. Privcap BEN MARZOUK What are the challenges facing private equity firms? Is there an uptick coming? Managing Director Monroe Capital Marzouk As competitive as our world is, their world is just as competi- Ben Marzouk is the Managing Director at Monroe tive. [For] a lot of PE firms, multiples for companies with, say, Capital. Ben joined the team in 2012. Previously, 25 to 50 million dollars EBITDA is increasing tremendously. Ben Marzouk worked as Managing Director at Some of the large companies go for ten, eleven [multiples]. So Praesidian Capital. Ben Marzouk graduated from because that market is so competitive, they’re coming down Emory University Goizueta School of Business into the smaller market, the sub-15 million dollar EBITDA with an M.B.A. in Finance. market. [So for] the smaller PE firms that usually play in that market, it’s becoming more competitive. They’re willing to pay a larger premium than the smaller guys, and that’s caus- ing the multiples to go up and the pricing to go up. I think that 2014 will continue to be a pretty good year given what we see right now. Most of the M&A investment bankers are talking about good deal flow... so I think the first half of [2014] will be pretty decent as compared to last year.

Privcap Special Report • Outlook 2014 | January 2014 / 31 OUTLOOK 2014 / EXPERTS Experts Weigh In Privcap asks three luminaries which trends will move the private capital markets in 2014

Gene Wolfson John Roach Aaron Money

All Eyes on M&A Return to Fundamentals GENE WOLFSON AARON MONEY Partner, Investor Relations & Business Development, Catalyst Investors Managing Director, FFL Partners

“Many managers should keep an eye on the M&A market in “For the last 18 months, a combination of readily available debt 2014. For the past few years, it has been expected to pick at record low interest rates and capital from private equity up again. Some of the larger public companies have very and other investors has led to a very strong market for private large balance sheets, and they have money to spend, but to companies. There were acquirers flushed with cash that could date they’ve been very hesitant to spend it. This is clearly an borrow a lot of money, and that led to valuations that exceeded important factor for mega-buyout firms. For smaller firms, the expectations, regardless of company performance. Over the next importance would be the ability to have strategic exits from year, as some of that gets reined in, as private equity funds expire, their larger companies. So in 2014, if the M&A market does as some firms fail to raise new funds or not as much capital, recover and normalize, that would be an opportunity for a lot you’re likely to see a return to focusing on company fundamentals of distributions back to LPs, for which they’d be very grateful.” rather than the tide lifting all boats. There is going to be a return to looking at the quality of those boats, those companies, and I think investors will reward those firms who can prove they A Macro Perspective add value rather than just benefit from a buoyed market.” JOHN ROACH Operating Partner, FFL Partners

“From a macro standpoint, we have to face the fact that the U.S. market has not been robust economically for half a dozen years now. That has moved a lot of opportunities to the financial service side. There are still a lot of capital-intensive industries that have held back, but there has got to be growth potential there somewhere. So when are those upticks going to take place? Which industries are going to dominate? Which companies might be able to capitalize on that? Asking these questions will lead to good opportunity for investment in the next few years.”

Privcap Special Report • Outlook 2014 | January 2014 / 32 OUTLOOK 2014 / Privcap Archives

The Privcap Archives Check out Privcap’s full coverage of the private capital markets

FUNDRAISING & DEALMAKING KKR: Credit Investing in an Uncertain World How I Raised $250M for Impact Investing With Erik Falk, KKR With Jean-Philippe de Schrevel, Bamboo Finance Raising a First-Time Chinese RE Fund ARTICLE: Know Thy Creditor With Jeff Tucker, Century Bridge Capital Jim Hunt, THL Partners

Fundraising and Dealmaking in Latin America IPOs/M&A With Juan Savino and Cate Ambrose, LAVCA PE-Backed IPOs With Mike Rogers, EY Huron’s $500M Fundraise

With Gretchen Perkins, Huron Capital Partners Capitalizing on the Mexican IPO Market With Arturo Saval, Nexxus Capital Track Record: Does Your Firm Stack Up? With Peter von Lehe, Neuberger Berman IPOs and the New VC Exit Reality With Jim Robinson, RRE Ventures How to Fundraise with a Challenged Track Record With Experts from MVision and Gulf Capital

A LOOK AT INDIA

Capital Demand in India With Sanjay Nayar, KKR

Capturing Emerging-Market Growth With David Wilton, IFC

DEBT DISCUSSIONS The Changing Credit Landscape With Michael Cerminaro, Sound Harbor Partners

Privcap Special Report • Outlook 2014 | January 2014 / 33 SPONSORED CONTENT Solutions Financing in Automotive Retail How a strategic partnership is helping auto dealerships monetize the value of their real estate assets

ast year, sale lease-back spe- W. P. Carey considers this element of cialist W.P. struck a deal with stability attractive. “Few institutional RML Automotive to acquire investors are currently targeting the real estate assets of eight this opportunity,” says Fox. U.S. automotive dealerships. According to McLarty, the sale-leaseback It was the first of an expected series of transactions bought out some other Click to watch this similar deals in a space that both firms property owners, allowing RML to con- video at privcap.com say represents a great opportunity. solidate its landlord relationships into one For W. P. Carey, many automotive lessor. “To have one institutional landlord dealerships own great real estate and whose interest is purely in being a are great potential tenants. For RML, long-term, triple-net lease landlord the deal represented an opportunity to gives us the clarity and certainty we unlock value and put capital to work need to aggressively grow our business, What is a in better way. According to Frank McLar- whether it’s by improving operations or triple net lease? ty, CEO of RML, the Arkansas-based acquisitions,” says McLarty. “We can focus When the tenant is responsible company had been growing strong- our attention and corporate resources on for all costs related to the asset ly through acquisitions, and by 2012, operating the business, not on complicated being leased, in addition to “We wanted to continue to grow, so we real estate negotiations.” paying rent. looked for the best return on our equity In August, W. P. Carey completed a investment. We also looked at the return follow-on transaction with RML, acquiring we get on our operational investments a Toyota dealership in Texas for $15 million. versus the real estate—there’s a substantial The facility will be leased back to difference between the two.” RML on a triple-net basis for 16 years. Out of a desire to unlock the value of According to Fox, W. P. Carey re- its real estate, RML entered into a sale mains highly interested in automotive lease-back transaction with W. P. Carey. retail deals. “This industry meets many Jason Fox, managing director at things we look for in a long-term net the firm, says W. P. Carey carefully con- lease. Given the lack of institutional siders two elements when weigh- capital focused on only real estate in the ing a sale lease-back deal, first, the automotive market, there are opportunities criticality of the real estate to the to find ways to invest money at good tenant, and second, the proper- yields.”/ ty’s underlying, fundamental value. For many automotive dealerships, both of these boxes are checked. Fox’s team has found car dealerships, because they often sell new and used cars, are less impacted by economic cycles. Also, parts and services provide steady cash flow and cover 70 percent Sponsored by of fixed costs for the average dealership.

Privcap Special Report • Outlook 2014 | January 2014 / 34