Coller Institute of Private Equity Private Equity FindingsINSIghts from the world’s best prIVATE EQUITY RESEARCH ISSUE 5 WINTER 2011 / £25 $40 €30 TOP OF THE LIST Do private equity-backed IPOs outperform or underperform their peers? /10 SWFs UNCOVERED Financial objectives or political considerations – what drives SWFs? /12 PUBLIC TO PRIVATES Can PE’s long-term outlook really improve company performance? /18 THE REGULATORY TANGLE ALUMNI LINKS Private equity is getting caught up in new How employee networks can rules designed to stabilise the global economy. Can it find a way through? boost your business /23 INCLUDING CONTRIBUTIONS FROM: ARIZONA STATE UNIVERSITY l BOCCONI UNIVERSITY l CASS BUSINESS SCHOOL l HARVARD BUSINESS SCHOOL l MASSACHUSETTS INSTITUTE OF TECHNOLOGY l STERN SCHOOL OF BUSINESS l TURIN UNIVERSITY l UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS l UNIVERSITY OF MICHIGAN l UNIVERSITY OF OKLAHOMA l UNIVERSITY OF TORONTO l © LONDON BUSINESS SCHOOL 2011 Editorial Board CONTENTS Jeremy Coller FOREWORD Professor Francesca Cornelli Professor Eli Talmor The Coller Institute of Private Equity is now into its third 4 By the numbers year of producing Private Equity Findings. Our publication EBITDA growth key to PE value creation. Fundraising periods increase sharply. Capital calls outstrip has established a niche place in the market, uniquely bringing the world’s best academic research in private distributions for LPs. PE produces healthier companies, say LPs. Refinancing wall pushed back. Special acknowledgements equity to the broader stakeholder community in a highly and thanks to engaging and accessible format. While academic Hans Holmen, research in the industry continues to flourish, this is not Professor Eli Talmor 6 The regulatory tangle Coller Institute of Private Equity, possible without the cooperation of the industry. With As regulators worldwide seek to reduce systemic risk to economies, is private equity getting too caught up in red Executive Director additional data and funding, academics can continue to tape? Viral Acharya, L Watts Hamrick and Christopher J Bellini debate the impact of new US rules and discuss embark on new research projects, thereby enabling a more Professor whether they are really necessary. informed view of private equity, a very important point as Francesca Cornelli the industry continues to come under public scrutiny. This is in fact where our editorial starts in Issue 5 – regulation. In the aftermath of the financial crisis, regulators around the world have looked into ways to promote stability in the financial system. Rightly or wrongly, 10 Top of the list private equity has come under the microscope. In this issue, we look specifically at the implications of the Dodd- Public markets investors remain sceptical about private equity-backed IPOs; a recent study examines whether Frank Act in the US, covering the thoughts of our keynote speaker at the 2011 Private Equity Findings Symposium, they really underperform. Professor Viral Acharya of NYU Stern. IPOs are another area where the financial crisis has had a significant impact. Volatile capital markets have made IPOs difficult and PE firms have had to resort to other exit routes, namely strategic sales and secondary buyouts. But how have PE-backed IPOs actually performed compared with other IPOs? Issue 5 of Findings 12 The truth about SWFs examines this question, looking at a sample of listings on the London Stock Exchange. Despite their importance in the investment arena, little is known about SWFs. How do they build their We then proceed to examine the question of whether quarterly reporting obligations imposed by capital portfolios? How do they perform? And how does politics fit into their investment strategies? We discuss with a markets provide incentives for short-termism by companies. Findings looks at a new research paper which panel of experts. compares plant productivity of public companies with companies that have gone private. You may find the results surprising! In this issue, we also look at some of the world’s largest investors in private equity: sovereign wealth funds. Examining three research papers, the article seeks answers to a range of questions including how SWF 18 The long view investments perform, how they build their portfolios, what determines their appetite for particular investments Private equity often claims to provide a longer-term perspective to the companies it takes private. Yet recent Published by Bladonmore (Europe) Limited and how much they are influenced by political concerns. research finds that there is little evidence that short-termism exists in public companies and that performance Editor: Vicky Meek Our final article takes as its base the paper that was runner-up in the Coller PhD Prize in 2010. This paper looks at alumni links between private equity firms and investment banks, and asks whether these ties increase the is not improved by taking a company private. So what does this mean for PE? Editorial Director: Sean Kearns James Carey chances of advisers winning mandates and of PE firms winning deals. Sub-editor: Lynne Densham We hope that this edition of Private Equity Findings stimulates a healthy exchange of views. If you have any 23 Alumni advantage? Portraits: Creative Director: Nigel Beechey thoughts on our articles, we would like to hear them. You can provide your perspectives at Art Director: Ivelina Ivanova www.collerinstitute.com/Research/Findings or by email at [email protected]. The most interesting comments Alumni links between private equity houses and investment banks are common. But what effect do they have on will receive a copy of International Private Equity, authored by Professors Eli Talmor and Florin Vasvari of London Production Manager: Andrew Miller how mandates are awarded and the way auctions are run? A new study comes up with some surprising findings. Business School. Publisher: Sharon May We sincerely thank all contributors to this issue. Stay tuned for future editions of Findings, which will continue Mike Murphy Publishing Director: Sophie Hewitt-Jones to showcase the world’s best private equity research. 26 Coller Institute of Private Equity News Group Managing Director: Richard Rivlin We report on the success of the 4th annual Findings symposium, the Coller Institute’s flagship event. Plus a T: +44 (0)20 7631 1155 round-up of recent and upcoming events, as well as research and Coller Prize competition updates. Illustrations: Cover: E: [email protected] Professor Eli Talmor Professor Francesca Cornelli Chair, Coller Institute Academic Director, Coller Institute 2 | FINDINGS | WINTER 2011 WINTER 2011 | FINDINGS | 3 THE TRIAGO QUARTERLY June 2011 EM PE investors’ proportion of total PE allocation targeted at EM PE* Dear Reader, SNAPSHOTProportion of total PE 30% allocation targeting EM: A growing number of limited100 partners are receiving net cash NET ASSET VALUES61 - 100% NEAR PRE-CRISIS LEVELS... 25% 90 19% 18% 31 - 60% from investments, after years of net outflow. At the same NAV Evolution time, general partners80 are locking in significant carried 21 - 30% 20% 7% 13% 16 - 20% 70 €60bn interest through trade sales and IPOs.9% And often these STRATEGY Q111 10 - 15% Q2 10 Q3 10 Q4 10 FY 10 15% same general partners 60are using record low interest rates, 16% 6 - 10% 14% Large BO +4.4 % +2.8% As of 2009+7.2% +10.4%As of 2010+27.0% As of September 2011 easier credit terms, and higher debt levels to make clever 1 - 5% 10% 50 deals. But it’s a market of “haves” and 10%“have-nots.” 11%MM BO +2.1 % +4.6% +4.4% +9.0% +21.5% 40 €45bn Respondents % 18% Typical (median) investor 5% 30 Special Sit. +3.1 % +4.4% +4.7% +7.0% +20.6% Overall, private equity remains burdened22% by poorly 20 Energy +1.9 % +1.8% +3.6% +7.8% +15.9% 0 performing investments made at the height of the credit 19% 10 bubble from 2005 to 2008. These vintages19% hold the bulk VC €30bn +2.8 % +0.4% +2.5% +4.2% +10.2% 5% of private equity’s dry powder0 and most of its unrealized investments. The impact these overhangsNow have on In 2 years' time ...AS SECONDARY PRICING ANTICIPATES MORE MARKUPS... investors raise questions about everything from fundraising 15bn to investment processes and fund strategy. All of the above € C]qÕf\af_k 100 are issues we address in The Triago Quarterly. -5% -5% 90 A round-up of private equity refinancing wall Pushed out As always, we hope the information found here will help €0bn trends and statistics 80 you make informed decisions. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 BY THE NUMBERS European Leveraged Loan Outstandings Maturity Profile for LBOs 70 Sincerely, €60bn n T wo years ago, concerns were mounting about NAV Index the amount of debt in private equity-backed portfolio 60 In good health PE heavy lifting driving growth As-35% of 2009 As of 2010 SecondaryAs of September Pricings 2011 companies that needed to be refinanced. The projections Fig 4: Drivers of organic revenue EBITDA growth, 9kl`]j][]kkagf[gflafm]\lgh]jkaklafFgjl` were that, starting from 2012, there would be a wall of The strategies that enable EBITDA growth €45bn PE exits, 2007–2010 Sources9e]ja[Y$[gklj]\m[lagfkYf\j]kljm[lmjaf_hdYq]\ of EBITDA growth 2006-10, by year of exit 50 refinancing that would peak in 2015 and that companies H=mk]\Ydde]l`g\klgY[`a]n]_jgol`l`jgm_`gf]g^ n Investors in PE funds Yfaf[j]Ykaf_jgd]af\]dan]jaf__jgol`&Gh]jYlagfYd 2009 2010 2011 would struggle to deleverage as earnings fell. l`]lgm_`]klj][]kkagfkaf`aklgjqÈ^g[mkaf_gfgj_Yfa[ overwhelmingly30% believe that the 20 40 n Yet the LCD-S&P CIQ chart, which shows the amount ]^Õ[a]f[a]kYf\aehjgn]e]flkafhjg[mj]e]fl0.6 j]n]fm]_jgol`Yf\[gklj]\m[lagfkoal`]imYd]eh`Ykak& industry’s involvement in the Jun Sep Dec Mar Jun Sep Dec Mar JunSep Dec Mar of capital outstanding in the institutional tranches 25% 2.1 3.7 €30bn Gmjklm\qk`gokl`YlH=klYq]\[dgk]lgalkhgjl^gdag companies it backs improves 16 hjY[la[]k[geZaf]\^gjf]Yjdq/(g^=:AL<9 of debt in LBOs, portrays a different picture.