2014 Private Equity Market Outlook
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Your Partner For Alternative Investment Solutions 2014 Private Equity Market Outlook www.torreycove.com ©2014 TorreyCove Capital Partners Table of Contents 3 A Macroeconomic Overview 15 Tactical Summary Buyouts 16 North America Buyouts 22 Europe Large Buyouts Special Situations 28 Distressed Debt 35 Mezzanine 38 Secondaries 43 Venture Capital This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from TorreyCove Capital Partners. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding whether any investment is appropriate, nor a solicitation of any type. The general information contained herein should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. Generally, alternative investments involve a high degree of risk, including potential loss of principal, can be highly illiquid and can charge higher fees than other investments. Private equity investments are generally not subject to the same regulatory requirements as registered investment options. Past performance may not be indicative of future results. 2014 Outlook A Macroeconomic Overview Domestic economic news was dominated in 2013 by the seemingly inexorable rise of the U.S. stock market. While equities moved relative to market sentiment rather than fundamental valuations, debt markets produced disappointing returns and have left investors on a multi-year search for yield. Meanwhile, the United States’ trade and budget deficits came in lower than in 2012, even as federal debt ballooned by over $600 billion. The prospects for a continued improving trend in Europe and the United States remain under stress, particularly in the labor markets, where unemployment and underemployment remained high. In emerging markets, growth continued to decelerate in 2013 amid economic and political instability, leading to heavy pressure on the government budgets and currencies of the most profligate, as well as some dubious policy choices by some countries that have put a damper on foreign investor confidence. All eyes are now on the new Federal Reserve Chairman, Janet Yellen, wondering how much she will turn down the dial on quantitative easing in 2014. So far, she appears set to stay the course, originally set by Bernanke, to gradually wean the markets off of easy money. © 2014 TorreyCove Capital Partners | 3 A Macroeconomic Overview 2014 Outlook Economic Growth U.S. real GDP increased at an annual rate of 4.1% during the third quarter of 2013 compared to 2.5% during the previous quarter, according to the Bureau of Economic Analysis (“BEA”). The BEA attributes this growth to increases in private inventory investment, personal consumption expenditures, residential and nonresidential fixed investment, and state and local spending, which were partially offset by negative federal government spending and imports. House prices in the U.S. have risen in line with last year’s expectations, as the average home price rose in 88% of U.S. cities, according to Bloomberg, thanks to limited inventories and fewer foreclosures. At year end, markets continued to be wary of the unsolved U.S. budget stalemate, which effectively shut down the U.S. government in 2013, with the hope that Washington would come to a consensus to avoid more such disruption in 2014. That hope appears to have been answered, at least in part, with the recently reached bipartisan debt ceiling deal, which looks to have effectively pushed that issue off the table for the year. For Europe, Eurostat estimates that 2013 yielded zero growth for the 28 European Union countries. Of the largest European economies, Bulgaria posted a growth rate of 0.5%, while Germany trailed slightly with 0.4%. GDP Growth 20% China United States European Union 15% 10% 5% 0% -5% -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: IMF © 2014 TorreyCove Capital Partners | 4 A Macroeconomic Overview 2014 Outlook Smaller countries on the periphery demonstrated the strongest growth, with Latvia, Lithuania and Estonia showing 4.0%, 3.4%, and 1.3% GDP growth, respectively, since 2012. Notably, Cyprus (-8.7%), Greece (-4.0%), and Slovenia (-2.7%) contracted the most. Lackluster growth inspired some creative fiscal strategies from government entities in Europe. Last year France enacted its most aggressive “wealth tax” on its citizenry (which contributed to an estimated 77% decline in foreign direct investment), portions of Cypriot bank deposits were confiscated by the ECB and IMF, and the Greek Troika was criticized for allowing unelected officials to determine massive austerity measures that many claim only further hampered the Greek economy. These are among the major challenges to the restoration of business confidence and resumed economic expansion on the Continent. In Asia, China’s GDP grew 2.2% during the third quarter of 2013 according to Trading Economics. And as predicted last year, growth continued to mellow from its reported 10% growth in 2010- 2012 and is likely to stabilize around 7.5% to 8.0% going into 2014 and beyond. It is important to note that 2013 was a year of policy shift in China, as it begins a very slow evolution to a more liberalized economy. The specter of a major liquidity crunch continues to lurk, as the central government attempts to discourage high borrowing rates among municipalities, as well as the ubiquitous “shadow banking” system that serves them and other credit-starved sectors of the economy. Notably, China’s trade surplus began to narrow toward the end of 2013 (though it more recently saw a considerable expansion), as exports slowed in the face of global currency devaluation, which served to drive up the price of Chinese goods. Japan’s growth must be considered in the context of the aggressive quantitative and qualitative easing program implemented in 2013. The Japanese government and the central bank formed an unprecedented agreement to target 2% inflation through asset purchases during 2013 in order to mitigate deflation, amounting to purchases between $574 billion and $671 billion annually for the next two years. The effect, so far, has been a mild increase in GDP growth throughout 2013 (estimated at 1.6%) and an increase of more than 50% in the Nikkei 225 index. The Bank of Japan has announced it intends to maintain this asset purchase program indefinitely until the desired inflation levels are achieved. © 2014 TorreyCove Capital Partners | 5 A Macroeconomic Overview 2014 Outlook Unemployment Always a major concern for citizens, U.S. unemployment decreased from 7.9% to 6.7% between December 2012 and 2013, according to the Bureau of Labor Statistics (“BLS”). Unemployed civilians decreased by 1.9 million persons to 10.4 million. The number of workers unemployed for 27 weeks or more remained steady at 3.9 million, or 37.7% of the unemployed. In spite of what looks to be an improving trend, the unemployment picture is not as positive as the headline numbers would suggest. For one thing, there is the problem of the chronically “underemployed,” meaning those who work less than full-time (who are still counted as employed). The BLS estimates nearly 7.8 million Americans are such involuntary part-time workers, meaning those who would like more work but cannot find it. Additionally, 2.4 million Americans were defined as “marginally attached to the labor force” (those who had looked for a job within the last 12 months, but were not counted as unemployed because they had not searched for work in the four weeks preceding the survey). Further, more and more Americans are leaving the workforce as discouraged workers, indicated by another year-on-year decline in the labor force participation rate, which dropped to 62.8% in December from over 63% at the beginning of the year. Long-term unemployment, under-employment and variations in those only marginally attached to the labor force are among the factors that will have to be overcome to put the economy on a more solid footing. Unemployment Rates U.S. Unemployment Rate 30% 12% 25% 10% 20% 8% 15% 6% 10% 4% 5% 2% 0% 0% Iraq Iran Italy Spain Egypt Ireland Turkey France Poland Austria Nigeria Greece Finland Belgium Portugal Colombia EuroArea Netherlands SouthAfrica CzechRepublic Source: Trading Economics Source: Bureau of Labor Statistics © 2014 TorreyCove Capital Partners | 6 A Macroeconomic Overview 2014 Outlook The Euro area reported an unemployment rate of 12.1% during November 2013, up from the prior year’s 11.8%, representing an increase of approximately 450,000 unemployed civilians on a year-over-year basis. Among the member states, the lowest rates were in Austria (4.8%), Germany (5.2%), and Luxembourg (6.1%). The highest unemployment rates persisted in Spain (26.7%) and Greece (27.4%). Notably, youth unemployment in Spain and Greece reached an unprecedented 57.7% and 54.8%, respectively. Such high unemployment rates among youths are of particular concern, as they may serve as a catalyst for social and political unrest, with potentially destabilizing consequences for the larger EU. Asia continued to exhibit low unemployment rates. The South Korean and Vietnamese unemployment rates were among the lowest at 2.9%, followed by China, which reported 3.0%. Japan reported a 3.9% unemployment rate as of June 2013. Inflation U.S. inflation remained in check, in spite of the aggressive expansionist policies of the Fed over the past several years. Indeed, deflation has been the primary concern of Chairman Bernanke over that period of time, and the effects of his policies will undoubtedly be of primary concern to Yellen as she navigates heretofore uncharted waters. Inflation in the United States rose slightly in 2013, with the annual change in the consumer price index gaining 1.2% through November 2013.