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Investment Banks Halt Stapling of LBO Financing

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Crystal Ball on Mega Buyouts

• Barclays led the way after DelMonte probe • Affects some LBO deals

• New finance web-site attempts LBO prediction

INSEAD Studies Exit Trends • China and India compared and contrasted

New Russian Co-investment Vehicle • State aims to stimulate PE investment over next 5 yrs

PE Funds Poised to Buy Sovereign Debt • Apollo’s Black anticipates Euro debt sell-off

Innovative Company DNA • INSEAD and Forbes reveal the details

Quote of the Week • UK wine industry ripe for new competition

September 22, 2011

INVESTMENT BANKS HALT LBO STAPLED FINANCING Bloomberg reports that Barclays led the way to dropping sell-side financing when offering M&A advice to sellers in an M&A transaction. It changed its policy following a February opinion from a Delaware judge, who said the bank deceived Del Monte Foods Co. when it advised the company on a sale and failed to disclose its plans to also arrange funding for the buyer until late in the process. At issue is so-called stapled financing on the sell side which enables banks to collect fees instead of just once for the M&A advice. After the judge's opinion, Credit Suisse Group AG, Bank of America Corp., JPMorgan Chase, UBS AG, Goldman Sachs Group Inc., Deutsche Bank AG, Morgan Stanley and Citigroup Inc. have reviewed their own policies on financing buyouts when they also have a role advising sellers, said people with knowledge of the situation. Lawyers at competing banks talked with each other and came to a consensus to be more careful about providing sell-side financing on public-to-private deals, according to the report.

CRYSTAL BALL ON MEGA BUYOUTS An article in Seeking Alpha speculates about potential LBO targets based on rumors published in online user generated content sites, Wall St. Cheat Sheet and Seeking Alpha. Stocks were then screened for those paying dividend yields above 3 percent. The anonymous author, presumably a marketing executive at a startup called Kapitall, came up with a list that includes Seagate Technology, Molex Inc, Lincare Holdings Inc, Gannett Co., Inc and Molson Coors Brewing Company and J.C.Penney. Only time will tell how accurate is this kind of crystal ball gazing. Kapitall is one of a new wave of startups that are aiming to compete with large and established financial sites, primarily, making it more like a game, and improving the man-machine interface. Some of the ease of use features, ticker symbols are not required, filtering and screening are enabled and users click on logos they recognize.


EXIT TRENDS IN CHINA AND INDIA Similar to China, almost all major exit transactions belong to the second half of the decade. Another interesting fact that was true for both countries is that the public markets have less influence on exit multiples than in the West.

A recent INSEAD study compares and contrasts exits in China and India. The study highlights the differences based on sample data provided by INSEADs inaugural panel of limited partners (LPs). Some 1250 exits have occurred in the 2000 to 2010 timespan and the pace is accelerating. There are some interesting differences. The exit strategy in China is typically an IPO, and in India the preferred route is M&A for the exit strategy. Another difference is the industry focus for PE and VC investments. Unlike China, where financial industry companies were the most common target of VC money, India was the target of telecommunications and renewable energy PE investments. Leveraged buyouts are practically non-existent in both countries.

Even during the global financial crisis, funds were able to exit investments with returns up to 30x. This is likely to be due to the specific economic environment in China and India, according to the research. Access to good companies is a key success factor in an imperfectly intermediated market, target companies are active in a fastgrowth environment and often have captive markets. In addition, IPOs did well in China because they are valued for their growth potential and first mover advantage and for the M&A exit, the scarcity of good acquisition targets in coveted markets such as India and China leads trade buyers to pay a substantial premium for companies whose business and corporate governance has been “de-risked� under PE ownership. Images: INSEAD LGT exit study.

Overall there were 898 exits from PE invested companies in China over this period of which two thirds happened in the last four years. In India the researchers counted 354 exits from PE invested companies in India over this ten year period.


RUSSIA TO STIMULATE PE DEALS The Russian Direct Investment Fund (RDIF) launched this week with a USD 10 billion budget, reports Reuters. The co-investment vehicle will invest up to USD200 million per deal. It will call down about USD2 billion a year in state cash for the next five years. The Russian government expects the fund to stimulate USD50 billion in investments. Fund managers include executives formerly of Troika Dialog, Alpha Group and New Nations Capital, all high-profile organizations active in Russian PE investments.

PE POISED TO BUY TRILLIONS IN BANK LOANS AND ASSETS Business Week reports that banks need to sell EUR 1.5 trillion euros in assets because of the region’s sovereign-debt crisis, which is going to be an opportunity for PE firms, according to Leon Black, head of private-equity firm Apollo Global Management. This is a long anticipated trend that Black is giving voice to. Sovereign debt levels that grew in Greece, Portugal, and Spain are expected to drive banks to sell whole companies, real-estate loans and non-performing debt, according to Black. One example: Lone Star Funds, a Texas-based PE fund, recently collaborated with JPMorgan Chase and Wells Fargo & Co to buy an almost USD 10 billion portfolio of real estate loans from Anglo Irish Bank Corp. Blackstone Group LP was a final bidder for at least a portion of the loans.

THE WORLD’S MOST INNOVATIVE COMPANIES Forbes followed up research published by INSEAD et al. who filtered out and studied dozens of companies that have a share price sporting an “innovation premium”. The company names are well-known, specifically Amazon, Apple and Google, but also Monsanto and, which invented the whole “cloud computing” concept in business software.. Other less well-known names are Intuitive Surgical, which delivers robotics with such precision that out-perform surgeons. Or India’s consumer-products brand Hindustan Lever, which used network-marketing to sell its goods via thousands of underprivileged rural women throughout 135,000-plus villages, in the process becoming a trusted national brand.



“I formed it to give the wine industry a massive kick up the ass.” Who said it: Rowan Gormley, former Virgin Money and Electra Capital Partners executive Context: The quote from the former PE executive was in response to the journalist’s question about why he founded online wine retailer Naked Wines. Gormley established the company in 2008 just as the financial crisis hit Europe. It invests in independent winemakers in exchange for preferential pricing which in turn gives the online company’s customers good value for money. Gormley said that wine production and distribution in the UK is a “big fat complacent business, totally dominated by the supermarkets” and it is ripe for disruption. He puts his PE dealmaking skills contracting with suppliers, bottlers, and winemakers. Where we found it: Reuters


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