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PE Funds Sitting on Billions in Dry Powder • Preqin estimates some $937 billion still available

Mega M&A in Energy Sector Canadian Pensions Find Profit in PE • Outperforming with long term view

Cleantech Fund of Funds On Track • Niche strategies still attractive

MBO of Rothschild’s Select FoF • Banking regulations drives spinoff

Foundations to Increase Exposure to PE Strategic Sourcing For Portfolio Firms More Consolidation: AXA Acquired • Banking regulations drives spinoff

Quote of the Week • The challenge of fundraising is the only thing that hasn’t changed

October 20, 2011

CURRENT PE DRY POWDER There is even more dry powder available to private equity funds, about USD 937 billion, according to Preqin. The research report says that 20 percent would probably have to be deployed or invested within about two years. Funds raised in 2008 have about USD 20 billion available. There is so much money in reserve because economic uncertainty and a tight deal market has delayed investment activity. “With an average investment period of five years, these funds will be under pressure to put the money to work and avoid asking clients for extensions,” Preqin said.

MEGA M&A : $21 BILLION GAS INDUSTRY MERGER Kinder Morgan Inc will acquire rival oil and gas company, El Paso Corp , in a large sized M&A transaction, USD 21 billion, that will create a natural gas giant in a market showing quick growth, according to Reuters. The deal caught our eye and we noted it here for a couple of reasons. Largesized M&As have been dramatically down in the past quarter, and this one goes against the trend. Furthermore, the offer is a 37 percent premium to El Paso’s current stock price, showing a high valuation by the acquirer. The deal is also a coup for the M&A advisors. Evercore Partners and Barclays Capital advised Kinder Morgan on the deal, while Morgan Stanley advised El Paso. The advisors are set to earn total of $100 million to $145 million in M&A fees, according to Freeman & Co. Another report in the WSJ speculates that PE firms might make a bid for some assets that will be spun off as a result of the merger. The energy sector is showing a lot of M&A activity with PE playing its part. For example, Denham recently committed USD 200 million to back Ursa Resources Group and Avista Capital Partners and Carrizo Oil & Gas are partnering to develop over USD200 million worth of natural gas and liquids projects in the Northeastern US region.


OUTPERFORMING: CANADA’S PENSION PLANS AND PE The Canadian Pension Plan fund was in the news in two separate articles this week. The Canada Pension Plan has a portfolio worth CDN 148 billion and sees itself as a long-term investor, reports efinancial news. Its portfolio is forecast to grow to CDN 275bn in the next decade and the fund is expanding abroad in global property and emerging markets. It has large sized PE and debt markets investment. Elsewhere the WSJ discusses how Canada’s pension funds are increasing their direct dealmaking and co-investment programs, naming CPP Investment Board and Public Sector Pension Investment Board, and giving as an example the recent mega-buyout along with Apax Partners of Kinetic Concepts for USD 5 billion. (We highlighted the deal in an earlier edition of DM Digest). The funds also have been active in Canada with a bid of CDN 3.66 billion for TMX Group Inc., the operator of the Toronto Stock Exchange. The bid made it possible for the TMX to avoid taking an offer from the London Stock Exchange Group PLC. According to the WSJ, this kind of co-investment and aggressive dealmaking has helped boost returns at a time (see images on right) when some of its peers are facing funding deficits, and interest rates in much of the developed world are low and unattractive. Image sources: Top: WSJ; Lower: efinancialnews

CLEANTECH CAPITAL FUND OF FUNDS F&C Investments announced a first close of F&C Climate Opportunity Partners LP, a new fund of funds with a climate change investment theme, reports Environmental Finance . The fund attracted EUR 30 million from three institutional investors. Up to 70 percent of the fund will be invested in PE funds, while up to 30 percent may be invested in project funds that build renewable energy and sustainable infrastructure. Most of the money will be invested into 12 to 15 undisclosed funds, but up to 30 percent may be used for direct co-investments.


MBO OF ROTHSCHILD’S PE FUND The management team of Edmond de Rothschild Private Equity Select LLP announced that it acquired the majority interest in Select held by Rothschild Banque SA. The bank’s divesture of the PE business comes as a result a decision to reduce its commitment to PE sponsorship, due to widely acknowledged changes in the regulatory environment. Select, a fund of funds player, becomes Seligman Private Equity Select which invests in small European buy-out and growth equity funds. The announcement offered a rare public outing on the performance ratios. Select’s first fund, which is nearly fully invested, has had full exits from underlying companies with an average of 4.7x cost. Select's investors include a blue-chip list of institutions and family offices from around the world.


Foundations are to become more active in PE, according a recently published survey published by Preqin in its October “Spotlight”. Almost fifty percent (46%) are looking to make new private equity fund commitments in the 12 months following June 2011. On average, foundations in both North America and Europe are currently below their target allocations to the private equity asset class. The newsletter reports that 85 percent of foundations that invest in private equity are based in North America. Images source: Preqin


STRATEGIC SOURCING : A PORTFOLIO PERFORMANCE BOOSTER We don’t just scan news at Dealmarket Digest, we also look for useful information on how to improve subscribers’ performance. This week, we picked an article about how PE group executives can increase their portfolios' value by implementing operational initiatives, such as strategic sourcing. According to Crowe Horwath LLP, one of the largest public accounting and consulting firms in the US market, strategic sourcing is a way of pooling procurement of portfolio companies to buy and source more favorable pricing for common items. Benchmarking and implementing purchase cost savings can be done in multiple categories – such as raw materials, administration, packaging and maintenance, repair and operations - and the result is substantial savings without sacrificing quality or delivery. The accounting and consulting firm is offering a Webinar on the topic.

WSJ SEES CONSOLIDATION OF FUNDS The sale of AXA Private Equity by its French parent, AXA SA is a further step toward consolidation in the buyout sector, reports the WSJ. Financial institutions are selling assets to comply with tough new capital requirements and large asset managers seek to boost market share. The article suggests that many if not all captive buyout funds may be independent in five years. Other takeover targets are private equity firms that are unlikely to raise another fund, or only one that is considerably scaled back. As an example, there reporter gave midmarket buyout firm Cognetas which is believed to have rejected a bid from rival Charterhouse Capital Partners.

QUOTE OF THE WEEK “The only thing that hasn't changed in the last 40 years is PE fundraising...” Who said it: David Rubenstein, Carlyle Group's managing director Context: During a key note speech at the British Private Equity and Venture Capital Association Summit, Rubenstein said that fundraising is the only that has not changed, and joked that is not like brain surgery or rocket science, in some ways it is more difficult. Surgery involves having teams of people working together, while rocket science enjoys a 99% success rate, unlike fund raising. Rubenstein also offered tips to firms struggling to hit their fund targets. He added limited partners have more power than they used to. Where we found it: BVCA Twitter and PE News Image Source: BVCA Summit Website


The Dealmarket Digest empowers members of Dealmarket by providing up-to-date and high-quality content. Each week our in-house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global. To receive the weekly digest by email register on Editor: Valerie Thompson, Zurich

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Dealmarket Digest 24