DealMarket Digest_Issue 54

DIGEST

54

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 54

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Latin America Dealmaking Down but Exits and Fundraising Up • Thomson Reuters Data

PE Fund Goes for Party City

Internet Startups, Cloning and Geo-Arbitrage

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Asia Takes Bigger Share in Global PE Market – McKinsey

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PE Outperforms Listed Markets following Crisis: Preqin

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Quote of the Week: Happiness and

• McKinsey data

Profit

June 07, 2012

LATIN AMERICA DEALMAKING DOWN BUT EXITS AND FUNDRAISING UP Exits and fundraising activity was strong, reaching “unprecedented heights” in Latin America in 2011, according to the latest Thomson Reuters’ Venture Equity Latin America 2011 Year-end Report.

A detailed analyses and year-to-year comparison data was provided in the study. Private equity and venture capital investing in Latin America showcased lower investment levels in 2011, declining by 68 percent or by USD 11.7 billion in 2011.

Other Key Findings • Fundraising came to USD 13 billion, a 67 percent growth increase over the prior year.

• Exit disbursements totaled USD 8.3 billion, showing a 5 percent growth increase year-over-year.

• Increased domestic consumption and purchasing power of the middle class drove private equity and venture capital investments • Brazil remained the most attractive location for private equity and venture capital investment.

Deals activity came to nearly USD 4 billion • IPO activity rose substantially.

• Regional funds reached USD 2.6 billion at year-end 2011.

PE FUND GOES FOR PARTY CITY

In what looks like the largest deal of the week Thomas H. Lee Partners is buying a large stake in Party City, a US-based retailer with 600 stores that sell Halloween, wedding, and other novelty items for celebrations, according to PE Hub. The size is USD 2.69 billion. It is that means sharing stakes with existing minority investors, Advent International Corp, Berkshire Partners LLC and Weston Presidio — as well as Party City management will retain minority stakes in the company. The company had been planning an IPO.

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INTERNET STARTUPS, CLONING AND GEO-ARBITRAGE The Economist published a feature story on a trend that is as old as the dotcom bubble. It used to be called the Red Herring effect, then the Tech Crunch effect, now it is being called "geo-arbitrage" or "tropicalisation". The article says that the term refers to the practice of backing start-ups that take an established business model and adapt it to an emerging market. The idea of tropicalisation has been lucrative for venture capitalists in India and China, with examples such as Baidu, a Chinese interpretation of Google, or Alibaba.com, a Chinese version of eBay, an online-auction site.

Now venture capitalists are looking at other markets, including Brazil, Indonesia, Russia, South Africa and Turkey. The article cautions that “most venture-capital firms do not head abroad with the sole aim of looking for copycats”, but plenty of their investments end up that way. One VC is quoted as saying that in emerging markets like China around 50 percent of start-ups backed by foreign venture capitalists in the internet and mobile sectors are copycats, and in markets like Brazil it is closer to 70 percent. There is much more in the article about specific examples, potential high returns and risks.

ASIA TAKES BIGGER SHARE IN GLOBAL PE MARKET - MCKINSEY In the last four years Asia's share of global PE transactions has doubled to 21 per cent according to a Reuters report citing McKinsey & Co executive. The consulting firm speculates that there will be a shift in deal flows, with the industry in Europe and the United States subdued due to economic slowdown and debt tightness. Private equity investments for Asia in 2011 hit USD 65 billion, up 63 per cent from a year earlier, says the report. China continues to dominate with 45 per cent of the region's private equity investments.

McKinsey’s report suggests there is little risk the region's markets will become saturated due to the size of the GDP and economic growth rate. Private equity investments in 2011 in the US were equal to 1 per cent of nominal GDP, but China, Asia's fastest growing market, has a penetration rate of just 0.4 per cent, the regional average

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PE OUTPERFORMS LISTED MARKETS FOLLOWING CRISIS: PREQIN Preqin has published a study that shows that its private equity index is outperforming the S&P 500 Index. The PreqIn Index currently shows that all private equity strategies, with the exception of venture capital, have outperformed the S&P 500 since 31st December 2000. However, there is significant variation in the performance of the best and worst private equity fund managers. This, coupled with more than 1,830 funds currently seeking investor commitments, means that the vital fund selection decisions investors need to make are more challenging than ever. The figure above compares various PrEQI indices.

Key Findings • The PrEQIn All Private Equity Index (rebased to 100 as of 31st December 2000) stands at 198.5 as of Q3 2011, while the S&P 500 stands at 105.1 as of Q3.

• The Index demonstrates that manager selection is very important for investors; The PrEQIn Top Quartile Index shows large quarterly increases up until the financial crisis, and begins to move up again during 2009, continuing its steep increase to 509.5 as of Q3 2011.

• The Bottom Quartile Index, meanwhile, peaked at 80.7 in Q4 2007 before enduring quarterly decreases as a result of the crisis, and has remained relatively flat since, standing at 49.1 as of Q3 2011.

• Distressed private equity funds have performed the best out of all private equity strategies, and the PrEQIn Distressed Private Equity Index stands at 322.1 as of September 2011.

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QUOTE OF THE WEEK: HAPPINESS AND PROFIT “There is no way to consistently turn customers into promoters unless they are being served by employees who are equally enthusiastic about their work…”

Who said it: Fred Reichheld fellow at Bain & Company, originator of NPS customer rating system and business book author In Context: In an article about the importance of happiness amongst employees in consumer oriented businesses, which was published in Forbes, Fred Reichheld makes the case that leaders can and should treat their employees well, and enable them to find happiness in their work by providing meaningful service to others. Happy employees and happy customers, who become promoters, which leads to better profitability, goes the theory. He said that if management is structuring teams correctly, assigning good leaders, providing the right tools and training, supporting them with good policies and putting individuals in roles that play to their strengths, and a feedback system such as the one he developed then there is every chance that happy customers become promoters of a company’s service or product. The NPS service he created is used by the likes of Qantas, Rackspace, and Zappoos, according to his company website. Reichheld co-authored with Rob Markey, The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World, published in September by HBR Press.

In Context: Forbes

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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.

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Editor: Valerie Thompson, Zurich

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