DealMarket Digest_Issue 56

DIGEST

56

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 56

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PE Groups Win Quest Bid KKR in Billion Dollar Drug-Store Merger Alt Investment Study Sees PE Investment Growing BDO Survey Says 2012 IPO Market Losing Luster Quote of the Week: Pre-IPO Intelligence

June 22, 2012

PE GROUPS WIN QUEST BID This week’s largest deal looks to be the acquisition of Quest Software by two private equity funds, Insight Venture Partners and Vector Capital. InvestorsBusiness says that the deal represents an increase on a March buyout offer price by the private equity firms, and a 33% premium to Quest's closing stock price on March 8, 2012, the day prior to the announcement of the original Insight agreement. Quest had announced on March 9 that it had agreed to be acquired by Insight, but two months later it received several other competing offers, including one from Dell.

KKR IN BILLION DOLLAR DRUG-STORE MERGER Walgreens has agreed to acquire its private equity-backed British peer Alliance Boots GmbH in a cash and shares deal valuing the UK company at about USD27 billion including debt. The deal is a partial exit for Alliance Boots owners Kohlberg Kravis Roberts, along with its CEO and significant shareholder Stefano Pessina, reports Deal Pipeline. KKR bought the company with Pessina in 2007, at the height of the credit bubble, says the report. It invested USD 2.45 billion in the company at the time. At moment, KKR will receive USD1.8 billion in cash and 7 million Walgreens shares of common stock equivalent to USD 0.2 billion for its share of the initial 45% stake.

ALT INVESTMENT STUDY SEES PE INVESTMENT GROWING

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Image source: Russell

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Russell 2012 Global Survey on Alternative Investing says that global institutional investors are investing in alternatives to support key objectives, such as diversification and alpha generation, and that there is greater interest in customized, investor-driven implementation approaches. In 2010, when Russell last surveyed institutional investors (including corporate and public defined benefit plans, corporate defined contribution plans, non-profits and superannuation funds) attitudes about alternatives were in a “flux”. Institutions were still adjusting to the repercussions of the global financial crisis across their entire portfolios.

Currently the environment is characterized by low returns, a high level of global economic uncertainty and financial market volatility; alternatives are a critical component of a diversified, multi-asset portfolio.

Key Findings • Diversification was cited as one of the top three reasons for using alternatives by 90% of respondents, while volatility management and low correlation to traditional investments was mentioned by 64%, and return potential was noted by 45%.

• the majority of respondents indicated that allocations would remain static or increase over the next one to three years across all alternatives categories. Thirty-two percent of respondents expect to increase their investment in hedge funds and private real estate, 28% in private infrastructure, 25% in private equity, 20% in commodities, and 12% in public real estate and public infrastructure.

• PE Investments will increase over the next 3 years, according to the majority of those surveyed, 57% • The survey also found that investors face challenges in assessing the range of alternatives across the expanding spectrum of opportunities, so education is an important component for integrating alternatives into multi-asset portfolios.

BDO SURVEY SAYS 2012 IPO MARKET LOSING LUSTER According to a new study by BDO USA, few capital markets executives agree about trends in US IPOs for the remainder of 2012. The bankers are relatively evenly divided among those that predict an increase (33%) in the number of IPOs and those that are forecasting flat (36%) or negative growth (31%), said the report. Bankers anticipate these offerings will average USD 221 million in size, which projects to more than USD43 billion in total IPO proceeds on US exchanges in 2012. The BDO IPO Outlook Survey is a national telephone survey interviewing 100 capital market executives.

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Image source: BDO IPO Outlook 1Q/2012

Key Findings

• IPO activity on U.S. exchanges increased steadily during the first quarter of the year and carried solid momentum until April • Global political and financial instability (59%) was the most often cited threat in the second half of the year.

• The presidential election (20%), the threat of government spending cuts (9%), constrained bank lending (6%) and continued high unemployment (6%) were the other threats mentioned.

• Except for the Facebook offering, the size of the average IPO in 2012 is running considerably smaller than 2011 • US exchanges are playing a larger role in the global IPO marketplace in terms of total proceeds: 43% percent of the investment banking community sees US exchanges continuing to increase their percentage of global IPO proceeds during the remainder of the year. More than a third (36%) believe it will remain steady and only one-fifth (21%) see the U.S. share declining in the second half of 2012.

• The technology sector is the most popular industry sector for IPOs. Almost three-quarters (73%) of investment bankers predict even more tech offerings during the second half of the year. A majority see the numbers of IPOs from the energy (61%), healthcare (55%) and biotech (54%) verticals increasing as well. No other industries came close to receiving a majority of support for the likelihood of growth in IPOs during the remainder of the year, the survey found.

Things are not looking a lot better in China at the moment, particularly consumer-goods companies, which have been falling out of fashion with venture firms, as a result of disappointing public offerings and fears of an economic hard landing scare investors, says WSJ Venture Dispatch blog .

Venture-backed deals in the consumer sector totaled USD 200.2 million from January to June, a steep drop from USD 468 million recorded in the same period a year earlier.

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QUOTE OF THE WEEK: PRE-IPO INTELLIGENCE

Image source: GGV

… the last VC rounds in Yelp, LinkedIn, and Splunk, although less heralded by VCs during their times as private companies, have all performed very well. VCs and other investors in high priced pre-IPO rounds need to think more about what will sell on Wall Street, not just on Sand Hill Road.

Who said it: Glenn Solomon, partner, GGV Capital, an expansion stage firm that invests in the US and China, and formerly of Partech and Goldman Sachs.

In Context: In a recent article, Solomon takes a look at the last few rounds of venture investments for four tech companies that didn’t pan at IPO out as planned and why. The companies are Facebook, Zynga, Groupon and Twitter -- where demand was so strong that venture capital firms paid large sums for secondary stakes of common shares at multi-billion valuations. He came up with three reasons for the lackluster returns for such investors: 1) too much focus on high growth rate when public investors rarely pay higher multiples for a company growing 100% versus a company growing 50%, all else being equal. 2) Lack of profit margin expansion - public investors don’t necessarily pay more for profitable companies early on but they want to see profits and will pay up for a company that can show profit margins expanding over time. Both Zynga and Groupon show a form of profitability, but margin expansion doesn’t seem proven, so public investors have been less willing to ascribe high prices. 3) Proven versus unproven business models. These companies have innovative models but they don’t have analogous or comparable companies they can point public investors toward. Solomon said that in the absence of good comparable companies, public investors often become uncertain how to value such companies. As a result, valuation multiples can be volatile until the business model is proven.

In Context: Three Reasons Venture Capitalists Can Get IPOs Very Wrong via Fortune magazine

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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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