DealMarket Digest_Issue 65

DIGEST

65

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 65

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Blackstone Invest $2 billion in Home Security and Solar Company

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Ivy League Endowment Shuns PE, Buys Farms and Forests

• Deal of the Week

Alibaba in Yahoo! Mega Deal Hotspots: Dealmaking Risks and How to Manage Them Buyout Funds Still Looking For Exit • Preqin Research

Quote of the Week: Valuing Waste

September 21, 2012

BLACKSTONE INVEST $2 BILLION IN HOME SECURITY AND SOLAR COMPANY This week’s deal of the week once again features one of the largest PE companies in the world as the main investor. It was announced that Blackstone will acquire for about USD 2 billion Vivint, which started out as a home-security and management business in 1999 but last year expanded into one of the fastest growing areas in the photovoltaic market, solar-power leasing, according to Bloomberg.

Image source: Vivintsolar.com

Vivint is currently owned by its founder and several private equity funds. The company’s annual revenues are about USD 30 million, without the new solar business. More details about the investment case will likely be reported in the coming weeks. We will cover it as more is revealed.

IVY LEAGUE ENDOWMENT SHUNS PE, BUYS FARMS AND FORESTS Harvard’s endowment, one of the highest performing university endowments, is making direct investment in Brazilian forests, South Africa natural resources, and New Zealand dairy farms, while putting a cap on its PE in the US, according to a lengthy feature in BW this week. Harvard’s investments in natural resources reportedly had gains of 19 percent in 2011, and 13 percent over the past 10 years.

But its private equity investment, which produced an annual average return of 24 percent over the past 20 years, has in the past ten years returned 7 percent. In a wider context, endowments and foundations had the “worst returns” of any class of institutional investor, gaining just 0.37 percent for the year through June, according to BW, which cited performance data from Wilshire Associates.

The trend has Harvard rewriting its strategy to play on an existing track record in acquiring and selling forests in the US, and will build on that by expanding the approach globally. Not all endowments are decreasing or halting PE investments. Earlier this year it was reported that Harvard sold some of its buyout fund holdings on the secondary market, reducing its PE exposure to 12 percent of the portfolio, but Yale’s exposure is 34 percent, according to a Yale Daily News. And Preqin said earlier this year, as we reported, that over half (58%) of North America-based endowments expect to make their next private equity commitment before the end of 2012 and a further 10% in 2013.

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ALIBABA IN YAHOO! MEGA DEAL China’s Alibaba Group, a consumer Internet company, raised USD 7.6 billion to buy back 20% of its shares from US-based Yahoo, according to AllThingsDigital in a report that included the press release.

The deal will net Yahoo around USD 4.5 billion after taxes. According to the article Yahoo invested USD 1 billion into Alibaba seven years ago. The completion of the USD 7.6 billion transaction caps off a total of more than USD 12 billion in M&A and financings undertaken by Alibaba Group in the past 12 months when private equity investors, Silver Lake, DST Global, Temasek and Yunfeng Fund invested USD 2 billion in Alibaba Group to provide liquidity to the company’s early investors and employees. It has also delisted from the Hong Kong stock exchange and currently has capital on hand of USD 3 billion.

HOTSPOTS: DEALMAKING RISKS AND HOW TO MANAGE THEM

Image source: PWC

The FT had a report this week on private equity and capital market trends in so-called “frontier” regions like subSaharan Africa, which suggested to us that PWC’s report published early this year about investing in BRIC countries, the most recent “hotspots”, may be worth reviewing. The report titled, Getting on the Right Side of the Delta: A Deal-maker’s Guide to Growth Economies, explores how to reduce the chances of pre- and post-deal problems.

It shows how to avoid doing bad deals, how to successfully complete on good deals, and how to make sure a good deal doesn’t turn bad. It says that nearly 40% of deals failed to complete because of a valuation mismatch. Three other issues explain another 50% of problems, specifically teams fail to obtain approval from the government, financial information is less transparent, and often there are non-compliant business practices (corruption, labour and tax compliance). Some 30% of post-deal problems concern partnering.

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BUYOUT FUNDS STILL LOOKING FOR EXIT

Image source: Preqin

Investments made by buyout funds in the era preceding the financial crisis are “still weighing heavily” on PE performance, according to the latest Preqin research. Only a minority of the portfolio companies purchased during the recordbreaking period of 2006-2007 have been exited (28% of deals made in 2006 and 19% of those made in 2007) completely. This means that portfolio companies are being held for longer than the usual 3 to 5 years, said Preqin. Part of the reason for the slow process of divesting is the sheer volume of investment in the years 2006 and 2007, some USD 1,308 billion worth of buyout transactions.

That figure is “significantly higher” than the aggregate value of all buyout transactions made during 2008 to 2012 combined, said Preqin. It highlights the negative impact of sustained financial market turmoil on the ability of GPs to exit investments. The report is not all negative. Preqin points out that fund managers have made exits whenever good market opportunities have arisen. For example, Q2 2011 alone saw approximately USD 130 billion worth of exits – a record quarter for the industry.

Other findings • 55% of currently held portfolio companies are based in North America. Europe accounts for 32%, and Asia and Rest of World makes up 13% of the number of deals yet to be fully exited.

• North American portfolio companies represent 60% of the aggregate value of currently held deals (by initial value), while 30% of the value is made up by Europe-based deals and 9% by Asia and Rest of World-based companies.

• The smallest proportion of active deals date from 2009, with less than 9% of all current portfolio holdings coming from transactions made during that year, which is due to the relatively small number of deals made in 2009 as a result of the financial crisis.

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QUOTE OF THE WEEK: VALUING WASTE “The value proposition is resource scarcity and the fact that wastes have now become commodities, providing strong returns…

There is no other way than becoming more efficient with resources.”

Who said it: Gijs Voskamp, Chief Executive Officer Ludgate Investments in an interview with Bloomberg.

In Context: Voskamp is talking about the target industries for his company’s latest fund. Several news outlets reported that Ludgate Investments Ltd., a London- based private equity investor, is seeking to raise as much as USD 300 million for a fund to invest in small to mid-cap businesses in the waste and recycling, energy efficiency, energy generation and water sectors, mainly in the UK but also Northern Europe. This is the second such fund for Ludgate, which is why it caught our eye. It is more than twice the size of its first fund, making it a fundraising counter to the trend seen amongst many other PE managers who have reduced the size of their latest funds. Ludgate has been investing primarily in the UK because it is slightly behind countries like Germany and Switzerland when it comes to recycling, socalled urban mining, and waste management. The EU is pushing for tighter waste management regulations and that will create more opportunity for the fund manager, according to Voskamp.

Where we found it: BW

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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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