DealMarket Digest_Issue 89

DIGEST

89

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 89

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Hot or Not: Direct Investments?

Deloitte Recalibrates the PE Business Model for 2013

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BMC Rumor: Another Mega Buyout in the IT Sector?

Mercer Reveals Fees Are Dropping Best Performing Funds Less Likely to Adopt Industry Standards

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Quote of the Week: PE Fund Manager on Dope

April 05, 2013

PE DEAL VALUE SOARS BOOSTED BY TWO BLOCKBUSTER TRANSACTIONS

Image source: Pension Pulse Blog

Reuters says pension funds and other large investors are looking for ways to invest directly in companies, as well as continuing co‐invest. The article suggests the main reason for the trend is that large pension funds and insurers are seeking to avoid the “large fees” associated investing through PE vehicles.

Limited partners (LP) who are taking this approach are still only doing about 10% or less of their investments as direct deals or club deals.

Some of the LPs mentioned in the report are Hermes GPE, an investor with 20 percent its assets in co‐investments, British insurer Legal & General, the Canada Pension Plan Investment Board (CPPIB), and the Ontario Teachers' Pension Plan Board.

Elsewhere, pensionpulse noted that CPPIB's newly appointed and well‐regarded CEO, Mark Wiseman, has said private equity

real estate and infrastructure are a better fit for the long view and relatively risk‐averse tastes of CPPIB.

DELOITTE RECALIBRATES THE PE BUSINESS MODELL FOR 2013 According to a new analysis from Deloitte, general partners in the PE world will have to rethink their business and operating models in 2013 to manage regulatory, compliance, and tax uncertainties, as well as combat cost pressures by identifying operational efficiency improvements, and they will have to aim to pursue new growth opportunities amidst elusive exits.

Further details • Deal making remains elusive as competition for quality investments is fierce, and those willing to sell are demanding higher valuations.

• Continued economic weakness and market volatility is clouding the investment environment, slowing the pace of initial public offerings, and making it more difficult for early investments to recover their value.

• The good news is that the industry continues on its upward trek. Assets under management climbed to a record USD 3 trillion in 2012, says Deloitte quoting statistics in an article from Dan Primack’s blog, and LPs are still attracted to private equity given the industry’s historic ability to generate returns across various economic environments.

• Adopting more technology and outsourcing will become more important to combat cost pressures.

Deloitte say that those who have to tap the full benefits of improved technology capabilities will likely make up lost ground in 2013 as cost efficiencies emerge as a tangible lever to deliver alpha.

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BMC RUMOR: ANOTHER MEGA BUYOUT IN THE IT SECTOR? Houston, Texas‐based BMC Software is currently the latest publicly traded software company to be the target of buyout funds, according to Reuters which published a report late last month, citing unnamed sources. The deal could be worth as much as USD 6 billion, which would make it our deal of the post Easter‐break week. BMC provides IT management solutions for large, mid‐sized and small enterprises and public sector organizations around the world.

MERCER REVEALS FEES ARE DROPPING A new survey by Mercer finds that asset management fees in alternatives have fallen “due to supply and demand dynamics”. In Mercer’s 2012 Global Asset Manager Fee Survey, data on more than 25,000 asset management products from over 5,000 investment management firms were analyzed. The survey covers a range of asset managers.

According to Mercer, the majority of managers left fees relatively unchanged. Yet asset managers are under pressure to negotiate fees for hedge funds, direct private equity and infrastructure funds. The areas where fee reductions are evident include equity mandates. Retail equity funds have tended to lower their fees more than have their institutional and segregated counterparts, it said.

It also said that “2 and 20” industry standard continues to move toward “1.5 and 20”. Taking all asset classes into consideration, Mercer found that Canada remains the most inexpensive country/region in which to invest, with average median fees of around 0.3%. The UK and Europe are also relatively low priced, with average median fees of around 0.4% and 0.5% respectively. Emerging markets remain the most expensive country/region at 0.89% on average, with Asia averaging 0.75%, a fall of 0.08% since 2010.

BEST PERFORMING FUNDS LESS LIKELY TO ADOPT INDUSTRY STANDARDS In its March newsletter, Preqin noted that industry guidelines from ILPA have had a “noticeable” impact, according to a study it did along with Dechert.

However, it notes that in both the US and Europe, the best performing private equity funds were the least likely to adopt the more significant recom‐ mendations in the ILPA Guidelines. Where the guidelines are having an effect is in the area of fee income offsets, making inroads on terms set by private equity funds.

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On average, 86% of new funds in 2011 and 85% of new funds in 2012 in the buyout fund sector rebated all transaction fees. In its 2012 Preqin Private Equity Fund Terms Advisor analysis, Preqin said that there did “not seem to be a significant difference” on average in the treatment of fees regardless of whether transaction, monitoring, directors, breakup or other. It does see more limited partners requesting management company information, including management fee budgets, as well as management professionals compensation criteria. Fees have generally declined since vintage 2010 funds in all size categories. For instance in funds under USD 500mn, fees have declined from 2% to 1.99% in 2010 and 2012 respectively; in funds from USD 500mn to USD 999mn, fees have declined in 2011 and 2012 to 1.97% and 1.94% respectively; and in funds over USD 1bn, fees have declined from 1.81% in 2010 to 1.75% in 2011 and 1.72% in 2012 respectively.

QUOTE OF THE WEEK: NFL GOES PE ”Marijuana's legalization in Washington state and Colorado, entrepreneurs are lining up to get into the marijuana business. They're increasingly seeing marijuana as a legitimate business opportunity, rather than the illegal activity it has been for the better part of a century.”

Who said it: Brendan Kennedy, general partner Privateer Holdings In context: Kennedy was quoted in an article about his recently founded private equity firm that is targeting investments in the legalized marijuana trade in the US market. He estimates the market for cannabis to be USD 50 billion. There are huge hurdles to overcome with the legal of cannabis status in the US, according to the article. Colorado and Washington have legalized possession. Eighteen states allow medical marijuana even though the federal government still considers it illegal. (Image source: Privateer Holdings). Kennedy sees lots of potential in the professionalization of the trade in the coming years.

Where we found it: Upstart Business Journal

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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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