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Emerging Markets


Clean Energy Investments


M&A Rebound – more competition for PE Buyers?

• Latin America rising • Asia rebounding

• Study about G-20 Investment activity • Report on PE and VC fund activity

• Asia Pacific and UK • China


Dotcom Reboud?


Competition for LP commitments to PE funds

• NY Times Dealbook report • Groupon planning an IPO

March 31, 2011

EMERGING MARKETS: LATIN AMERICA RISING AND ASIA REBOUNDING New Latin America funds are trying to raise USD 16 billion, according to the Wall Street Journal, citing the latest data from Preqin. About 50 Latin America-focused private equity funds are raising roughly double the amount raised last year, which was already an all time high. According to other sources, Brazil alone has about $8 billion in private equity capital seeking targets. It is not just Latin America that is seeing greater levels of activity. It is Asia too. Fundraising by both local and foreign GPs increased by 22% last year, while the average deal size in the region grew by 92%, according to a new report from McKinsey and Company. A growth rate of 400% in 2010 is a sign of “renewed optimism among GPs” and the “momentum” is expected to continue. The full report can be downloaded here Private equity Asia-Pacific Rebounds, globalization, and other tales. With such rapid growth in GP interest in Brazil and Asia, there are worries about overheating in

the BRIC emerging markets in general. In a recent editorial Private Equity International takes the stance that LPs could make “costly mistakes” if they find themselves following the “herd”. This is what could be happening in BRIC markets, writes PEI’s editor, citing thoughts expressed by industry insiders on the side lines and from the podium - of a recent Emerging Markets conference in New York. “Investors will watch what other institutions are doing; as they see more and more LPs crowding into a market in search of outsized performance, the fear of missing out takes over.” The article also provides some advice on how to avoid getting invested in what might be “over-saturated” markets. Sticking with the herd makes a lot of sense for wildebeest in the Serengeti, also sheep in remote pastures, and in some cases even among humans, but not necessarily among private equity investors in Europe or North America, it seems.

CLEAN ENERGY INVESTMENTS In a follow-up to our previous issue’s article about investment in clean or renewable energy, there is still more industry research making headlines. A study published about G-20 investment activity by Pew Charitable Trusts and Foundations announced that the top spot in clean energy investing now belongs to China, attracting a record USD 54.4 billion in. Germany moved from third to second place with USD41.2 billion. When it comes to private equity and vc investment, the US is still number one with USD6 billion, representing three-quarters of the G-20 total. But it was number three in overall investment, the report says. There is also information


about key financials, investment and technological trends related to clean energy in G-20 countries in the report. On the whole Pew is bullish on clean energy, saying that asset investment could reach $2.3 trillion in total over the 2010-20 period.

Cleantech-focused funds did not see a decline in capital raised in 2009, however in VC fund activity from Preqin (See Fig. 1: Annual Solely Cleantech-Focused Fundraising 2004 - Feb 2011). Over 80 purely cleantech-focused funds are currently seeking $23.5bn in capital, says Preqin. The study also notes the size of cleantech funds of funds is increasing, according to a brief in Inside Investor Relations. Back in 2006, the average cleantech fund of funds closed at USD173 million in capital commitments. Now the average fund size is closer to USD300 million. More on Preqin’s report here.


M&A REBOUND – MORE COMPETITION FOR PE BUYERS? The M&A market is bouncing back to pre-financial crisis levels in several regions of the world, such as Asia Pacific and the UK, according to recent surveys. The trend is likely to continue, according to AFIC Grant Thornton in a study entitled Mergers and acquisitions: global prospects for growth released in early March (See Figure 1. Plans to Grow). The report is based on a survey conducted in December 2010 of private business owners, where 34 per cent of the 6000 respondents across 39 economies, said they are planning acquisitions. The business owners are buying for strategic growth, a change from the “survival” mode acquisition strategy of the past couple of years. PE buyers also mentioned as competing for deals. What has changed also is the level of confidence of strategic buyers. “Ambitious businesses now sense that the combination of a more stable global economy and receptive vendors is generating interesting acquisition opportunities,” says the report. China’s M&A is also on the rebound. In its twice-yearly China M&A Market report, Baird says that inbound deal count is up 18 per cent in 2010 and outbound dealmaking is up almost 25 per cent. Last year, China M&A rebounded more quickly than in other regions. “Based on shifts in global capital flows, China should become an increasingly important participant in cross-border M&A over time,” says the report. All this means that private equity buyers will have more competition from strategic buyers as the M&A rebounds. The pickup in activity is expected to be sustained throughout 2011.

DOTCOM REBOUND? It is not only the M&A market that is exhibiting a rebound of sorts. According to a report in the NY Times Dealbook, dotcoms are also on the up again. There is suddenly a new crop of highly valued Internet ventures and there is talk of over-valuation. One of the companies is micro messaging platform Twitter, which is apparently valued at USD 10 billion, raising concerns of a new tech bubble,


according to Alt Assets. The flurry of activity in social media companies, has Dealbook asking if investors are “partying like it is 1999”. Actually, if one looks at the above infographic used to illustrate the article, the bubble in 1999 was the same size as today’s, about USD71 million but the number of companies in it in 2011 is much smaller and only limited to dotcoms, illustrating that valuations for individual companies are much higher than during the tech bubble. The article makes the argument that this time it is different, quoting industry insiders and observers who posit that nowadays such companies are generating quick growing revenues, and furthermore, since it is such a small group of companies, the potential impact if these ventures suddenly lose value or fail, the impact would be limited. Their shares are not yet in the hands of the wider public.

Elsewhere there is some insight into how quickly valuations are inflating. Bloomberg Business-Week broke the news that “social shopping” site Groupon is planning an IPO valuing it at $25 billion. Less than a year ago, the company was valued at $1.4 billion, says the report. It subsequently sought funding at a $3 billion valuation in November and turned down a $6 billion offer from Google two months after that. In the meantime, says the article, Groupon raised $950 million in venture capital from Kleiner Perkins Caufield & Byers, Andreessen Horowitz, and other well-known venture firms. Much of that capital went to early shareholders, who cashed in parts of their stakes, says Bloomberg BusinessWeek. The company is reporting quick growing sales, and is aiming for a turnover of USD1 billion in 2012.


COMPETITION HEATS UP FOR LP COMMITMENTS TO PE FUNDS PEI reports that several big name LPs, Employees’ Retirement System, The Wellcome Trust and Harvard Management Company, for example, have spent the last year and a half “cutting down relationships in their private equity portfolios, keeping only the best-performing managers and those firms that have been the most forward-thinking with regards to alignment of interests”. This is going to make it difficult for other GPs to find a spot in the new slimmed down portfolios, not to mention the fact there are an estimated 1,300 to 1,500 funds coming to market this year, “many of whom will be knocking on the same limited partners doors”. The article gives some suggestions on how GPs can position for success in a more competitive fundraising market. Fimeris, which is a placement agent and PE industry service provider, has a more optimistic view on fundraising based on a survey of its PE industry constituents. In its latest report Fimeris says that some “interesting facts regarding GP relationships emerged from our survey, specifically that a large number of institutional investors continue to focus on developing new GP relationships with 40% expecting to commit to new GPs going forward”.


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