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Tue, 19-May-2009 Permira, one of Europe’s largest private equity firms, published its 2008 Annual Review in late April 2009 discussing the firm’s 36% writedown of its investment portfolio, Damon Buffini‘s comments in the Chairman’s letter, and outlook for 2009. See a copy of Permira’s 2008 Annual Review below.
Damon Buffini Quotes from Chairman’s Letter
- Lack clarity on outlook and market conditions may get worse. “I have not experienced such a lack of clarity about the outlook in my career and there may be worse to come before we see a recovery.”
- Difficult decisions with portfolio companies. “We have taken some difficult decisions over the last year and there will be more to come in the months ahead, as we seek to secure the long-term future of the Permira funds’ companies. The same is true of any business right now, public or private.”
- Changes in the private equity industry.
- Deal sizes will be smaller. “It will…be a very long time before the prefix ‘mega’ is applied again to the industry’s activity; investments will be smaller, albeit there will still be opportunities to invest in and transform many businesses.
- More regulation. There may well be a higher degree of regulation than before, which will mean working even more closely with lawmakers and regulators. Read More »
Mon, 18-May-2009 Private equity firms have other fees such as transaction fees and monitoring fees in addition to the commonly known “2 and 20″ fees for the fund which is a management fee (typically 2% of committed capital of the fund) and carried interest (typically 20% share of capital gain profits of the fund net of fees and expenses). Global law firm Dechert LLP recently conducted a survey of private equity transaction fees and monitoring fees that covered 60 leveraged buyout acquisitions by 40 different lead investors, all of which were prominent private equity firms. Below is an overview of transaction and monitoring fees (including a sample of The Blackstone Group’s legal agreement-see below) and a summary of Dechert LLP’s findings:
Transaction Fees. Transaction fees, also known as deal or success fees, are the fees charged by the private equity firm in connection with the completion of the acquisition for typically unspecified advisory services. The private equity firms usually collect such one-time fees in cash typically at closing. Out-of-pocket expenses are usually reimbursed separately. Given the assessment and execution of transactions are expensive, the transaction fees usually help cover the cost of broken deals or abort costs from other deals. A majority of private equity firms offset 50% or more of the transaction fees against the management fee (i.e., typically 2% of committed funds) charged to limited partners. Additionally, the private equity firms generally disclose its transaction fee as apart of its sources and uses of funds for the transaction as it works with lenders, management and co-investors in terms of structuring the transaction, so there is some outside market pressure on this fee.
- Average transaction fee is 1% to 1.25% of deal size. According to the survey, the average transaction fees tends to converge around 1.25% of deal size for deals under $1 billion, and 1% for deals over $1 billion. In other words, for a $300 million deal the transaction fee would be $3.75 million and for a $1 billion deal the transaction fee would be $20 million.
Read More »
Fri, 8-May-2009 Private equity firm Kohlberg Kravis Roberts & Co. has reached an agreement to acquire South Korean Oriental Brewery (OB) from Anheuser-Busch InBev for $1.8 billion, in one of the largest leveraged buyouts announced this year, reported various media reports. The deal also marks KKR’s first investment in Korea and will help to boost confidence in the private equity industry in Asia.
Key Deal Terms
- Target. Oriental Brewery is the second largest brewery in South Korea with approximately 40% market share in a $2.8 billion beer market duopoly. Hite is the largest brewery with approximately 60% market share. Oriental Brewery’s beer sales by volume rose 6.1% in 2008 which was more than double the total South Korean beer market.
- Purchase price-to-EBITDA of 9x. With a $1.8 billion purchase price, KKR is paying approximately 9x EBITDA (earnings before interest, taxes, depreciation and amortization — known as a measure of cash flow). OB’s EBITDA was around $200 million, sources close to the deal said. Previous acquisitions in the beer sector commanded multiples of 12x cash flow or more. “The price doesn’t look excessive,” said Lee Kyung-min, analyst at HI Investment & Securities and “it looks like a pretty good deal for KKR.”
- Debt financing of 3.75x EBITDA. Approximately $750 million in debt financing which equates to approximately 3.75x EBITDA or approximately 40% of the capitalization structure. This is a sign of the current global economic environment because the range was between 6x to 8x during the boom times before the credit crunch. The lender group includes JPMorgan Chase, Standard Chartered, HSBC, Calyon, ING Bank, Natixis and Nomura, Reuters Basis Point reported earlier.
- Seller financing of 1.5x EBITDA. AB-InBev is providing seller financing of $300 million in pay-in-kind vendor financing at attractive terms which equates to approximately 1.5x EBITDA or approximately 16% of the capitalization structure. Read More »
Mon, 13-Apr-2009 The Emerging Markets Private Equity Survey 2009 published by Emerging Markets Private Equity Association (EMPEA) and Coller Capital was released on April 6, 2009. The survey covered 156 respondents that represented a range of institutions and geographies, including pensions, foundations, endowments, asset managers and funds‐of‐funds from North America, Europe, Asia, Africa, the Middle East and Latin America. According to the survey, emerging markets means emerging economies of Africa, Asia, Central & Eastern Europe, Russia/CIS, Latin America and the Middle East. See a copy of the report below or directly download it here.
Key Highlights:
- Limited partners’ appetite for emerging markets private equity
- 78% of limited partners currently invested in emerging markets private equity plan to commit to additional emerging markets managers and/or geographies over the next 5 years, with 49% planning to do so over the next 2 years.
- 62% of limited partners with current exposure to emerging markets private equity expect the dollar value of their new commitments to remain steady or rise in 2009 relative to their actual commitments in 2008. Read More »
Mon, 30-Mar-2009 Driving Growth: How Private Equity Investments Strengthen American Companies report by the Private Equity Council provides an overview of how private equity firms drive growth and create value in the companies in which they invest. The report refers to American companies, however, these principles would apply and be useful in any country at any portfolio company. Given the major changes in the financial landscape and the global economic crisis, the days of driving a majority of growth in enterprise value through financial engineering and leverage are long gone. Private equity firms must primarily focus on improving and enhancing portfolio companies to drive enterprise value growth and ultimately investment returns. Please see a copy of the report below or directly download here.
For illustration purposes of the value-add from private equity, there are case studies of U.S. companies such as Burger King, Sungard and Autozone in the report. Most importantly, the report covers key principles on how private equity ownership permanently strengthens companies and increases enterprise value. The key principles (as abstracted from the report) are as follows:
Four Cs of Private Equity
- CAPABILITIES
- Private equity works very closely with portfolio companies, especially post-investment. Private equity owners often act strategically to infuse their own talent into the companies they acquire. The lead partner on a transaction often will spend half or more of his or her time working with the portfolio company management team for the first few months after its acquisition. The private equity owner helps management design and execute near-term improvements and develop a detailed multi-year business plan. In the crucial time immediately after acquisition, private equity owners work with portfolio company management to stabilize the business and set it on a higher performance trajectory. Read More »
Tue, 24-Mar-2009 Globalization of Alternative Investments Working Papers Volume 2: The Global Economic Impact of Private Equity Report 2009 report published by the World Economic Forum dated January 2009 provides insight into the global economic impact of private equity. See a copy of the report below or directly download it here.
The key areas covered:
- Do Private Equity-owned Firms have Better Management Practices?
- Private Equity, Jobs and Productivity
- Leveraged Buyouts – Evidence from French Deals
- What Drives Private Equity Activity and Success Globally?
Key Findings
- Management Practices Study. Study of management practices across 4,000 private equity-owned and other firms in a sample of medium size manufacturing firms in 12 countries in Asia, Europe and the US. Key findings:
- Private equity-owned firms are on average the best-managed ownership group. They are significantly better managed across a wide range of management practices than government-, family- and privately owned firms.
- Private equity-owned firms have strong operational management practices. Private equity-owned firms have strong people management practices in that they adopt merit-based hiring, firing, pay and promotions practices and have tough evaluation metrics, which are integrated across the short and long run, that are well understood by the employees and linked to performance. Private equity-owned are better still at operational management practices that include modern lean manufacturing practices, using continuous improvements and comprehensive performance documentation process. This suggests private equity ownership is associated with broad-based improvements across a wide range of management practices.
- Most private equity-owned firms are well managed. The high average levels of management practices in these firms are due to the lack of any “tail” of very badly managed firms under their ownership (that is, very few private equity firms are really badly managed). Read More »
Thu, 19-Mar-2009 Public Value: A Primer on Private Equity report by the Private Equity Council in 2007 provides a good overview of private equity. A copy of the Public Value: A Primer on Private Equity is below or can be downloaded here. The report covers the following topics:
- Private Equity’s Model of Corporate Governance
- What is Private Equity?
- Private equity is an asset class that generally invests in unlisted companies. From a practical standpoint, private equity is an ownership structure that enables a private equity firm and its investors to acquire companies – either public or private – that have significant potential for growth, in some cases because they are undervalued or under-performing. Generally, the private equity firm invests time, energy, talent and capital to improve the company’s performance and prospects. After several years, usually between four and five (and up to seven years for some firms), the private equity firm sells the company, hopefully at a premium to the purchase price.
- In a nutshell, a private equity firm’s goal is to increase the value of the underlying asset for the investors and sell for a capital gain.
- How Does Private Equity Work?
- Private equity firms (also known as the general partners – GPs) raise capital from investors (or limited partners – LPs) in a limited partnership legal structure. Key terms of private equity firms:
- Targeted investor returns: 30% internal rate of return (IRR) (More likely in the mid-20s due to the global financial crisis and intensifying competition in private equity)
- Investor commitment: 10 years
- Portfolio company investment horizon: 3 to 5 years (and up to 7 years for some firms; longer investment periods will become more typical especially in light of the global financial crisis) Read More »
Tue, 17-Mar-2009 A new Roland Berger Strategy Consultants study titled Increasing The Value of portfolio companies by improving their performance was released in March 2009. The study is a survey of 56 private equity executives in Europe, Switzerland, Russia and the USA. The study shows that the importance of operational performance improvement is rising as attractive acquisitions and sound exits have become more difficult during this period of the financial crisis. A copy of the report is provided below or can be directly downloaded here.
Key Findings
- Private equity firms hold their investments longer and focus more on operational performance improvement.
- Private equity firms use more professional management levers to increase the value of their investments.
- Private equity firms seek high-impact representation in their management. Nearly all private equity firms assign one single team for the entire investment lifecycle – this team is also responsible for performance improvement.
Key Takeaways
- 100-Day Plans. Nearly all private equity firms (86%) draw up 100-day plans for their investments. “Private equity firms with a large-cap focus are increasingly professionalizing their support capabilities for operational performance improvement,” says Thomas Rinn, Partner in Roland Berger’s Operations Strategy Competence Center. Read More »
Mon, 16-Mar-2009 Lessons from Private Equity Any Company Can Use (Memo to the CEO)
The book Lessons from Private Equity Any Company Can Use (Memo to the CEO) by Hugh Macarthur, Head of Bain & Company‘s Global Private Equity Practice and Orit Gadiesh, Chairman of Bain & Company, was published in February 2008 and provides a good concise overview of certain disciplines and best practices that Bain has researched and analyzed from their consulting projects with the top private equity firms in the world. As a result of these winning formulations of discipline and best practices, the top 25% of U.S. private equity funds raised between 1969 to 2006 have earned internal rates of return of 36% on average through good times and bad.
The global economic slowdown and credit crunch will definitely impact private equity and there will be some significant challenges. However, this book provides applicable concepts and lessons that could aid companies in managing their organization for the recession and maximize value through company improvements.
The 6 private equity lessons:
- Define full potential. Top private equity firms generate high returns primarily by creating operating value. They start by building an objective fact base. They scrutinize demand, customers, competition, environmental trends and the details of how money is actually made. Only then do they pursue a few core initiatives to reach full potential. Read More »
Fri, 13-Mar-2009 This publication written by Kaye Scholer LLP dated December 22, 2008 is titled Private Equity Markets in China: A Legal Puzzle covers the following topics:
- Since the early 2000s, there have been Chinese legislative efforts to provide a specific legal framework for private equity funds, but no specific timetable has been set at the moment.
- The delay has resulted in a fragmented and complex legal landscape that is governed by various People’s Republic of China (PRC) ministerial-level authorities and local governments issuing their own regulations of investment funds.
- Examples of the fragmented and complex legislation that govern private equity and investment funds in the legal framework include:
Thu, 12-Mar-2009 China continues to be the world’s most robust emerging market for private equity and venture capital finance, even in a difficult global economic environment, according to a report release on March 5, 2009 titled “Private Equity and Strategic M&A Transactions in China 2009″ released by China First Capital, Ltd., a boutique investment bank with offices in China, Hong Kong and the USA. “While the overall investment environment remains challenging and the effects of 2008′s turbulence are still being felt, 2009 will be a year of unique opportunity for private equity, venture capital and mergers and acquisitions in China,” said Peter Fuhrman, China First Capital’s Chairman and the report’s author.
“In 2009, China should rightly be among the most attractive — and active — private equity investment markets in the world,” the China First Capital report predicts. “Many of the international private equity firms we work with are expecting to invest more in Chinese SMEs in 2009 than in 2008. Chinese companies raising capital this year will enjoy significant financial advantages over competitors, improving market share and profitability.”
Read More »
Mon, 9-Feb-2009 Private equity veteran Henry Kravis, Founder and Senior Partner of Kohlberg Kravis Roberts & Co, believes market economies would benefit greatly by adopting private equity’s method of linking management compensation with a firm’s long-term financial performance. He states that buyout firms empower managers at their portfolio companies to invest and become part owners, something that could help correct unjustifiable levels of executive pay.
Henry Kravis quotes:
- “The model that we use when managing companies could stabilise the economy worldwide. Aligning interests is key: the real payday comes when our managers sell their stock – stock in which they have invested their own money.”
- “That makes a big difference. If a person only receives stock options in a company, then he himself risks nothing.”
- “Secondly, companies and managers will have to pay more attention to all stakeholders in firms, in other words not just the owners but the employees, customers and the company overall as well.”
- “The companies we buy, we hold in our portfolios for seven years on average. Many exchange-listed companies 60 to 80 percent of the stock changes hands in a year, so we are more long-term oriented than most shareholders.”
- “I can certify that 85 percent of our profits can be traced back to operational improvements, while only 15 percent stem from rising corporate valuations in the market.” He dismisses the notion that the industry billions generated from its investments stemmed mainly from a rise in asset values.
Go to Source
Wed, 7-Jan-2009 A publication by The Boston Consulting Group (BCG) and IESE Business School of the University of Navarra dated December 2008 titled ‘Get Ready for the Private-Equity Shakeout – Will This Be the Next Shock to the Global Economy?‘ covers the following 4 questions:
- What is the root of the problem?
- How will the shakeout affect different players within the private-equity industry?
- What impact will the collapse of private-equity portfolio companies have on the wider economy?
- What can private-equity firms do now to deal with the threat of a shakeout or to capitalize on any opportunities?
Key Points
- Most private equity firms’ portfolio companies are expected to default on their debts which are estimated at $1 trillion
- Roughly 60% of 328 private equity portfolio companies surveyed were trading at distressed levels (i.e., any debt with a credit spread in excess of 1,000 basis points and is likely to default or breach its loan covenants).
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