SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 98

DIGEST 154

September 19, 2014

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Carving Out Deals to Avoid High Valuations

Trendsetters: Family Offices Forge Ahead on Impact Investing

Peppy Prospects for India

Russian PE Reduced in 2014

Nine Months of Booming M&A in Europe

Quote of the Week: Not Quite Like Gambling

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CARVING OUT DEALS TO AVOID HIGH VALUATIONS There were few buyouts greater than a bil-lion dollars in this week’s headline news, suggesting that valuations are acting as a deterrent for PE dealmaking. High valua-tions are great for selling portfolio compa-nies and for entrepreneurs, but not neces-sarily good for PE firms looking to invest funds raised. Partners Group in Switzer-land calls the situation “assetflation” and says it is a fact of life for the time being. Nevertheless, some resourceful private equity teams are still finding ways to invest without overpaying for assets, says the FT. To avoid high valuations they do less obvi-ous deals like corporate carve-outs. Sure enough, this week we note several, globally. In Japan, KKR acquired the DJ equipment business unit from Pioneer for about USD 550 billion, according to several news reports. In Europe, Nordic Capital acquired a Czech Republic-based outsourcing division of mul-tinational ABB Group, completing a corporate carveout as buyout firms chase primary assets, reports efinancialnews. These large multinationals are paring down non-core businesses creating opportu-nities for PE players. And there is no shortage of such companies doing that. For example, the WSJ report suggests that DuPont might be next. It also reported that Bayer AG is considering a carve out of its MaterialScience unit. The US market is also seeing some high profile multi-billion dollar carveo-uts, such as Golden Gate and Red Lobster, as noted in TermSheet last week. (Image source: Digital DJ Timeout)

TRENDSETTERS: FAMILY OFFICES FORGE AHEAD ON IMPACT INVESTING

Impact investing has about USD 50 billion of assets under management, a figure that’s been growing steadily, mainly due to Family Offices setting the trend, according to the authors of an extensive report called Charting the Course by Deloitte and WEF, quoted in an interview on the HBR blog.Institutional investors and other mainstream investors are expected to follow the allocation trend exhibited by family offices, according to the WEF report, as they also followed suit with investing in PE and hedge funds back in the 80’s and 90’s. That is why they created this report, which has road-maps for mainstream investors, and examples of leading edge impact investors. The rationale for impact investing is varied, but proponents see it as a distinct approach to putting

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PEPPY PROSPECTS FOR INDIA

capital to work that address areas that existing private and public capital markets are not serving well, but the authors say their surveys reveal that it is also a way for the super-wealthy to reap a more ful-filling or satisfying return on investment, as opposed to simply acquiring more luxury goods, or accu-mulating more wealth, or preserving it, whatever the case may be. (Image source: WEF)

Private equity giant Partners Group, with USD 4.2 billion in assets under management, which recently opened an office in Mumbai after investing “close to a billion in the Indian” market in recent years, is looking for investment opportunities in Education, eCommerce, and IT, including infrastructure, accord-ing to India-based financial portal moneycontrol.com. About one third of that US dollar total was invested by Partners Group in the past 18 months. The Swiss giant aims to put about USD 150-250 million to work annually.

It’s not the only private equity investor targeting tech in India, there are at least five corporate VC funds created recently by Indian tech stalwarts, as well as for-eign corporate VC funds run by the likes of Cisco, American Express, Intel and SAP, that are active in the market, according to Business Standard and Tech in Asia. The graphic here illus-trates the trend. (Image source: Busi-ness Standard)

RUSSIAN PE REDUCED IN 2014Buyout activity in Russia is dwindling this year with PE firms having invested only USD 35 million, compared to USD 295 million in 2013, and USD 1.6 billion in 2011, according to FN, citing data from the Emerging Markets Private Equity Association. The slowdown is due to compliance issues caused by western sanctions. It says that Russia is at the moment the largest economy subjected to the imposi-tion of western sanctions to date (others include North Korea, Iran, Syria, Cuba and Myanmar).

An article in the Moscow Times quoted regional PE fund managers on the difficulty faced raising new funds from European and US LPs this year, despite the number of growing Russian businesses to in-vest in, and the good returns that Russian deals have delivered in the recent past.

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NINE MONTHS OF BOOMING M&A IN EUROPE

M&A activity in Europe has already surpassed the yearly volumes in 2009 to 2013. With an M&A volume of USD 399.7bn so far this year, Europe is seeing an increase of 30% over the same period last year (see graphic). It is the highest YTD level since 2008, according to the latest data from dialogic. Deal ac-tivity has increased to 4,069 deals in 2014, up 11% on same period in 2013 (3,676 deals). France is the most targeted nation. The UK is a top acquirer and Chinese acquirers are making their mark too with a record-breaking USD 11.8bn via 43 deals in 2014 YTD. The average deal size is USD98m, which is the highest average since 2007 (USD193m). Cross-border M&A is up by a whopping 67% on the same period of 2013, accounting for 59% of total M&A volume in 2014 YTD.

QUOTE OF THE WEEK: NOT QUITE LIKE GAMBLING

“It seems very strange to me that you can lose your house at Ladbrokes in a few minutes, but you cannot buy GBP 500 worth of shares in a company you like (no matter how well presented) without being a ‘sophisticated investor’ or taking advice (how?), or certifying it is less than 10 per cent of your investible assets (a nebulous and transient calculation)…”

Who said it: John Moulton, founder of Better Capital (former Alchemy Partners)

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Context: The ever-quotable PE industry veteran Jon Moulton weighed in on crowdfunding this week in CityAm. He’s an investor in two crowdfunding platforms Funding Circle and InvestingZone, and has much to say on the topic. In the editorial, he’s critical of the regulatory authority in the UK, but also warns of intransparency and emotional drivers of investors that use crowdfunding platforms. He points out that members of crowdfunding sites may be overly-influenced by good stories or pitches, and are attracted to celebrity or maverick personalities. The crowdfunding platforms like the buzz fac-tor too, because it attracts investors. He concludes that crowdfunding can be very exciting, but inves-tors should beware and to understand that there is the chance that managers “milk” the company, that they can get diluted in later rounds, and beware that some of the shares on some platforms are non-voting shares.

Where we found it: CityAm.

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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 notewor-thy news items, scoping trends and currents events in the global private eq-uity 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:  Pro-fessional, Accessible, Transparent, Simple, Efficient, Effective, and Global. To receive the weekly digest by email register on www.dealmarket.com.Editor: Valerie Thompson, Zurich

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