Our weekly pick of Private Equity News and Trends

1. DIGEST 117
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Cautious Optimism for MENA Dealmaking
Growth in Multi-Trillion Sovereign Wealth
Fund Assets Could Boost PE
Shoes, Handbags & Mascara: Private Equity’s
High Fashion Passion
Smart Money Monitors Private Equity Costs
Sustained Recovery Predicted for Global M&A
Quote of the Week: Outperformance –
Algorithms versus Humans
November 14, 2013

2. CAUTIOUS OPTIMISM FOR MENA DEALMAKING
Private equity activity in the Middle East North
Africa region is still a long way off from a peak in
2011, but dealmaking is showing improvement
this year, according to Financial News. Citing
data provider Dealogic, the article reports, 24
private equity deals worth a combined USD 783
million in the Mena region to the end of the third
quarter of 2013. It is an improvement on the 16
deals worth USD 525 million done during the
same period of 2012, but the reporter notes that
the figure “hides a sharp reduction in average
deal size” in the third quarter of 2013, when the
eight deals were worth just USD 85 million. Activity falls short of the 11 deals worth a total of $1.3 billion in the first three quarters of 2011. The main
problem is finding an exit. The political instability has created more need for capital in certain sectors
and a wealth of mid-market deals. The trend is a “flight to quality” both in individual deals and in GP
selection. (Image source: Four Seasons Hotel, Istanbul, Turkey)
GROWTH IN MULTI-TRILLION SOVEREIGN
WEALTH FUND ASSETS COULD BOOST PE
Sovereign wealth funds globally have
added more than USD 750 billion to
their total assets since 2012, the largest
growth since to 2007, according to new
research from Preqin. Growth is driven
by the number of new sovereign wealth
funds formed over the last few years and
new capital injected into existing sovereign wealth funds. It is an important
trend because the level of capital flowing
into alternatives from sovereign wealth
funds is “extremely significant”, according to Preqin, which expects that once the
newly established sovereign wealth funds
become more developed, we could see a number of new allocators to alternative assets, including private equity. Preqin analysts are upbeat on this group of institutional investors, as a statement by Amy
Bensted, Head of Hedge Fund Products, makes clear, “Despite the challenging financial landscape and
political unrest, sovereign wealth funds have continued to thrive and to grow, and this trend is predicted to continue over the next few years. We are still seeing new launches of sovereign wealth funds,
with many countries approving plans for new launches over 2012-13.” (Image source: preqin)
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3. SHOES, HANDBAGS & MASCARA: PRIVATE
EQUITY’S HIGH FASHION PASSION
Over at the WSJ’s MoneyBeat, a young reporter has undertaken an entertaining assignment to live a
week without touching
or using anything owned by
a private equity investor.
She’s had to toss out her
mascara and stop using
Twitter and avoid certain
blockbuster movies at
the cinema. We assume, the
point being that private equity has become so
integral to the economy
that it has stakes in almost
every area of consumer
and business endeavor. One
thing is certain is that private equity has a passion for
fashion brands. Several
PE bidders have stepped to
acquire a EUR 850 million stake in Versace that is
on the blocks, according
to the FT, which also makes
it DealMarket Digest’s
buyout deal of the week.
According to the WSJ, the
dollar value of investment by
private equity firms in retail apparel companies rose
nearly ten-fold last year to USD 5.5 billion, citing data from Dealogic. (Image source: Versace website)
SMART MONEY MONITORS PRIVATE
EQUITY COSTS
The big US endowment funds, those
of Yale University and Harvard University in particular, are considered
the benchmarks for patient, smart,
long-term investment, according to
Forbes, so when Yale’s Endowment
team made a decision to reduce its
allocation to private equity from 35%
of its portfolio to 31% of the portfolio (which is still a hefty stake in PE),
the magazine took note and did a bit
of investigative reporting. The article
describes recent investment activity
of endowments and sovereign wealth
funds in alternative assets. The conclusion was that the smart money
appears to still like private equity, but
are keeping a close eye on whether they are getting sufficient return for the illiquidity involved. The
smart money apparently “mistrusts” hedge funds; and “loves” infrastructure funds. One of the chief
criticisms is the illiquidity of private equity and the fact that there is not much of a discount because
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4. of it. These careful investors will no doubt be awaiting the finalizing of an academic study that was
announced this week. Barrons wrote about it here. The internationally-authored study investigates
whether the performance of private equity investments is sufficient to LPs for risk, long-term illiquidity, and management and incentive fees charged by the general partner. Initial findings were that
“management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha
to compensate LPs for bearing these costs”. In other words, LPs have to be very good at selecting GPs
and at the same time be meticulous about monitoring the costs of PE investments. (Image source: Yale
Endowment website)
SUSTAINED RECOVERY PREDICTED FOR
GLOBAL M&A
The latest report from the mergermarket/
Intralinks Deal Flow Indicator (Q32103) team
suggests that a sustained recovery may be
underway based on analysis of its global data
on M&A deals across, which shows an 18%
year-on-year increase in global early-stage
M&A deals. The improvement is a result of
growing investor and corporate confidence.
The report says that this is the largest YoY increase in the DFI since Q3 2012, but also the
third successive quarter where YoY growth
has increased. EMEA and Latin America have
performed particularly strongly, gains of 35%
and 21% respectively. The popular sectors
are consumer, life sciences, and telecoms,
media and entertainment (as shown in the
graphic here). Private equity is no longer on
the decline, according to the data. Exit activity increased in Q3 2013 for the first time in
several years.
QUOTE OF THE WEEK – OUTPERFORMANCE - ALGORITHMS VERSUS HUMANS
“It seems that individual investors, once given the freedom to vary from the
‘model’ promptly went about shooting themselves in the proverbial financial foot.
Many didn’t buy the biggest winning stocks - stocks that were often very cheap
but had major business problems or industry challenges”
Who said it: Michael Nairne, President of Tacita Capital, family office & investment advisory firm
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5. Context: In a discussion about portfolio management and the suitability of using computer-aided
models, Nairne suggests that it should not be a surprise to hear that individuals make mistakes when
managing a portfolio of investments. He believes that a good investment model will outperform the
typical investor. A model avoids the emotional and fear-driven buy/sell decisions that a typical investor would make. Sophisticated investors such as pension plans have known for decades that defining
their own longterm “asset mix model” is vital to success, he writes. A model sets out allocations to the
major asset classes to stay on course, in good markets and bad. He said that many investors, including wealthy ones, gloss over the critical step of thoughtfully defining the right long-term asset mix for
their risk profile and financial situation. “It is so easy to resist the needed discipline of an asset mix
model when stock prices are skyrocketing, top equity managers abound and suave market experts are
offering free tips in every media outlet,” writes Nairne. (Image source: Financial Post)
Where we found it: Canada’s Financial Post
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6. 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.
To receive the weekly digest by email register on www.dealmarket.com.
Editor: Valerie Thompson, Zurich
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