1. DIGEST109
September 20, 2013
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IPO Window Opens: Trends and Hot Sectors
Drop in Buyouts Emerging Markets
Deal Sourcing Challenge Slows Down Family
Office Club Deals
LP Direct Investment: Disintermediating
Private Equity Markets?
US Dealmaking Rebounds
Quote of the Week: Autonomy Founder’s New
Billion Dollar VC Fund5
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IPO WINDOW OPENS: TRENDS AND HOT
SECTORS
DROP IN BUYOUTS EMERGING MARKETS
Renaissance Capital’s IPO market snapshot
says there have been 158 IPOs priced this
year, an increase of 17.9% from last year.
The most IPOs are in the US but activity is
increasing in other parts of the world too, it
says. So far this year IPOs have raised USD
28.6 billion and produced an average return
of 34% post-IPO. There have been 53 IPOs in
the past 90 days, with total proceeds of USD
10.3 billion and an average return of 28%.
The active IPO pipeline includes 118 compa-
nies looking to raise USD 33.8 billion. In the
last year North America represented 37.3%
of global proceeds raised. The hottest sector
is the financial industry which has had the
most IPOs this year. Consumer industry IPOs
are number two with 15% of the IPO market.
According to its latest PWC IPO review report
published in August, technology IPOs sector increased in the second quarter with 16 IPOs raising USD
2.8 bn compared to 10 IPOs in Q1 and raising USD 1.7 billion in proceeds. Comparing activity to the
same quarter last year, total funds raised declined 84%. However, last year’s second quarter did have
the giant USD 16 billion Facebook IPO. (Image Source: Renaissance Capital)
There was a dramatic drop in private equity-backed
buyout deals in emerging markets, according to
Preqin’s Buyout Deals Analyst. So far this year
there have been 217 transactions, valued at an ag-
gregate USD 11.9bn, a 33% decrease in the number
of buyout deals and a 41% drop in the aggregate
deal value compared to last year. Earlier this year,
Preqin published a survey of investors in Emerg-
ing Markets that predicted a decrease investment
in the next 12 months, although not necessarily a
33% decrease. (See chart sourced from Preqin).
Emerging market buyout deal size has been
steadily declining in the past couple of year. Preqin say there is a 27% decrease in the average size of
buyout deals in emerging markets from 2010 to present, compared to a steady increase of 21% in av-
erage size for buyout deals globally. Today buyouts in emerging markets represent 12% and 6% of the

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DEAL SOURCING CHALLENGE SLOWS
DOWN FAMILY OFFICE CLUB DEALS
Global total number and aggregate value. The largest deal announced in the region this year was the
buyout of the South Korean insurance unit of ING by MBK Partners, valued at USD1.65bn.
China and South Korea have reported the largest proportion of deals this year to date, with buyout
investments in both countries each representing 25% of the value of all private equity-backed buyouts
in emerging markets. Investments in India account for 18% of the total value; Indian buyout deals also
represent the largest proportion of buyout deals in emerging markets by number, at 41%.
The hot sectors are business services with 22%, closely followed by industrials, which have accounted
for 20% of buyout deals, according to Preqin.
There has been a lot of buzz about club deals being done by family offices, writes CampdenFO but
they are not happening as much as it might seem. The feature article says the rationale for club deals
for direct investment is compelling: wealthy families can avoid paying fees to asset managers whose
performance they are not happy with. A club deal spreads the risk between family offices, and such
deals offer greater transparency and potentially greater alignment. They can often be a good way to
get emerging market exposure.
But the ability to find a profit-making operational business requires good contacts and knowledge in
an industry. CampdenFO says one example is the family office of Brian Souter, a Scottish entrepreneur
who founded Stagecoach, has been investing in transport businesses including bus and ferry firms. He
had an exit recently of an investment in the yacht-maker Sunseeker (highlighted in the photo above). It
was acquired by China’s Dalian Wanda Group, according to research by your Dealmarket Digest edi-
tor. Another example given is Mike Lynch (he is the British founder technology company Autonomy
acquired by HP in 2011 for USD 11 billion) who has created Invoke Capital, a EUR 1.2 billion fund to
provide venture funding to technology start-ups. One of the biggest problems is deal sourcing, accord-
ing to the article. The family office needs to have a large network and be “tapped into good businesses

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and good people that run businesses”. Some family offices have the advantage of being run by active
entrepreneurs who tend to have leads into the deal market, but the ones that are second or third gen-
eration and quite large and have employed people to run the family like a fund of funds for the families
may find it a bit harder, says the report.
To get the deals an investment in marketing telling the market that you are looking for deals is nec-
essary. All this has led to some teams emerging that source deals, do some due-diligence and legal
work, and then run them afterwards as a GP, such as Penta Capital or Chrystal, basically GPs that
invest a pledge fund.
Furthermore, the deals are sometimes difficult to execute because leadership is not clear. There is no
standardized blueprint for doing club deals, and most family offices are just not set up to do it, says the
report. A large one might only have 15 to 20 people on the investment team and not have the resources
for labor-intensive one-off deals. Too many investors in a club deal make it cumbersome and complex
and the seller may get impatient with having to deal with a number of investors instead of just one GP,
says the report. (Image Source: Sunseeker website)
LP DIRECT INVESTMENT: DISINTER-
MEDIATING PRIVATE EQUITY MARKETS?
Last week we highlighted FT’s article about
Canada’s Pension funds increasing their
direct investment activities. The article refer-
ences a paper by an INSEAD and Harvard re-
search team that evaluated the performance
of such investments over time. This week we
took a look at what is being said by Bain, for
example, about the paper and an executive
summary published in Working Knowledge.
The researchers used proprietary data cover-
ing 392 deals by a set of institutions, both co-
investments and direct investments, between
1991 and 2011. It is the first study based on a large sample of the relative performance of direct in-
vestments by large institutional investors. The authors of the study found a sharp contrast between
the performance of “solo” deals compared to co-investment deals (deals initiated and negotiated by
buyout fund managers, giving their clients an opportunity to invest alongside them). Solo deals out-
performed. The underperformance of co-investments appears to be associated with the higher risk of
deals available for co-investments. The outperformance of independent direct investments is due in
part to their ability to exploit information advantages by investing locally and in settings where infor-
mation problems are not too great, say the authors, as well as to their relative outperformance during
market peaks.
Despite the quality of the data used, the authors said that data must be interpreted “cautiously”. The
internal rate of return for seven direct programs were examined, points out Bain and Co, adding that
the direct programs in the study were large, experienced PE investors that had strong local connec-
tions for industry intelligence and deal sourcing.
The authors of the study caution that small investors replicating a direct investment strategy “may
have different experiences”. Some direct deals that are less than stellar include Dubai’s sovereign

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wealth fund struggle with some direct investments in Europe. And Omers’ co-investment in Cengage,
the US college alongside Apax Partners for USD 7.75 bn at the peak of the buyout market in 2007 re-
sulted in a bankruptcy protection filing in July, according to the FT.
Bain concluded in its commentary on the study that even for large LPs, direct investing is “a big leap
from conventional fund investing or active co-investing. To build a credible program requires end-to-
end investment capabilities that take a lot of time and money to build.”
US DEALMAKING REBOUNDS
The Private Equity Growth Capital Council (PEGCC) recently released its first quarterly Private Equity
Trends Report. It took a look at PE industry activity in the US, including investments, fundraising and
exits. The report says that second quarter private equity activity rebounded after a sluggish first quar-
ter. Specifically, fundraising and exit volumes “surged”, indicating continued demand for PE funds,
as well as greater distributions of capital to investors. Investment volume also increased, but at a
“moderate pace”.The report says that second quarter private equity activity rebounded after a sluggish
first quarter. Specifically, fundraising and exit volumes “surged”, indicating continued demand for PE
funds, as well as greater distributions of capital to investors. Investment volume also increased, but at
a “moderate pace”.
After record private equity exit volumes in 2012, exits appear to have returned to trend based on a
four-quarter rolling average, said the PEGCC. Compared to investment and fundraising, exits continue
to be the bright spot in private equity activity. The trends in Q2 provide optimism for private equity’s
investors and fund managers alike. Exit volumes doubled in the second quarter, signifying that inves-
tors such as pension funds, charitable foundations and university endowments are receiving the capi-
tal distributions needed to finance their mandates. The sharp increase in fundraising also shows that
investors continue to have a strong appetite for private equity investing, said a PEGCC spokesperson.
(Image source: PEGCC)

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Context: Almost a year to the date of the announcement of his new
EUR 1.2 billion venture fund, Mike Lynch was back in the news this
week, talking about his fund’s investment activity, and why he’s
QUOTE OF THE WEEK: AUTONOMY
FOUNDER’S NEW BILLION DOLLAR VC
FUND
“What my management team learned over the years is how to add the
missing ingredient in European [technology breakthroughs from uni-
versity labs]… There is great technology around… What I’m trying to do
is unlock that amazing technology. This is exciting stuff.””
Who said it: Mike Lynch, Founder of Autonomy and Invoke Capital
in an interview broadcast on CNBC
confident about creating the next ARM or Autonomy in Europe. He was interviewed on CNBC. His fund
is called Invoke Capital (mentioned in the above CampdenFO article). In the video, he talks about geo-
arbitrage (inventing in technology made in Europe, testing it here, marketing it, and then scaling up
and distribution in the US market), the fact that he is not at all interested in investing in social media
startups, the lack of competition in Europe for good investment deals compared to Silicon Valley, and
his conviction that his fund is big enough to cover the financing gap to take a startup from seed to IPO.
This week it was announced that Lynch invested an undisclosed amount into a cybersecurity venture
called Darktrace, which was widely reported (see here and here), including German and French press
outlets. It is clear that Mike Lynch and his new fund are getting a lot of attention and international ex-
posure, which is quite important if he is going to be able source quality deals that will make his billion
dollar fund deliver returns on the scale of high-profile established venture capital funds. According to
the Invoke website, he has a hired an tech industry veterans, including a few other tech entrepreneurs
that have gone from seed phase to IPO, as well as marketing and public relations veterans. (Image
source: CNBC)
Where we found it: CNBC video
Key findings about the private equity activity in the second quarter of 2013 include:
• Quarterly U.S. private equity investment deal volume increased from USD 69 billion in the first
quarter of 2013 to USD 71 billion in the second quarter.
• Fundraising volume increased from USD 17 billion in the first quarter to USD 42 billion in the second
quarter.
• Exit volume doubled from USD 21 billion in the first quarter to USD 42 billion in the second quarter.

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