2011 global private equity report

GLOBAL PRIVATE EQUITY REPORT 2011

A force for growth

Contents
01 Key findings
04 Global picture
15 Western Europe
24 North America
33 Asia Pac
41 MENA
50 BRICS
62 Sample and methodology
64 Grant Thornton capabilities
IBC Grant Thornton contacts

Glossary
AFIC Association Française des Investisseurs en Capital (the French Private Equity Association)
AIFMD Alternative Investment Fund Managers Directive
Asia Pac Asia Pacific region
BRICS Brazil, Russia, India, China and South Africa
CEO Chief Executive Officer
DD Due diligence
ESG Environmental, social and governance
FMCG Fast moving consumer goods
GCC Gulf Cooperation Council
GDP Gross domestic product
GP General partner
HR Human resources
ILPA The Institutional Limited Partners Association
IPO Initial public offering
IR Investor relations
IT Information technology
LATAM Latin America
LP Limited partner
M&A Mergers and acquisitions
MENA Middle East and North Africa (including Turkey)
N/A Not applicable
PE Private equity
PIPE Private investment in public equity
PLC Public limited company
SME Small and medium sized enterprises
SWF Sovereign wealth fund
TMT Telecommunications, media and technology
UN PRI The United Nations-backed Principles for Responsible Investment Initiative

The views and opinions in this report expressed by those private equity survey respondents providing comments or quotes
are theirs alone, and do not necessarily reflect the views and opinions of Grant Thornton International Ltd or any of its
member firms.

Key findings

MARTIN GODDARD
GLOBAL SERVICE LINE LEADER – TRANSACTIONS
GRANT THORNTON INTERNATIONAL

Over recent years, practitioners Three years in, the answer to the Three years ago, as the clouds
within the private equity industry question of whether we are emerging gathered with the tightening of the
might have been forgiven for thinking from the global economic downturn debt markets, dealflow within the
they were facing something of a or about to slip into a double-dip is more developed private equity
perfect storm, with the industry being still to be answered. markets rapidly started to fall away.
challenged on all sides. Globally, the Through this, private equity has With the skies not having lightened
competitive environment within the been asked to reflect on both its own that much in the intervening period,
industry has become more intense place in the financial landscape and to the consequent increased competition
with quality dealflow at a premium, face up to its often compromised for quality deals has only been
while simultaneously Limited public perception. There are real compounded by the return of strategic
Partners (LPs) have become challenges here for the industry world- buyers, many of them keen to put
increasingly demanding and vocal, and wide. In this report, we consider what healthy balance sheets to work.
the industry has also received greater it means to undertake private equity in In the emerging markets, the sense of
scrutiny from the broader public and the principal private equity markets opportunity has seen something of a
regulators alike. Compounding the around the globe – in terms of both gold rush mentality with an influx of
industry’s own internal growing pains the challenges and opportunities – and Western private equity firms seeking
– which in some of the oldest private find an industry that, on many levels, new areas of opportunity and the
equity markets has seen the validity of is converging in terms of the way it rapid development of domestic private
the whole model questioned – has goes about business. However, while equity industries also driving
been one of the toughest macro operating a private equity firm in competition. Across the world, then,
economic environments in recent London, Sao Paulo, New York, there has been a shortage of quality
history, with portfolio companies Shanghai or Sydney may require assets at reasonable prices for a private
sucking in time and resource as they increasingly similar skills, functions equity industry which had been
face up to the economic headwinds. and approaches, the dynamics in those accelerating its accumulation of funds
individual markets driving this over the course of the previous decade
convergence often remain quite and, as a consequence, has a pent up
different. need to deploy capital.

Global private equity report 2011 1

Just finding shelter and sitting out inevitable concern. However, in these Historically, IPOs have often been
the storm hasn’t been an option for markets too, private equity firms a preferred exit route for private
private equity investors either. With report the growing relevance of equity firms, and they do remain a
the boom in investment activity in the added-value approaches to portfolio viable option in parts of Asia, for
run up to the downturn, private management. These markets are often example. However, this channel has
equity portfolios had grown still characterised by growth capital been all but closed for some time in
considerably and have often been investments, with low levels of Europe and the USA; overall public
demanding of attention as the leverage, meaning the focus too is on investor sentiment and desire to invest
environment has become more performance improvement. As these might be the issue in some regions,
challenging and unpredictable. markets become more globalised, but the perception of private equity
Creating ‘saleable’ businesses with there is a recognition of the need to has also acted as a particular brake on
enhanced valuations is the endgame ‘professionalise’ businesses, with the IPO option in some countries
for private equity firms and, while the private equity firms seeing a key largely due to perceived pricing issues.
exit markets are showing some signs aspect of their involvement as the The return of strategic buyers might
of life again, the torrid market for new introduction of international have added to the competitive
investments of recent years has often standards of governance and ways of pressure on the buy-side, but they
been reflected in the exit markets too. doing business in order to prepare have been a welcome sight on the
In the West, the challenging companies for eventual sale. horizon from an exit perspective. If
trading environment has seen a Generating quality exits and corporates present the industry with
renewed focus for private equity in returns has always been critical for something of a double-edged sword,
getting more closely involved in private equity, but their significance so too does private equity’s own
portfolio businesses – while leverage has, if anything, increased as holding ‘internal’ response to the need to both
and multiple arbitrage might have periods have been stretched. In put money to work and generate
worked in a rising market, come the developed markets, private equity returns – secondary buyouts. While
downturn performance improvement firms are starting to bump up against many practitioners themselves remain
is the order of the day. Many private the investment hurdles of their fund very aware of the need to provide a
equity firms have therefore been cycles which need to be negotiated clear rationale for such deals in order
responding by ‘tooling up’ and even before new funds can be raised. to convince investors that they are not
establishing more formalised portfolio In some of the more emerging just fuelling an internal market in
operations teams to add more strategic markets, the development of the private equity assets, they have
insight and even operational resource industry is still at an early stage, but become an established feature of the
alongside the financial planning there is again a sense that the developed markets. However, even in
insight provided. enthusiasm and promise on the back the more growth-oriented emerging
In many of the emerging markets, of which these markets have grown markets they are also gaining
economic growth has been less of a now needs to come good in the form significance.
concern – GDP growth of seven or of demonstrable returns.
eight percent plus might be difficult to
imagine in Europe or North America,
but markets such as Brazil, India and
China have seen sustained growth and
continue to drive forward even
though the fear of over-heating is an

2 Global private equity report 2011

Maintaining a true course through The more forensic approach being Troubled waters perhaps, and ones
such choppy waters was always going taken by institutional investors may which no doubt will see more
to present challenges for investing and bring with it a greater administrative casualties to come, but good
exiting. But churn has also been a burden for private equity firms, but it helmsmanship and a solid crew (and a
feature of the fundraising environment can be seen as an integral part of the bit of luck here or there) still leave the
as well. Institutional investors have longer-term trajectory of an industry chance to navigate through
themselves faced considerable that also includes being under the successfully. There is a strong sense
challenges in recent times, not least increasingly watchful eye of the within the industry, whether in
within their private equity regulators – given added momentum developed or emerging markets, that it
programmes, which has led to a by the pressures exerted by the macro is a time to focus on the fundamentals
significant period of reassessing environment, for sure, but something of private equity investing – building
allocation strategies and the balance that was already well underway. While relationships, getting your hands dirty
between investing via re-ups (repeat some may worry that the inherent alongside management at the coalface,
investments with an existing investee entrepreneurial spirit of the industry is focusing on performance
manager) and identifying new under threat, others will see scrutiny improvement and proving the model
managers, potentially in new markets. and regulation as proof of an industry through good exits and good
Private equity firms rarely fail and institutionalising as it plays a higher company stewardship. This approach
disappear overnight, but the ability to profile and more significant role in then needs to be effectively and
generate returns and raise new funds is economies around the world. continuously communicated,
the life-support machine that, if Undoubtedly in the West, as more providing a stream of concrete
switched off, will see firms die slowly. high-profile businesses have come examples to educate, and in the more
There is still a clear sense that there under private equity ownership, developed markets perhaps re-
will be winners and losers within the interest from the regulatory educate, an ever-expanding range of
industry. The Darwinian process at authorities, politicians and the public stakeholders that the private equity
work will undoubtedly ensure the in general has increased markedly, and model does work as a positive catalyst
long-term vitality of the industry, but such attention is certainly not always for change and value growth. With
many also believe that the increased favourable; indeed it sometimes feels overall global economic sentiment
intensity this has brought to the as if it has become fashionable to making a shift in the wrong direction
selection and monitoring of criticise and blame private equity at during the latter stages of this research
investments by LPs will continue to the slightest opportunity, not least project, perhaps even dampening
be felt by private equity firms around because of the industry’s perceived some of the signs of cautious
the world for a long time to come. opacity. Elsewhere in the world, the optimism evident throughout this
industry has more quickly gone down report, the need to support and
a similar path as the desire to promote encourage such catalysts of wealth
private equity and growth has creation and economic development –
sometimes battled with a lingering a force for growth – is stronger now
scepticism about private equity than ever before.
practices and a desire to protect a
culture of family-owned business.

Global private equity report 2011 3

Global picture:
Investment activity

FIGURE 1: SOURCES OF DEALFLOW
PERCENTAGE

Western Europe North America Asia Pacific MENA BRICS Global result
Corporate divestments 20 15 23 20 8 17
Family/private 31 52 38 60 68 46
Secondary buyouts 47 30 23 20 10 30
Public markets 1 3 13 0 6 4
Other 1 0 3 0 8 3

• Firms in family and private ownership continue to be seen as the principal source of private equity dealflow.
• Secondary buyouts are a feature of all markets, but are expected to be particularly prevalent in the developed European arena.
• Respondents in the emerging markets of Asia Pac and BRICS have the most varied expectations in terms of deal sources.

“With origination you need to be able “Healthcare continues to be a key “Assuming that the economy will
to get through every level of the sector and we participate in its modestly improve, and not
process successfully. You need basic consolidation. Consumer and retail deteriorate, there should be an
hygiene factors, some differentiating are very active, driven by large increase in both dealflow and
factors and some compelling factors. domestic demand. Energy and completed deals. There’s a lot of pent
On the hygiene factors, you need infrastructure are other sectors to up seller demand, and a lot of pent
money, a fair price, good processes watch, and ones where there has up buyer demand, and when those
and well-oiled due diligence. The been a lot of competition from local two things coincide, deal flow
differentiators are often linked to the and foreign strategic partners.” increases.”
people you have, your international
TURKEY survey respondent UNITED STATES survey respondent
networks, your understanding of the
business, your relationship with
management and your brand. The
wow factors tend to come down to the
individual leading the deal and the
more personal factors.”

UNITED KINGDOM survey respondent

4 Global private equity report 2011 – Global picture

FIGURE 2: MOST ACTIVE SECTORS
“It is significant that the Consumer
consumer sector is cited Business services

as the most active. This Industrials and manufacturing
Healthcare
could change if a double TMT
dip recession does occur.” Financial services
Education
STEVE BRADY Natural resources
PARTNER, HEAD OF TRANSACTION ADVISORY
Energy
SERVICES
GRANT THORNTON, US Infrastructure
Food and agribusiness
Real estate and construction
While the macro headwinds are still
Software and IT services
blowing around the world, there is a
sense within the global private equity
community of optimism. With caution FIGURE 3: INVESTMENT ACTIVITY BY REGION
PERCENTAGE
still the watchword, approaching two-
thirds of GPs included within this Western Europe 50 43 7
survey nevertheless believe that
investment activity will increase over the North America 63 30 7

coming year. It has been fashionable to
Asia Pacific 66 27 7
talk of the rise of the East both inside
and outside private equity, and although MENA 62 38 0
there’s no doubt that the developed
markets have suffered most, recent times BRICS 72 22 6
have served as a reminder of the
Global result 61 33 6
interconnectedness and mutual reliance
of global markets in the modern era. Increase Stay the same Decrease
Globally, the principal impacts of the
downturn have been to raise the spectre • Over 60% expect an increase.
of an industry shake-out and to see • Caution is most clearly expressed in Europe, where over 40% expect it to remain at current levels.
• BRICS respondents are most positive, driven particularly by respondents in Brazil and India.
levels of quality dealflow reduced. The
reaction of the private equity industry
has been to align itself with the best
opportunities, wherever they may be. FIGURE 4: SOURCES OF COMPETITION
PERCENTAGE
This flight to quality has resulted,
inevitably, in increased levels of Western Europe 47 11 38 0 3 1

competition which has also kept prices
North America 65 5 30 0 0 0
for the best assets high. The strength of
corporate balance sheets has served to Asia Pacific 46 29 21 0 4 0
intensify this competitive environment.
MENA 36 30 15 0 15 4

BRICS 40 32 18 5 3 2

Global result 48 20 26 1 4 1

Domestic Foreign/ Trade Public Family Other
private international buyers markets offices
equity private equity

Global private equity report 2011 – Global picture 5

“We’re seeing good private equity dealflow and a
strong pipeline. Entrepreneurs and families are coming
out of hiding and are looking for finance to support
growth.”
ARNAUD LIMAL
PARTNER, CORPORATE FINANCE
GRANT THORNTON, FRANCE

FIGURE 5: KEY FACTORS IN IDENTIFYING AND WINNING DEALS The reawakening of the corporate
Corporate/entrepreneur networks community, including the restructuring
Advisory relationships of larger businesses, means that the
Sector expertise traditional channels of private equity
Local presence dealflow, namely family- and privately-
Track record/reputation owned businesses and corporate
Price divestments, are expected to remain the
Value add proposition dominant sources. However,
Access to capital competition within the private equity
Deal process management industry itself has helped promote an
Management chemistry environment where secondary
Speed
transactions can take hold, with this
Strategic differentiation
being an increasingly relevant feature of
both the developed and more nascent
markets.
In this new landscape, everything
points to the enhanced importance of
networks. In emerging markets, this
manifests itself in the need for local
presence and an understanding of local
business cultures. Whereas in more
established markets, rising competition
has emphasised the need to self-
originate, act fast and develop an angle.

“It’s still a very competitive market “The two main sources of deals here “I’d have to say that at this point in
and unfortunately that means that are entrepreneur-owned businesses time we are more cautious than
price matters most when competing who are unable to access debt optimistic about the economy.”
for deals. In a hot market, it’s always funding any more, and the public
CHINA survey respondent
price and terms, and then the markets which are becoming
probability of close. How strongly you interesting because of the stock
can demonstrate that you can market pricing.”
deliver.”
HONG KONG survey respondent
UNITED STATES survey respondent


Portfolio

FIGURE 6: AREAS OF HANDS-ON INVOLVEMENT Throughout the downturn, private
Strategic input equity firms around the world have
Financial planning found themselves having to focus more
Human resources on working with portfolio businesses in
M&A order to help strengthen their positions
Operational input in an adverse climate. While the skills
Professionalisation might have been honed in firefighting,
Governance they are now proving useful where
Access to networks private equity firms are operating in
Cost control low-growth environments.
Internationalisation Given the low growth in some
Mentoring
markets coupled with the lack of value
Exit planning
uplift available from leverage or multiple
Monitoring
arbitrage, many private equity houses
Sector knowledge
stress the importance of performance
Managing banking relationships
enhancement as a value driver and
Access to capital
highlight their input in a number of key
Kudos
areas in aiding this. In particular,
Innovation
strategic input is universally seen as
central to the private equity offering.
Around the world, the professionalisation
of businesses as they develop under
institutional ownership is something
which private equity players can and do
contribute to. Assistance with
operational systems, financial planning
and human resources are oft-cited
benefits that private equity ownership
“With the market as challenging as it is at the moment, can bring to companies.
adding value is the only way of really unlocking returns.
Groups are finding they have to do more and work more
closely with their portfolio management teams. Some got
caught out before, and now there’s no going back – if
you want to generate a return, you have to work for it.”
STEVE LUKENS
HEAD OF ADVISORY
GRANT THORNTON, US


“The value we bring is really about FIGURE 7: HANDS-ON PORTFOLIO INVOLVEMENT
PERCENTAGE
boosting growth initiatives, reinforcing
corporate governance and Western Europe 15 74 11

strengthening management teams.”
North America 17 73 10

SINGAPORE survey respondent
Asia Pacific 31 69 0

MENA 36 64 0

BRICS 25 75 0


The likelihood that portfolio Increase Stay the same Decrease

companies will be involved in M&A
activity varies considerably by company
FIGURE 8: PORTFOLIO VALUE DRIVERS
and GP. However, there is a general PERCENTAGE
sense that M&A levels will increase, with
Western Europe 17 39 32 3 9
this likely to include cross-border
acquisitions. While GPs are mindful of North America 29 49 14 0 8
the challenges involved in making M&A
work, and indeed the additional cultural Asia Pacific 36 45 14 0 5

and complexity challenges posed by
MENA 26 49 17 4 4
cross-border deals, factors such as
relatively cheap assets and opportunities
BRICS 35 46 13 2 4
to rapidly access growing markets are
serving to encourage activity. Global result 27 44 20 2 7
A further aspect of portfolio firm
Market Performance M&A Financial Multiple
professionalisation in which private growth improvement growth engineering Arbitrage
equity is playing a role is in relation to
Environmental, Social and Governance
(“ESG”). Governance, in particular, is an FIGURE 9: ESG
PERCENTAGE
area of GP focus globally, both reflecting
the ‘best practice’ aspect of this approach Western Europe 41 41 13 5

as well as a recognition of increasing
North America 30 17 17 36
pressure from other stakeholders,
including LPs and regulators. Asia Pacific 33 42 17 8

MENA 0 33 50 17

BRICS 34 38 22 6

Global result 32 35 20 13

Highly Growing Of some Not
relevant relevance relevance relevant


Exit

FIGURE 10: EXIT ACTIVITY
PERCENTAGE

Increase 69 53 74 79 50 63
Stay the same 18 40 13 14 36 26
Decrease 13 7 13 7 14 11

• Over 60% of respondents expect to see exit activity increase over the next 12 months.

With what was an accelerating The pressure to exit for some is, Inevitably, secondary buyouts
population of private equity backed however, matched by the pressure to provoke debate about their pros and
businesses leading up to the downturn, invest for others, namely those who have cons. However, in those markets where
coupled with the closing of most viable dry powder to deploy before the end of they are an established feature, they have
exit routes at the peak of the crisis, the agreed investment periods. These push provided the lifeblood of the exit market
private equity industry has found itself and pull drivers are the key factors in the in an environment where IPOs have
with rapidly aging portfolios and, with increasing trend towards secondary been very difficult to achieve. In
fundraising looming in many cases, a buyout activity in recent times. emerging markets, secondary buyouts
need to achieve realisations. This is are yet to achieve the same position, but
reflected in the fact that approaching are increasingly seen.
two-thirds of GPs globally expect to see
an increase in exit activity over the
coming year.
“Secondary buyouts work well here, “The global financial crisis resulted in
but for different reasons. India is a a lengthening of the holding period
growth market dominated by minority for portfolio companies and typically
expansion investments. As a natural has led to a delay of 1-2 years in the
part of this, the businesses backed investment cycle, which has been
need larger capital injections as used to fix and repair portfolio
they grow and this presents good companies. Now that these two
opportunities for financial investors years have passed, portfolio
up the scale.” companies are ripe for exit.”

INDIA survey respondent SOUTH AFRICA survey respondent


FIGURE 11: EXIT ROUTES
PERCENTAGE

IPOs 1 9 5 16 37 14
Trade sale 54 56 62 68 43 54
Secondary buyout 45 35 33 16 20 32

The other saving grace for private FIGURE 12: AVERAGE RETURNS
PERCENTAGE
equity firms in realisation mode has been
the appetite of trade buyers. This Western Europe 35 35 30

highlights the positive side of the
double-edged sword for private equity
that is an acquisitive corporate Asia Pacific 38 23 39
community.
Given the range of competing factors MENA 29 42 29

at play, practitioners find it difficult to
BRICS 50 42 8
form a certain view as to the direction of
returns for the industry. On the one
hand, high entry prices, continuing
global macro uncertainty and a shortage Increase Stay the same Decrease

of debt have applied downward
pressure. On the other, improving
confidence, a buoyant secondary market
and trade appetite keep optimism alive.
Despite this, the prevailing view is that
the coming period will see both winners
and losers and it will be this that
determines the shape of the industry
going forward.

“There is optimism that exit activity will increase this
year. The nature of private equity is such that investors
measure performance against a benchmark and this is
how LPs look at the world. GPs are engaged in an
ongoing process of understanding what’s important to
LPs; ultimately this comes down to getting capital back
and churning portfolios.”
HARISH HV
PARTNER, HEAD OF TRANSACTION ADVISORY SERVICES
GRANT THORNTON, INDIA


Fundraising

FIGURE 13: AREAS OF INCREASING LP DEMANDS For private equity firms heading out to
Transparency market, the fundraising environment
Performance remains testing. Practitioners point to
ESG the increasingly polarised nature of the
Fees market in which high performers are
Commitment to strategy able to raise, and even quite quickly,
Governance while others find it tough. This is linked
Key man to a flight to quality by LPs which has
Fund secondary DD seen even some of the most longstanding
Differentiation relationships reassessed.
Value drivers Simultaneously, the industry has seen
Alignment
a clear shift in the balance of the GP–LP
Direct competition
relationship, with investors increasingly
Co-investment
willing to demand more transparency
Dealflow
and seek demonstrable performance, not
least in newer private equity markets
that have been sold hard in recent times
and now need to prove they can deliver
the promised returns. In developed
“The fundraising environment is both positive and
markets, LPs have sought to find a
negative. There are plenty of firms hitting the fundraising collective voice with which to put their
jackpot and deservedly so, but equally there are many case. In particular, initiatives such as
players who are really struggling. Ultimately, painful as ILPA and the drive for a particular
fund’s LPs to hold closed meetings
it is for some, it’s probably a good thing for the industry.” without the GP present illustrate the
FRANCOISE NOEL-MARQUIS
more ‘forensic’ approach now being
PARTNER employed.
GRANT THORNTON, FRANCE

“I think it’s a competitive fundraising “The big problem for the local market “Fundraising is pretty tough. A lot of
environment. It’s better than it has is the total lack of returns made. people flooded into the market and
been but people still have exposure to There just haven’t been enough of there is possibly now a bit of a knee-
bad funds. The denominator issue is them and as a result there are some jerk as people fear conditions are too
diminishing, as is the liquidity issue, very poorly-performing funds.” overheated.”
but the overhang is still there and
VIETNAM survey respondent BRAZIL survey respondent
existing managers are scrapping for
re-ups.”



“It is harder to raise funds now and “LPs are reducing both their allocations and the number of GPs they
we will continue to see a flight to want to work with. They have learnt a lot in recent times and are more
quality. We’re in a situation where the discerning about performance and the way they are treated by GPs. These
better end of town will do well, but the days more than ever, strong performance and transparency are key.”
rest will find it very tough. It is the
same highly-selective environment on
the deal side as well, with the lending
banks definitely having an A list of GPs.”

AUSTRALIA survey respondent

There are signs of longer-term FIGURE 14: FUTURE FUND SIZE VERSUS PREDECESSOR
PERCENTAGE
confidence with many GPs expecting to
be able to raise larger funds in the future. Western Europe 46 51 3

This is most notably a feature of
emerging markets, with evidence of the
process of fund size inflation having Asia Pacific 83 0 17
paused in developed markets.
A clear outcome of the changing MENA 61 31 8

sentiment in the investor community is
BRICS 75 0 25
the expectation amongst GPs globally
that there will be a degree of churn
within their LP bases. Pressures in this
respect vary from country to country Larger Same size Smaller

and fund to fund, but it is clear that
while in some regions the opening up of • Taking fund size as a measure of the likely future size of the industry suggests that emerging
market PE firms are confident of future growth.
domestic sources of capital is seen as an
• Within the developed markets, the picture points more towards a stabilising of the industry size.
opportunity, in others the retrenchment
of domestic LPs is forcing GPs to build
increasingly international investor
FIGURE 15: FUNDRAISING ENVIRONMENT
relationships. This is, in effect, leaving PERCENTAGE
some GPs to compete for attention
Western Europe 9 11 33 27 20
amongst a broader range of peers by
convincing LPs of the attractiveness of
North America 4 22 26 41 7
their firm and market in an international
arena. Asia Pacific 0 13 7 47 33

MENA 0 46 31 23 0

BRICS 3 36 22 33 6

Global result 4 24 26 33 13

Very Positive Neutral Negative Very
positive Negative


Overall market outlook

FIGURE 16: KEY CHALLENGES FACING THE PRIVATE EQUITY INDUSTRY With the global economic situation still
Macro economy very much in the balance, macro
Regulation economic considerations are regarded as
Competition the greatest challenge currently facing
Performance the private equity industry worldwide.
LP sentiment The fallout from the downturn has also
Deal origination triggered increased attention from
PE perception national regulators seeking to drive more
PE HR transparency from financial institutions.
Access to debt The inherent opacity of the private
Portfolio issues equity industry has made it a lightning
Industry maturity
rod in some instances, giving
Exiting
momentum to a process that had already
Tax
begun on the back of concerns about job
Geo-political factors
security and asset stripping as businesses
Fiscal environment
with larger (often politically sensitive)
Human resources
stakeholder groups came under private
Secondary buyouts
equity ownership in some markets. This
has added to the challenges faced by the
industry, with firms noting the need to
educate and sell the benefits of private
equity on an ongoing basis.

“I think in general the industry has a “The reliance on leverage, and also
problem in generating the types of the ability of private equity companies
returns to justify the asset class. to differentiate themselves both
There just hasn’t been the present challenges.”
performance in recent times.
AUSTRALIA survey respondent
Institutional investors are getting
disillusioned. That’s a problem the
industry needs to work on.”

CANADA survey respondent


FIGURE 17: AREAS OF RECRUITMENT
“One of the biggest PERCENTAGE

issues for the industry is Deal doing 37
Portfolio operations 14
one of perception. Every Research 11
time the industry puts its Admin 4

head above the parapet, it IR 4
Legal 1
risks getting it shot off by Other 1

either the press or the N/A 28

Government. I think it’s
symptomatic of the fact FIGURE 18: AREAS OF NEW BUSINESS DEVELOPMENT
PERCENTAGE
that when times are hard, Core business 48
people look to blame Geographic opportunities 17

someone.” Sector opportunities 9
Asset class opportunities 7
MARTIN GODDARD Deal size shift 3
GLOBAL SERVICE LINE LEADER – TRANSACTIONS Independence 1
GRANT THORNTON INTERNATIONAL
Privatisations 1
N/A 14

The bulk of the other key challenges GPs that are looking to diversify
faced by the industry relate to the need their areas of interest as the global macro
to demonstrate performance in today’s trends play out are most likely to look
highly competitive environment. Given for similar opportunities within new
this backdrop, it is no surprise that the geographies. Wherever the focus, the
key focus of, and opportunities pursued common factor is the need for
by, private equity firms relate to their communication, whether that be
core business. While the drivers are introducing the asset class, re-educating
somewhat different in the emerging and stakeholders, or demonstrating the
more developed markets, the shared ability to generate returns.
outcome is a perceived need to sharpen
deal origination and portfolio
“The big challenges to the industry all
management processes, with many firms
stem from regulatory issues and the
being in the process of augmenting their
fact that PE has been lumped
teams in these areas. In the mature
together with the banks and hedge
markets, the long-term process of
funds. All of the resulting scrutiny is
institutionalisation has seen teams
leading to more and more admin –
expand in many areas to support larger
and that is not value-adding. There is
portfolios and fundraising ambitions.
massive pressure on resources and
Paradoxically, there is a opposing
this will translate into problems for
pressure to minimise back office costs.
returns. There is also a problem
In the emerging markets, the rapid
associated with all the attention on
development of private equity has
fees and remuneration. If there is too
required GPs to work to ensure that
much pressure here we will not be
their own development in human capital
able to hire the top people and they
terms keeps pace.
will simply go to hedge funds.”

GERMANY survey respondent


Western Europe:
Investment activity

FIGURE 1: KEY FACTORS IN IDENTIFYING AND WINNING DEALS Confidence in the prospects for dealflow
Corporate/entrepreneur networks over the coming year is returning slowly
Advisory relationships amongst European private equity firms
Sector expertise with around half expecting an increase in
Track record/reputation activity. Although this is the lowest level
Access to capital recorded in any of the key global
Deal process management markets, very few people actually expect
Price to see investment levels decline.
Local presence Anticipated sources of dealflow are
Value add proposition particularly varied in Europe. However,
Management chemistry most strikingly the importance of
Speed
secondary buyouts is higher than in any
Strategic differentiation
other market.
With dealflow in the region being
generally hard won, private equity firms
have sought various ways to get ahead of
the competition. In the first instance this
involves building and consolidating
networks both within the corporate and
advisory communities. However, whilst
track record is still very important, there
is also an increased emphasis on building
knowledge of markets and the dynamics
of individual businesses and their
management at an early stage in the
process.
Ultimately, most deals will go
“I believe secondary and tertiary deals “There’s more competition from trade
through some form of intermediation
will continue to be very important, buyers, and I expect this to continue
and market testing of the price. This is
particularly for larger mid-market to increase. Trade players are getting
the case not least because trade buyers
deals. In 2010 the largest proportion more confident, and unless the
have returned as a key competitor to
of deals above Euro 75m was economy ends up in a double dip, I
private equity, and one with deep
accounted for by secondary buyout can’t see this changing – they’ll be
pockets for the right asset strategically.
activity. Under Euro 75m a lot more out in force. There are lots of private
deals were primary transactions. The equity houses with money, but this
fact is that we’re seeing corporates can only dwindle over the medium– to
being less focused on divestiture, but long-term, not increase.”
much more acquisitive.”

Global private equity report 2011 – Western Europe 15

“It’s a combination of factors, but FIGURE 2: SOURCES OF DEALFLOW
PERCENTAGE
really it comes down to your
networks, increasingly your sector
Public markets: 1%
knowledge and focus, rigour,
Other: 1%
discipline and tenacity. Clearly you
can’t discount the value of Secondary buyouts: 47% Corporate divestments: 20%
intermediary networks, but GPs are
spending a lot more time on non-
intermediated deals these days.
There will always be auctions, but you
want to try to avoid them if you can,
Family/private: 31%
or at least make sure you have a
head start.”


“Deal sourcing is the same now as it’s
always been for us. It’s about being as
early as you can on an asset, and not
waiting for the pitch from banks. It’s
about spending more time with
management teams and vendors to FIGURE 3: SOURCES OF COMPETITION
PERCENTAGE
understand the asset before it comes
to market, which means you’re more
Others: 1%
prepared and can move faster.”
Family offices: 3%

FRANCE survey respondent

Trade buyers: 38% Domestic private equity: 47%

“The market in Italy is split between
those deals that are marketed above
and below the radar. For the former
you obviously need to have a strong
relationship with the intermediaries,
but these are more commodities. The
real key in Italy is to have a big
network of contacts among the
entrepreneurs.”

ITALY survey respondent

“It will mainly be secondaries. Most Foreign/International private equity: 11%

German corporates have completed
their disposal programmes and
entrepreneurs are reluctant to sell
assets only to see their money get “Speed is key in deal origination. It is a very competitive
sucked into sovereign debt crises!” market and so getting to deals early is crucial. Strong
relationships with intermediaries is a key part of this.”
PAR EKENGREN
HEAD OF CORPORATE FINANCE
GRANT THORNTON, SWEDEN

16 Global private equity report 2011 – Western Europe

Portfolio

FIGURE 4: AREAS OF HANDS-ON INVOLVEMENT Hands-on involvement with portfolio
Strategic input investments has risen to relatively high
M&A levels in Europe versus other parts of the
Human resources world and is expected to remain so, with
Operational input the key focus of GP efforts typically on
Financial planning strategic input and M&A. Assistance
Internationalisation with financial planning has also been
Professionalisation significant, with the majority of GPs
Cost control reporting that debt renewal will not be
Access to networks an issue over the next 12 months.
Mentoring European private equity firms are
Exit planning
more cautious regarding portfolio
Monitoring
prospects than their counterparts in
Managing banking relationships
other parts of the world, with the macro
Governance
economic environment being cited as the
Innovation
chief driver of sentiment.
Sector knowledge

“The nature of the value drivers depends on the “Growing market share through
innovation is fundamental. The
business and what you’re trying to do to it. In some businesses I like are in big markets
cases it could be a mixture of multiple arbitrage and with lots of players, some big groups
M&A; in others it might be more organic. You need to with lots of legacy systems, and you
find someone smaller with an
build a growth strategy to suit the individual innovative approach. The majority of
company.” deals we do like this would succeed
even if the market stayed flat in my
MO MERALI
PARTNER, HEAD OF PRIVATE EQUITY
personal view.”
GRANT THORNTON, UK


Portfolio M&A support is seen to be FIGURE 5: PORTFOLIO VALUE DRIVERS
PERCENTAGE
more important amongst European
private equity firms than elsewhere. In
particular, crossborder M&A is seen as Multiple arbitrage: 9%
an increasingly relevant feature. Financial engineering: 3% Market growth: 17%
However, with this comes the additional
challenges of cultural issues and relative
M&A growth: 32%
complexity. These are perhaps thrown
into even sharper relief when Performance
transactions are being considered improvement: 39%

beyond European borders in markets
such as China, which is now on the
radar for an increasing number of GPs.

FIGURE 6: CHALLENGES TO CROSS BORDER M&A
PERCENTAGE

Funding constraints 2
Foreign market credibility 2
Different fiscal environment 2
Currency risk 2
Lack of opportunities 7
Parochialism 9
Management team 13
“There are massive cultural
Lack of PE resource 13
differences between China and the
Relative complexity 18
West. You can’t afford to ignore China
Culture 32
and you need to understand it as best
you can. Doing business in China is
not to be taken lightly.”


“The benefits of cross-border M&A
really depend on the company – if the
company is already international,
then it is almost business as usual…
they will understand what they are “The main thing is to get the right strategic equity story to be developed
doing and there is a good basis of and executed. We are keen to pursue a long-term plan that is signed off by
due diligence to draw upon. If the both the management and ourselves.”
company is venturing abroad for the
first time or it is the first acquisition,
it is more tricky. There is more work
to be done with the management “As a whole, and not just in terms of the weak GDP announcements
team to convince them and us that it recently, the economy is shaky and confidence is low – I just don’t think it
is a good thing to do.” feels good.”

FRANCE survey respondent UNITED KINGDOM survey respondent


Exit

FIGURE 7: EXIT ROUTES Sentiment regarding prospects for the
PERCENTAGE
exit market are generally positive, with a
window of opportunity seen to have
IPOs: 1%
opened up over the last year. Around
Secondary buyout: 45% Trade sale: 54% three-quarters of European respondents
also expect exit levels to continue to
increase over the coming year, which
compares favourably with their
counterparts elsewhere.

“Secondaries are driving the market “The main cons of secondary buyouts
because on one side you have people are that they almost always come via
who need to return capital in order to highly contested auctions and are
fundraise and on the other you have therefore expensive. On top of that,
people who need to deploy capital.” the former owner has normally done
a good job with the business making
SWEDEN survey respondent
it difficult to see further growth.
Sometimes though, it is just a
question of fit and it can really work
better for the second buyer than the
first.”



The two key drivers of these exit
trends are: first, the return of trade “Returns have, fundamentally, been pretty strong. If
buyers, which, while increasing the exit markets aren’t great then, by and large, private
competition on the buyside, is also equity firms just sit on investments for longer and wait
proving a willing source of liquidity for
private equity assets, and; second, the
until they can get value.”
pressures being felt by many private KAI BARTELS
equity firms in relation to their own SENIOR PARTNER, HEAD OF M&A
fundraising cycles and the need to both GRANT THORNTON, GERMANY
deploy capital and demonstrate returns.
The IPO window is seen to be very
firmly shut in Europe, with the
consequence that, in comparison,
secondary buyouts have taken on an
added significance.
The cocktail of competition and
pressure to exit is resulting in
considerable variation in expectations
for returns going forward. There
remains a sense that there will be
winners and losers and that a final shake
out within the industry is still to happen.

“I think returns will stay the same in “I think exit levels will increase
the short term, but longer term they because of the maturity profile of
will decrease. The best performers portfolios at the moment. There have
will maintain their high returns, but certainly been some great exits
the discrepancy between the best and recently. The challenge is always
the worst will increase.” having the patience to allow
companies to mature.”


Fundraising

FIGURE 8: AREAS OF INCREASING LP DEMANDS Unsurprisingly, European private equity “We’ve just come off a fundraising
Transparency practitioners continue to regard the and it’s incredibly competitive out
ESG fundraising environment as tough by there. Pretty much every LP in the
Performance historical standards. With many world is reducing the number of GP
PE firm management investing institutions still working relationships they have and will only
Fund secondary DD through their own problems, while they consider re-ups and new relationships
Commitment to strategy remain positively disposed towards with top-tier managers, so it’s very
Differentiation private equity, they are having to look very tough.”
Co-investment closely at the number and size of their
Key man UNITED KINGDOM survey respondent
commitments to the asset class.
For GPs, this sentiment means
higher levels of LP churn within their “ESG matters are becoming much
investor bases as institutions more important. We signed the UN PRI
contemplate future funds. GPs are last year and contributed to AFIC’s
readying themselves for the prospect of White Paper on ESG. We have a
needing to identify a higher proportion dedicated in-house team and are doing
of new investors than in the past and the a big appraisal on the subject now. It is
likelihood of a stagnation in fund sizes. extremely important for the image of
In addition, GPs are reporting a the industry and to satisfy the LPs.”
higher degree of LP engagement. A
greater desire amongst investors for
transparency and depth of information is
the key trend here. While areas such as “LPs are drilling into companies more
performance clearly continue to be of than they have in the past – what
key importance to LPs, there is also an makes them tick, why we did the
increasing focus on ‘new areas’ such as deal, where the key threats are.
ESG and the management of the private However, most LPs have 70-80 fund
equity firm itself. interests, and they just don’t have
time to sit down with every one of
their GPs and go through things in
such detail.”
“It’s very difficult at the moment. But if
you look at the past, LP appetite has UNITED KINGDOM survey respondent
normally returned 9-12 months after
M&A activity has kicked back into gear
and liquidity rises. With any luck that
will be felt in the next year.”



Overall market outlook

FIGURE 9: KEY CHALLENGES FACING THE PRIVATE EQUITY INDUSTRY Reflecting the underlying positive
Macro economy sentiment with regard to expected deal
Performance and exit activity, private equity firms are
LP sentiment building capacity in order to capitalise
Regulation on the opportunities ahead. In particular,
PE perception around two-thirds of European
Deal origination respondents are planning to increase
Competition their head count over the coming year,
PE HR with this predominantly being in the
Access to debt core area of front-line deal-doing.
Portfolio issues With increased emphasis being
Industry maturity
placed on self-origination strategies and
Exiting
recruitment, it is no surprise that the
Secondary buyouts
majority of private equity firms stress
Geo-political factors
the importance of focusing on their core
business of identifying quality
businesses within their target market.
Private equity players are currently
faced with a plethora of challenges, some
private equity specific, some regulatory,
and others reputational. However, the
most significant factor relates to the
challenges presented by the state of the
macro economy.
Regulatory matters are high on the
agenda of GP concerns, not least the
introduction of the AIFMD. This
particular initiative is expected not only
to lead to higher levels of bureaucracy
and increased costs, but also to frustrate
the dynamism of the industry by raising
“Regulation is terrifying. The mindset “We are working on increasing our
barriers to entry for first time managers
out there is that what private equity build-up programme for the portfolio
and spin-outs.
does is terrible. How we combat this I and trying to profit from the fact that
don’t know. What is certain is that very good companies are struggling
regulation of the industry is going to to raise bank funding and therefore
become a lot more rigorous.” are turning to growth capital
providers for the first time.”
SPAIN survey respondent


“We have been through the worst FIGURE 10: IMPACTS OF EU REGULATION
PERCENTAGE
downturn since WWII and companies
have demonstrated they have the Bureaucracy 38

DNA to survive in a market that gets Costs 20
Barriers to entry 7
little support from government. The
Capital adequacy rules 7
main opportunity is to harness the
Fundraising 4
strength of those businesses and help
Less competition 2
them into new markets.”
Risk perception 2

ITALY survey respondent Transparency 2
N/A 18

“You can see that the AIFMD
represents a challenge, but it will FIGURE 11: AREAS OF NEW BUSINESS DEVELOPMENT
PERCENTAGE
help generate a better understanding
of the industry.” Core business 60
Geographical opportunities 16
SWEDEN survey respondent Asset class opportunities 7
Sector opportunities 7
Deal size shift 2
N/A 8

“Competition is the
biggest issue facing the
industry. You can really
see the need for
consolidation in the
market – there are too
many players with too “In these difficult economic times, private equity is
much committed capital. faced with not only an origination issue, but also
Those funds with capital pressure from investors, regulators and the broader
still to invest will be public. The industry is therefore being challenged to
under pressure, and this visibly prove the model and demonstrate it can add
will drive up prices.” value regardless of broader economic conditions.”
RAINER WILTS THIERRY DARTUS
PARTNER HEAD OF TRANSACTION ADVISORY SERVICES
GRANT THORNON, GERMANY GRANT THORNON, FRANCE


North America:
Investment activity

FIGURE 1: KEY FACTORS IN IDENTIFYING AND WINNING DEALS Price remains king in North America’s
Corporate/entrepreneur networks highly intermediated and efficient
Price market and is seen by many as the key
Sector expertise factor in winning deals. However,
Advisory relationships evidence suggests a GP’s sector expertise,
Access to capital as well as the quality of its corporate
Deal process management networks, are central elements of their
Local presence approach to deal origination.
Value add proposition
Track record reputation
Management chemistry
Speed

“I think there are two key areas in
terms of deal sources: sponsor-to-
sponsor deals will be the biggest
area, followed by independent family-
owned businesses. For sponsor-to-
sponsor, the market’s been so
negative that they haven’t been able
to sell and so now’s the time.
Independent family-owned businesses
“I think PE investment activity over the “Origination is sector led. We’re calling may be a driver of deals as there’s
next 12 months will be increasing. I on companies in specialist areas where uncertainty around so this may drive
still think there’s lots of dry powder out we’ve invested before and built domain things through.”
there and banks are still lending as the knowledge, that’s how we differentiate.
debt markets have softened a bit. The We’re proactive in terms of identifying
economy is in good shape in Canada companies we’re interested in and
but it’s all subject to company building up relationships over time, “As it always has been, winning deals
availability – whether there are several years prior to any investment comes down to who pays the highest
companies available to buy. Valuations opportunity. By the time an opportunity price. Of course, you need to be in
are strong so vendors are getting what does arise, we already know each front of the right intermediaries, but
they’re looking for and generally other, and that provides an advantage.” price is by far the biggest
there’s a willingness to transact.” determinant of success.”
CANADA survey respondent CANADA survey respondent

24 Global private equity report 2011 – North America

2011 global private equity report

2011 global private equity report

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (20)

Similar a 2011 global private equity report

Similar a 2011 global private equity report (20)

Más de Grant Thornton

Más de Grant Thornton (20)

Último

Último (20)

2011 global private equity report