Credit crunch eclipses industry - PRIVATE EQUITY NEWS Annual Review 2008
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PRIVATE EQUITY NEWS
www.pennews.com
Annual Review 2008
Credit crunch
eclipses industry
Deal volumes fall
PLUS
Caution and flexibilty:
the new watchwords
Restructuring • Regional focus • Fund admin • Secondaries • Deals • Debt markets
02 Contents January 26, 2009 •ANNUAL REVIEW • www.penews.com
PRIVATE EQUITY NEWS
Stapleton House,
29-33 Scrutton Street,
3 Comment: Credit crunch eclipses industry and throws Golden Age
London, EC2A 4HU heroes into shadow
Editorial
editorial@penews.com
Editor
4 Christmas cull ends 2008 on sour note
James Mawson
Tel: +44 (0)20 7309 7752
jmawson@penews.com
Associate editor
6 Bell tolls for large buyouts
Oliver Smiddy
Tel: +44 (0)20 7309 7786
News editor
Paul Hodkinson 8 Mezzanine credit’s glass was half full last year
Tel: +44 (0)20 7426 3358
Reporters
Jennifer Bollen
Tel: +44 (0)20 7426 3349
Toby Lewis
12 Placement agents revel as fundraising defies crunch
Tel: +44 (0)20 7426 3334
Sub-editor
Jay Blanche 14 Industry’s mid-market Davids eye Goliath triumph
Production
Greg Russell
16 Growth and development capital pick up speed
Publisher
Leon de Bono
Tel: +44 (0)20 7309 7732
ldebono@penews.com
Commercial director
Sarah Elizabeth Kelley
Tel: +44 (0)20 7309 7766
Sales and marketing manager
Tommy Nguyen
Tel: +44 (0)20 7309 7707
Sales and marketing executive
Sioni Smith
Tel: +44 (0)20 7309 7720
Customer services
Tel: +44 (0)20 7309 7798
18 Light pierces gloom as VCs learn from dotcom crash
The Wall Street Journal,
Dow Jones Newswires, LBO
Wire and Private Equity
20 European buyout market left standing
Analyst are owned by Dow
Jones, the parent of Private
Equity News
To trial our sister publication
24 Momentous year for the industry’s birthplace
Private Equity Analyst contact:
+44(0) 203 217 5176;
Privatemarkets.Sales@
DowJones.com
26 The gloom was global
Printed by: Patersons
Distributed by: Citipost
Published by:
27 Adaptable firms reaped spoils as Middle East proved gobal oasis
eFinancialNews Ltd. © 2009
No part of this publication
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29 Secondaries come of age as investors eye bargains
the editor. All rights reserved.
ISSN 1741-9085
31 Back office prospering as investors demand more data:
www.penews.com • ANNUAL REVIEW • January 26, 2009
Comment 03
Credit crunch eclipses industry and
puts Golden Age heroes in the shade
The burgeoning credit crisis and its TPG which was caught out in its role
impact on the economy eclipsed the
industry last year and cooled the frenzied
Editorial comment leading the consortium investment in US
bank Washington Mutual, showed the
dealmaking of the previous two years. dangers of being too early rather than too
Private equity, at least, was able to James late in the present downturn.
take advantage of the super-liquid and Mawson The year, therefore, was one where the
cheap leveraged finance markets to buy, pendulum of power swung towards those
refinance and sell their portfolio on the
editor, providing the cash. Private equity firms
way up. The fundamental misalignment Private Equity had little fear of being outbid in
of interest in other parts of the financial News competitive auctions as there were few
services industry, however, has drawn rivals, limited partners could pick and
the greater attention and ire of investors choose their commitments and try and
and regulators by causing greater losses. offload the second tier through
Private equity is flexible, able to secondaries, and banks and other lenders
operate in almost any country or sector repriced the risks of lending to buyouts
and use any financial tool to boost profits. more in their favour.
That flexibility makes it a useful tool to saw a number of personal bankruptcies, The year was one of unprecedented
measure the failings of other areas, investors cutting back on previous turmoil and the greatest volatility in
including inappropriate regulation, weak commitments to private equity funds and anyone’s working memory.
watchdogs, inadequate oversight by insolvencies or broken covenants at No region or asset class was spared
investors and poor corporate governance portfolio companies. and hopeful talk that the emerging
at other intermediaries. From this year, there will be a move to markets might have de-coupled from
The buyout industry has a greater buying solid businesses with western markets and continued to grow
alignment of interest with investors, a inappropriate (ie overgeared) capital was revealed as just that – hope rather
stronger corporate governance model structures from cash- rather than value- than reality – as capital flooded back to
and poses no systemic risk to the broader orientated owners with the result that the biggest economies.
financial system. Still, the industry is companies will be likely to benefit from Private equity was part of this
unlikely to escape collateral damage from the green shoots of recovery. upheaval that saw household name banks
sweeping regulatory and tax changes disappear or merge and hedge fund kings
that are expected by many to hit the Last year was the transition revealed as wearing no clothes but the
overall financial services industry. implications for the industry will be
As a result, last year was the transition year from the Golden Age played out over the longer term. This is
year from the Golden Age to the next era to the next era and because the structure of committed
and economic cycle. capital in closed funds means buyout
Much in the way the venture capital economic cycle firms control the investment into and
industry benefited in the 1990s from the sale of companies and have flexibility in
rising enthusiasm for internet-focused how the private businesses are valued.
companies before crashing after the The concerns of the industry that the It will take five to 10 years for winners
millennium as sentiment cooled, so debt bubble from 2005 to 2007 was and losers of the bull era and the next
buyout firms cashed in on rising asset unsustainable were well-founded. Many generation of leaders to appear as the
prices, stable economic growth and of the most sophisticated firms took industry returns to fundraising or
cheap interest rates from 2001 to 2007. money off the table at the height of the realising assets. And they will be needed:
Late-stage economic-cycle benefits bubble by selling or refinancing the crunch caused a number of senior
leveraged equity investments but the companies and running down the size of figures to leave the industry last year. It
resetting of the clock will see a return, their portfolio. also prompted talk of a lost generation of
initially, to repaying or owning debt. The unprecedented speed and scale of managers who joined after 2002, had yet
A number of private equity-backed the downturn’s impact has, however, to reap the performance fees of the
companies, from Denmark’s TDC to Bain caught out most people. The equity in Golden Age and who were now at risk of
Capital’s South African retailer Edcon, much of the industry’s remaining job cuts.
last year bought back their debt at a portfolio has effectively become just an Still, the industry is in better shape,
substantial discount to par value, while option on a potential future return in relatively, than other asset classes with
private equity firms, such as Apollo and value provided the debt burden of many more than $1 trillion of dry powder to
Alchemy Partners, have also snapped up companies, combined with often falling spend on new deals.
debt of rivals’ portfolio companies to earnings, does not force the deal into Private equity has a track record of
position themselves for potential debt- insolvency. generating returns from operational
for-equity swaps or just to realise an Last year, therefore, saw relatively few improvements as well as leverage and
equity-like return on investment. deals as vendors, whether of businesses the ability to invest into and form the
The savage de-leveraging required or private equity fund interests, next generation of corporate leaders.
across the financial services industry struggled to come to terms with the Private equity was the first investor to
showed the insidious way debt had crept proffered prices and buyers worried leave the market when the credit crunch
into the business, from people’s portfolios about the lack of earnings visibility and hit the industry and is expected to be the
through to over-committed investors and the risk of substantial contractions in first to return as the credit crunch passes
then into portfolio companies. Last year businesses. Seasoned investors, such as leaving a brighter landscape for investing.
04 Distressed www.penews.com • ANNUAL REVIEW • January 26, 2009
Christmas cull puts 2008 on scrap heap
Christmas usually means gleeful celebration approval by stakeholders (a simplification of the
for the retail industry as consumers, intoxi- Few had anything to current, extremely complex, position, according
cated by the festive mood, dig deep into their to one insolvency lawyer). Philip Dougall, a
pockets. However, 2008’s festivities will not
be remembered fondly by many, not least
cheer during the managing director at turnround specialist Sun
European Partners, would support an extended
because of the swathe of insolvencies in the
UK and US. The growing list of insolvency fil- holiday period, writes moratorium with businesses run by both
administrators and existing management.
ings throughout last year included UK retailer Dougall said: “The earlier we can see the
Woolworths and UK tea retailer Whittard as
well as US packaging company Chesapeake.
Toby Lewis business going into difficulty, the better,
because it provides everyone with more
Such defaults are also likely to be blamed on acquisitions worth $10.7bn (€8.1bn), which was options. Even as little as two or three weeks is
the widespread use of leverage by buyout firms more than two-thirds of the overall market better than having to start from scratch in an
and other corporates imitating private equity value of such deals and more than half the num- administration situation.” He added: “There is
firms’ appetite for risk. A report by rating ber of deals, according to data provider Thom- also no doubt that it is harder to acquire com-
agency Standard & Poor’s published late last son Reuters. The difference was even more panies after they have entered administration
year found 53 of 86 entities had defaulted glob- stark in 2007, with US deals making up 98% of than [beforehand]. Damage to the company is
ally on their debt in the first eight months of the $17bn deals from insolvency globally. almost inevitable in a situation where an admin-
2008, compared with 22 in all of 2007. Of those By contrast, only four deals hatched from UK istrator’s timetable is five weeks, whereas an
55 defaults, nearly 70% were involved in pri- insolvency situations in 2008 and none in 2007, investor’s timetable is potentially five years, so
vate equity transactions. according to Thomson Reuters (who blamed the they have a different set of objectives.”
This data was seen by many commentators as low tally on the lack of public information about Jon Moulton, founder of turnround specialist
one of the strongest quantitative signs yet that such business in the UK). Alchemy Partners, said: “Reform to [the time
the widespread use of leverage by buyout firms The main reason for the busier pipeline of period of administration] is feasible but proba-
materially weakened companies, and was seen mergers and acquisitions in the US is that Chap- bly too radical to be introduced in haste.” He
as a factor sending many towards bankruptcy. ter 11 provides companies time to restructure. said it was possibly desirable.
This analysis of the S&P data has been con- US companies are allowed to continue operating He said: “UK administration would work bet-
tested by US buyout trade body The Private so as to generate revenues and, in due course, ter if the statutory aim was not to preserve
Equity Council. repay creditors or make time to sell assets. companies – hardly ever done – but to preserve
It said only 22, or about 25% of defaulting In light of fears that the UK economy would businesses. ‘Cramdown’ would be a very good
companies globally, “are controlled by private suffer if too many companies were destroyed thing to have, whereby worthless layers of
equity partnerships in a way that would give the in the present downturn, David Cameron, financing would be disregarded for restructur-
firm authority over their [portfolio company’s] leader of the UK parliamentary opposition Con- ing, which would simplify matters.”
capital structure and operations.” servative Party, called in June for the UK to Last year’s company collapses pointed to a
The likely uptick in insolvencies as the down- implement US Chapter 11-style laws, providing stark reality for the rash of over-levered and
turn bites – whatever their provenance – is companies with the chance to restructure and operationally troubled companies that are likely
unlikely to affect all global regimes equally. One giving them more time to find a buyer. to come close to insolvency
issue raised by critics of the UK’s administra- The Conservatives proposed three reforms to this year. The various global
tion process for insolvent companies arising the UK law to address these concerns: a court- bankruptcy regimes threw up
from last year’s high-profile collapses, is that sanctioned stay of enforcement to prevent cus- different difficulties in 2008,
the regime is far more destructive of compa- tomers and suppliers from terminating con- and the debate will further
nies as going concerns than in other countries, tracts, so that panic doesn’t destroy intensify this year.
especially the Chapter 11 process in the US. viable businesses with a reasonable
The administrations of companies like US period of time provided to salvage
bank Lehman Brothers’ European arm and companies; the granting of priority
Woolworths especially, were felt by restructur- status to any finance provided post-
ing professionals to have been particularly dif- administration; and allowing restruc-
ficult to handle in UK law without destroying turing proposals to be approved by
value in the companies. Sources said both com- courts with
panies entered administration in an uncon- only a
trolled fashion. This left administrators with major-
the highly complex task of salvaging value in ity
the companies, both for creditors and to pro-
tect the businesses themselves.
The number of deals by insolvent companies
shows the difference between the US and the
UK regimes. Last year there were 115
US insolvency-related mergers and
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06 Large buyouts January 26, 2009 • ANNUAL REVIEW • www.penews.com
A switch to a wider
variety of smaller
deals could affect
$4.1bn
Largest deal (ConvaTec)
top-end firms, writes
James Mawson
Large buyouts hit the skids
The collapse just before Christmas of the and conversion of the US investment banks tions) and leveraged investors, such as hedge
$51.2bn (€39.6bn) offer for Canadian telecoms effectively to commercial banks. The US gov- funds, had pulled out of the market, constrain-
operator BCE by a Providence Equity Part- ernment also wrested control of Washington ing dealmaking.
ners-led consortium signalled the death of the Mutual, wiping out shareholders, including As a result, the non-government organisa-
mega-buyouts boom of 2005 to 2007. TPG’s $1.5bn investment. tion World Economic Forum in its recent paper,
Correspondingly, the ambitions of the private To all intents and purposes, activity stopped The Future of the Global Financial System, said
equity industry were scaled back as the credit at that point, with Dealogic noting investment the industry would see smaller deals. The
crunch, that started in July 2007, spread through banks took in $553m in fees in the fourth quar- average size in the period from June 2006 to
the world’s economic and financial services. ter – one-third of the $1.6bn generated in the December 2007 was $631m compared to
Globally, there were $189.8bn of financial third quarter and 19% of the $3bn generated in $244m in the six months from April to Sep-
sponsor buyouts last year, which was a 71% the comparable period the year before. tember last year, the paper said.
drop from the $658.9bn in 2007, according to The biggest deal now theoretically possible is Yet this switch from a smaller number of
data provider Dealogic. about $2bn in size, according to the global head mega-value control buyouts to a potentially
The large buyout section of the industry of leveraged finance at one of the largest greater number and variety of investments in
showed the greatest decline. There were 44 remaining banks still in the market. companies could affect the top-end private
deals worth more than $1bn last year versus equity firms.
136 in 2007 and 127 in 2006. In Europe, rating The biggest deal now In his presentation, Private Equity in an Era
agency Standard & Poor’s said large deals theoretically possible is of Challenges, Josh Lerner, Jacob H Schiff pro-
worth more than €1bn made up just 15% of the fessor of investment banking at Harvard Busi-
€49.5bn market compared to 29.5% of the about $2bn in size, ness School, said the impact on mega-focused
€140bn total in 2007. according to one buyout firms of smaller deals would mean dif-
The 18-month window to mid-2007 saw nine ferent skill sets were needed.
of the 10 largest buyouts ever, primarily from US
bank’s global head of This could “introduce strains even in smart,
public markets, such as US energy company leveraged finance creative organisations”. He also questioned
TXU, real estate manager Equity Office Prop- how they could deploy funds of similar size to
erties, healthcare company HCA but also those in past few years. “Is the machinery in
including UK retailer Alliance Boots. He said: “Potentially $1bn could be lent [at place to deal effectively with numerous smaller
A number of other deals agreed in that period, the end of 2008 to the beginning of 2009], and deals; are groups oversized?”, Lerner said.
including BCE, were subsequently withdrawn. that would be hard to arrange. It would require A number of private equity firms, ranging
Dealogic said buyouts worth $132.3bn were a good, BB-rated credit in a non-cyclical area, from Cerberus Capital Management to Sun
withdrawn last year, the second highest volume such as telecoms or healthcare, with low lever- Capital and 3i, have been cutting staff while
after the record $234.1bn pulled in 2007. age levels of about four times [debt to earnings others have been hiring senior bankers and
A brief respite in the gloom last spring and before interest, tax, depreciation and amorti- industry executives to help on investor rela-
summer, however, gave hope the financial sys- sation and as a 50:50 proportion to equity of tions, strategy, operational management and
tem could spring back from the credit crunch total purchase price] and to be well priced [i.e. debt issues.
quickly and without the global economy falling. the yield for investors at a large spread over However, a European head of one of the
In this relative calm, TPG led a consortium that risk-free rates].” world’s largest private equity outfits said: “A
invested $7bn of equity for a minority share- He said his bank had, since the credit crunch longer-term issue is overcapacity in the indus-
holding in US savings institution Washington started, effectively lost more money, about try of people and capital. We could see a lost
Mutual while Nordic Capital and Avista Capital $5bn, in writedowns on leveraged loans to back generation of talent and is there really the
Partners struck what turned out to be the year’s buyouts than it had made in fees in the past need for more than 2,000 good investors in
biggest full buyout, the $4.1bn acquisition of five years. He added that the bank would try to Europe alone?”
healthcare company ConvaTec (see box). stay in the market. Following Washington Mutual and a wide-
However, the summer lull ended in the However, other, usually state-owned banks ranging global fundraising programme earlier
autumn with Lehman Brothers’ collapse, the and particularly the non-bank institutions, such last year, TPG allowed its limited partners to
firesale of Merrill Lynch to Bank of America as structured funds (collateralised loan obliga- potentially cut their commitments by 10%.
January 26, 2009 • ANNUAL REVIEW • www.penews.com
Large buyouts 07
$132.3bn 44
Value of withdrawn buyouts Deals over $1bn
Permira made a similar deal for the uninvested 2007 was better than the rest of the asset class However, US funds raised in times of meltdown,
portion of its fourth fund that resulted in a cut and mirrored the 1986 to 1989 boom with its such as 1991 and 2001, delivered average
from €11.1bn to €9.6bn. 40% returns. returns of more than 30% per year and this gave
The issue for some investors was both their However, after the boom, from 1989 to 1992, hope for funds raised last year.
overcommitment to the asset class (as other mega-fund returns were the worst – less than However, a French private equity leader said
financial areas, primarily equities and bonds, 5% versus 10% for the rest – and he feared the the success of large leveraged buyouts was
halved in value last year) and a broader concern same pattern could be repeated. based on a macro-economic assumption of a
that returns from large funds raised in the past Research from the London School of Eco- benign world for asset-price inflation with long
few years would struggle and distributions fall. nomics’ Alternative Investments Conference periods of growth and short recessions. The
Lerner said the recent returns success of estimated 2007 vintage funds would only return recent turmoil, he said, could call into question
mega-funds at nearly 15% per year from 2002 to 7% per year and 19% from the 2006 vintage. this premise and required a broader mandate
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08 Mezzanine www.penews.com • ANNUAL REVIEW • January 26, 2009
for private equity firms beyond just control,
leveraged buyouts. ConvaTec deal shows financing market changes
This mandate could cover an industry where
LPs traded off a lack of control in deal timing Last year’s biggest deal reveals the But Europe’s largest deal remains
handled by the general partner in return for limits and requirements for buyout the consortium purchase in 2005 of
higher returns. firms trying to acquire large Danish phone operator TDC at more
The flexibility for GPs would then enable companies while Europe’s largest deal than €12bn (after sterling’s recent fall
them to look for these high returns beyond shows the changes in the market. against the euro knocked the £11.1bn
LBOs in equity or debt, minority or majority The leveraged buyout of UK-listed (€11.8bn) 2007-vintage buyout of
stakes in companies, public or private invest- drug company Bristol-Myers Alliance Boots from its throne).
ments, mature businesses or those in the build- Squibb’s medical technology TDC had €2.2bn of equity and
up stage, be they stable or distressed assets, business, ConvaTec, by US-based about €11.7bn of debt arranged by
he said. Avista Capital Partners and Swedish five banks who provided €6.5bn of
Fundraising in the large end, broadly held up peer Nordic Capital saw the two senior paying Euribor plus 2.87%, a
until the fourth quarter, according to data private equity firms write their roll-over of €1.85bn of existing
provider Preqin. largest equity cheques. medium-term notes, €2bn of
It said 11 funds closed last year with com- The two invested $2.2bn, 44.5% of subordinated junior debt and about
mitments of at least $5bn, which indicates the the deal’s total enterprise value, of €500m of other finance.
larger-focused buyout firms, against 171 the fin- equity with $2.75bn of leverage Overall, rating agency Standard &
ished fundraising across the market. arranged by nine banks. The debt Poor’s said 5.1 times was the average
The 11, such as Advent International’s included a $600m facility to help with debt to Ebitda multiple on European
€6.6bn, Nordic Capital’s €4.3bn, PAI Partners the subsequent bolt-on purchase of buyouts last year, although in the
with €5.4bn and Bridgepoint at €4.8bn in Danish trade peer Unomedical, which second half this fell towards four times
Europe and TPG at $19.8bn and Carlyle Group was previously owned by Nordic a seasoned banker said.
at $13.7bn globally, raised an aggregate $108bn, Capital’s fourth fund. In 2007, the ratio was 6.1 times,
which was 49.9% of the buyouts total in the year Total debt to earnings before made up of 4.5 turns of first lien, 0.5
and just less than the $116.5bn in 2007. interest, tax, depreciation and of second tranche and 1.1 times of
Overall, the industry has $1 trillion of com- amortisation was 6.8 times, including other debt, including mezzanine. In
mitments – so-called dry powder – in its funds $900m of mezzanine, and was more 2001 and 2002, the ratio was 4.1
to spend on future deals so, even if many large than two times oversubscribed by times and only climbed to more than
buyouts do dry up for the near-term, the outlook investors as the senior debt alone five in 2005 and beyond as the
for the firms and industry remains brighter than offered prices of 4.25% more than the pressure from non-bank institutions
the gloom of last year would indicate, firm European risk-free rate (Euribor). to invest money increased.
bosses said.
Mezzanine credit’s glass
was half full in 2008
After a short revival, Mezzanine, a junior form of credit that lies
between senior debt and equity in the capital
Capital participated); and £175m in mezzanine
backing US buyout firm Kohlberg Kravis
structure of buyouts, enjoyed a short period of Roberts’ £1.1bn takeover of business out-
the high-risk renewal and regeneration in early 2008. As sourcing group Northgate Information Solu-
increasingly risk-averse senior lenders low- tions, underwritten by Park Square Capital,
instrument faced a ered the amount of debt they were willing to
discharge into buyouts, mezzanine was able
Goldman Sachs, HSBC and Barclays.
Globally, mezzanine expanded to an aver-
forecast of default to top up the shortfall.
This was a major turnround for the high-
age of 11% of the capital structure of buyouts
during 2008, compared to 7.48% over the pre-
risk instrument, which had ceded much of its vious full year, according to rating agency
rates of between bargaining power during the boom due to Standard & Poor’s Leveraged Commentary
cheap and arguably mispriced sources of and Data – the highest proportion of the cap-
5% and 10% by credit jostling for a slice of the buyout action.
Among the deals mezzanine investors
ital structure occupied by mezzanine for at
least five years.
backed during the first half of the year were: an Terms also improved. Until the summer of
2010, writes estimated £280m (€309m) put up by UK-listed 2007, mezzanine had frequently been denied
mezzanine investor Intermediate Capital “non-call protection” against being paid off
Catherine Craig Group to back the £1.8bn buyout of UK waste-
management company Biffa by buyout firms
early in favour of cheaper refinancings. This
diminished its long-term yield prospects, a
Montagu Private Equity and Global Infra- major driver of profits for mezzanine funds.
structure Partners; an estimated £300m back- Providers also argued its high-risk repayment
ing listed buyout group Candover’s £1.8bn profile, subordinate to that of senior debt in
buyout of oilfield technology firm Expro Inter- buyout deals, was being mispriced given the
national (in which mezzanine firm Park Square risk it bore.
$ 2.75 bn £ 860 m € 505 m
Senior- Senior- Senior-
Facilities Facilities Facilities
Arranger Arranger Arranger
Senior-Facilities
€ 1.25 bn
25.01 % stake in undisclosed € 98 m undisclosed
Senior- Senior- Senior-
Facilities Facilities Facilities
MLA, Underwriter,
Bookrunner Lead Arranger Arranger Joint Lead Arranger
$ 1.668 bn € 570 m € 1 bn
Senior- Senior- Senior-
Facilities Facilities Facilities
Joint Lead Arranger Joint Lead Arranger Joint Lead Arranger
Leveraged Finance
In 2008 we successfully developed our European
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structures for our customers. We would be pleased
to show you how your company can profit from our
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We wish all our current and future business partners
every success! http://corporatefinance.helaba.de
10 Mezzanine www.penews.com • ANNUAL REVIEW • January 26, 2009
By April last year, however, pricing had The report concluded the mezzanine market of the leveraged structures put in place at the
already climbed from lows of 7% over the could face recession-level default rates of top of the market in 2007 began to be tested.
Euro Inter-Bank Offered Rate to as much as between 5% and 10% by 2010. Default rates among private equity deals are
10% on some deals, attracting institutional It also showed that because senior debt lev- certain to rise because debt structures were
investors on account of the instrument’s els for credits originated since the second half poorly attuned to risk.”
improved prospects. of 2004 had not been materially reduced, only Doumar added Park Square had kept invest-
Mezzanine investors raised $30bn (€23bn) mezzanine deals done after the first quarter of ment to a minimum during 2007 and was cur-
globally in 2008, double the figure of the pre- 2008 stood even a small chance of recovering rently focused on acquiring debt at discounted
vious year, according to research firm Preqin, any value should they default in the new credit prices in the secondary credit market through
with a further $21bn being sought by funds environment (see attached chart entitled its existing mezzanine fund, Park Square Cap-
still on the road. “Vintage European mezzanine out of the ital Partners LP.
Among those to raise mezzanine funds last money” which shows debt levels as of Sep- At the end of 2008, Steve Clarke, head of
year was alternative asset manager Partners tember 2008 for mezzanine deals originated UK buyouts at Intermediate Capital Group,
Group, which in April closed PG Global Mezza- from 2003 to date). said the secondary debt market offered best
nine 2007 on €447m ($584bn), 50% over its ini- In October, Jonathan Guise, a managing value for investment as well as the most vol-
tial target, for primary mezzanine investments. director in Houlihan Lokey’s debt advi- ume in terms of completed deals. Clarke esti-
At the time, René Biner, partner and head mated market default rates approached about
of private debt at Partners Group, pointed to “Mezzanine is being 3% by the end of 2008, adding defaults had
lower-risk debt structures coupled with priced at 11% over been at historic lows in the two prior years.
improved pricing benefiting the market. He He said Intermediate Capital Group esti-
said: “The lowest pricing we saw on a Euro-
Euribor and above, with mated the value of the secondary loan mar-
pean mezzanine deal prior to the turnaround call protection of up to ket in Europe totalled about €500m, with ICG
in the credit markets during the summer of three years in order to expecting between €200m and €400m to
2007 was 6.5% over Euribor with leverage become available as banks and funds holding
levels at about eight times earnings before guarantee a yield over the loans liquidated their positions over com-
interest, tax, depreciation and amortisation. several years” ing months.
Today, prices are averaging around 10% over But as mezzanine investors themselves
Euribor, while weighted average leverage is were not immune to the financial downturn,
about six times ebitda.”
Simon Walker,
access to liquidity became a problem for insti-
However, shocks to the economy during BVCA chief executive tutional mezzanine providers reliant on credit
the second half of the year hampered the ben- lines to fund their deals. One debt adviser said
efits of improved terms. Despite the rosier sory division, said mezzanine investors were only ICG and Park Square remained consis-
picture, improved terms on paper were in working to guarantee higher returns to offset tently active on European mezzanine deals at
reality part of a worsening environment for the rising likelihood of defaults in their port- the end of 2008 with few banks willing to
primary mezzanine issuance. As leveraged folios. He said: “Mezzanine investors are underwrite mezzanine loans.
buyouts became scarcer over the year, so demanding higher returns to mitigate higher Doumar said while he anticipated few fresh
mezzanine issuance declined from €1.9bn in default assumptions. Mezzanine is being buyout deals during the first half of 2009, mez-
the third quarter of 2008 to just €340m in the priced at 11% over Euribor and above, with zanine investors with cash to invest were
final quarter, according to S&P’s LCD. call protection of up to three years in order to spoilt for choice in the credit markets. He
By the final quarter of 2008, mezzanine guarantee a yield over several years.” added the firm was considering investing in
providers were seeking even higher prices The market consensus was that those deals corporate refinancings, with an estimated
and improved terms to compensate for the most likely to unravel in 2009 were closed €800bn in non-financial corporate debt due for
prospect of future losses on their existing during the buyout boom of 2006 and, in par- repayment over the next three years.
portfolios. In September, rating agency Fitch ticular 2007, though some deals with lighter He said: “We see opportunities all across
published a report which identified “mezza- covenant structures might be able to delay the piste from forced refinancings to banks
nine at risk” – all B-issuer default ratings with restructuring until 2011 or 2012. rolling over existing financing packages with
a negative outlook or CCC ratings where a Robin Doumar, managing partner of Park an additional cushion of junior capital or equity
negative trend is clear for the credit – among Square Capital, which manages third party to lower their risk exposure. In my lifetime,
the 26 European buyouts it tracks which had funds to invest in mezzanine and leveraged I’ve never seen a more exciting time to be a
mezzanine in their structure. loan opportunities, said: “During 2008, some buyer of credit.”
Mezzanine contribution Senior and mezzanine debt in European leveraged buyouts
% €bn
12 80
70
10 Senior LBO volume
60 Mezzanine volume
8
50
6
40
4 30
20
2
10
0
2004 2005 2006 2007 2008 0
Q1 ’07 Q2 ’07 Q3 ’07 Q4 ’07 Q1 ’08 Q1 ’08 Q3 ’08 Q4 ’08
Source: Standard & Poor’s Leveraged
Commentary and Data Source: Standard & Poor’s Leveraged Commentary and DataMonument Group
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None of the announcements above constitute either an offer to sell or a solicitation to buy any securities. They appear as a mat ter of record only.12 Placement agents www.penews.com • ANNUAL REVIEW • January 26, 2009 Placement agents revel as fundraising defies crunch Agents can come to the fore, writes Jennifer Bollen Placement agents saw an increase in business last year as private equity funds achieved the second highest level of fundraising on record. Firms have more than $1 trillion (€760bn) with which to make deals this year after closing 768 funds last year worth $554bn, according to data provider Preqin. The figure trailed the $625bn raised in 2007 but was more than the $525bn garnered in 2006. Investors allocated the most capital, $216bn, works to the advantage of the placement agent. investors’ appetite for funds in Europe had to 170 buyout funds, although the 217 venture We tend to know who has got money to get shifted from multinational funds to local vehi- vehicles were the most numerous. Firms through the investment process, but we had to cles. He said investors like the local knowl- raised 166 real estate funds worth $116.8bn, work harder at identifying who had the money. edge, contacts and experience of funds that the second-largest total. Mid-market funds, When the money allocated to the megafunds invest only in their own countries. funds worth $1bn or less, raised an aggregate dries up, it doesn’t tend to affect us like it would MVision advised several significant fundrais- $40.2bn worldwide in 122 vehicles. investment banks. They tend to have big sales ings last year, including Norwegian buyout firm Fundraising did, however, slow substantially forces and they take their products to everyone. HitecVision Private Equity, which raised the over the year, with $97.6bn raised in the fourth We work out who is likely to be interested in our country’s biggest fund after closing its latest quarter, compared to $159.6bn in the first. clients and target them.” vehicle on $800m and Russian buyout group Richard Sachar, managing director of place- Guen said his firm, which usually holds final Renaissance Partners, which raised the coun- ment agent Almeida Capital, said: “Last year closes on six mandates at the end of every try’s second-largest private equity fund after was very varied. The first half was straightfor- year, closed two. However, he said he held holding a final close on $660m in March. ward [but] in the second quarter you could see final closes on 10 funds in the first quarter of It also advised Middle Eastern buyout group people found out they didn’t have the money the year. Abraaj Capital on the closure of the region’s they expected this year because their cashback He said: “There was a shift that was begin- biggest fund by an independent Middle Eastern from the big buyout groups dried up. People ning to happen in the summer as a lot of group, which had a $4bn target. The firm held were taken somewhat by surprise by the speed investors had been very aggressive in their pri- a first close on nearly $3bn in October, already with which liquidity dried up.” vate equity programmes and committed their making it the biggest Middle Eastern fund Mounir Guen, chief executive of placement allocations for 2008 very quickly in the year. raised by an independent group. agent MVision, said the volatility in the public Interestingly, the Lehman bankruptcy was a Placement units within banks also enjoyed markets, which affected private investments trigger point in the market place, leading to success. Swiss bank UBS’ placement agent because of fair-value pricing, meant investors programmes subsequently going on hold for arm guided transatlantic buyout firm Tower- lost their bearings and had no idea what level long period of times. Brook Capital Partners to its upper limit in of risk exposure they had to private equity. “As we approached June and July, fundraising November when it closed a $2.75bn vehicle, He said: “Older and more-mature investors started becoming quite challenging, especially past its initial target of $2.5bn. The fundrais- in the US effectively shut down in late 2008. in the US, a little slower in Europe and the rest ing took less than a year. These included the super investors – the billion- of the world.” The close came a month after UBS closed dollar-plus commitments. He said appetite for emerging markets three other funds at their hard caps. Chinese pri- “In the US, the complexities of the over-com- increased, particularly for Africa, the Middle vate equity firm FountainVest raised $940m for mitments coupled with the challenges in the East, Brazil, China, India, Australia and Japan. its maiden fund, US mid-market group Lin- public markets have led to deep restructuring of He said: “It looked like the average investor colnshire Management raised $800m for its the portfolios that is going to take until late 2009 is planning on allocating up to 20% to new or fourth vehicle, and Norwegian buyout group for a lot of these investors to re-emerge. Given frontier markets. They kept Europe the same, Herkules closed on NKr6bn (€687m). the continuing negative environment for 2009, reduced US exposure and increased new- Despite difficult fundraising conditions last we could find these investors not coming back world exposure. US fundraising became unbe- year, firms proved they could still raise capital until the end of 2010.” lievably difficult at year-end, many mid-market in the right circumstances. Indeed, that envi- Almeida Capital’s Sachar said the downturn funds in the US are finding it hard to hit their ronment placed placement agents’ skills at a had played into the hands of placement agents, PPM covers.” premium, helping to source investors who still however. Placement agents, he said, target He said investors maintained their alloca- had capital to invest and manage fundraisings investors more selectively than investment tions to Europe because the market has out- that might otherwise have foundered. banks. “When the markets get tougher, it performed the US regularly. He added With additional reporting by Oliver Smiddy
Loyalty and commitment with the long view.
AMERICAN INDUSTRIAL PARTNERS
C A P I TA L PA R T N E R S L L C14 Mid-market buyouts www.penews.com • ANNUAL REVIEW • January 26, 2009
Industry’s mid-market
Davids eye Goliath triumph
The financial crisis looks set to echo the story
of David and Goliath with the smaller, more Operators in the mid- added that small and mid-market deals would
also see failures, “even if they come out bet-
nimble mid-market firms poised to stand vic- ter” than their larger peers.
torious over their bigger but unwieldy rivals.
Mid-market firms continued to do deals in
market would do well Speaking at the London School of Economics’
alternative investments conference, he added:
2008, while their larger buyout peers were
slowed by the dearth of leverage. to remember their “A 30% failure rate would not be a surprise [in
the mid market]. Between 1990 and 1992,
There were 950 mid-market buyouts last receivership was the most numerous and valu-
year worth $103.9bn (€80.3bn, according to data scripture, writes able exit route for firms, even if only a few [buy-
provider Dealogic, which defined the mid-mar- out managers themselves] vanished.”
ket as deals worth less than $1bn.
Mid-market firms more than doubled their
Toby Lewis This is still relative outperformance. Moulton
said Alchemy calculated (with publicly available
market share to 54.5% last year, compared to information) the equity of as few as three of the
25.3% in 2007, as the credit squeeze hit home 50 largest European buyouts have more than
hardest at the larger end of the market. marginal value given public market falls, falling
Despite this relative increase of market earnings and high debt multiples.
share, the mid-market failed to escape Yet it is felt the mid-market is well positioned
unscathed from the crisis. The number and to take advantage of the steep decline in valua-
value of mid-market deals fell from 2007 levels tions in markets worldwide. Christian Hess,
respectively by 37.5% and 26%. head of financial sponsors and leveraged finance
Yet while such falls were a significant con- at Swiss bank UBS, said: “[The mid-market] is
traction, this was significantly stronger than best positioned to take on companies from
larger peers. The number of buyouts valued at seemingly lower in multiples as, historically,
more than $1bn fell last year by 67.7% to 44 [they have] it in their DNA to work without
transactions worth $86.7bn – only 17.6% of the over-dependence on leverage.”
$492.8bn large buyouts in 2007. Frothy deal structures and payment terms
Tycho Sneyers, a partner at mid-market spe- were common in deals hatched by firms in the
cialist fund of funds LGT Capital Partners, said: years leading up to 2008. Stewart Licudi, head
“Small and mid-market buyouts have been less of European financial sponsors coverage at US
impacted by the credit crunch and by [global] de- mid-market advisory firm William Blair, said:
leveraging. In the mid-market buyout sector, “Everybody, at all times, claims their quality
financing is still available for the best deals and threshold is high. I think there is a tendency in
the best GPs and deals keep taking place, which a bull market for deals to get done at a pricing
is very important for our investors.” level and, more importantly, using a structure
Even mid-market deals from the bull market that may not be ideal. What these market shifts
are expected to outperform larger buyout vin- do is bring people back to basics. They become
tage deals. Sneyers said valuation multiples had more selective about what they do and much
come down in the mid-market, but less than in more concerned about the fundamentals of the
the mega-buyout sector, where the highest mul- deal structure.”
tiples were paid in 2006 and 2007. He added Hess said most of the deals he was working
lower levels of leverage meant the conse- on were more structured than the auctions so
quences for mid-market investors in the bull prevalent in 2007. Deals are
market would be less. structured
Mark Spinner, head of private equity at law
firm Eversheds, said: “We are already seeing
the impact of the credit crisis in the mid-market,
although, in my view, the issues faced by the
mid-market are much more acute where pri-
vate equity houses try to raise debt to do new
deals. The large buyout funds, where the model
is one of financial engineering and using debt to
create the equity return, are now dead.”
Still, the carnage could be significant in the
mid-market. Jon Moulton, chief executive of
UK turnround firm Alchemy Partners, said last
week nearly one-third of European mid-mar-
ket buyouts could fall into receivership.
Moulton said attention was focused on large
buyouts, which struggle to retain value, butwww.penews.com • ANNUAL REVIEW • January 26, 2009
Mid-market buyouts 15
for firms to take minority stakes, convertible Advent International and Bridgepoint, which included UK buyout firm BC Partners’ acqui-
bonds and portfolio company bolt-ons. raised €6.6bn ($8.5bn) and just under €5bn sition of German manufacturing company
Levels of leverage came down substantially respectively. Starkstrom Geratebau for more than €500m.
in 2008. Licudi said: “Ratios of private equity Some firms demonstrated it was still possi- the firm has been better known for multi-billion-
to bank debt have returned to levels that many ble to exit mid-market deals in spite of the dollar buyouts.
of us are more familiar with. The private equity credit squeeze. UK mid-market firm HgCapi- BC’s Starkstrom Geratebau deal also marked
firm supplies 50% of the transaction value, tal demonstrated this with 15 exits between the start of a trend, widely expected to con-
rather than the banks providing 70% of the July 2007, when the market peaked, and the tinue, whereby buyout firms invest with no
value – in debt, as we saw in 2007.” end of 2008. bank financing but only a vendor loan provided
Such levels of debt, are unlikely to return Even firms with strong reputations had dif- by the seller.
for a long time. Hess said: “People should not ficulties. The share price of UK alternative Licudi said one of William Blair’s most recent
bank on leverage being available for the investment group 3i lost 70% during the year deals, the sale of Octopus Investments-backed
entirety of 2009.” as analysts voiced concerns about both group TDX to Bahrain investor Investcorp, had
The bankruptcies of the various Icelandic leverage and the use of debt in the company numerous bids, many of which had no financ-
banks caused upheaval in the market. Spinner mid-market portfolio. ing contingency whatsoever.
said: “There is no doubt the mid-market is suf- The parameters of the mid-market also He said: “I was genuinely surprised. I spent
fering from the failure of the Icelandic banks shifted last year. By some definitions, the mid- 10 years as a mid-market investor and although
and many portfolio companies are finding that market can encompass firms that invest less everybody used to talk about how we should go
committed, but undrawn facilities, put in place equity than $10m in some deals or, by others, out and underwrite the debt, it proved easier to
at the time of the deal, are not as committed as include those who invest more than $1bn. This talk about it than do it. I was amazed how many
they might hope.” blurred definition may be further clouded if the mid-market investors came in and said they had
The fortunes of individual firms have been lack of debt available leads many larger buyout an approval to do just that.”
varied in 2008. Funds of similar sizes to larger firms to invest in the mid-market in order to Other deals in the mid-market during 2008
buyout rivals were raised by firms such as get deals away. Examples of such deals in 2008 included Bridgepoint’s acquisition of Prêt à
Manger for €500m ($647m), which took private
Global financial sponsor buyouts an influential fast-food company, and the €530m
Christmas Eve acquisition by Bain Capital and
Deal value, $bn Italian buyout firm Clessidra Capital Partners
100 of Italian credit-checking company Cerved.
For mid-market firms, 2008 will be a year that
Less than $300m $500m to $1bn (---) Volume
may not rank as the most enjoyable, but
80 $300m - $500m arguably demonstrated this segment of the pri-
101 vate equity world’s strengths as much as at any
906 1127 86 990
60 time in its history.
840 Some of those firms that outperformed other
64 houses last year may well have established their
40 92 55
80 franchises for a long time to come. To continue
60 55 their success, such firms would do well to
20 remember their scripture – David’s transition
from giantslayer to king heralded a troubled
reign and the slaughter by his armies of his
0 rebellious son, Absalom. The difficulties of the
2005 2006 2007 2008 Goliath firms should remain burned in the
Source: Dealogic memory of any Davids who would take their
place if they are again to safely navigate the tur-
bulent wake of last year’s cyclical shift.
“[The mid-market] is best
positioned to take on
companies from
seemingly lower in
multiples as,
historically, [they
have] it in their DNA
to work without
over-dependence on
leverage”
Christian Hess,
UBS16 Small deals www.penews.com • ANNUAL REVIEW • January 26, 2009
Growth and development
capital gain speed on gradient
Venture capital and the debt-lite end of the industry are more
resilient to the credit crisis, writes Jennifer Bollen
Fundraising for growth and venture capital the public markets, and half
funds increased by €1.6bn last year to a total of believed private equity
€6.6bn. David Whileman, a partner at private offered the best
equity firm 3i and head of its UK growth capi- option for fund-
tal team, said his team received close to 30% ing future
more serious inquiries about deals in the last growth.
quarter of 2008 than in the same period in 2007 The survey
as bank lending dried up. found 48% of
He said many of the calls concerned deals institutional
that would have been buyouts or at least shareholders
involved bank financing in a healthier market. in small com-
He said: “Alternatives to 3i growth capital over panies (defined
the past three years included hedge funds, risk in the research
capital from integrated finance divisions of banks as businesses
or listings on London’s Alternative Investment with market cap-
Market or main stock exchanges. We are expe- italisations below
riencing increasing interest for 3i growth capital £250m) expected
partly because the knowledge of our product is to push for a pri-
spreading and because companies are finding vate equity-backed
these other avenues for finance somewhat take-private, while
restricted and, in some cases, closed.” 32% of small companies
One firm that bucked the trend of depressed looked likely to consider a
private equity deal activity was venture capital public-to-private deal within a few
firm Index Ventures, which completed its 20th years.
deal of the year, an increase on the 16 deals it Michael Cobb, a corporate finance partner at
completed last year, last month. It was the lead BDO Stoy Hayward, said: “Our survey is fur-
investor in a $13m second round of venture cap- ther evidence that the majority of smaller
ital funding for Rightscale, a software develop- quoted companies are very frustrated about
ment house. their place on the public markets. A significant
A survey last month by accountancy group number of directors feel that it is in their com-
BDO Stoy Hayward echoed Whileman’s opinion. pany’s best interest to explore coming off the
It showed one-third of small listed company market and obtaining private equity funding.
managers regretted taking their companies to Many institutional investors agree and are
encouraging management teams to find an exit.”
UK buyouts < $100m Information provider Thomson Reuters and
the National Venture Capital Association in the
Value, $bn Volume US, said the number of venture-backed initial
5 120 public offerings globally fell to zero in the fourth
quarter of last year. IPO exits in the US last year
100 numbered just six, the fewest since 1977.
4
Meanwhile, figures from trade body Clean-
80 tech Group showed that for the whole of last
3 year, clean technology venture investments in
60 North America, Europe, China and India rose by
38% on 2007 to reach a record $8.4bn. The fig-
2
40 ures represented the seventh consecutive year
of higher investment in venture.
Value, $bn
1 Investors also grew keener on small-cap
20
Volume deals than large buyouts last year. A survey pub-
lished in March by private equity adviser
0 0
Almeida Capital showed 44% of respondents
’03 ’04 ’05 ’06 ’07 ’08
regarded large buyouts as attractive or very
Source: Dealogic attractive, while 77% favoured small and
medium buyouts.You can also read
