DELTA Insight

The new face of private equity

The role of specialists
September 2010

Kristoff Puelinckx, Group Managing Director

kpu@deltapartnersgroup.com

Francisco Sosa del Valle, Associate Partner

fs@deltapartnersgroup.com

1 | Delta Partners | | September 2010

 Is private equity extinct?
The financial system is still trying to work its way out of the abyss. Debt and equity capi-
tal markets remain unstable and banks are still beefing-up their capital ratios. A business
culture built around leverage is being severely questioned. The prospects of private
equity remain unclear.

It seems tempting to claim that the days of the asset class are over. Some LPs are press-
ing PE firms to reduce fees, commitments, or both; others have elected to circumvent
them. The industry is also facing an uphill battle to invest committed but uninvested
funds. In addition, investees require more attention than they required in the past. Fund
managers’ economics are under pressure; they are expected to remain that way in the
foreseeable future.

Despite the prognosis, we still believe there is a future for PE. Leverage, a key industry
driver, is temporarily out of the equation. However, PE firms have also succeeded due to
their ability to pick industry winners, to align interests of the various constituencies in a
transaction, and to marshal resources around investees.

Private equity will emerge out of the crisis. Its value proposition of active ownership to
maximize long-term returns for investors remains sound. However, firms that hope to
survive must adapt to a new reality – a new norm.

A new industry, a different landscape

The absence of financing has redefined the rules of engagement in PE. Cash-strapped
corporations are refining their portfolios and carving-out non-core assets. Buyers are
shying away from all-cash deals and increasing seeking alternate sources of financing in
the absence of cheap debt. The industry’s focus has shifted from financial engineering to
industry know-how.

Table 1: Old paradigm New reality

Private Equity:
Financial engineering Industry expertise
Changing Realities
Build-ups Carve-outs
Cash acquisitions Equity deals
Leverage Seller financing
IPOs and follow-on offerings Liability management
Top-line growth Earnings quality
Recapitalizations Restructuring
Source: Delta Partners Analysis.

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We think the industry’s landscape has to adapt to the new conditions and that it will move
towards a model in which global mega-funds co-exist with niche players that are focused
on a specific sector, a region, or both.

Global funds will be industry leaders. They will manage the largest pools of capital,
invested across multiple industries and geographies. Sector and geography specialists
will not be as large as their mega-peers, but will develop a dominant position in a regional
market or a specific sector. We expect them to prevail in emerging markets, and to
potentially co-operate with global funds in certain transactions.

The benefits of specialization

Small and mid-sized firms must rethink how they will differentiate going forward.
Successful firms will be those that remain selective and that focus on building sector or
geographic expertise. A migration towards sector specialization will acquire momentum;
its benefits are evident.

Specialization allows fund managers to be in regular contact with key industry players.
This provides them access to a vast, focused deal pipeline. More importantly, it allows
them to pro-actively originate high-quality deals.

Specialists also have an edge in identifying potential winners thanks to their stringent
screening criteria, their discipline and expertise. They are ideally-positioned to reach
out to various industry stakeholders which are able to identify shifts in industry trends.
In doing so, they develop proprietary insights which make them better prepared, for
example, to screen-out less promising opportunities. This gives them a powerful com-
petitive edge during the due diligence phase.

Sector specialists typically identify high-potential sub-sectors in which to zoom-in based

on their size, growth potential and profitability, the availability of targets, the existence
of potential exit avenues, and based on the firm’s ability to create value in each sub-
sector. Such razor-sharp focus allows successful sector funds to be closer to the ground,
better equipped to interpret localized trends and dynamics, and ready to fine-tune their
investment thesis based on their observations.

Post-investment, the ability of specialist funds to contribute value to portfolio companies

has reinforced their edge over generalist funds. They are better-equipped to create
value, and to provide strategic guidance and direction to investees. Additionally, given
their broad industry relationships, they can attract the best professional talent to fill
crucial positions in their investees. Finally, specialist funds are better skilled to develop
relevant KPIs to challenge the investees.

Finally, specialist funds also have an edge as they seek to exit their investments. They
can better assess potential buyers’ interest, and are well prepared to present the most
compelling case for each of their portfolio companies.

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Putting the pieces together
In summary, we strongly believe that the PE industry is far from dead; it is only changing
and adapting. In order to survive, small and mid-sized firms must re-think how they
position themselves in a new reality. In this battle for survival, specialists have a sustain-
able competitive edge.

Delta Partners is the leading investment and management advisory firm specializing in
telecom, media and technology in emerging markets. We have built our investment
business around such focused model and we intend to continue growing and adding value
to the TMT industry in emerging markets under the same specialized model.

www.deltapartnersgroup.com
Copyright © 2010 Delta Partners FZ-LLC. All rights reserved.

4 | Delta Partners | | September 2010