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New horizons emerge
April 2010
New horizons emerge
A year ago, there were diverging views on the future of private Leveraged loans used to nance new acquisitions bounced back in
equity (PE). Some contended the model had suffered irreparable the fourth quarter. While Thomson Reuters reports that new issues
damage, while others saw a nimble industry that would recover in the US totaled US$80 billion in 2009, nearly half of that total —
and eventually become stronger than ever. Although 2009 was a US$37 billion — was issued in the fourth quarter, up from just US$14
challenging year, with leverage in short supply, acquisitions and billion in the third quarter and US$21 billion in the fourth quarter of
divestitures down sharply, and fund-raising difcult, the industry 2008. Financing for new acquisitions should increase gradually in
showed resilience in adapting to adverse market conditions. 2010, barring major banks being hit with defaults on government
and commercial debt in Greece and, possibly, Spain.
Globally, PE rms made 1,612 acquisitions1 in 2009, a 36%
decrease from 2008.2 The average size of an acquisition in 2009 Liquidity also returned on the sell side. The recovery of worldwide
was smaller — US$100 million versus US$158 million in 2008 — as stock markets restored the initial public offering (IPO) as a viable exit
total deal value fell 56% to US$95.5 billion. While there were fewer strategy in the US and Asia. PE sponsors brought 53 new companies
buyout deals during 2009, minority investments3 as a percentage to market in 2009, raising proceeds of US$16 billion, compared with
of total acquisitions rose from 45% to 50%, even as the value of such US$11 billion in 2008. Only three of these IPOs occurred in Europe,
transactions fell from US$57.7 billion to US$21.9 billion. while 25 took place in both the Americas and in the Asia-Pacic
region. While trade sales fell sharply last year to US$65 billion from
However, annual data mask the real story of 2009. The long
US$140 billion, they have increased steadily since bottoming out in
retreat that began in the summer of 2007 ended as a comeback
the rst quarter of 2009, as bid-ask spreads between buyers and
that began in the third quarter and gained strength as larger deals
sellers narrowed.
were announced towards year-end. Globally, transactions worth
US$39 billion were announced in the fourth quarter, up from US$24 PE rms continued to focus on preserving portfolio company value
billion in the third quarter, and more than double the US$18 billion as operating excellence replaced nancial engineering. Over the
announced in the fourth quarter of 2008. last few years, larger rms have concentrated on hiring operating
partners and managers to focus on improving their portfolio
Driving this recovery is the renewed willingness of banks to
companies. They have also tapped former executives of global
underwrite debt. Bloomberg reported that global high-yield debt
Fortune 500 and other multinational companies, along with a coterie
issuance nearly tripled last year to US$210 billion, from US$74
of ex-management consultants to serve as senior advisers. These
billion in 2008. PE rms, particularly those in the United States (US),
executives, who have years of strategic and operating experience,
used their share of new issues to replace existing portfolio company
have been invaluable in helping struggling companies streamline
debt, gaining critical debt extensions in the process. The use of newly
operations, improve their working capital, ease their nancial
issued high-yield bonds to renance leveraged loans is expected to
situation and position themselves for growth.
continue through 2010 as interest rates on government bonds are
expected to remain low, causing investors to seek higher yields.
1. 956 acquisitions where the value was disclosed, and 656 where the value was not disclosed.
2. Unless otherwise noted, Dealogic is the source of all acquisition, divestiture and IPO data cited in this report.
3. Acquisitions of less than a 50% ownership stake.
Fund-raising will continue to be a challenge for the next 12 to 18 high-prole secondary sales have been completed. Firms are taking
months. With Preqin reporting that PE rms had US$500 billion advantage of improving markets to make acquisitions, enhance
in uncommitted capital waiting to be deployed at the end of 2009, portfolio company performance, and exit investments in order to
one of the biggest challenges may be nding quality targets. That return funds to limited partners in advance of 2011 fund-raising
said, rms closed US$234.9 billion worth of funds, 60% less than in rounds. All the while they keep a watchful eye on tightening debt
2008.4 As limited partners continue to demand better returns and covenants.
more transparency, competition among general partners will heat
During the rst three months of 2010, global PE rms have
up, even as investors — who sat on the sidelines last year — prepare
announced 358 transactions valued at US$27.0 billion, compared
to commit more capital, according to a recent Preqin study. Mid-sized
with 415 transactions priced at US$17.0 billion for the same period
buyout, distressed debt, secondary, and emerging market funds
in 2009. While the average deal size, where the value was disclosed,
focused on China, India and Brazil may garner increased interest.
for those three months rose to US$157 million from US$70 million
While 2010 should be a better year than 2009 on all fronts, last year, it remains far below the pre-recession high of US$706
regulatory reform is a major uncertainty that could slow the million in the second quarter of 2007. 2010 is looking to be an
industry’s recovery. The European Union’s (EU) proposed directive on intriguing year with global PE activity on the rise.
alternative investment fund managers (AIFM) will dramatically affect
both European and foreign rms operating in the EU. Increased
capital requirements in many markets could adversely affect lending, Kind regards,
as could the “Volcker Rule” in the US, which would force banks to sell
their PE operations and the income streams they provide. Evolving
tax rules in many jurisdictions could affect returns, as decit-ridden
governments seek to increase their tax revenue.
John Harley
In last year’s report, we highlighted the evolution of PE rms from Global Private Equity Leader
their early years as buyers of family businesses to today’s business Ernst & Young
entrepreneurs, renowned for transforming companies and injecting
change capital. As the industry recovers, some PE rms will continue
to diversify into other asset management functions and other
advisory roles, such as capital markets.
4. Unless otherwise noted, Preqin is the source of all fund-raising data cited in this report.
About the data
Our report focuses on worldwide acquisition, divestiture and fund-
raising activities of PE rms. Ernst & Young relied on several data
sources in producing this report.
Acquisitions and divestitures: Dealogic is the primary information
source for data on acquisitions, divestitures and IPOs. Deal activity
for various world regions and countries is based on the location
of the target, not that of the buyer or seller. Acquisitions and
divestitures are based on announced deals. Deal value and average
deal size are based on disclosed deals — transactions where a value
was disclosed — while total transactions include all announced deals
including those where the amount paid was not reported. Unless
otherwise indicated, deal value is reported in US dollars. Acquisition
data include minority investments but exclude repurchases, venture
and portfolio company add-ons, which are technically corporate
deals and are discussed separately.
• Expansion/growth equity
Credit and lending trends: Ernst & Young relied on several sources:
Standard & Poor’s for lending (leverage) multiples; Bloomberg,
Thomson Reuters, Moody’s Investors Service and Credit Suisse for
information on the global syndicated loan markets and the US high-
yield and leveraged loan markets.
Table of contents
2009: private equity turns a corner after a tough year .........................................pg 1
Key contacts........................................................................................................... 34
2009: private
equity turns a
corner after a Global M&A deal volume: 2000–2009
tough year
2,510
# of PE deals
3,056 1,612
$480,573
# of funds $500,000
Avg. fund size ($USm)
Fund size ($USm) $400,000
$1,000 $306,290
$234,860 $300,000
0 $0
2005 2006 2007 2008 2009
Source: Preqin
Fund-raising data excludes venture funds.
Biotherapeutics listed on NASDAQ. As of $590.3 billion in 2008. Average fund size In terms of investment style, buyout funds
29 March 2010, there were 39 PE-backed declined less dramatically to $658 million continue to account for half of all funds
companies waiting to go public, and more from $770 million. Preqin reports that it raised. Growth capital, fund of funds and
lings are expected. Activity on European took 18 months, on average, to close a fund secondary funds gained share last year,
exchanges is expected to pick up later this in 2009, compared with 12 months in 2007. while infrastructure and distressed debt
year, but the deferral of the New Look funds accounted for a smaller share of total
Funds in the $500 million to $999 million
and Travelport IPOs, and the sale of Pets funds closed.
range appear to be attracting a greater
at Home and Ambea to PE secondaries
share of investor commitments, while larger
have dented early condence. That said,
funds — especially mega-funds over $5
the recently announced €880 million
billion — lost share last year. In response,
IPO of Providence Equity Partners’ Kabel
some large funds lowered their fees.
Deutschland, Germany’s biggest cable
According to an October survey by Preqin,
company, could signal more IPO activity.
on average, PE funds — funds with $1 billion
Fund-raising declined in 2009. Globally, PE or more — reduced their management fees
rms closed 357 funds valued at $234.9 to 1.65%.
billion, down from 767 funds totaling
trend is up.
>
>
>>
Source: Dealogic
Source: Dealogic
$62,672
80
$60,000
67
60 $44,058
75 $40,000
52
40 $35,840
$20,000
20
$9,210
$7,930
14 10
16
$728
0 $0
2005 2006 2007 2008 2009
# investing with PE # SWF direct investing $ investing with PE $ SWF direct investing
Source: Dealogic
This chart captures transactions where the buyer is a SWF acquiring global targets.
However, IPOs gained momentum last year, 2004 $69,590 $65,897 $32,675
as a recovering stock market once again
made them viable exit alternatives. In terms 2003 $27,717 $34,055 $10,276
of proceeds, PE rms raised 64% from sales 2002 $17,116 $16,790 $11,237
to strategic buyers, 16% from sales to PE,
and 20% from IPOs. While PE rms took 2001 $39,548 $4,989 $8,305
roughly the same number of companies
2000 $57,544 $11,857 $13,695
public in 2009 as in 2008, proceeds from
those transactions rose sharply from $10.8 0% 25% 50% 75% 100%
billion to $16.2 billion. By contrast, both Source: Dealogic Strategic sales Secondary sales IPOs
strategic sales and secondary sales fell to
$51.6 billion and $13.1 billion, respectively,
less than half their 2008 levels.
Global PE exits: 2000–2009
The value of PE exits usually outstrips that (deal volume)
of acquisitions, which is not surprising, given 2009 332 76 53
the industry’s model of buying undervalued
entities, turning them around and selling 2008 400 216 52
$9.0
$19.2 $0.4 $17.6 $17.9
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
height of the market 2007 2008 2009
Source: Dealogic
are unlikely to yield as
much as those made
in weak markets, PE Average PE deal size: acquisitions vs. divestitures: 2000–2009
rms are eager to Based on disclosed deals
($USm)
$424
to LPs. $303
$321
300
$235
$209
200 $227
$244 $158
$170 $100
$146
100
$108 $98
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Dealogic
This chart excludes IPOs.
Average PE deal size: strategic sales, secondary sales and IPOs: 2000–2009
($USm)
1000
Strategic sales
Secondary sales $801
800 IPOs
$567
600 $530
$496
$422
$388
$395 $368 $364 $384
400 $344 $350
$318 $308 $306
$289 $280 $279
$254 $234
$214 $218 $216 $207
$188 $193 $184
200 $156 $168
$178
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Dealogic
0% 25% 50% 75% 100% The top exchanges for IPOs last year were
the NYSE, the NASDAQ, Hong Kong and
Strategic sales Secondary sales IPOs
Australia (mainly due to of Myers Holdings’
Source: Dealogic
Strategic and secondary deal values refer to deals where the value is known. $1.9 billion IPO), which, as a group,
accounted for 79% of proceeds. In terms of
IPO volume, the NYSE and the NASDAQ and
+
;<
<=> Hong Kong exchanges drew more than half
($USm)
of the activity.
$8,203 $1,535 $6,947
Health care, retail, professional services
? $6,546 $2,735 $3,654 and computers and electronics companies
headed the list of nancial sponsor-backed
$13,019 $6,646 $14,105 IPOs, accounting for more than 50% of
IPO volume and proceeds. The ve largest
@ $5,195 $1,056 $6,530 IPOs of 2009 were Myers Holdings ($1.9
$660 billion), Hyatt Hotels ($1.1 billion), Telecris
$15,111 $2,787 Biotherapeutics ($1.1 billion), Cobalt
$408 International Energy ($958 million) and
D $7,685 $8,074 Dollar General ($824 million).
Source: Dealogic
Strategic and secondary deal values refer to deals where the value is known.
Source: Dealogic
Strategic and secondary deal values refer to deals where the value is known.
Health care
22.6%
(12 deals/$2.4b) Computer and electronics
37.7% Retail
(20 deals/$6.9b)
Professional services
Other
17.0%
(9 deals/$1.9b)
9.4% 13.2%
(5 deals/$1.0b) (7 deals/$4.1b)
Source: Dealogic
5. Credit Suisse
6. Moody’s Investors Service
restructuring 700
New issues
Total issues
efforts 600
500
While nancing for new acquisitions was
400
difcult to obtain during the rst three $689
quarters of 2009, it picked up in the last 300
$612
$110
PE funds with a global investment focus 2008 $181,664 $229,834 $85,833 $85,396
to Preqin, with funds closing in 2007 and $100m – $499m Under $100m
2008 accounting for three-fths of that Source: Preqin
amount. Deploying these funds will be a Fund-raising excludes venture funds.
the recent performance of their funds, while 2009 $102.6 $42.8 $23.5 $18.5 $26.7
only 42% of those in Europe and 60% of
those in North America were satised. Given $34.6 $17.0 $8.7 $20.9
these conicting signals, some funds that 2008 $233.5 $135.0 $42.1 $45.0 $53.6
That said, the second-largest fund to close in $11.2 $7.4 $15.1 $3.3
2009, the $8.8 billion First Reserve Fund XII, 2006 $221.1 $99.2 $24.8 $42.5 $56.1
is focused on energy and natural resources
in Brazil, China and India, while the 18th- $8.3 $7.7 $8.8 $7.9 $11.2
ranked Mount Kellett Fund I is focused on 2005 $138.9 $72.0 $29.9 $21.6
Asia. Both Blackstone and Carlyle opened
renminbi-denominated funds this year, the 0% 25% 50% 75% 100%
former in a partnership with the Shanghai
Buyouts Real estate Infrastructure Distressed
Pudong New Area, and the latter through a
Fund-of-funds Growth equity Secondaries Balanced
partnership with Fosun International, China’s
largest non-state-owned conglomerate. Other
completion risk.
2008 $341,678 $145,479 $103,157
In the wake of the market’s 2008 collapse,
there was much talk about investors
reducing their allocations to PE, ironically 2007 $349,316 $151,901 $87,234
-5%
attractive returns, while some expressed -6.46%
-8.35%
reservations about committing more money -10%
Quarterly IRRs
Source: Preqin
8,000
$6,739
7,000 $6,256
Less affected by the global nancial crisis $5,691
6,000
and rebounding faster than the developed
$5,525
world, emerging markets are viewed by 5,000
$4,811 $3,780
many as increasingly attractive investment 4,000 $1,651 $3,961
$1,404 $1,689
targets. We’ve proled three of the largest, 3,000
$1,133 $427
$1,223
$1,007
$541 $889 $3,242
$578 $363
fastest-growing markets — China, Brazil and $183
$404
$135 $230
$828 $952
$1,572
$1,778
2,000 $193
India — ranked the rst, second and third $80
$165 $78
$1,766 $1,028
$123 $10
1,000 $864
most attractive emerging markets among PE $12
$669
$722
Asia’s response to the 2008 nancial crisis could grow by as much as 20%. • Although it is not likely to do so until the
was very different from its response to global recovery is in full swing, China
Private consumption remains low relative to
the Asian nancial crisis a decade earlier. is expected to eventually decouple the
China’s GDP (37% in 2008) but is growing
Instead of tightening monetary and scal yuan from the US dollar to gain more
more than 7% a year, the fastest rate in
policy, which forced companies to rely on control over its monetary policy. Allowing
the world. Despite this increase, ination
exports for growth, Asia undertook the the yuan to trade within a 0.5% band of
is expected to remain at a low 2.5%,7
largest collective easing of economic policies the 6.83 yuan-to-dollar peg set in 2008
due largely to abundant manufacturing
in history. China led the way with a RMB4 may have shielded Chinese exports from
capacity which fuels price competition.
trillion stimulus program ($586 billion) sharper declines such as those occurring
China’s focus on using stimulus money for
announced in late 2008, dedicated primarily in developed countries like Japan. But it
infrastructure projects — particularly in
to multi-year infrastructure projects. That could also have deleterious effects should
underserved regions of the country — was
program created demand that lifted other growth rates and monetary policy in the
also responsible for limiting inationary
Asia-Pacic markets, boosting Australia’s US and China diverge.
pressures and ensuring real growth. China’s
commodity exports and Japan’s sales of emphasis on infrastructure also gives it a • As China recovers faster than the rest
luxury goods. major competitive advantage over India as a of the world and moves to become a
target for new investment. consumer-driven economy, inflation is
Source: Dealogic
>
>
>
>>>>
>>
> >> X> >
>
">>> India
a risk. Consumer prices rose 1.5% in Longyuan Power valued at $730 million, After a year that witnessed both the global
January and are expected to accelerate Morgan Stanley Private Equity’s purchase of nancial crisis and an internal food crisis
further as the year progresses. The Sihuan Pharmaceutical Holdings Group for brought on by weak monsoons, India’s
central bank has already raised reserve $319 million, and the acquisition of a 20% economy is recovering and is expected
requirements twice in 2010 to curtail a stake in Chery Automobile by CDH China to grow by 8% in 2010, buoyed by lower
credit and housing price boom. Should Holdings and Bohai Industrial Investment interest rates, rising consumer demand and
China grow at a double-digit rate and Fund for $293 million. a strengthening jobs market.
impose stricter monetary policy while Last year, India undertook stimulus
Going forward, infrastructure opportunities
the US keeps interest rates near zero in programs worth 3.5% of GDP. But with GDP
abound. With 13 million cars sold in China
response to a tepid recovery, China could growing for the rst time since 2007, and
last year, and just 30,000 kilometers of toll
experience huge capital inflows, inflation with ination reaching a 13-month high of
roads, China will need 85,000 kilometers of
and possibly an asset bubble. 8.6% in January, the government is under
new highways by 2020, according to Andrew
What might this mean for PE rms? Last Yee, global head of infrastructure nance at pressure to begin winding down economic
year, PE investments in China fell, but by less Standard Chartered Bank. Similarly, China stimuli. India’s recently released 2010
than in other emerging markets. In 2009, treats just 50% of its wastewater, in contrast budget is designed to do this in a calibrated
there were 73 PE acquisitions in China with Europe’s 90% and Singapore’s 99%. way, reducing the decit from 6.9% to
valued at $3.8 billion, compared with 120 5.5% of GDP, and restoring duties on crude
China’s exit market recovered last year, oil, gasoline and other rened petroleum
transactions worth $6.3 billion in 2008.
with $4 billion in divestitures and $9.7 products. While some worry that these
In a major shift, Chinese PE rms made
billion in IPOs, well above 2008’s $160 taxes will be inationary in the short term,
more than half of last year’s acquisitions,
million and $1.6 billion. Large divestitures others believe they are necessary to wean
accounting for $3.2 billion of the total.
included TPG Capital’s sale of its 17% stake consumers off unsustainable government
However, acquisitions were decidedly in Shenzhen Development Bank for $2.3 subsidies. The Reserve Bank of India’s (RBI)
smaller than in prior years, with the largest billion, CDH China Holding’s sale of Meihua recent decision to increase the cash reserve
one being Hopu Investment Management’s Biotechnology Group for $848 million and from 3% to 3.75% will reduce liquidity in the
$790 million purchase of a 20% stake in the $285 million sale of a majority position banking system as well as increase the cost
China Mengniu Dairy — markedly smaller in Hejian Technology by NIF SMBC Ventures. of borrowing from banks. Should this not
than 2008’s largest transaction: Arcapita China’s largest IPOs of 2009 were Yingde be sufcient, the RBI may consider further
Bank’s $2 billion acquisition of Honiton Gases Group, Kaisa Group Holdings and measures, including hikes in benchmark
Energy Holdings. Other large transactions PCD Stores, with proceeds of $470 million, interest rates, which would increase the cost
included WL Ross & Co.’s stake in China $445 million and $434 million, respectively.
70%
67% 69% PE interest in infrastructure sectors should
56%
59% continue, while strong growth should
60%
56% 48% 50% spark interest in consumer products and
50% 45% 45%
48% services, nance, health care, education
40% 31%
and green technologies, the last driven by
35% 32%
28%
30% the government’s focus on cutting carbon
20% 20%
25%
17% emissions.
16%
10% 6%
0% 0%
0%
3% 0% PE rms exited relatively few Indian
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 companies last year, with just four trade
nia China Brazil sales and two IPOs. Adani Power raised
Source: Dealogic
$626 billion in its initial offering, and DB
>
>
>
>
>>
>> >
>>
>
>
> >> X> Corp. — a professional services rm — raised
China or Brazil.
$82 million. Only one trade sale, the
disposition of an 8% stake in Shriram City
of credit and thus curtail the increase in Unlike China and Brazil, which have Union Finance by an investor group led by
demand and ination. witnessed an increase in acquisitions by local ChrysCapital of Mauritius, disclosed the
PE rms, India attracts a greater proportion value, $25 million.
Moody’s believes the new budget bodes well
of foreign PE rms. 3i, Baring Private Equity,
for India’s sovereign rating. When combined Looking ahead, India should continue to be
HSBC Private Equity, Standard Chartered
with a rebounding economy, a stronger a growth market, with minority investments
Private Equity and Citigroup Private
rupee and a well-timed exit from scal the norm. However, buyouts, currently
Equity were active last year. Its legal and
stimuli, the proposed measures could reduce approximately 5% of all transactions
governance systems have long attracted PE
India’s debt to 70% of GDP in the next two to involving Indian targets, may gain
investors from around the world.
three years, down from the current 78%. acceptance longer term. Exits should pick up
According to Dealogic, last year, PE rms over the next few years, as rms look to take
Unlike China, which faces structural change
invested $1 billion in India, a decline from prots on investments made between 2004
as it shifts from an export-driven to a
2008 levels when PE rms spent $5.5 and 2006. Regulation is likely to increase to
consumer-driven economy, India’s growth
billion. While the technology and business meet global investor demand for increased
has long been dependent on domestic
process outsourcing sectors have historically transparency, better risk management and
demand, even as exports have risen.
been PE’s main investment targets, only more sophisticated internal controls.
However, its major weakness has been
one of the 10 largest acquisitions last
infrastructure, with basic transportation, Since India’s banks largely avoided the credit
year — Future Capital Holdings’ $46 million
power grid and irrigation systems lagging freeze that plagued developed countries,
acquisition of Tikona Digital Networks —
behind those of China. In a welcome access to capital has not been a signicant
was in information technology, while six
move, the government plans to increase issue. In turning to PE, Indian companies are
of the top 10 involved infrastructure-
infrastructure spending by INR1.74 trillion seeking partners who can bring them sector
related industries like transportation and
($38 billion) this year. knowledge, operating expertise and access
construction. These include the following
minority investments: 3i Group’s $161 to new markets and technologies.
million investment in Krishnapatnam Port
Fund-raising
Accounting and
tax structuring Valuations
Distressed
services Operations/
working capital
Japan
Michael Buxton
Japan Private Equity Leader
michael.buxton@jp.ey.com
+81 3 5401 6406
Oceania
Bryan Zekulich
Oceania Private Equity Leader
bryan.zekulich@au.ey.com
+61 2 9248 5833