why distinctive pe firms will flourish - ey...however, as our report demonstrates, pe is finding new...

Standing tall Why distinctive PE firms will flourish

Global private equity watch 2013

Contents

02 Creating firms of distinction

03 Head for the exit

04 Stand out from the crowd: diversification

10 The path ahead

11 PE reaches steady state

13 Fund-raising edges up

17 US leveraged sees record year, but Europe trails

18 High variation in activity at a regional level

19 Secondary buyouts a major source of new deals

22 Exits fall as IPOs decline and strategic buyers step back

23 Emerging markets

24 China 26 India 28 Latin America 30 Africa

34 Key contacts

01Standing tall: why distinctive PE firms will flourish Global private equity watch 2013

Executive summary

Creating firms of distinction

Private equity (PE) is no stranger to evolution. It has always sought to take advantage of the new opportunities change brings, on both macro and micro levels. PE has proven itself highly adaptable and able to spot and implement new ways of conducting business to stay ahead of the game. It’s just that now, the pressures PE firms face are greater than ever.

Competition in the PE industry is intensifying. Asset managers are moving into the PE space, and PE managers in emerging markets are building capacity and starting to expand geographically. And limited partners(LPs) seem to have more leverage themselves — whether they are taking tentative steps toward investing directly in companies or seeking to negotiate more favorable economic terms with general partners (GPs). At the same time, regulatory pressure has mounted as PE has come under the umbrella of alternative investment rules, making the business of raising capital and investing in private companies ever more complex.

However, as our report demonstrates, PE is finding new and creative ways of growing in stature. Firms are capitalizing on their key strengths, talent and knowledge base to achieve distinction in an increasingly crowded market. For some, this means diversification across asset classes and/or geographies to extend their reach into new territories. For others, standing out from the crowd means a relentless focus on being the best in class in their chosen strategy.

As we move into 2013, we are seeing an improvement in exit markets, with IPOs a particular focus. We cannot tell how long the window will remain open, but the evidence so far suggests that PE is making the most of the opportunity to sell high-quality portfolio companies on the public markets. As we note, there is still much more to be done to manage the exit overhang that exists in the industry, but current activity levels suggest some cause for optimism. We are confident that PE will find ways of working through this.

The most distinctive firms will be the ones that stand tall and flourish in what is becoming an evermore competitive and complex environment.

Jeff BunderGlobal Private Equity Leader

Diversify, stand out from the crowd, strive for excellence

Creating firms of distinction

02

PE is no stranger to evolution. It has always sought to take advantage of the new opportunities change brings, on both macro and micro levels: PE has historically proven itself highly adaptable and able to spot and implement new ways of conducting business to stay ahead of the game. It’s just that now, the pressures PE firms face are greater than ever before.

“ Achieve distinction in an increasingly crowded market.”


Indeed, our annual studies on how PE creates value demonstrate that PE is able to significantly improve areas such as productivity (up 6.9% on average across all European markets, according to our European study) and that 45% of PE returns in Europe for exits to the end of 2011 and 57% in the US to the end of 2010 were attributable to value creation.

Notwithstanding these impressive results, PE must focus still more on the companies it holds if returns as measured by the internal rate of return (IRR) are not to be dragged down. Exits need equal importance to new deals within PE firms. PE must also find new ways of incentivizing management teams — particularly those operating in companies acquired at high valuations in the boom times — to focus on the exit and therefore ensure that all possibilities are explored.

PE needs to at least double the current pace of exits. To achieve this in what is set to be a challenging market for the foreseeable future, firms will need to prepare portfolio companies early on for sale. This means continuing to add significant value to businesses but also putting in place well-defined exit strategies for each company individually and by casting the net ever wider in the search for potential buyers.

By way of example, in our latest European exit study we found that US and Asia-Pacific trade buyers accounted for around half of sales to strategics by PE in 2011, double the proportions seen in the 2005 to 2007 period. Many of these buyers, particularly in Asia-Pacific, need time and detailed information to get comfortable with acquisitions. If PE exit trends are to beat the wider M&A market, firms need to spend time understanding what individual buyers are looking for and tailor their companies’ equity story to appeal to them.

The world’s corporations are sitting on unprecedented levels of cash, estimated at up to €1 trillion in Europe and over US$1.8 trillion in the US, while Asia-Pacific has many companies, such as Honda, Mitsubishi, Samsung and China Mobile, with billions on their balance sheets. If PE is to persuade strategic acquirers to part with some of their cash, it must ensure that its portfolio is highly attractive to these potential buyers. In today’s uncertain world, corporations need compelling reasons for embarking on M&A strategies and a PE firm’s portfolio needs to provide them. Only by making existing portfolio companies a top priority will PE clear the backlog of exits that remains from the boom era.

Head for the exit

The biggest challenge for PE lies within firms’ own portfolios. PE is sitting on a record number of unrealized investments, many of them made during the boom years of 2005 to 2007. This is an aging portfolio that challenges the three- to five-year holding period that characterized the industry until the crisis. Over the last two years, many firms have taken the opportunity to refinance companies, giving them extra time to work with portfolio companies to generate value and pushing back the need for realization. However, the exit overhang now has to be an overarching priority for all firms.

To put this into perspective, we estimate there are now more than 700 companies in PE portfolios in Europe acquired since 2004 that had an entry enterprise value (EV) of €150 million or more. In the US, there are nearly 600 companies that had an entry EV of US$150 million or more awaiting realization. On an aggregated basis, the entry EV of these US investments is over US$700 billion.

Emerging markets face a similar issue. LPs are looking to increase their exposure to emerging markets, but there is growing evidence to suggest that many are now more cautious in committing capital to markets such as India and China, where fund-raising figures for 2012 were flat and down, respectively. A lack of consistent distributions is a contributing factor to the reduction in fund commitments.

Addressing this exit overhang will be far from easy. IPO markets globally have been subdued over the last year and continue to be so. Meanwhile, corporations, particularly in Europe, are taking a cautious stance when it comes to acquisitions — M&A values were down last year, and volumes remained flat. It remains to be seen if the large M&A deals announced in the first quarter of 2013 are a sign of a more sustained return to corporate M&A activity. Improving credit markets in the US, and more recently in Europe, may help as PE is more able to acquire companies through secondary buyouts. Some are also underperforming assets looking for an uptick in economic conditions in order to reach break even.

Whatever the prevailing market conditions, however, the impetus for an exit must come from the companies’ current owners. Part of the answer lies in seeking ways of reinvigorating businesses that were bought at the peak of the market. Many PE firms now have considerable operational resources that they can bring to bear on existing portfolio companies to improve performance.

04

Top five private equity firms by AUM

2008

48%

17%

35%

2009

49%

15%

36%

2010

45%

17%

37%

2011

38%

17%

45%

2012

33%

17%

50%

■ Real estate

■ Credit and marketable alternative

■ Private equity

Source: Preqin, 10-Ks

Diversification by business line is being led primarily by the publicly listed US-based firms as they seek to more closely align with investors’ desire for more consistent earnings. This is a trend that may well continue as more firms seek IPOs. Of the top 10 PE firms, 6 are now listed, with The Carlyle Group and Oaktree Capital having joined the ranks of the publicly quoted in 2012. The drivers behind this move are clear: firms are utilizing public currency to provide liquidity to aging founders and to attract or retain key professionals.

Stand out from the crowd: diversification

While clearing a backlog of portfolio companies is an important focus, PE firms are increasingly looking for new ways of leveraging their brands, talent and experience as active managers to stand head and shoulders above new competitors that are entering the market. We see three key means of achieving this.

1. Diversify the platform

One of the ways firms have been differentiating is by diversifying into new lines of business. Firms are increasingly leveraging their strong brands in PE by expanding into advisory and capital markets services and becoming multi-asset managers. The result is that large firms in particular derive less from the traditional leveraged buyout (LBO) model in terms of returns and capital-raising. In 2003, buyout assets accounted for 46% of all private equity capital. By 2012, this had dropped to 38%. The trend is even more pronounced at the largest firms. In 2008, PE assets accounted for 48% of total assets under management (AUM)at the top five firms; by 2012, this had fallen to just 33%. PE is aggressively positioning itself for a larger share of the alternatives capital.

Buyout dry powder as a % of all PE assets

– Buyout

– Non-buyout

20052006

20072008

20092011

20102012

20042003

54%56%

54%52%

56%54% 54%

57%

61% 62%

46%44%

46%48%

44%46% 46%

43%

39%38%

“ The diversification trend is driving new strategies for PE on their quest for growth as they look for ways to adapt to the market.”

Jeffrey Bunder, Global PE Leader


Yet it’s not just the very largest firms that are venturing into new areas in their quest for diversified income streams and to take advantage of the brand. Our analysis of the top 100 firms in the Private Equity International 300 ranking shows that the tier below has also started to branch out. Among the top 10–20 firms, 40% now have a debt or credit arm and 20% a real estate business. In the top 20–50, 37% have credit funds, 10% run hedge funds, 3% have fund of funds operations, 13% real estate and 10% now run some “other” kind of business line. Of these top 20–50, 43% have at least one line of business above and beyond traditional PE.

One key strategy for PE is therefore to act as a consolidator in the alternatives space. While many of the skills required to manage different alternative assets vary significantly, those with strong brands and a proven ability to gather capital from institutional investors will be the firms that can attract top talent in a variety of investment fields.

PE firms are also seeking to build up asset management capability to expand the franchise and active management expertise. LPs look to be reducing the number of relationships they have to manage — not just in their private equity portfolios, but in other asset classes, too. The larger, more diversified firms can provide investors with the option of committing to a suite of asset classes under one roof. While this is a trend that has been playing out over the last few years, there are recent signs that this is building momentum. The Carlyle Group, for example, has acquired all or part of three new business lines over the last few years: Vermillion Asset Management to build up capability in commodities; Claren Road Asset Management, a hedge fund business; and PE fund of funds AlpInvest. In 2010, TPG announced a joint venture with real estate manager Caruso Capital Partners and GSO/Blackstone acquired the Collateral Management Agreements for nine collateralized debt obligation (CDO) and collateralized loan obligation (CLO) funds from Callidus. And 3i and Fortress Investment Group have expanded into fixed income via acquisitions of the UK operations of Mizuho Investment Management and Logan Circle Partners, respectively. In addition, KKR last year bought hedge fund manager Prisma Capital Partners.

Percentage of PEI 300 firms operating in additional segments

Hedge fundsDebt/credit Real estateFund of funds Other

■ Top 10

■ Top 20–50

100%

80%

60%

40%

20%

0%

90%

70%

50%

30%

10%

Source: PEI 300

06

China is already the third-largest market in the world in terms of PE dry powder with US$47 billion available for investment, behind the UK with US$76 billion and the US (US$464 billion including all fund types, such as growth capital, venture, and real estate). Given that 10 years ago the Chinese PE market was still very much in its infancy, this growth is nothing short of remarkable.

PE is employing a variety of strategies to seize the opportunity that emerging markets have to offer, from raising local currency funds (TPG, The Blackstone Group, The Carlyle Group and Morgan Stanley have all raised renminbi (RMB) funds in China) to partnering with local funds to secure access to new deals and gain insights into the nuances of different market dynamics. Recent examples of the latter include, in Brazil, JP Morgan’s tie-up with Gávea Investimentos, The Blackstone Group’s 40% stake in Pátria Investimentos, and in China, the partnership involving The Carlyle Group, Prudential Financial and the Fosun Group.

Yet while the focus until recently was on seeking out opportunities in the largest economies — Brazil, India, China — PE is in the early stages of looking into new emerging markets that are starting to show increasing signs of promise.

Many newer markets to PE, such as Indonesia, Turkey, Colombia, Peru and Western and Eastern Africa, now exhibit many of the same dynamics at play in the more established and well-trodden emerging markets. They, too, have rapidly growing middle classes with increasing disposable incomes, more stable governments that are seeking to build out the infrastructure needed to develop their economies and that are becoming increasingly receptive to PE investments. Yet they do not suffer from the intense competition that markets such as China, India and Brazil currently display.

Firms that can act on opportunities in these fast-growing markets, while also mitigating the risks involved in investing in uncharted territory, will reap the kind of rewards open to true pioneers. We are already seeing increasing but limited activity across many markets in Latin America, Africa, Southeast Asia and Eastern Europe while many funds circle these new jurisdictions looking for evidence to support a more focused effort.

2. Diversify by geography

Yet the growth of AUM through the addition of new business lines is only one way of standing out from the crowd. PE is also leveraging its talent and active management expertise by capturing some of the world’s most compelling growth stories. It is increasing its geographic reach into new markets.

PE’s shift to global investing is not new. Over the last decade, and particularly since the onset of the financial crisis, PE managers have been looking for ways to expand as economies in the more developed markets have remained stalled. LPs, for their part, have also been seeking increased exposure to emerging markets. The result has been a rebalancing of the industry along more global lines.

While assets under management of the PEI 300 in both the US and Europe declined between 2010 and 2012, they have been rising in some of the key emerging markets over the same period, with the main beneficiaries being Asia-Pacific and South America and, to some extent, Africa. It’s a trend that is set to continue: a recent survey by the Emerging Markets Private Equity Association found that 75% of LPs expect their commitments to emerging markets to increase over the next two years, while only 26% said they would increase their exposure to developed markets over the same period.

In addition to providing investors with a choice of assets, the GPs’ relationship with LPs is evolving in other ways, too. While just 7% of LPs currently have separate accounts with PE fund managers, a recent Preqin study found that 35% would consider doing so in the future. Separate accounts, which are already commonplace in other asset classes, give large investors more control over their investments (in addition to fee reductions), allowing them to build out and tailor portfolios to meet their specific liquidity schedules and risk profile.

For PE fund managers, offering separate accounts gives them access to larger pools of capital than they might otherwise have with off-the-shelf fund products. Recent examples include New Jersey Division of Investment and CalPERS agreeing to separate accounts with The Blackstone Group worth US$1.8 billion and US$500 million, respectively, and the Texas Teacher Retirement System negotiating two separate accounts worth US$3 billion apiece with Apollo Global Management and KKR.


2012 PE investment in frontier markets (in US$ billions)

MENA

0.5

Sub-

Saha

ran

Africa

Latin

Am

erica

ex-B

razil

CEE &

CIS

Emer

ging A

sia

ex-C

hina

14

10

8

6

4

2

0

12

16

1.5 1.6

4.9

14.7

Source: EMPEA, Preqin

PEI 300 AUMs by manager region

North America

PEI 300 total AUM:

2010 — US$933b

2011 — US$930b

2012 — US$917b EMEIA

PEI 300 total AUM:

2010 — US$318b

2011 — US$300b

2012 — US$284b Asia-Pacific

PEI 300 total AUM:

2010 — US$38b

2011 — US$42b

2012 — US$72b

South America

PEI 300 total AUM:

2010 — US$6.6b

2011 — US$9.2b

2012 — US$15.4b

Source: PEI 300

75%of LPs plan to increase commitments to emerging markets

08

3. Strive for excellence in core markets

The third path open to PE firms is simply to stick to their knitting and execute PE as a single asset class. Those that opt for this must strive to be the very best in their chosen strategy.

As LPs increasingly have the choice of committing to firms with a variety of asset classes or a menu of geographies, firms that concentrate on a particular market, investment strategy or sector must provide compelling evidence that their focus can provide outstanding returns.

Over the years, many firms in the US, followed by those in Europe, have developed specialist sector or strategy expertise. There is evidence to suggest that many LPs are willing to support such firms where they see the specialist knowledge as providing a particular edge not just in sourcing deals, but also in adding value and sourcing good exit routes.

Firms that can demonstrate expertise in sectors of high demand, such as the oil and gas industry, or those that offer a unique perspective on markets that are experiencing rapid change, such as financial services, are achieving fund-raising success. In Europe recent examples include AnaCap Financial Partners and HitecVision and in the US Kayne Anderson Capital Advisors. Indeed, in the first half of 2012, 23 sector-specialist funds in the US raised over US$13 billion, according to Dow Jones LP Source, the strongest half year for this type of fund on record. This attests to the development of specialist funds, but also to strong LP appetite for them.

This trend toward specialization is also even starting to become apparent in some of the more developed emerging markets, where competition for deals has intensified over recent years. In our recent Asia-Pacific private equity outlook 2013 report, 87% of respondents said that sector specialization was important in the region, with 49% saying that it was “very important” in identifying the high-potential players in a given industry and in defining the right strategy for the business following investment. There are even some sector-focused funds emerging in the region: L Capital Asia, which is targeting brands, is seeking US$1 billion; BioVeda, a China-focused life sciences venture capital firm; and Tsing Capital, a Chinese cleantech venture capital firm.

2012 Dry powder amount by region (in US$ billions)

12

Latin

Am

erica

8

6

4

2

0

10

Emer

ging E

urop

e

MENA

Emer

ging A

sia

Source: Preqin

Indeed, firms located in frontier markets now have around US$21 billion in dry powder to fund new deals. The largest concentration of this is in emerging Asia, including Thailand, Indonesia, South Korea and Malaysia. Firms are, with increasing frequency, establishing offices in Singapore to use as a base to invest into Southeast Asia. These frontier markets are clearly top of mind among firms: our recent Capital Confidence Barometer found that emerging Asia is where most investors plan to increase their activity over the next 12 months. Also topping the list were Russia and Eastern Europe.

Cracking these markets will require a good deal of determination, courage and a highly discriminating strategy — only by finding the very best businesses to back and local partners can PE be successful. The growth inherent in many of these markets may forgive some mistakes, but PE will need to learn quickly what does and does not work in each economy. As a result, some international firms may choose to co-invest in these markets before striking out on their own, and others may hire in exceptional talent. The rest may well seek to acquire all or part of local firms or seek joint venture arrangements with them.


LPs are increasingly scrutinizing every aspect of a firm’s operations. They are looking for excellence in all areas, from deal sourcing to operational experience and high-quality networks that are likely to help with realizations. Past performance, while still important, has become less of an indication for them as to whether a firm will achieve outstanding returns in the future. They are seeking evidence of improvements made to companies during the downturn as a means of assessing how effective fund managers are at working their portfolios to achieve maximum performance.

While many generalist funds may struggle in this environment, those that can prove they are top quartile, have an experienced core team with a disciplined approach and, importantly, demonstrate recent

high-quality exits despite the more challenging M&A and IPO markets will attract capital. The current bifurcated fund-raising market, in which some funds raise with relative ease while others take many months to reach their target, is one manifestation of how discriminating LPs have become.

Meanwhile, new sources of capital are emerging around the world. As new LP bases in new markets open up, the fund-raising dynamic changes. Firms will need to take a more global approach to fund-raising. This will require expanded investor relations teams that spend even more time on the road than they currently do to build and foster relationships throughout the world.

“ PE’s agility has allowed firms to adapt to niche sectors with laser-sharp focus in order to understand the businesses they own and add value. ”

Michael Rogers, Global Deputy Sector Leader, Private Equity

10

In emerging markets, increased competition both from local and regional players as well as the global PE firms means that deal sourcing and buying well, enabling firms to achieve good, risk-adjusted returns, have become more challenging. Hence PE’s move toward the more uncharted territory of frontier markets. Again, this type of diversification is not without risk, and over time, some firms will retreat with their fingers burned.

Limited partners, such as sovereign wealth funds and some larger pension funds, are also increasingly seeking to invest directly in companies as a means of deploying large amounts of capital more efficiently with lower fees. Investors such as the Abu Dhabi Investment Authority have been building teams over recent years to effect this strategy. Others are increasingly seeking co-investment rights as a way to deploy capital side by side with PE funds.

As a result, only firms that can demonstrate outsized returns relying on a particular skill set, industry insight or in-built talent for investing will remain successful. And, as the first few months of 2013 show signs of a thawing IPO market and a pick-up in M&A, firms that can capitalize on increased activity levels to work through the exit overhang will flourish. So far, PE has shown itself more than equal to these new sources of competition. But it is highly likely there will be still more new entrants to the market. As a result, PE must continue to find new ways of differentiating itself, striving for excellence and standing tall in a crowded environment.

The path ahead

PE stands at an inflection point. With the worst of the crisis now behind them, firms must act decisively to ensure that they stand out from the crowd to potential portfolio companies, LPs and talented professionals looking for their next career move.

We are already seeing competition intensify within the alternative assets space. And as economies around the world start to stabilize, this will only increase. For example, there are large asset managers, such as BlackRock, building out capacity in PE and other alternative assets. These will give many of PE’s largest and most established names a run for their money. As we’ve outlined in this report, these PE firms are increasingly seeking to consolidate what is a highly fragmented alternatives space in a bid to attract investors, increase their market share and bring in experienced managers to create new platforms.

As a relatively new development, this strategy is not yet proven. The risks involved in such ambitious expansion are high. These firms will need to ensure that only the best people are recruited and the highest-quality systems are implemented internally. Lowered thresholds or deviation from a proven model in one area of the business can damage hard-earned brands in others. It’s only over time that we will be able to judge the success or otherwise of this type of diversification.


PE reaches steady state

Last year continued in the vein of 2011, with global economic growth slipping to 3.2% from 3.9% the previous year, according to the International Monetary Fund. Concerns about the Eurozone rumbled on and uncertainty prevailed about the outcome of the US elections, after which the political wrangling continued over the fiscal cliff. In addition, growth slowed in some of the key emerging markets, such as China, India and Brazil.

“ PE’s reputation for innovation and creativity have propelled the industry forward in times of adversity. PE funds are demonstrating that they continue to have what it takes to thrive and expand.”

12

Meanwhile, a slow M&A environment, particularly in the first half of 2012, meant that investments and exits closed the year down from 2011 figures, although the overall figures mask regional variations. New deals were up in the Americas, down slightly in Asia-Pacific and down significantly in the EMEA region. We would expect exits to improve over 2013 as PE’s dry powder increases to fund secondary buyouts. We may also see the pipeline of companies ready to go public unblock if stock market conditions continue to improve over the year. As an opportunistic and entrepreneurial investment model, PE has already demonstrated that it is able to take advantage of improving conditions where they arise — even if only temporarily. In 2013, we expect PE to seize the opportunity of available deal financing, particularly in the US, to fund new deals and exit existing portfolio companies. The macroeconomic picture will continue to be challenging through 2013, but PE firms that can source the right investment targets and support post-deal growth and value improvement should be able to generate traditional PE returns levels.

Against this somewhat sluggish backdrop, PE proved itself able to capitalize on opportunities where they arose while maintaining a relatively steady state in other areas. Global PE fund-raising was up 10% to the highest level seen since 2009, driven largely by the success of global funds in attracting commitments. As we enter 2013, there is a strong pipeline of funds on the road, which will boost PE’s current US$358 billion of uncalled commitments to fund new deal activity. Faced with the prospect of low interest rates, many investors are seeking opportunities to increase overall returns, and this plays to PE’s track record of delivering strong performance.

PE was also able to capitalize on the strong credit markets seen in 2012. Driven by continued central bank interventions, low interest rates enabled firms to refinance existing portfolio companies, chipping away at the refinancing wall and pushing back maturities. In the US, 2012 saw high-yield issuance hit a record high, and leveraged loans had their most active year since 2007. In Europe, refinancing activity jumped from £1.2 billion in 2011 to £6.6 billion in 2012.

Key PE statistics at a glance

2007 2008 2009 2010 2011 2012

PE funds closed 1,073 1,024 638 590 603 589

Committed capital US$610.9b US$630.5b US$285.1b US$253.3b US$256.6b US$282.3b

Announced PE deals 3,349 2,680 1,847 2,265 2,306 2,233

Announced PE deal value US$733.6b US$218.9b US$137.9b US$240.2b US$223.1b US$205.9b

Average PE deal equity component 30.87% 38.85% 45.51% 41.37% 37.95% 37.73%

PE-backed M&A exits US$303.0b US$140.4b US$69.0b US$223.0b US$231.2b US$197.9b

PE-backed IPOs US$58.4b US$10.8b US$16.8b US$34.8b US$38.5b US$22.2b

Sources: Preqin, through 31 December 2012; Dealogic — includes sponsored entry and exit deals and PE-backed IPOs — through 31 December 2012; S&P LCD, December 2012 release


Several large fund-raisings by global funds drove an uptick in average fund sizes

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 20112010 2012

Average PE fund sizes, 2005–2012 (in US$ millions)

Source: Preqin, December 2012; ROW and emerging markets includes Latin America, Africa, Australia and Asia-Pacific regions

Interestingly, many of the largest funds raised by PE houses were targeted outside the more traditional buyout space. The biggest fund raised in 2012 was Blackstone’s seventh real estate vehicle, which received commitments of US$13.3 billion. Oaktree Capital Management and Fortress Investment Group both raised significant distressed debt funds totaling US$5 billion and US$4.3 billion, respectively. The largest buyout fund raised in 2012 was Advent International Corporation’s Global Private Equity VII fund, which attracted US$10.8 billion of capital.

Fund-raising edges up

After a flat 2010 and 2011, the total raised by PE funds globally increased by 10% in 2012 to US$256 billion. This increase was driven in large part by a number of successful global fund-raisings. As a result, the average fund size increased to US$479 million in 2012, up from US$425 million in the previous year. PE firms raised a total of 589 vehicles in 2012.

Fund-raising grew 10% in 2012, yet remains well below boom-era highs

Annual global PE fund-raising,2005–2012 (in US$ billions)

■ Committed capital– Number of funds closed

749

9611,073 1,024

638590 603 589

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 20112010 2012


Largest funds closed in 2012 (in US$ billions)

Fund Type Size Closed

Blackstone Real Estate Partners VII Real estate 13.3 Q412

Advent International Corporation Global Private Equity VII Buyout 10.8 Q412

BC European Cap IX Buyout 8.6 Q112

Global Infrastructure Partners II Infrastructure 8.3 Q412

AXA Secondary Fund V Secondaries 7.1 Q212

Green Equity Investors VI Buyout 6.3 Q212

Coller International Partners VI Secondaries 5.5 Q312

Oaktree Opportunities Fund IX Distressed debt 5 Q312

Ares Corporate Opportunities Fund IV Buyout 4.7 Q312

Fortress Credit Opportunities Fund III Distressed debt 4.3 Q212

Source: Preqin, December 2012

14

Dry powder by region (in US$ billions)

■ Europe– ROW as a percentage of all buyout dry powder

$0

200

400

600

20052006

20072008

20092011

20102012

■ ROW■ North America

20042003

3%

5%

8%7%

9%10% 10%

12%

14%15%


$358bUS$358 billion in dry powder available, with Asia and the emerging markets making up an increased share

US$189bUS$116b

US$53b

■ US

■ Europe

■ Asia-Pacific and the rest of the world

However, funds in the US still hold the bulk of unspent commitments


This trend is in line with the fall seen in global M&A volume for 2012, which declined by 6% to 42,129. M&A value, meanwhile, remained constant, boosted by a number of large deals in the final quarter of 2012. Indeed, Q4 2012 saw the highest M&A value since Q4 2007. And while the value of deals withdrawn fell 55% over 2011 figures, the time taken to complete deals was the longest since 2005. From announcement to completion, deals took an average of 53 days, suggesting a higher degree of caution among buyers as global economic growth continued to stall.

Larger deals a dominant force in the market

Despite the overall fall in PE deal values for the year, the second half saw a significant and encouraging uptick, although primarily in the US. The value of new deals by PE firms increased 42% in H2 to US$120 billion from US$85 billion in H1 2012. Average deal values remained broadly stable, as did purchase price and debt multiples, both of which had been creeping back up over 2010 and 2011 following a sharp correction in the aftermath of the financial crisis.

Asia and emerging markets see rising percentage of PE dry powder

The global value of PE’s dry powder has fallen from its 2009 peak. However, firms still have significant uncalled commitments to fund new deal activity. At the end of 2012, PE firms had US$358 billion, a fall from the US$392 billion recorded at the same time in 2011.

Most of this resides in the US, where firms held US$189 billion, while in Europe, the figure was US$116 billion. Both of these figures have been in decline since 2009. However, dry powder in Asia-Pacific and the other emerging markets has been rising and last year stood at US$53 billion, up from US$49.1 billion in 2011. As a result, their share of available capital for investment as a percentage of the global total has increased further over the last year and now stands at 15%.

Lower activity against the backdrop of subdued M&A

PE investment activity levels declined in 2012, with the number of acquisitions falling 3% to 2,233 from the 2,306 announced in 2011. The value also dropped, by 8%, to US$205.9 billion from US$223 billion the previous year.

2000–12 PE acquisitions and valuations (in US$ billions)

■ Deal value

– Purchase price multiple

0

200

400

600

800

2005 2006 2007 2008 2009 20112010 2012

– Debt multiple

20042003200220012000

6.4x5.8x

6.4x 6.7x7.x

8.1x 8.x

9.3x8.7x

7.2x8.1x 8.4x 8.3x

4.2x 4.1x 4.x4.6x 4.8x

5.3x 5.4x6.2x

4.9x

4.x4.7x

5.2x 5.3x

Sources: Dealogic through 31 December 2012 — includes sponsor-backed acquisitions and excludes repurchases, spinoffs, splitoffs and add-ons; S&P LCD, December 2012 release. Purchase price multiple calculated using average purchase price divided by adjusted earnings before interest, taxes, deduction and amortization (EBITDA). Debt multiples calculated using average debt-to-adjusted EBITDA ratio for LBO transactions for companies with EBITDA greater than US$500m

16

Top PE deals announced in 2012 (in US$ billions)

Date announced PE buyer Target Industry Deal value

24 Feb 12 Riverstone Holdings, Apollo Global Management LLC EP Energy Corp. Oil and gas $7.2

18 Jul 12 BC Partners Ltd. Cequel Communications Holdings I Telecommunications $6.6

19 Nov 12 Terra Firma Capital Partners Ltd. Annington Homes Ltd. Real estate $5.1

30 Aug 12 Carlyle Group LP DuPont Performance Coatings Materials $4.9

25 Jul 12 Carlyle Group LP, BC Partners Ltd.Silver II Borrower SCA — Hamilton Sundstrand Industrials

Industrials $3.5

14 Aug 12 Carlyle Group LP Getty Images Inc. Professional services $3.3

13 Aug 12Carlyle Group LP, CDH China Holdings Management Co Ltd., CITIC Capital Holdings Ltd.

Focus Media Holding Ltd. (82.5329%)

Professional services $3.1

17 Feb 12Advent International Corporation, Goldman Sachs Capital Partners

TransUnion Corp. Financial services $3.0

5 Aug 12 Advent International CorporationAOT Bedding Super Holdings LLC (majority %)

Consumer products $3.0

5 Jun 12 Thomas H Lee Partners LP Party City Holdings Inc. Retail $2.7

Drilling down further into the figures, the analysis reveals that the 20 most active PE houses accounted for 13% of announced deals (both acquisitions and exits) and as much as 49% of value. The most active firm was The Carlyle Group, which announced 67 deals in total, with a value of US$35 billion. Of these, 4 appear in the top 10 deal rankings: the US$4.9 billion acquisition of DuPont Performance Coatings, the US$3.5 billion acquisition of Hamilton Sundstrand, the US$3.3 billion deal to buy Getty Images and the US$3.1 billion Focus Media deal. The latter of these, which Carlyle completed with China-based co-investors CDH China Holdings Management and CITIC Capital Holdings, demonstrates one of the approaches global firms are taking as they seek to access local deals in markets such as China: organizing club deals with locally based firms.

Other notable deals in 2012 include the US$7.2 billion acquisition of US-based EP Energy Corporation by Riverstone Holdings and Apollo Global Management and BC Partners’ deal to acquire US-based Cequel Communications Holdings for US$6.6 billion. The third-largest deal of the year was for a UK-based company: Terra Firma Capital Partners bought Annington Homes for US$5.1 billion.

Most active PE firms in 2012 (in US$ billions)

Firm Total value Deals

Carlyle Group LP 35.04 67

Goldman Sachs Capital Partners 29.89 31

Apollo Global Management LLC 18.26 16

KKR & Co. LP 15.88 40

Blackstone Group LP 14.90 36

CVC Capital Partners Ltd. 14.25 29

Advent International Corporation 13.77 24

Bain Capital Partners LLC 13.37 45

Permira Ltd. 12.92 12

Oaktree Capital Management LP 11.84 37

Sources: Dealogic through 31 December 2012 includes buy-side and sell-side transactions

Sources: Dealogic through 31 December 2012


Secondary deal value as a percentage of all PE acquisitions hit a new high in 2012

■ Leveraged loans

■ High yield

0

250

300

350

20052006

20072008

20092011

20102012

2004

150

200

100

50

US-sponsored leveraged loans and high-yield issuance, 2004–12 (US$ billions)

Source: S&P LCD, December 2012 release

CLO formation is a key enabler of PE financing. In 2009, the market was essentially dead, but has since recovered: 2012 volumes more than quadrupled the prior year’s

120

100

80

60

40

20

0

20062007

20082009

20112010

20122005

CLO formation 2005–12 (in US$ billions)

Source: S&P LCD, December 2012 release

US leveraged sees record year, but Europe trails

Underpinning much of this activity has been a strong credit market in the US. Continued central bank interventions kept interest rates low, leaving fixed income investors searching for higher yield by moving further out on the risk spectrum. In the US, financing is available for all types of deals, including refinancings — helping PE chip away at the refinancing wall and push maturities back — dividend recaps and new acquisitions.

Over the year to the end of December, total US-sponsored leveraged loan issuance reached a total of US$234 billion, the highest recorded since the boom times of 2006 and 2007. In addition, US high-yield bond issuance reached record levels. The sponsored high-yield market reached US$116.1 billion, outstripping the 2010 issuance figure of US$90.6 billion. While much of this was driven by PE’s need to refinance existing debt packages, the availability of debt capital also enabled many of the large transactions on the previous page.

Demand for credit investments came from an influx of yield-seeking investors, including CLOs, retail investors and hedge funds. CLO issuance exceeded US$454 billion in 2012, more than a 300% increase from 2011.

In Europe, the picture was markedly different. Last year, the credit markets experienced a significant decline as the crisis surrounding the Eurozone took its toll. Declining confidence in the region has increasingly moved investors away from assets at the riskier end of the spectrum; instead they prefer to invest in safer assets.

European senior loan volume in 2012 was €23.4 billion, a 30% decline from the €33.3 billion issued in 2011. However, PE in Europe still increased its refinancing activity considerably. In 2011, the total refinanced was £1.4 billion, but it reached £6.6 billion in 2012, according to figures from the Centre for Management Buy-Out Research.

18

High variation in activity at a regional level

The overall new deal figures also mask a significant difference in activity levels across regions, with EMEA witnessing a steep decline over the full year.

The Americas saw a modest increase in deal activity, with 1,083 deals executed in 2012, up from 1,005 in 2011. In value terms, PE acquisitions in the region were up by 4% from 2011 figures, with US$115.9 billion announced in 2012. The third quarter was most active, with US$39.8 billion in new deals recorded — the highest quarterly total since Q4 2010.

Global M&A activity by value and volume (in US$ billions)

■ Value – Volume

2000

27,079 25,35823,187 23,187

23,362

31,588

37,135

43,065 41,92137,207

41,85744,879

42,192

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1,000

4,000

5,000

3,000

2,000

Sources: Dealogic through 31 December 2012; excludes repurchases, spinoffs, splitoffs and add-ons

PE acquisitions by region (in US$ billions)

■■ ■

EMEA value

Asia-Pacific value

0

20

40

60

80

– Total number of deals

Q4Q3Q2Q1

Americas value

2009 2010 2011 2012

Q4Q3Q2Q1 Q4Q3Q2Q1 Q4Q3Q2Q1

459

498

458 459471

502

610557

596

524

638599

545596

564 578

Sources: Dealogic through 31 December 2012

Asia-Pacific, meanwhile, saw a modest 4% decline in deal activity over 2012, to US$32.6 billion. As with the Americas, the third quarter saw the most deals announced by value (US$14.6 billion).

However, the EMEA region saw a significant reduction in both value and volume terms over the previous year. In 2011, sponsors announced 935 deals valued at US$77.5 billion; in 2012, there were just 837 PE deals worth US$57.6 billion. This is a fall of 10% by volume and 26% by value. However, the value of deals in the final quarter of 2012 almost doubled from previous quarters to a total of US$20.1 billion. Several large deals accounted for this increase, including one of the largest deals of the year globally: Terra Firma Capital Partners’ US$5.1 billion investment in Annington Homes.


Secondary deal value as a percentage of all PE acquisitions hit a new high in 2012

0%

5%

10%

15%

20%

25%

30%

35%

20122011

20102009

20082007

20062005

20012002

20032004

2000

Source: Dealogic through 31 December 2012

Secondary buyouts a major source of new deals

Last year was the year of the secondary buyout. This kind of deal accounted for nearly a third of all PE acquisitions by value, the highest percentage since at least 2000. However, most of these deals were US-based. Sponsors announced US$39.8 billion of secondary buyouts involving US targets. This is more than three times the US$12.1 billion value announced in 2011.

The largest secondary buyout was the US$6.6 billion deal by BC Partners and the Canada Pension Plan Investment Board to acquire Cequel Communications. Goldman Sachs, Oaktree Capital Management and Quadrangle Group were the exiting sponsors. Other notable secondary buyouts include the US$3.3 billion Carlyle Group acquisition of Getty Images from Hellman & Friedman and the deal to acquire TransUnion Corporation for US$3 billion by Advent International Corporation and Goldman Sachs from Madison Dearborn Partners and Pritzker Group.

Notable PE secondaries in 2012 (in US$ billions)

Date announced Target Buyer Seller Deal value

18 Jul 12Cequel Communications Holdings I

BC Partners Ltd.Quadrangle Group LLC, Goldman Sachs Capital Partners, Oaktree Capital Management LP

$6.6

14 Aug 12 Getty Images Inc. Carlyle Group LP Hellman & Friedman LLC $3.3

17 Feb 12 TransUnion CorporationAdvent International Corporation, Goldman Sachs Capital Partners

Madison Dearborn Partners, Pritzker Group $3.0

5 Aug 12AOT Bedding Super Holdings LLC (majority %)

Advent International Corporation

Ares Management LLC, Teachers Private Capital $3.0

5 Jun 12 Party City Holdings Inc. Thomas H Lee Partners LPBerkshire Partners LLC, Advent International Corporation, Weston Presidio Capital

$2.7


20

Consumer goods, retail and services account for 37% of last year’s PE deals

PE deals Industrials 7%

Oil and gas 8%

Materials 8%

Consumer goods 14%

Retail 9%

Health care 8%

Services 14%

Telecom 8%

Utilities 2%

Financials 11%

Technology 11%

2012 increase Consumer goods, services and retail all active in 2012

PE acquisition by industry (in US$ billions)

■ 2011■ 2012

0

20

30

50

Indus

trials

Consu

mer

good

s

Health

care

Serv

ices

Telec

om

Finan

cials

Utilitie

s

Tech

nolog

y

Mater

ials

Oil and

gas

40

10

Retail



PE funds have outperformed every asset class over the last five years

Five-year asset class returns

-4%

-2%

0%

2%

4%

6%

MSCI E

mer

ging M

arke

ts

Russe

ll 2000

Manag

ed fu

ture

s

Privat

e equ

ity

Global

inves

tmen

t gra

de -

Barcla

ys gl

obal

aggr

egat

e

MSCI W

orld

Ex U

S

HFRI fu

nd of

fund

s

com

posit

e

Sources: Morgan Stanley US Investment Monthly Databook, December 2012; PE represented by Venture Economics all-PE index; represents a six-month reporting lag

Consumer-focused deals regain popularity

By sector, consumer-focused investments saw the some of the largest increases by value in 2012, largely as more positive economic news and rising consumer confidence became evident in the US. Together, consumer goods and consumer and professional services accounted for 28% of 2012 deal values/volumes. The sectors with the greatest year-over-year value gains were consumer goods, consumer and professional services, retail, and oil and gas services.

Technology activity declined in value terms, with fewer of the larger deals that characterized 2011 in evidence in 2012. The decline in financial/real estate services is mainly due to the fact that 2011 saw one particularly large deal: Blackstone’s US$9.4 billion acquisition of nearly 600 shopping malls from Centro Properties.

PE has performed well in a tough environment

PE has performed well in an exceptionally difficult climate. PE funds have outperformed many other asset classes over three- and five-year horizons, including most equity indices and alternative assets. However, it has underperformed many fixed income indices over the same period.

The Venture Economics all-PE index has returned 4.9% over the last five years, significantly higher than US and global equities, which have been highly volatile over the period since the crisis and have returns of 2% and -3.4%, respectively.

In addition, we find evidence that PE returns are marginally uncorrelated with most other asset classes: approximately 30% to 40% with equities, 30% with bonds and 40% with hedge funds.

PE returns remain marginally uncorrelated with most other asset classes. As a result, PE remains attractive for institutional investors seeking diversification.

Sachin Date EY Private Equity Leader Europe, the Middle East & Africa

22

Exits fall as IPOs decline and strategic buyers step back

PE exits proved harder to achieve in 2012 than 2011. Last year’s figures are down from the previous year, with a 7% decline in volume and a 23% fall in value, reaching a total of 967 worth US$220.1 billion.

Exits via IPO saw the largest fall in a year that proved difficult for companies looking to list regardless of their ownership structure. PE-backed IPOs were down 5% by volume to 110 and 42% by value to US$22.2 billion. As the figures suggest, there were few of the large exits via IPO that characterized the first half of 2011. The largest deal of 2012 was in Asia: IHH Healthcare’s US$2.1 billion listing in Singapore and Kuala Lumpur. Yet while the Asia-Pacific region was dominant in terms of IPO activity more generally in PE-backed deals, the Americas accounted for 74% of total IPO proceeds. One European IPO made it into the top five PE-backed IPOs with the US$1.2 billion listing of Ziggo by Cinven and Warburg Pincus.

PE exits by M&A and IPO, 2000–12 (in US$ billions)

■ PE M&A exits — Global

■ PE IPOs — Global

400

350

300

250

200

150

100

50

0

20002001

20022003

20042005

20062007

20082009

20102011

2012

Source: Dealogic 31 December 2012

Exits via M&A also registered a drop of 8% by volume and 14% by value to 857 valued at a total of US$197.9 billion. The decline in trade sales was driven by an overall slowdown of acquisitions by strategics, although it’s interesting to note that the more general decline of 25% was rather higher, suggesting that PE portfolios hold greater attractions for buyers than the wider business population.

Meanwhile, exits via secondary buyout had a strong year, increasing by 28% during 2012.

Notable exits included KKR’s disposal of a partial stake (45%) of its investment in Alliance Boots Holdings to Walgreens in a deal valued at nearly US$7 billion.

Despite the 2012 decline in value and volume, PE firms are optimistic about the outlook for exits. In a recent Capital Confidence Barometer survey, 43% of PE executives said they expected to increase their exit activity over the next 12 months.


Emerging markets

Emerging markets retain their allure for PE

Last year saw falling economic growth in some of the key emerging markets, such as China, India and Brazil. However, PE appetite for emerging markets (EMs) continues unabated. The prospect of strong long-term GDP growth, driven by rising consumer demand, increasing and young populations, and a rising middle class, is a highly attractive one for sponsors. In addition, PE penetration in EMs remains low by developed market standards despite the strong capital flows toward some of the main markets. This leaves plenty of room for growth and opportunity in many countries and regions.

Even where 2012 saw slower growth, the longer-term outlook is somewhat stronger, with most EMs expected to achieve GDP growth rates well in excess of the developed markets of the US and Europe. This clearly provides some highly attractive deal opportunities for PE funds, which are increasingly looking to the BRICs and beyond for new investments.

Emerging markets represented 17% of the total invested by PE firms in the first nine months of 2012, according to Emerging Markets Private Equity Association (EMPEA) data. EMPEA’s figures also show increased interest among LPs in capturing the growth story of EMs: funds targeting EMs attracted US$40.3 billion, or 20%, of global PE commitments for the full year of 2012, the largest share to date.

Private equity penetration in the emerging markets is a fraction of the developed markets …

United

King

dom

India

China

Turk

ey

Sub-

Saha

ran A

frica

Brazil

Russia

United

Stat

es

Sout

h Kor

ea

MENA

1.2

PE penetration in select markets (GDP/average 2011–12 PE investment)

1.0

0.8

0.6

0.4

0.2

0

Source: EMPEA

… while growth rates are significantly higher

9%

United

King

dom

India

China

Turk

ey

Sub-

Saha

ran A

frica

Brazil

Russia

United

Stat

es

2010–15 expected yearly GDP growth

Sout

h Kor

ea

MENA

7%

4%

3%

2%

1%

0%

6%

5%

8%

Source: EMPEA

24

China

Activity falls, but long-term thesis remains intact

China’s economy took a pause from its breakneck speed of economic growth in 2012. There was uncertainty around the effects of the leadership transition, the IPO markets slowed and talk of a bubble, particularly around the country’s real estate market, persisted. World Bank figures suggest that China’s GDP growth fell below 8% in 2012, significantly under the 9.3% recorded in 2011. However, the projections are that China will get back on track and that the market will achieve over 8% growth in 2013.

PE fund-raising activity also took a pause in 2012. Firms raised approximately US$22.8 billion over the year, a little below the US$28.5 billion raised in the full year of 2011. Closings were strong in the first and third quarters of the year, with the latter period experiencing a significant jump in RMB-denominated funds. Indeed, RMB funds closed the year accounting for two-thirds of funds raised. Q1 saw US$8.3 billion committed by investors and Q3 saw US$6.9 billion. Yet even despite the slowdown in fund-raising, firms continue to have significant reserves of dry powder to deploy in the Chinese market.

Both China-based and global funds saw some significant fund-raisings. The largest local fund was the CITIC Private Equity Fund III,

which attracted RMB12 billion (US$1.9 billion), closely followed by the Shanghai Cultural Industrial Fund with RMB10 billion (US$1.6 billion) in commitments. Among the global players to have achieved fund-raisings were Mount Kellett Capital Partners II, which achieved US$4 billion, and Bain Capital Asia (US$2.3 billion).

New deal activity was down in China in 2012. PE firms announced US$12.6 billion of transactions in 2012, a significant drop from the US$20 billion announced in the same period of 2011. One possible explanation for this is the slowdown in China’s IPO market, making pre-IPO deal opportunities less attractive for investors. However, going forward, the decline in public market valuations may well provide a new deal source for PE investors, which may seek to pursue public-to-private opportunities. Some such deals have already been announced over the course of 2012, including the US$3.7 billion delisting of Focus Media. Other notable deals announced in 2012 in China include the US$740.3 million acquisition of Suning Appliance Co. by Hony Capital, and CVC Capital Partners’ acquisition of Hong Kong Broadband Network, valued at US$643.7 million.

While last year’s deal activity declined, the longer- term prospects seem brighter. In our Asia-Pacific private equity outlook 2013 report, 91% respondents said they expected PE deals to increase in 2013, with nearly half believing the pickup would be significant. Well over 90% operating in Greater China also said that acquisitions would be their most important goal over the coming 12 months.

Exits in China have proved to be more challenging for PE as the IPO markets remain volatile globally. In 2012, the value of new global issuance was down 25% from 2011. Yet declining overall valuations are also having an impact. While many of the global players and well-established local firms have developed value-creation strategies, some in the market have relied heavily on multiple expansion. If the downward movement in valuations persists, many of these investments may prove difficult to exit profitably.

China PE transactions, 2010–12

Q4Q3Q2Q12010 2011 2012

Q4Q3Q2Q1 Q4Q3Q2Q1

■■■ Value (US$ billions) – Number of deals

8

6

4

2

0

230

155169133

143

191170

136

79949385

Source: Thomson Reuters


China fund-raising, 2011–12 (in US$ millions)

Fund Vintage Type Final size (m)

Top RMB funds CITIC Private Equity Fund III 2011 Growth RMB12,000

Shanghai Cultural Industrial Fund 2012 Growth RMB10,000

Fang Fund 2012 Early stage RMB5,000

CITIC Mezzanine Fund 2011 Mezzanine RMB5,000

New Horizon Capital China Fund II 2012 Growth RMB4,000

Top US$ funds

Mount Kellett Capital Partners II 2012 Special situation US$4,000

Bain Capital Asia II 2012 Buyout US$2,300

Axiom Asia III 2012 Fund of funds US$1,150

CapitaMalls China Development Fund III 2012 Real estate US$1,000

Pantheon Asia Fund VI 2011 Fund of funds US$647

Top RMB and US$ funds closed in 2012

0

6,000

8,000

12,000

2,000

4,000

10,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q40

6,000

8,000

12,000

2,000

4,000

10,000

0

6,000

8,000

12,000

Q1

2,000

4,000

Q2 Q3 Q4

10,000

2010 2011 2012

■ RMB funds

■ Non-RMB funds

Source: Preqin

26

India

headwinds in the form of a difficult exit environment, challenged fund-raising and declines in valuations (although the latter is starting to slow). India’s GDP growth is expected to climb, from the 5.5% estimated by the World Bank for 2012 to around 6% in 2013.

Indian deal activity in 2012 was lower than in 2011. Last year saw 415 PE deals announced totaling US$7.6 billion, a value decline of 21% from the previous year. While large-ticket deals have always been difficult to source in the Indian market, last year was markedly down. In 2012, 16 deals valued at US$100 million or more were announced to reach an aggregated total of US$3.1 billion, compared with US$4.4 billion across 23 deals in 2011. Leading the fall in large deals was the infrastructure sector, which registered only US$774 million in 2012, against US$2.3 billion in 2011. This has been caused by issues such as policy breakdown and a resulting lack of Government approvals as well as corruption allegations. One notable deal in the sector last year was Morgan Stanley’s greenfield investment in Continuum Energy valued at US$212 million.

Big-ticket transactions elude India

The Indian market faces dual market dynamics. This makes it a challenging environment for both local and global firms. Rupee depreciation and the Government’s support for PE and VC in India are clearly welcome developments. However, the industry faces

Top 20 deals in 2012

Rank TargetAmount (US$m)

Deal stake % Inv. month

Financing stage

Target sector Investor

1 Genpact Ltd. 1,000 30.0 August 2012 PIPE Technology Bain Capital and GIC

2 Embassy Property Developments 230 36.0 July 2012 Growth RHC Blackstone

3 Continuum Energy 212 NA June 2012Startup/ early stage

InfraMorgan Stanley Infrastructure Partners

4 Thomas Cook India 176 NA May 2012 Buyout Travel Fairbridge Capital

5 Future Capital Holdings 174 NA June 2012 Buyout FS Warburg Pincus

6 Ashoka Concessions 150 NA August 2012 Growth Infra Macquarie-SBI Infrastructure Fund

7 Jain Irrigation Systems 147 NA September 2012 PIPE AgricultureIFC and Mount Kellett Capital Partners

8 Prometheon Holdings UK (Cox & Kings) 138 NA August 2012 Growth Travel Citi Venture Capital International

9 Godrej Consumer Products 134 4.9 January 2012 PIPE RCP Temasek

10 Quality Care India 110 NA April 2012 Buyout Health care Advent International

11 Godrej Agrovet Ltd. 105 20.0 December 2012 Growth Agriculture Temasek Holdings

12 Fourcee Infrastructure Equipment 104 NA January 2012 Growth Logistics General Atlantic

13 International Tractors 101 12.5 October 2012 Growth Auto Blackstone

14 Flipkart Online Services 100 NA January 2012 Growth RCPAccel Partners and Tiger Global Management

15 RMZ Corp. 100 NA February 2012 Growth RHC Baring PE

16 Vasan HealthCare 100 NA March 2012 Growth Health care GIC

17 DM Healthcare 98 NA January 2012 Growth Health care Olympus Capital

18 Marico 96 4.5 April 20012 PIPE RCP GIC and Baring India

19 SIS India 91 26.0 August 2012 GrowthBusiness services

CX Advisors

20 Sheth Developers Pvt. Ltd., Mumbai Project 90 NA March 2012 Growth RHC Morgan Stanley Real Estate

Total of top 20 deals 3,456

Total of all 2012 deals 7,573

Source: VCCEdge and EY research


New commitments to Indian funds remained broadly stable in 2012, with US$3.9 billion raised. However, the number and value of fund-raising announcements fell from 47 in 2011 to 34 last year and from US$15.5 billion to US$9.8 billion, respectively. And while China’s fund-raising figures were boosted by some notable RMB fund-raisings last year, the lack of local LPs in the Indian market means that the country is more reliant on international LPs. Many of these are waiting for exits before committing to new funds and are taking a more cautious stance toward India as tax, regulatory and governance issues remain in a state of some flux.

Among those that achieved success in fund-raising during 2012 were ChrysCapital, which attracted US$510 million; Red Fort India’s second real estate fund, which closed on US$510 million; and AION Capital Fund, which announced a US$350 million final close in the year.

Exits saw a marginal increase in 2012, up to 113 announced from 91 in 2011. Secondary buyouts registered an increase of more than 50%, rising from 10 to 18 deals, while sales to strategics also rose from 24 to 30. Buybacks and PE-backed IPOs halved in 2012 compared with 2011. The largest exit of 2012 was The Carlyle Group’s sale of HDFC on the open market for US$1.1 billion. Also on the open market were Kotak Mahindra Bank, sold by Warburg Pincus for US$444 million, and ICICI Bank, exited by Temasek in a deal valued at US$298 million. The second largest deal of the year in India was a secondary buyout: General Atlantic Partners and Oak Hill Capital Partners sold Genpact for US$1 billion to Bain Capital. However, there remains a significant backlog of deals that still need to be realized: more than an estimated 2,300 over the next three to four years.

Despite some of the challenges the market faces, most notably in exits, many PE houses remain bullish about India as an investment destination. In our recent Private Equity Capital Confidence Barometer, 69% of executives said they expected to increase their activity in India over the next 12 months.

Of the other larger deals that were announced, some of the most significant were: Bain Capital and GIC’s PIPE deal in which they took a 30% stake in Genpact for US$1 billion, Blackstone’s growth equity investment of US$230 million in Embassy Property Developments, and Fairbridge Capital’s buyout of Thomas Cook India for US$176 million.

However, this drop in value should be viewed against the overall backdrop of declining IPO activity. Excluding the offer for sale by the Government in Government-owned companies, the IPO market has been slow, with just 24 new issues in 2012, compared with 39 in 2011. Most of these were small, raising median funds of less than US$5 million (versus the median PE transaction, which was double that). This suggests that, overall, PE activity held up in 2012 in what was clearly a difficult market.

In addition, overall deal volume was not substantially lower (446 in 2011) as early-stage and venture capital investments continued to be active, with deals valued at US$10 million or less accounting for nearly 40% of transactions by number. The median deal size for 2012 was US$10 million, a 10% decline on the median for 2011 (US$11 million).

Number and value of funds raised and announced (in US$ billions)

■ Announced

■ Raised

2010 2011 2012

13

2.1

43

15.5

3.9

9.8

3.9

0

5

10

15

20

25

47

34

1123

– Number of funds announced

– Number of funds raised

Only India specific funds/allocations and excludes global or regional funds which may have India as one of the focus geographies with no specific allocations

Source: VCCEdge and EY research

46%Top 20 deals account for 46% of the investment value during 2011 and 2012

28

Latin America

Armed with dry powder, firms are now focusing on new deals

As with China and India, 2012 was a year of slower growth for Latin America. After a 4% increase in GDP in 2011, last year it fell to under 3%. Brazil in particular slowed, with GDP growth around the 1% mark. This reduction was the result of falling exports and lower commodity prices as some of the region’s key trading partners curbed spending. However, the rise of the consumer continues unabated — the World Bank estimates that nearly 50 million people joined the ranks of the middle class in Latin America over the last 10 years — meaning that opportunities for PE remain highly promising.

After a strong 2011, which saw some notable fund-raisings by firms such as Gávea Investimentos, Vinci Partners and The Carlyle Group, 2012 was always going to be a quieter year as PE firms turned their attention to sourcing and executing deals. As a result, fund-raising for the region declined to US$4.9 billion in 2012 from US$15.2

Quarterly Latin America fund-raising, 2010—12 (in US$ billions)

Q4Q3Q2Q1

2010 2011 2012

Q4Q3Q2Q1 Q4Q3Q2Q10

5

6

7

8

2

3

4

1

Source: Preqin

billion in 2011. Of those that did raise capital, Victoria South American Partners II, which closed on US$850 million, and GTIS Brazil Real Estate Fund II, which attracted US$810 million, were among the largest.

Latin American PE firms now have a sizable reserve of dry powder to put to work. Firms focused on the region have nearly US$11 billion in capital, according to Preqin, meaning that it could be a further two years before many need to return to the market for more commitments. When they do venture out on the fund-raising trail, the prospects look good: a recent Latin America Venture Capital Association and Coller Capital survey found that 85% of LPs intended to maintain or increase their Latin American PE exposure.

Deal value picked up accordingly in 2012. PE firms announced US$4.5 billion of new acquisitions over the year, with a significant increase in the third quarter, boosted by the year’s largest deal: Brookfield Asset Management’s US$1.7 billion acquisition of Obrascon Huarte Lain Brasil, a toll road operator. The total value of deals for 2011 was just US$2.1 billion.

By sector, consumer, retail and technology were the most active, as PE firms capitalized on the growing disposable incomes in the region. These types of deal accounted for 63% of the number of deals announced. One of the largest was The Carlyle Group’s acquisition of furniture retailer Tok&Stok in a deal valued at US$346.4 million. Another was retail/wholesale business SBF Comercio de Produtas Esportivas, a US$220.6 million deal completed by GP Investimentos and Partners Group.


There were 14 exits by Latin American PE firms in 2012. Of these, six were sold to trade, five to other PE houses and three went public via IPO. The latter category dominated by value largely because of one listing: the US$1.7 billion IPO of Banco BTG Pactual, the largest since 2007. In Brazil, overall volume of IPO activity was down significantly from 2011. Over the year, there were just 4 IPOs, which raised US$2.6 billion, a reduction from the 11 seen in 2011, which raised an aggregate US$4.4 billion.

Secondary deals started to come through in 2012 as the PE industry in Brazil has started to mature. The year saw GP make two exits via secondary: the sale of restaurant chain Fogo de Chão Churrascaria to Thomas H. Lee Partners for US$400 million and that of Sascar Tecnologia e Segurança Automotiva to Empreendedor Brasil and JCR for an undisclosed amount.

Latin America deals, 2010—12 (in US$ billions)

Q4Q3Q2Q12010 2011 2012

Q4Q3Q2Q1 Q4Q3Q2Q1

■■■ Deal value

– Deal volume

0.0

2.0

3.0

4.0

5.0

29

1.0

0.5

2.5

3.5

4.5

1.5

24

1920

14

25

1817

12

25

2023


Announced deals 2012 (in US$ millions)

Company PE firm Deal value Date Sector

Obrascon Huarte Lain Brasil SA Brookfield Asset Management 1,700 6 August 2012 Infrastructure

Repsol Butano Chile Larrain Vial SA 529.52 24 July 2012 Oil and gas

Estok Comercio e Representacoes Ltda. The Carlyle Group 346.4 13 September 2012 Retail and wholesale

Leader Participacoes SA Banco BTG Pactual SA 335 28 May 2012 Retail and wholesale

Sociedad Concesionaria Vespucio Norte Express SA Brookfield Asset Management 289.5 2 July 2012 Real estate

SBF Comercio de Produtos Esportivos Ltda. GP Investments, Partners Group AG 220.6 8 November 2012 Retail and wholesale

Grupo Cruzeiro do Sul Educacional Actis Capital LLP 103 20 January 2012 Education

Despegar.com, Inc. Tiger Global Management LLC 92.5 4 April 2012 Professional firms and services

XP Investimentos CCTVM S.A. General Atlantic 201.2 5 December 2012 Banking & capital markets

Total Artefactos SA Linzor Capital Partners 99.7 21 December 2012 Retail and wholesale


63%Consumer products, retail and technology continue to be the most active sectors for deals in Latin America, accounting for 63% of the deals in 2012

30

Africa

Africa’s activity levels set to increase

Africa’s resilience to the economic turmoil seen elsewhere makes this region one to watch. Many African countries bucked the global trend of reduced economic expansion in 2012, with the continent showing an increase from 5.1% GDP growth in 2011 to 5.4% in 2012, according to IMF figures. Over the last decade, 6 African countries have been among the 10 fastest-growing economies in the world. Ethiopia, Mozambique, Tanzania, the Democratic Republic of the Congo, Ghana, Zambia and Nigeria are expected to be among the 10 fastest-growing countries over the coming 5 years. This, combined with increasing foreign direct investment flows, favorable

demographic trends and improved political stability in many African nations means that the continent is ripe for PE investment. Both global and local players have been increasingly active in Africa over recent years and look set to remain so.

After an active 2010 and 2011 for African PE fund- raising, 2012 was somewhat slower. However, given the relatively small size of the market, this was to be expected because the US$900 million fund close by Helios in 2011 boosted the numbers. In 2012, Africa-focused funds raised US$1.1 billion, compared with US$3.3 billion in 2011. No funds greater than US$300 million were raised in 2012. The largest was the Actis Africa Real Estate Fund 2, which attracted US$278 billion, followed by the RMB Westport Real Estate Development Fund, with US$250 million.

Nevertheless, the pipeline of funds coming to market remains strong. Ethos Private Equity recently announced the close of its Fund VI in January 2013, which raised US$800m. And there are at least eight funds currently on the road targeting US$500 million or more, with many of these likely to close in 2013. As these funds are closed successfully, the dry powder available for new investments in Africa will increase considerably, and we would expect to see a significant rise in deal activity over the coming years.

Selection of PE funds currently fund-raising for Africa (in US$ millions)

Vintage Name of the fund Fund managerTarget fund size

Latest interim close Fund type

2012 Pan African Infrastructure Development Fund II Harith 1,200 NA Infrastructure

2012 BTG Pactual Africa Fund BTG Pactual 1,000 NA Infrastructure

2012 African Development Partners II Development Partners International 500 NA Growth

2012 Frontier Resource Group I Frontier Resource Group 500 100 Natural resources

2012 Ivora Africa Property Fund Ivora Capital 500 NA Real estate

2012Convergence Partners Communications Infrastructure Fund

Convergence Partners 500 NA Infrastructure

2011 Vital Capital Fund I Vital Capital Investments 500 250 Growth

2012 Carlyle Sub-Saharan Africa Fund Carlyle Group 500 NA Buyout

Source: Preqin, EY research. Based on funds that have been announced and not yet reached a final close


0

25

30

35

15

20

10

5

20100

25

30

35

15

20

10

5

2011

Fund-raising in Africa and other emerging markets (in US$ billions)

■ Africa

■ China

■ India

■ Latin America

0

25

30

35

15

20

10

5

2012Jan-Sept 2012

Selection of PE funds raised for Africa in 2012 (Jan–Sept 2012) (in US$ millions)

Close date Name of the fund Fund manager Fund size

23 January 2013 Ethos Private Equity Fund VI Ethos Private Equity 800

9 October 2012 Actis Africa Real Estate Fund 2 Actis 278

9 August 2012 RMB Westport Real Estate Development Fund RMB Westport 250

30 March 2012 Vantage Capital Mezzanine II Vantage Risk Capital 232

28 February 2012 New Africa Mining Fund II Decorum Capital Partners 120

31 January 2012 Old Mutual Private Equity Secondary Fund Old Mutual Private Equity 83

Source: Preqin

32

Exits have remained flat in Africa over the last two to three years, averaging around 15 annually. Sales to strategics are the most popular exit route, and these often involve local or regional buyers. However, there are signs that multinationals are starting to look more closely at the region as they seek acquisitions that will enable them to capitalize on Africa’s strong growth prospects. Exits to other PE firms are also on the rise as the industry matures in Africa. IPOs remain a difficult exit route in the region because of the small size of exchanges outside South Africa, although this should improve over time.

Exits in 2012 included Actis, sale of Ghanaian real estate business Accra Mall, ECP’s sale of Anvil Mining to trade buyer MMG Malachite and Ethos, sale of Atio back to management.

In line with most other geographies, 2012 saw a decline in deal activity in Africa. The value of PE investment across the continent was US$1.2 billion, down from US$2.7 billion in 2011, although not far off the US$1.6 billion announced in 2010. The largest deal of the year was in Tanzania, where The Carlyle Group teamed up with Standard Chartered Private Equity and Pembani Remgro to acquire Export Trading Group in a US$284 million transaction. Other notable deals included Abraaj Capital and the International Finance Corporation’s US$250 million investment in Saham Finances in Morocco and Kerogen Capital’s investment in regional player NewAge (African Global Energy), which totaled US$125 million.

PE investments in Africa by value and volume (in US$ billions)

■ Value

– Volume

145

8983 81

71

0

1

2

3

4

5

2008 2009 2010 2011 2012

4.7

1.7 1.6

2.7

1.2

Source: EMPEA, Thomson Reuters

Africa

PE in Africa has returned almost double to investors what they might have achieved on the public markets.


Date Target company Value Country Sector Investor

November 2012 Export Trading Group 284 Tanzania Food and agriculture The Carlyle Group, Standard Chartered Private Equity and Pembani Remgro*

March 2012 Saham Finances Co. 250 Morocco Insurance International Finance Corporation and Abraaj Capital Ltd.**

January 2012 NewAge (African Global Energy) Limited 125 Sub-Saharan Africa Oil and gas Kerogen Capital

May 2012 Dashen Brewery PLC 90 Ethiopia Food and agriculture Deutsche Investitions, Duet Capital

January 2012 Kevro (Pty) Ltd. 70 South Africa Media and entertainment Ethos Private Equity

September 2012 Eland Oil and Gas 62 West Africa Oil and gasHelios Investment Partners, Solstice International Investments, Artemis Investment Management

May 2012 CAL Bank 39 Ghana Banking and capital markets DPI and other investors

May 2012 Golden Lay 24 Zambia Agriculture Phatisa

July 2012 Waco International, Ltd. NA South Africa Diversified industrial products Ethos Private Equity, RMB Ventures

Selection of PE investments in Africa in 2012 (in US$ millions)

Source: Thomson Reuters, EMPEA, Private Equity Africa

*Standard Chartered Private Equity invested US$74m on 17 January 2012, and Carlyle, Standard Chartered Private Equity and Pembani Remgro invested US$210m on 15 November 2012**Abraaj invested US$125m on 7 March 2012 and IFC invested US$125m on 12 March 2012

Company Exiting PE firm Country Sector Exit route Buyer name

Accra Mall Actis Ghana Real estate Strategic sale Atterbury, Sanlam

Anvil Mining ECP Democratic Republic of the Congo Extractive industries Strategic sale MMG Malachite Limited

Atio Ethos South Africa IT Management buyout Atio management buyback

Fidelity Supercare Services Group RMB Corvest South Africa Business services Strategic sale Compass Group

Fintech Investec South Africa Financial services Sale to PE firm RMB Corvest

Golden Lay Aureos Capital Zambia Agribusiness Sale to PE firm Phatisa (African Agriculture Fund)

MTN Nigeria African Capital Alliance Nigeria Telecommunications Strategic sale Sale to investment holding company

Petro Ivoire Cauris Management S.A. Côte d’Ivoire Power generation and distribution Sale to PE firm NA

Poulina Group Holding Actis Tunisia Business services NA NA

Pronto Readymix Capitalworks Equity Partners South Africa Industrials and

manufacturing Strategic sale Pretoria Portland Cement Company Limited

SAVCIO Actis, Ethos South Africa Engineering and construction Strategic sale Actom

Umeme Actis Uganda Power generation and distribution IPO Ugandan Stock Exchange

Selection of PE exits in 2012

Source: EY research

Key contacts

Jeff Bunder

Global Private Equity Leader [email protected] +1 212 773 2889

Michael Rogers

Global Deputy Sector Leader, Private Equity [email protected] +1 214 969 0675

For more information on EY’s Global Private Equity practice, visit

www.ey.com/privateequity

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