Wednesday, January 20, 2010

Is Private Equity Staging a Comeback?

Before I delve into the latest topic, I received an important message from Ellie Brown of International Medical Corps:
Dear Leo,

International Medical Corps is a global, humanitarian, nonprofit organization, founded by volunteer doctors and nurses and dedicated to saving lives and relieving suffering through relief and development programs. Our emergency response team is in Haiti responding in force and I would like to ask for your help to get the word out to the readers of Pension Pulse.

There are still thousands of patients seeking treatment of which approximately 80% are in need of surgery and are running out of time - especially with the tremendous aftershocks still devastating this country.

The team is treating crush injuries, trauma, substantial wound care, shock and other critical cases with the few available supplies - And they're in it for the long haul. I would love your help spreading the word by blogging or tweeting about IMC's rescue efforts. We've put up a blogger friendly widget here on our site:

With the widget it's really easy to let your readers know that donating $10 to help the people of Haiti is as simple as sending a text message of the word "haiti" to 85944. If you have any questions just let me know and I will do my best to help you out. If you are able to post the widget or tweet, I would appreciate it if you could send me the link.

Thanks so much,


Ellie Brown
International Medical Corps

Please give whatever you can to this wonderful organization. I am going to post the widget on my blog as soon as I can, but please visit their site and see the great work they're doing.

Now, back to pensions. On Tuesday, Reuters reported that Ontario Teachers to acquire UK education provider:
One of Canada's largest pension administrators, the Ontario Teachers' Pension Plan, has agreed to buy a leading British provider of special needs education, for an undisclosed sum.

The private equity arm of Teachers, a pension plan with over C$87 billion ($84 billion) in net assets, agreed to buy Acorn Care and Education Ltd from British mid-market private equity firm Phoenix Equity Partners, the UK firm said in a statement.

Terms of the deal were not disclosed, but a report in Britain's Financial Times pegged its value at about $245 million. Teachers could not be reached for immediate comment.

The Canadian private equity industry, a global leader, is homing in on acquisition opportunities at home and abroad in the wake of the global financial crisis.

Experts say dealmaking in the private equity space will likely grow in 2010 as the spread between bid and asking prices narrows and targets come up for sale, with deep-pocketed pension funds like Teachers leading the way.

Acorn, which provides facilities for children with special needs, operates 10 schools across England and has grown through acquisition from just two schools in 2005.

It put itself up for sale in late 2009.

Teachers invests and administers the pensions of 284,000 active and retired teachers in Ontario and is one of Canada's largest investors.

The fund's private equity arm, which manages around C$10 billion and owns companies across the globe, has been actively seeking growth.

Its director, Erol Uzumeri, has in the past described the current investment climate as "the best investment opportunity of my lifetime."

Teachers announced plans in early January to buy AIG Inc's Canadian mortgage insurance business, with assets of C$274 million.

Reuters did report that Canadian private equity deals seen jumping in 2010:

Infrastructure renewal, government stimulus spending and the end of the traditional income trusts will drive Canadian private equity deals higher in 2010, according to a top industry player.

Gregory Smith, the president of the Canadian Venture Capital and Private Equity Association (CVCA), told Reuters that buyout firms could participate in as many as 30 percent more deals this year than last, helped in part by narrowing spreads between the buy and sell on potential deals.

"I think you'll see investment activity improve, enhanced investment activity," Smith said weeks ahead of the official release of CVCA figures for 2009 and for its 2010 outlook.

"The difference between January 2010 and January 2009 is that in January 2010 people actually have a view. People this year are prepared to make commitments based on their outlook."

There were some 100 deals done by private equity firms in 2009, slightly more than in 2008 but well below peak deal volume of 140 before the global economic crisis.

Canadian income trusts lose their favored tax status 2011, forcing them to reassess strategies from ones aimed at giving investors regular cash payments to ones focused on increasing production and growth.

Larger trusts, many of them oil and gas companies in Western Canada, will mostly opt to become corporations, but smaller companies in sectors like manufacturing and food distribution will have to seek other options.

"You probably need a market cap of C$500 million ($487 million) to effectively get the attention of investors and analysts and have sufficient liquidity," said Smith, who estimated 50 to 100 companies could fall into that category.

"Less than that and PE (private equity) provides a compelling alternative," he said.

Canada needs about C$200 billion to replace aging infrastructure, from schools and bridges to water and waste water facilities, and for electricity generation.

Smith said investments related to revamping infrastructure, and stimulus spending announced by the government during the recession, will form the focus of private equity buyout activity this year.

He pointed at recent financing activity in public markets as a sign of a strong market for fund-raising in 2010.

Onex Corp, one of Canada's best-known buyout companies, said early this month it boosted its stake in a new fund by 60 percent due to optimism about near-term investment opportunities.

Toronto-based Onex, with stakes in sectors as diverse as electronics, health care, cosmetics and movie theaters, said it would boost its stake in Onex Partners III to $800 million from $500 million, bringing the total fund size to $4.3 billion.

"That is indicative of how fundraising will come back in 2010," Smith said.

Smith said the outlook for venture capital was poor, predicting investment in the already struggling sector could plunge 30 percent in 2010, for another dismal year.

He predicted venture capital activity would be worth about C$1 billion in 2009, 30 percent less than in 2008, when it also had a poor showing.

Venture capital is risky in the best of times, so you can imagine how bad it is during these challenging times when banks are unwilling to lend past three year terms. But private equity is staging somewhat of a comeback, and it couldn't come soon enough.

Marietta Cauchi of Dow Jones Newswires reports that in the UK, buyouts hit a 25-year low as debt dries up:

The value of buyouts fell 72% in 2009 to hit a 25-year low as debt to fund deals remained elusive and sellers refused to drop prices, according to research released Tuesday.

Deal value was just GBP5.5 billion last year, compared with GBP19.7 billion in 2008 --a level not seen since 1995, said the Centre for Management Buyout Research, or CMBOR.

Meanwhile the volume and value of private equity-backed buyouts at 117 deals and GBP4.7 billion respectively were also the worst for a quarter of a century.

"Overall the end of this decade has seen very low levels of buyout activity compared to a far more buoyant private equity market in 2006-2007," said Christiian Marriott, Director at Barclays Private Equity which sponsors the research.

"In addition, of the total recorded deal value of GBP4.7 billion in 2009, GBP1.2 billion is related to one transaction--the buyout of NDS Group," he added. The U.K. digital pay-TV company was taken private by Permira in a transaction that left the private-equity firm with a 51% stake in the digital pay TV specialist. News Corp. (NWSA), which owns Dow Jones, the publisher of this newswire, holds the remaining 49%.

Large buyouts which require higher multiples of debt were the hardest hit and private equity buyers were forced to stump up significantly higher amounts of cash to fund acquisitions--the average equity contribution rose to 64% in 2009, from 48%, said CMBOR.

However there is evidence that confidence is returning to the buyout market as the value of buyouts backed by private equity firms in the fourth-quarter of 2009 rose 48% to GBP843 million, from GBP636 million the previous quarter, it added.

Further, confidence is also returning to public markets and a slew of initial public offerings by private equity-owned companies are coming to market including Blackstone Group's (BX) Travelport which earlier Tuesday confirmed plans to float its shares on the London Stock Exchange in a transaction valuing it at around $3 billion, London's largest IPO in nearly two years.

Finally, Steven Davidoff of the NYT's Dealbook reports on the evolving IPO market, circa 2010. Read this article carefully and note the conclusion:

Ultimately, while there are reasons for optimism, the numbers appear to show that the market for initial offerings is in transition. It would behoove market participants and regulators to take a hard look at market structure again, including these important issues, through a lens other than Sarbanes-Oxley.

I am very cautious on private equity and other private market assets like real estate and infrastructure. Given the macroeconomic uncertainty, I think pension funds should think long and hard before committing capital to private assets.

Ultimately, what matters most is whether or not we're heading into a protracted inflationary cycle or deflationary episode. If it's the latter, private markets are cooked.

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