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Despite the region’s economic resilience, Asia saw a big fall in private equity fundraising during the downturn. Funds raised around US$28bn in Asia last year, down sharply from US$91bn the year before, according to Preqin, a research firm.
So far this year, Asia-focused fundraising has accounted for around 12% of the global total. However, funds currently on the road are seeking nearly US$120bn from investors in Asia, accounting for more than 20% of funds being raised around the world. Asia did not provide much of a buffer during the downturn, but private equity funds clearly see it as an engine of growth for the future.
Buyouts are getting bigger. Or so the latest data from Europe would suggest. The average value of private equity deals in the third quarter was nearly double the previous quarter, according to statistics compiled by the Centre for Management Buy-out Research. The total value of deals in the first nine months of this year, at €30.5bn, is already well above the €18.2bn recorded in the whole of last year. Still, this latest resurgence doesn’t bring the industry back to anywhere near the heady volumes, values and multiples seen during the mid-2000s boom.
Conditions remain challenging for private equity firms. For funds that closed in the second quarter of 2010, US$41bn was raised, down from US$92bn in the same quarter last year and US$195bn in the second quarter for 2008, according to Preqin, a research firm. And as this blog has addressed before, the effort required to raise even these more modest sums is rising; the average time it takes to close a fund now stands at nearly 20 months.
A “robust” recovery is underway for private equity in emerging markets, according to an industry group. The Emerging Markets Private Equity Association notes that buyouts in developing markets reached US$13bn in the first half of this year, up from US$8bn at the same time last year. The rise was driven mainly by activity in China, India and Latin America.
Fundraising is also ahead of last year, with some US$11bn raised in the first six months of 2010, a 22% increase on the previous year. Although investments remain modest in relation to other emerging regions, fundraising in sub-Saharan Africa in the first six months of 2010 surpassed the total raised in the whole of 2009.
Although not in the news as much as before, sovereign wealth funds have “retained their collective significance in the world of institutional investors,” according to a new report from Preqin, a data provider.
State-controlled funds now boast US$3.59trn in assets under management, up 11% from the previous year. This is encouraging for hedge fund and private equity managers, as sovereign funds’ general lack of liabilities gives them more leeway to invest in “riskier, less liquid and alternative investments,” Preqin notes. As the risk appetite of other investors wanes, this presents a potentially vital source of funds to an alternative-investment industry that’s feeling the squeeze.
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In search of higher returns, investors are boosting their bets on private equity in Brazil.
In a recent survey of investors, Brazil took the top spot as the emerging market where the most new private equity money will flow this year. In addition to foreign firms, the country’s fast-growing private pension funds are also getting in on the act, having recently been granted more scope to invest in riskier assets.
The country’s attractive economic growth story is given additional lustre by the large investments the country will make to revamp its infrastructure ahead of the football World Cup in 2014 and the Summer Olympics two years later. International investors are also keen on taking part in the exploitation of huge new oil and gas discoveries.
Read more at Financial Services Briefing: “Southern charm” (April 21st)
In purchasing a US$1.9bn portfolio of investments from Bank of America, AXA Private Equity closed “one of the largest secondary private equity transactions in history,” it said today. The deal came only a few days after the French group took over funds worth US$718m from Natixis in a similar “secondary” deal.
The market for secondary buyouts is a rare bright spot in the private equity industry. According to Preqin, a data provider, the value of such buyouts in the first quarter of this year, US$7bn, surpassed the total for the whole of 2009 (US$5.1bn). AXA’s deals will boost these totals, as will a raft of other secondary buyouts announced recently.
Private equity firms sell portfolios to each other at a discount, suggesting that the need to boost liquidity is as pressing as the search for returns. Thankfully for sellers, the average bid from secondary buyers was 72% of net asset value in the second half of last year, up from only 40% in the first half, according to the latest data from Cogent Partners, an investment bank. The price paid by AXA for Bank of America’s portfolio was not disclosed.
Facing limited opportunities to exit investments via stockmarket listings or sales to trade buyers, private equity firms are looking to each other for help (at a price). As The Economist put it recently, “if you are looking for a way out, don’t forget the way you came in.”
To balance out yesterday’s gloomy post about private equity, a new report from Ernst & Young strikes a decidedly more cheery tone about the industry. The consultancy lauds private equity’s “resilience”, notes improving quarterly trends beginning in late 2009, and talks of “new horizons” in 2010.
The report is realistic about the prospects of private equity returning to the heady days of 2007. For one thing, the debt financing that fuelled mega-deals during the boom times is simply not available—a chart tracking the ever-shrinking size of deals in recent years is telling in this regard. For the foreseeable future, private equity firms will have to hope that it pays to think small.
Even after cutting the size of fund commitments, private equity firms are struggling to meet fundraising targets.
According to research firm Preqin, funds that closed in the first quarter of 2010 took, on average, just over 19 months to raise their desired funds, even longer than last year. At the same time, fundraising targets were slashed by an aggregate US$55bn during the quarter.
The amount ultimately raised in the first quarter, US$50bn, was up modestly on the previous quarter but well down from earlier quarters. The last time private equity firms raised so little over a six-month period was the second half of 2004.
With credit for leveraged buyouts still scarce, the private-equity balance of power remains with investors. In a report published earlier this month, Bain & Company, a consultancy, makes some predictions about private equity’s prospects “in a future devoid of free-flowing credit, multiple arbitrage and mega-deal opportunities.”
Before conditions improve, investors are looking to “strike while the iron is hot,” as one investor tells Bain, and “rebalance the relationship” with fund managers. On fees, investors think that they have the most leeway to negotiate on transaction and monitoring fees. In the words of another investor in the Bain report, this is the “most abused area” in private equity.
Transaction fees are charged when acquisitions are made by funds and monitoring fees are levied on portfolio companies for advisory services. In its latest survey of the US private equity industry, Dechert, a law firm, reckons that funds charge an average transaction fee of 1.1% of deal size and a monitoring fee of 1.4% of annual operating earnings. In addition to these fees, investors in Bain’s survey are also bullish on renegotiating the traditional annual management fee, suggesting that all expenses unrelated to the performance of funds are under review. How willing, or able, are fund managers to resist?
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