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Ride the hype, don’t buy it 5 Jul 2011
It's hard to prove there's a link between trends big LBOs and mid-market deals; and between the global, US and UK PE scenes. But global investment attitudes to PE do exist – and the different markets are responsive in similar ways. So a glance at the stats at the end of Q2 make for interesting reading, even if they're not UK specific.
Prequin reported this week that PE funds globally raised $11.2bn in Q2, up from $8.9bn in Q1 and $7.1bn in Q4 last year. Wow. The caveats? The bulk of the commitment was to US funds; and real estate is the dominant sector.
Still, new funds committed implies cash is recycling in the system - and the news that the volume and value of US venture-backed IPOs rose again in Q2 is also welcome. Twenty-two flotations accounted for $5.5bn - and although some are tainted by the "Web 2.0 bubble" tag, it means more money is likely to flow back to businesses looking for development capital for disruptive models. Remember, VC-backed IPOs numbered just 6 in 2008, 12 in 2009 and 75 for 2010. So YTD of 36 is good going.
The downside? Bloated warchests. The US private equity overhang - what they got limited partners to commit but haven't yet spent on buying businesses - stood at $376bn at the start of 2011. That's a lot of cash looking for a home, even with the froth around M&A.
But that might be a plus point for those of you hoping to get into a mid-market deal. In the absence of big leveraged deals, many firms are re-branding as mid-market players, keen to burn some of that dry powder. (OK, so in the US, "mid-market" means $200m to $999m, but the point is valid). And in Europe, says research from Coller Capital, small buyouts (sub-$200m) are even more popular than mid-market deals.
One general partner (GP) who runs the European arm of a big US PE firm told me last month that his funds were certainly looking at smaller deals and had switched their focus from mainly turnaround to development capital opportunities. The firm is active and because - even with the return of bank lending - debt leverage is still much lower than 2006/07, he needs sharp management with a compelling and well-worked growth story. Good news for commercial FDs, then.
So let the Americans build up a head of steam for PE as an asset class, touting the mega-fundraisings and ploughing cash into property. Then forget the hype and look out for interesting opportunities as European general partners get stuck into manageable deals with operationally driven growth opportunities.
Mind your language
The other trend worth picking up on is international M&A. The stats are amazing. Q1 2011 was the biggest quarter for UK companies buying abroad since the end of 2007 - a massive £18.3bn spent on foreign acquisition, compared to just £3.8bn in Q4 2010. (Note that UK acquisitions by UK companies remains in the doldrums...)
My aforementioned GP contact noted that there was certainly a feeling that these days it's hard to be a regional or even national player and have much credibility. A product or service that can go international is a huge plus. And that means either opening up or buying abroad.
(I recently attended an ICAEW event where former Kidde FD John Nicholas explained how the company painstakingly built relationships in Brazil to establish its presence in that huge market - but the decisive act was (years down the line) acquiring their key distributor in the country. Email me if you'd like to hear more.)
That's got to make multi-lingual management teams a big plus for PE investors. And for FDs, it means not just speaking the language, but also knowing how the financial culture, accounting rules, currencies (plus FX risk) and regulations work. That's not easy - but if you have the skills, get ready to be in demand.
Deals of the day
So, is there a bubble in tech? KKR doesn't think so - judging by its purchase of web hosting giant GoDaddy for $2.25bn. Actually, that's a bad example to cite, since domain name management and web hosting are pretty safe businesses even in the event of a bubble in tech valuations bursting. But it makes a nice contrast to the way the public markets lapped up shares in the IPO of "technically insolvent" web plugger Groupon. We'll mark that up as a win for PE...
Meanwhile, further proving that public shareholders tend to be less blessed with brains than PE folk, it seems 3i is facing calls for a share buyback programme rather than reinvesting capital in the portfolio. Let's just say accounting and fund management legend Terry Smith might be favouring CEO (and ex FD) Michael Queen on this one. And if you want to be FD of a PE backed business, you might, too…
Finally, check out the BVCA Portfolio Company Awards, just announced, to get a feel for what passes for a good deal these days. I'm delighted to say I'm having coffee this week with Jim Buckle, CFO/COO of LoveFilm which won the exit management team of the year gong. I'll ask him if he has any tips for would-be exiting FDs...
Web quickie
In the last two posts, we've flagged up some good PE and FD/FC resources on twitter and the web. Here's another one to add to the list of potential reads - remember, be selective and if you don't already, play with RSS feeds (using a dead simple tool like Google Reader) - it's http://www.financeblogs.co.uk/ which lists a bunch of sources in different categories. (Although there isn't one for private equity or accounting... yet!)