Private Equities

[helios]

Nothing mysterious about private equity ("PE").

Then, there is what I called the venture capitalists ("VC") that in addition to taking liquidity risks of private companies, they also take venture risks (whether the companies' business will be viable over time as they are not proven at the point of investment). VC business is essentially a number game. Usually 8 out of 10 companies will fail and the other remaining 2 companies need to generate at least 5-10X monies to yield a decent returns for the total portfolio risks. However to be fair (it is not just a pure number game), successful VCs usually have strong industry domains and the fund managers are usally ex-industrialists rather than ex-commercial or investment bankers. You will find ex-commercial and investment bankers mostly in late stage PEs than VCs.

meanwhile, there are corporate [specialised] brokers who will 'facilitate' the marriage between VC, SME companies and as well as, leverage on the Business Angel Funds (setup by IE Singapore).

yeah?

[winston]

From Ishak with thanks:-

Good time to invest in private equity
BT, 27 Aug 2008

It is during disruptive periods that PE performs best; and investments made in 2008 and 2009 could prove to be some of the most profitable vintages, says MARIO BIZZOZERO

PRIVATE equity (PE) has evolved from what was a minority spot typically among North American endowments, into a full-fledged alternative asset class - a trend driven by outperformance versus public markets.

As a result, high net-worth individuals (HNWIs) are increasingly diversifying their assets into alternative investments, including PE, as a way to improving the returns and diversifying the risk of their traditional equity and fixed income portfolios.

In general, investments in PE are appropriate for investors who are taking a medium to long-term view and are willing to accept illiquidity in return for potentially higher returns.

The main benefits of adding PE to a portfolio of traditional asset classes of stocks and bonds are the potential to enhance returns and increased diversification.

Over the long term, returns of private equity have shown to outperform public equities: this has been the case in the US and in Europe over the past 10 years where average private equity returns have outperformed public equities by about 400 basis points (bps).

That ought to be a good reason alone to be in the asset class and this gets significantly better by investing with top quartile managers who have outperformed by a much wider margin of approximately 2,000 bps annually.

However, the most important thing to remember about PE returns is that the reason people invest in PE is not because of the potential attractive returns but because they have concluded that the gap between what they can get by buying let's say an S&P 500 index and what they can get from a top quartile firm is so large that illiquidity and higher fees are worth it.

Typically, top quartile firms beat the S&P on average by 1,500-2,000 bps - and we think the gap is likely to exist in the future and remain at a minimum of 1,000 bps.

This begs the question: What are the key drivers of PE's outperformance over public equities? They are: access to legitimate 'inside information' before making an investment, high degree of control and influence over investments, and strong alignment of shareholder and management interests.

When evaluating the merits of making an investment, PE managers are generally afforded fuller access to company management and information. This type of access and information can prove quite valuable when determining a company valuation and the timing of making an investment. This greater level of disclosure potentially contributes to reducing risk in private equity investment.

For the degree of control over investments, PE managers usually acquire majority stakes in their portfolio companies and have the opportunity to influence a portfolio company's management and strategic direction.

Finally, PE managers do seek absolute returns and their traditional incentive structure, the carried interest (typically a 20 per cent performance fee), is highly geared towards achieving net cash returns to investors. There is, therefore, a strong alignment of interest between shareholders and management which is very much triggered on exit - which you do not have by investing in public equities.

What Investors should look out for

The wide dispersion of returns in private equity highlights the need for a professional approach to the selection of funds. In this regard, it is important for private banks to provide the 'best of breed' PE investments to their clients - where success depends on the bank's ability to identify and gain access to the best fund managers.

Since it is not possible for HNWIs to secure a diversified exposure to a variety of funds, bearing in mind the minimum commitment size to PE funds (usually in the range of US$10 million), these individuals will potentially be able to access PE investment opportunities via dedicated feeder vehicle structures which provide exposure to a few pre-selected top-tier PE managers with a proven track record at a much lower minimum investment level (usually US$250,000).

Theoretically, private banks will provide their clients the opportunity to build a diversified PE portfolio over time focused on a specific strategy (eg buyout, distressed, venture capital) and geography of the PE market. Since 2004, Deutsche Bank has structured eight PE offerings worth a combined US$3 billion raised from HNWIs globally, including a fifth from Asia.

The current market conditions are creating enormous potential investment opportunities in PE. It is during these disruptive periods when PE typically makes its best-performing investments; and investments made in 2008 and 2009 could prove to be some of the most profitable vintages. Given the market predicament, Deutsche Bank PWM's investment activity, manager due diligence and selection will focus on top-tier managers, targeted sectors and sources of return and ability to adapt.

On manager selection, it is best to avoid broad diversification as this is generally viewed as the enemy of high returns in PE. This applies to private banks - which should not be looking to build a broadly diversified PE portfolio given that it would at best generate average PE returns which are usually a few basis points above public equity returns.

For Deutsche PWM, we believe in building - through our PE investment programme of two to three PE products per annum - a portfolio of 25 to 30 top-tier PE managers investing across different industries, different regions (US, Europe, Asia) and different strategies (buyout, distressed and growth capital). As the performance gap between top and bottom quartile managers will remain significant, we believe that a concentrated portfolio of 25 to 30 premier managers built over 3-4 years offers the greatest opportunity for outperformance.

We also continue to see compelling PE investing opportunities in the following sectors:

(i) Distressed investing: similar to both the early 1990s and then the early 2000s, the current severe capital market dislocations will create compelling opportunities to invest in good companies which are available at significant discounted levels.

(ii) Asia: We continue to believe that the fundamentals within the Asia PE market are very attractive. The market has evolved and matured since the financial crisis of 1997 with larger control transactions becoming more usual and exit more commonplace. As macroeconomic investing in the region remains strong, PE is an excellent way through which one can potentially invest in the region's growth, particularly in comparison to the public markets.

(iii) Energy: Energy is an industry in transition and the current transformation is creating market inefficiencies and dislocations that require significant capital investments. We see compelling investing opportunities both in conventional energy as well as in renewable and alternative energy industries and believe that private equity firms are very well positioned to play an opportunistic role in the ongoing restructuring and growth of the conventional and renewable and alternative energy industries.

We believe that 'not all returns are created equal' from a risk-adjusted standpoint and it is therefore important to understand the sources of the equity value creation on which an investment relies. To achieve this, one really needs to dig down to sort out the source of returns.

In conclusion, we believe that an individual can potentially make money in PE in three ways: leverage, multiple expansion and operational improvements. We see little potential for multiple expansion going forward and the leverage scope will decline. However, the scope for operational improvement remains high across the globe. Our future investment activity will focus on PE managers with a proven track record in generating superior value from operational improvements across different economic cycles and not rely on the positive developments of the capital markets.

[financecaptain]

A lot of marketing talk given that the author is selling wealth management product.

Trying to pick among superior performing fund manangers is at best a concept or in theory. Even Warrant Buffet himself admitted that going forward it is a mistake to assume that the superior histrical return he achieved in the last 30 years is repeatable.

My experience tells me that PE performance correlates very little with fund manager and more often largely with vintage (just like wine in which year the grapes were harvested), sectors (just like wine what types of grapes and in which year they were harvested) and geographical locations (just like wine what types of grapes and where they were harvested).

For example, a VC fund with vintage between 1998 and 1999 is likely to outperform (in fact most of these funds returned all the shareholders' capital within 3 years with a lot of extra change) funds formed in 2000/2001 (in fact most of them actually tanked) because the internet boom began 2000 and went bust in 2001.

For example again, communications fund that was created in 2000/2001 would have tanked as the internet, independent telecom companies ("CLEC") and photonic bubbles bursted globally. What happened to our US$2 billion technopreneur fund launched by our government in 2000 when internet bubble was at its peak ? I have not heard much of it any more.

For example again, PE funds that invested in Australia and China since 2000 would have performed excellently. Maybe even better than US and European fund although traditionally US and Europe performed better. Australia, is due to the commodity boom (before that Australia was a sleepy economy helped by its tourist sector). China, is due to rapid econmic growth and the fact that the global capital markets (NASDAQ, LSE, AIM, SGX, HKSE) were beginning to value higher China stocks as its economy opens up and its corporate governance improves. On latter, maybe it is more due to the global fund managers are becoming more used to Chinese stocks and view them with less scepticism.

A few pit falls in PE Fund investing that was never highlighted :-

(1) High Management Fees.

Typically between 2-3% on "committed capital" in advance and 20% of profits as performance fee. What does that mean ? As PE cannot be fully invested at the time they are raised (unlike mutual fund; PE deal generations is over a period of time) fund managers may either call monies over time or 100% on day 1 and put them in fixed deposit until they are needed. Hence, when your capital is not working for you, you still need to pay 2-3% per annum. Your effective fee could be as high as 10% in the first few years. For example, you commit US$1 million and the monies are called periodically say only US$200k (20%) in first year. Since management fee is say 2%, you will be paying effectively about 2% X 1m / 200,000 = 10% in the first year. On top of that there is brokerage fee of up to 5%-7% payable by the fund and performance fee of 20% sharing with fund manager if the latter meet a certain hurdle rate for each investment (but no sharing of loss if any investment fails).

This means that the return generated by PE in each single investment has to be sufficient large to compensate the high management fees (in the initial years), distribution fees and performance fees for your PE fund return to be sufficient good. Achieving 20-30% p.a in each deal and if the average investment period is too short (say 1-2 years), the fund will not generate good returns.

When your fund reports to you IRR the next time, ask them whether it is net of all fund costs.

(2) Investment Pressure and Keen Competition

With so many PE funds out there all looking at similar themes (like what was mentioned in distressed assets, Asia and Energy) mean pricing of deals will suffer. For me, a superior PE manager is one that is able to secure deals with reasonable good rate of returns. In a nut shell it means good relationship/connection or perceived superior value add. It is common for fund mangers to pay up to 7% to deal brokers when market is hot to secure a deal and guess who pays for it ? It is common that large investment banks have PE arm. Guess who they employ ? Sons and daugthers of key politicians and business men.

If a PE funds is maturing and the fund is not fully invested, managers are usually highly pressured to make investments. It may not work to the advantage of investors.

(3) PE fund is highly illiquid. The life can be as long as 10 years.

My point is that PE is like any asset class such as mutual funds, stocks, bonds, real estate and cash. it should be treated like an asset class in your overall portfolio. Maybe higher weightage like as I agree with the author given the current economic environment (remember vintage is important) provided that your liquidity needs are well addressed. It is not magic.

[winston]

Private equity execs see US slowdown hitting Asia

HONG KONG, Sept 23 (Reuters) - The U.S. economic slowdown is hitting Asian companies and will make investing difficult across the region for at least the next year, private equity executives said at a conference on Tuesday.

"In a number of companies we have looked at, profit margins are contracting at least by half," said KY Tang, chairman of Asia-focused private equity firm Affinity Equity Partners.

Rising raw material prices that can't be passed on to customers will take their toll on Asian firms, the founder of Affinity said, speaking on a panel at the SuperReturn private equity conference in Hong Kong.

"The bigger problem is the U.S. economic slowdown," he added.

Tang and other private equity panelists noted that valuations were dropping. But the question they faced was how much further will share prices slide.

He also pointed to the difficulty of getting loans from banks.

"Financing is cheaper in Asia but it doesn't mean it's easy to get," he said.

Speaking on another panel, X.D. Yang, a managing director of Carlyle Group, said investing in Asia would be difficult for the next two to three years. But it also presents an opportunity for good companies to grow, he said.

Yang mentioned an investment Carlyle made in a hotel chain, a sector not immune from the economic downturn.

"They are seeing great acquisition opportunities. Nobody else has money, no access to bank credit, and no access to public markets. What we can do is give them $100 million to buy out everybody else and build a really big business."

He also referred to an investment that Carlyle made in a fibreglass company, which is trying to set up a joint venture in the Middle East.

"I think we're going to see that the best companies can emerge in these challenging times to become better companies."

[winston]

CLSA Capital builds war chest for Asia property

HONG KONG, Sept 23 (Reuters) - Private equity house CLSA Capital Partners is building a war chest to invest in property in Japan, China and India next year, expecting cheaper deals, and will pour more money into firms it sees as recession-proof.

Mosquito coils, ceiling fans and light switches were the type of "things you can touch" that CLSA Capital sought out as it supplied venture capital for Asian manufacturers, and its chairman, Richard Pyvis, said he wanted more of the same.

But the firm has about $100 million to spend on property, freed up by divestments last year, and is looking to raise more money for a region-wide property investment strategy.

"We've got a war chest but we're unlikely to deploy it until next year, until real estate prices settle down," Pyvis told a media briefing in Hong Kong. "I wouldn't want to be sitting on a long real estate portfolio right now."

Pyvis would not give details of planned funds, citing regulatory issues, but saw few difficulties in capital raising for long-term, closed-end funds despite the turmoil in financial markets.

He said one of CLSA Capital's open-ended funds, for investment in clean resources, had "one or two minor" redemptions, but that these had been off-set by new subscriptions.

CLSA Capital, which has about $2.5 billion under management, would look to buy old buildings and refurbish them in Japan, as well as build top-notch office blocks in the biggest cities in India and China.

"Japan is certainly going to be very interesting next year," Pyvis said. "As inflation comes into the equation, it will flow into real estate."

With banks scaling back on loans to the property sector, second-grade buildings in Tokyo have seen a drop in values, sending rental yields up by as much as 100 basis points in the last year.

In China, land prices have dropped thanks to government austerity measures, including a clampdown on lending to developers for land purchases and the introduction of various taxes to deter speculation. And Indian property prices have also fallen as much as 25 percent this year after a surge since 2005, because of overbuilding in some areas and a funding crunch for developers.

CLSA Capital, part of the Asian investment banking arm of French lender Credit Agricole (CAGR.PA: Quote, Profile, Research, Stock Buzz), would invest more in companies considered the most immune to a global economic slowdown, Pyvis said.

He cited past investments in a Chinese firm that made fire engines, in a manufacturer of eyedrops for conjunctivitis, and in an Indian firm that produced the oil for transformers used on the country's fast-growing power grid.

"There's no question we're seeing a slowdown, and there are going to be some sectors that are losers," he said. "So our investment rationale is very simple: the old economy, domestic growth and demand, things you can feel and touch."

Pyvis said he expected a CLSA Capital fund that provides mezzanine financing to flourish after a rise in the cost of debt and share market slides.

The fund had found it difficult to source deals, he said, but companies were now keen on mezzanine funding.

"Because there's been a great delineation in the prices of debt and equity, mezzanine is really coming into its own," he said.

[millionairemind]

Watch KKR and BlackRock to get an idea of how bad the credit situation has become..

KKR interim investment loss at $1.1bn
PHILADELPHIA, Sept 22 - Private equity firm Kohlberg Kravis Roberts & Co said it posted a total investment loss of $1.1bn in the first half of the year, compared with a year-ago profit.

KKR, which in July set plans to become publicly traded company by buying an affiliated fund, said the rocky financial markets and difficult access to cheap credit has made it difficult to do large buyouts.

”The lack of credit has materially hindered the initiation of new, large-sized transactions for our private equity segment and, together with declines in valuations of equity and debt securities, has adversely impacted our recent operating results,” KKR said in the filing.

KKR’s total investment loss for the first half of 2008 compared with a total investment profit of $3.4m in the first half of 2007, the filing said.

Its net loss for the first six months of 2008 totals $1.1m, compared with a profit of $667.4m, according to a filing with the US Securities and Exchange Commission.

KKR, which has made investments investments in numerous household names such as Toys R Us, mattress maker Sealy and asset manager Legg Mason Inc, said its fee income in the first half of the year was $135.3m, compared with $115.4m a year ago.

”If conditions further deteriorate, our business could be affected in different ways,” the private equity firm said.

”Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in net income relating to changes in market and economic conditions.”

Blackstone Group LP, which became the first big US private equity firm to go public when it listed in June 2007, just before the credit crunch, has seen its earnings hit and its shares drop sharply from their $31 listing price.

Blackstone shares closed at $16.24, down $1.48, on the New York Stock Exchange.

Founded in 1976, KKR rose to prominence during the debt-fueled leverage buyout (LBO) craze of the 1980s. The firm carried out its first $1bn LBO in 1984 and was involved in dozens of deals building up to the decade-defining 1988-1989 buyout of RJR Nabisco, which was immortalized in the best selling book ”Barbarians at the Gate: The Fall of RJR Nabisco.”

[winston]

Abu Dhabi Investment House eyes $1.5 bn China fund

TIANJIN, China, Sept 28 (Reuters) - Abu Dhabi Investment House, a Gulf Arab bank, is planning a $1.5 billion private equity fund to invest in real estate and manufacturing in China with a Chinese partner, a senior executive said on Sunday.

An agreement to launch the fund will be signed within two months, said Rashad Janahi, ADIH's managing director.

The Gulf firm is eyeing China at a time when a raft of tightening measures have chilled its real estate market, with sluggish transactions and falling prices in major cities. For a related story, double-click on [nPEK249255].

China's manufacturing sector, especially export-oriented and labour-intensive firms, are being hit hard by weakening demand from the United States as well as Europe.

However, Janahi said: "We find the correction is an opportunity."

Janahi, speaking to Reuters and a Chinese newspaper on the sidelines of the World Economic Forum in the northern Chinese port city of Tianjin, did not say how much ADIH would invest. Nor would he name the Chinese partner.

ADIH also aims to launch a $250 million real estate project next month in Marrakesh, one of Morocco's main tourist destinations, comprising villas, a convention centre and shopping malls, Janahi added.

The development will be part of a $7 billion plan to create style and design hubs in Abu Dhabi, Qatar, Tunisia and India, he said.

Emirates Business newspaper has reported that ADIH plans to launch a $2 billion project in Abu Dhabi by the end of this year, which will mark the three-year-old firm's entry into the real estate market in the United Arab Emirates.

[winston]

Lena, it looks like the BBs are quite optimistic about properties in Asia ...

===========================================

UPDATE 1-Merrill raises $2.65 bln fund for Asia property

HONG KONG, Oct 14 (Reuters) - Merrill Lynch has raised $2.65 billion to invest in Asian real estate at a time when several funds are hoping to snap up bargain assets as the region's property markets fall.

The U.S. bank said in a statement its Asian Real Estate Opportunity Fund would mainly invest in Japan, China, South Korea and India, but would also consider Southeast Asia and Australia.

While stocks have plummetted in the global financial crisis, property fund managers still believe they can lure investment into closed-end private equity funds that typically have a seven-year life span.

Merrill said investors in its Asia property fund included pension funds, endowments, foundations and private individuals from North America, Europe, the Middle East and Asia.

"We see exceptional opportunities in Asian real estate over the medium and longer term," said Tim Grady, head of Asia commercial real estate at Merrill Lynch.

Many funds specialising in Asian property have said the next year could be a good time to buy because property booms are turning to slowdowns, and even busts.

Citigroup, which has been trying to raise a multi-billion dollar fund, is keen to invest more in China and India. And JPMorgan told Reuters in August that its special opportunities group planned to invest more than $1 billion in Asian real estate over the next three years.

Morgan Stanley has also earmarked for China around a fifth of a $10 billion global property fund it is raising.

Bargain Chinese property projects will probably be up for grabs in coming months as developers scramble to survive falling home sales and a funding crunch.

When Beijing upped the ante in a fight against property speculation at the end of last year by ruling that buyers of second homes must pay 40 percent in equity, apartment sales and prices slid in the southern cities of Guangzhou and Shenzhen.

Developers, already squeezed by a land appreciation tax and a clampdown on bank lending, then found that capital market turmoil closed off share and debt issuance.

Many property firms have slashed prices by as much as 30 percent and are looking for foreign partners to complete projects.

The situation is similar in India, where a property boom fizzled into a price drop of a third this year in some cities, and analysts expect the same in 2009.

[winston]

REUTERS SUMMIT-Kuwait Finance to raise $600 mln for Asia buys

SINGAPORE, Oct 14 (Reuters) - Kuwait Finance House , the Gulf's third-largest lender, said on Tuesday it is aiming to raise $600 million in funds from Middle East investors in 2009 to buy ships, stakes in private firms and properties in Asia.

"Of course raising funds is not going to be easy, but this is the best time because if you have the money, then things are very cheap," said the Islamic bank's Singapore chief executive Lim Boh Soon at the Reuters Wealth Management Summit in Singapore, referring to current market turmoil.

Lim, who previously headed Vietcombank Fund Management, said his office's first $100 million Asia Growth Fund will be launched in the first quarter of 2009, followed by a $300 million property fund, and a $200 million ships fund.

Kuwait Finance House will seed 10 percent of each of the three Asia-focused funds with its own cash, and seek out investments from institutions, private banks, and ultra-rich individuals in the Gulf region, he said.

He added he saw opportunities across the region, noting particularly China and Southeast Asia.

[blid2def]

If all of us pool some money together, and we have a call in (non-toll free, mind) or SMS voting system to pick a bunch of stocks... does that become a private equity company too?

In fact, that sounds like a neat idea for a reality / game show.