Private Equity In Q3 2011

Private Equity In Q3 2011

During the third quarter of 2011, activity within the private equity industry saw a decline across buyouts, exits and fundraising. The drop was largely caused by concerns about Europe’s debt crisis, a weak US economy, volatility in global markets, and a tightening of debt financing, according to recent Preqin reports. Preqin’s quarterly deal data show that a total of 674 private equity-backed buyouts were announced in Q3. While this number remained consistent with previous quarters, a lack of large deals meant the transactions generated an aggregate value of only $60.6bn. This represents a drop of 23 percent on the $78.7bn generated in the second quarter of 2011 – the high point of the post-Lehman era to date.

On a geographical basis, North America generated almost half of the aggregate deal value for the quarter, raising $29.9bn across 365 buyouts. Even so, this was a decline of 24 percent on the previous quarter. Buyouts conducted in Europe raised a combined $22.8bn during the third quarter, a 30 percent decrease from the 246 deals worth $32.3bn conducted in Q2. Meanwhile, in Asia and Rest of World, deals with an aggregate value of $8bn were announced, an increase of 11 percent on the $7.2bn of deals in the region during the second quarter.

In terms of exits, 254 deals were announced in the third quarter with a total value of $56.2bn – a 54 percent decrease from the record high of over $120bn during the second quarter. As with buyouts, this decline has been primarily due to a marked absence of exits valued at over $1bn, with only 12 in this range during Q3, and none over $5bn. Despite this slowdown in exits, Preqin points out that activity is still above the levels witnessed in late 2008 and 2009.

Almost three-quarters of the total number of deals made in Q3 were in the small-cap space less than $250m. Mid-cap deals valued between $250m and $999m accounted for 19 percent of total deal volume and 31 percent of the aggregate capital put to work. Although accounting for just 8 percent of deal volume during Q3, deals exceeding $1bn made up 56 percent of aggregate deal value, despite the slowdown in economies around the world.
Of the 17 deals made in Q3 valued at $1bn or more, the majority occurred in July, generating an aggregate $30bn. As market volatility returned and the European sovereign debt crisis became more problematic, large-cap deal activity slowed significantly towards the end of the quarter. Only two large-cap deals were announced in September, generating just over $12bn.
The $6.3bn acquisition of Kinetic Concepts, provider of treatments for wounds and tissue regeneration, was announced in July. Bought by a consortium comprising Apax Partners, CPP Investment Board and Public Sector Pension Investment Board, the takeover of San Antonio based Kinetic Concepts is the largest buyout in the post-Lehman era and was announced before the recent wave of market uncertainty.
In terms of sector activity, more deals were completed in the industrials sector during Q3 than in any other, accounting for 29 percent of volume and 16 percent of aggregate value. Business services accounted for 21 percent of total deal value, helped by CVC Capital Partners’ $2bn purchase of capital markets technology firm ConvergEx. Meanwhile, healthcare accounted for 18 percent of total deal value. This was due in large part to the two biggest buyouts of the quarter, both of which were public to private transactions: the $6.3bn Kinetic Concepts deal, which accounted for more than 50 percent of the total value of healthcare investments in Q3, and Blackstone‘s $3bn acquisition of medical data services provider Emdeon Inc, announced in August.
The information technology sector also attracted a significant amount of investment, with four of the top 10 deals announced during Q3 focused on this sector. The largest of these was the acquisition of web hosting company The Go Daddy Group Inc by KKR and Silver Lake for $2.25bn including debt, announced in July. The combined value of this deal and the buyouts of SunGard Higher Education by Hellman & Friedman, Blackboard by Providence Equity Partners, and the Alibaba Group by a consortium led by Silver Lake, had a cumulative value of more than $7bn – a significant proportion of the total $12bn invested in IT.
Breaking down the data by deal type reveals that the $31.2bn worth of leveraged buyouts contributed 52 percent of the total value of deals announced during Q3, down slightly on Q2’s 60 percent. The number of LBOs remained unchanged, accounting for 43 percent of all deal activity in both Q2 and Q3. Add-on deals accounted for 37 percent of all deals, up from 33 percent in the previous quarter. The share of public to private deal volume declined slightly from the previous quarter, although the aggregate value increased from 22 percent to 29 percent. Meanwhile, the volume of growth capital deals announced increased slightly from 12 percent in Q2 to 14 percent in Q3, and their aggregate value accounted for 6 percent of the total, compared to 4 percent in the previous quarter. Up to the third quarter of 2011, 257 secondary buyouts were announced with an aggregate value of $53.2bn. This surpasses the whole of 2010 when 251 secondary buyouts worth $52.6bn were announced. A closer look at secondary buyout activity during Q3, however, reveals a dip – the 87 announced deals valued at $16.6bn declined from 101 deals valued at $25bn in Q2. In contrast, secondary buyout figures for Q3 mark a 44 percent increase in value from Q1 2011, and constitute one of the strongest quarters for secondary buyouts in the post-Lehman landscape, surpassed only by Q2 2011 and Q3 2010. With private equity firms sitting on an estimated $400bn in dry powder, there is a significant amount of capital at their disposal for new deals. Furthermore, in a recent survey of 37 private equity firms, Preqin found that nearly half of respondents expect secondary buyouts to increase going forward. The prospects for fundraising, however, are less bright

During Q3, 97 private equity funds reached a final close, raising an aggregate $44.8bn which, compared to the $82.8bn raised by 175 funds in the previous quarter, was a significant drop. However, a further 109 funds held interim closes during Q3, securing commitments totalling $42.7bn towards their fundraising targets. A geographical look at fundraising activity shows that funds primarily focusing on North America raised the most capital, with 37 funds gaining a total of $22.5bn in commitments. The 28 funds targeting Europe raised an aggregate $11.3bn, while the 32 funds focused primarily on Asia and Rest of World generated a combined $11bn.

The 19 buyout funds that closed during Q3 contributed the most capital for the quarter, raising $14.4bn. Berkshire Fund VIII, which closed in July 2011, was particularly active in this arena, raising $4.5bn and exceeding its initial $4bn target. An aggregate $10.8bn was raised by 16 real estate funds while five distressed-focused funds secured $6.5bn – two-thirds of which was raised by the $4.4bn Centerbridge Capital Partners II fund.

As of October 2011, there were 1728 funds on the road seeking a combined $706bn, an increase on the 1676 funds on the road chasing $680bn during Q2 2011. Funds that closed in Q3 took an average of 17 months to reach their target, a slight improvement on the average of 20.4 months taken to raise funds closed in 2010.

To gain some insight into how the fundraising environment will play out in the near term, Preqin interviewed 120 limited partners on their plans for investing in private equity over the next 12 months. Of those questioned, 66 percent said they will be investing in the asset class during this period, leading Preqin to note that recent volatility in public markets has done little to deter investment in private equity funds.

However, the longer term outlook may be different. Helen Kenyon, senior manager at Preqin concluded that “although this is encouraging news for managers on the road, it is still important to note just how many firms are currently competing for investor commitments. 1728 funds are seeking capital at present, more than has been seen at any point in the past couple of years, and it is set to remain extremely difficult for managers to stand out in this crowded market.”

Selina Harrison, January 2012


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