1) Fundraising is increasingly getting hard
- Over 60 funds are on the road to raise an estimated $13B
- Challenges for LPs: bad returns, me-too funds, GP strategy overlaps, relationship fatigue, expensive valuations, team changes
- Recent examples: Warburg's Rajesh Khanna has decided to cease operations of Arka Capital given fundraising challenges
2) Early-stage VC investment has been attractive
- Drivers: e-commerce, mobile and media growth
- Key investments: Fashionandyou and Snapdeal, inMobile
- Key exits: Makemytrip (tech) and MedPlus (non-tech)
- Potential exit candidates: JustDial and One97
3) PIPE deals have been attractive
- Driver: Choppy capital markets have offered opportunities
- Examples: Dedicated focus on PIPE's by Westbridge
4) PE activity remains low in real estate
- Drivers of low growth: Rising real estate prices, and borrowing rates
- Exception: Blackstone's significant real estate investments
5) PE funds are becoming full service
- Deal Examples: KKR completed four debt transactions last year through it's NBFC arm
- Other examples: Goldman, Beacon and Everstone started Indostar Capital Finance Ltd
6) Mezzanine, safe structures emerge
- To avoid risks from economic cycles
- Variety of funds are using debt alongside equity, and are pushing for convertible and mezzanine structures
7) Governance challenges
- Highlight example: Lilliput issues with Bain Cap and TPG
- Other examples: KS Oils and Subhiksha
8) PE exits remain low
- Capital market constraints
- Funds are focusing towards portfolio companies to ensure 'saleable' business
9) Big shots leave to start new funds; examples:
- ICICI's Renuka started Multiples
- Sequoia partners started Westbridge
- Temasek's Manish Kejriwal and General Atlantic's Sunish Sharma started Kedaara Capital Advisors
- CVCI's Ajay Relan started CX Partners
10) Mid-market M&As popular bets
- Specially preferred by those promoters who are not fussy about control
- Good news for large funds, given the typical trend that smaller funds sell to large funds, and large funds sell to strategic buyers
Source: VCCircle
Friday, December 30, 2011
Friday, November 18, 2011
Importance of leverage in PE deals
It is not news to anyone that leverage is not a significant driver of returns (anymore) for buyouts. All of this is primarily driven by financial crisis and shortage of capital. From what I understand, as much as one-third of the return from private equity transactions stems from the use of leverage, and I wonder what that'll imply for the returns going forward.
As a first step, PE funds aren't able to raise as much debt for the new transactions. In past, 70% debt has been typical, and 80% wasn't uncommon either. I wonder what is this ratio going to settle down at. I heard a ratio of 40-50% somewhere - please don't quote me on that.
But as a second (and a bigger) step, what I realized today is that a number of PE funds now need to infuse additional equity in their portfolio firms. This is because banks aren't able to provide enough capital. In exact words of Guy Hands from Terra Firma - "Buyout firms will have to recapitalise their current portfolio companies by infusing fresh equity worth €450bn ($607bn) between 2013 and 2015, due to a dearth of financing from banks and limited partners."
The industry is clearly at a stage where it needs to fundamentally redefine itself.
As a first step, PE funds aren't able to raise as much debt for the new transactions. In past, 70% debt has been typical, and 80% wasn't uncommon either. I wonder what is this ratio going to settle down at. I heard a ratio of 40-50% somewhere - please don't quote me on that.
But as a second (and a bigger) step, what I realized today is that a number of PE funds now need to infuse additional equity in their portfolio firms. This is because banks aren't able to provide enough capital. In exact words of Guy Hands from Terra Firma - "Buyout firms will have to recapitalise their current portfolio companies by infusing fresh equity worth €450bn ($607bn) between 2013 and 2015, due to a dearth of financing from banks and limited partners."
The industry is clearly at a stage where it needs to fundamentally redefine itself.
Saturday, October 22, 2011
PE markets acting strange
There's a lot that's happening in the PE markets around the world. These markets, and the PE deals, are not the same anymore. Deal structures, traditional methods of making money (read: leverage), fundraising, returns, end-markets - everything is changing. I recently read two news articles, which made me think if the PE model is fundamentally evolving. Although its too early to conclude anything right now, a lot of interesting things are happening - things that may be important to keep in mind for future.
Blackstone recently made an all-equity 106M GBP deal to get minority stake in Leica, a German camera manufacturer. The fund is betting on the expected rapid growth and the potential to increase Leica's scale by 2 times over the next 3 years. Majority of this growth is expected to come from Asian markets. Wait a second - did we hear that it's an all-equity deal, and has something to do with the Asian (read: emerging) markets?
On another (a relatively sad) note, Bain Capital and its portfolio company - Lilliput - in India are not having a good time together. Apparently, they recently had a bitter legal spat. Bain Capital doesn't seem to have approved recent accounting statements of Lilliput. This has significant side-effects - such as casting doubts on Lilliput's proposed IPO, and postponing capital raising for Lilliput's near-term plans. In response to the dispute, Lilliput is noted to have been looking out for another private equity investor to buy out Bain Capital's (and TPG's) existing share in the company.
Wierd isn't it. Although the Asian markets are attractive, and private equity funds are ready to take uncommon (and even riskier) paths to explore those markets, operating in the Asian markets comes with its own set of challenges.
Blackstone recently made an all-equity 106M GBP deal to get minority stake in Leica, a German camera manufacturer. The fund is betting on the expected rapid growth and the potential to increase Leica's scale by 2 times over the next 3 years. Majority of this growth is expected to come from Asian markets. Wait a second - did we hear that it's an all-equity deal, and has something to do with the Asian (read: emerging) markets?
On another (a relatively sad) note, Bain Capital and its portfolio company - Lilliput - in India are not having a good time together. Apparently, they recently had a bitter legal spat. Bain Capital doesn't seem to have approved recent accounting statements of Lilliput. This has significant side-effects - such as casting doubts on Lilliput's proposed IPO, and postponing capital raising for Lilliput's near-term plans. In response to the dispute, Lilliput is noted to have been looking out for another private equity investor to buy out Bain Capital's (and TPG's) existing share in the company.
Wierd isn't it. Although the Asian markets are attractive, and private equity funds are ready to take uncommon (and even riskier) paths to explore those markets, operating in the Asian markets comes with its own set of challenges.
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