2011 global private equity report

A force for growth

GLOBAL PRIVATE EQUITY REPORT 2011

Contents01 Key findings

04 Global picture

15 Western Europe

24 North America

33 Asia Pac

41 MENA

50 BRICS

62 Sample and methodology

64 Grant Thornton capabilities

IBC Grant Thornton contacts

GlossaryAFIC Association Française des Investisseurs en Capital (the French Private Equity Association)AIFMD Alternative Investment Fund Managers DirectiveAsia Pac Asia Pacific regionBRICS Brazil, Russia, India, China and South AfricaCEO Chief Executive OfficerDD Due diligenceESG Environmental, social and governanceFMCG Fast moving consumer goodsGCC Gulf Cooperation CouncilGDP Gross domestic productGP General partnerHR Human resourcesILPA The Institutional Limited Partners AssociationIPO Initial public offeringIR Investor relationsIT Information technologyLATAM Latin AmericaLP Limited partnerM&A Mergers and acquisitionsMENA Middle East and North Africa (including Turkey)N/A Not applicablePE Private equityPIPE Private investment in public equityPLC Public limited companySME Small and medium sized enterprisesSWF Sovereign wealth fundTMT Telecommunications, media and technologyUN PRI The United Nations-backed Principles for Responsible Investment Initiative

The views and opinions in this report expressed by those private equity survey respondents providing comments or quotesare theirs alone, and do not necessarily reflect the views and opinions of Grant Thornton International Ltd or any of itsmember firms.

Global private equity report 2011 1

Key findings

Three years in, the answer to thequestion of whether we are emergingfrom the global economic downturnor about to slip into a double-dip isstill to be answered.

Through this, private equity hasbeen asked to reflect on both its ownplace in the financial landscape and toface up to its often compromisedpublic perception. There are realchallenges here for the industry world-wide. In this report, we consider whatit means to undertake private equity inthe principal private equity marketsaround the globe – in terms of boththe challenges and opportunities – andfind an industry that, on many levels,is converging in terms of the way itgoes about business. However, whileoperating a private equity firm inLondon, Sao Paulo, New York,Shanghai or Sydney may requireincreasingly similar skills, functionsand approaches, the dynamics in thoseindividual markets driving thisconvergence often remain quitedifferent.

Over recent years, practitionerswithin the private equity industrymight have been forgiven for thinkingthey were facing something of aperfect storm, with the industry beingchallenged on all sides. Globally, thecompetitive environment within theindustry has become more intensewith quality dealflow at a premium,while simultaneously LimitedPartners (LPs) have becomeincreasingly demanding and vocal, andthe industry has also received greaterscrutiny from the broader public andregulators alike. Compounding theindustry’s own internal growing pains– which in some of the oldest privateequity markets has seen the validity ofthe whole model questioned – hasbeen one of the toughest macroeconomic environments in recenthistory, with portfolio companiessucking in time and resource as theyface up to the economic headwinds.

Three years ago, as the cloudsgathered with the tightening of thedebt markets, dealflow within themore developed private equitymarkets rapidly started to fall away.With the skies not having lightenedthat much in the intervening period,the consequent increased competitionfor quality deals has only beencompounded by the return of strategicbuyers, many of them keen to puthealthy balance sheets to work. In the emerging markets, the sense ofopportunity has seen something of agold rush mentality with an influx ofWestern private equity firms seekingnew areas of opportunity and therapid development of domestic privateequity industries also drivingcompetition. Across the world, then,there has been a shortage of qualityassets at reasonable prices for a privateequity industry which had beenaccelerating its accumulation of fundsover the course of the previous decadeand, as a consequence, has a pent upneed to deploy capital.

MARTIN GODDARDGLOBAL SERVICE LINE LEADER – TRANSACTIONSGRANT THORNTON INTERNATIONAL

2 Global private equity report 2011

inevitable concern. However, in thesemarkets too, private equity firmsreport the growing relevance ofadded-value approaches to portfoliomanagement. These markets are oftenstill characterised by growth capitalinvestments, with low levels ofleverage, meaning the focus too is onperformance improvement. As thesemarkets become more globalised,there is a recognition of the need to‘professionalise’ businesses, withprivate equity firms seeing a keyaspect of their involvement as theintroduction of internationalstandards of governance and ways ofdoing business in order to preparecompanies for eventual sale.

Generating quality exits andreturns has always been critical forprivate equity, but their significancehas, if anything, increased as holdingperiods have been stretched. Indeveloped markets, private equityfirms are starting to bump up againstthe investment hurdles of their fundcycles which need to be negotiatedeven before new funds can be raised.In some of the more emergingmarkets, the development of theindustry is still at an early stage, butthere is again a sense that theenthusiasm and promise on the backof which these markets have grownnow needs to come good in the formof demonstrable returns.

Just finding shelter and sitting outthe storm hasn’t been an option forprivate equity investors either. Withthe boom in investment activity in therun up to the downturn, privateequity portfolios had grownconsiderably and have often beendemanding of attention as theenvironment has become morechallenging and unpredictable.Creating ‘saleable’ businesses withenhanced valuations is the endgamefor private equity firms and, while theexit markets are showing some signsof life again, the torrid market for newinvestments of recent years has oftenbeen reflected in the exit markets too.

In the West, the challengingtrading environment has seen arenewed focus for private equity ingetting more closely involved inportfolio businesses – while leverageand multiple arbitrage might haveworked in a rising market, come thedownturn performance improvementis the order of the day. Many privateequity firms have therefore beenresponding by ‘tooling up’ andestablishing more formalised portfoliooperations teams to add more strategicinsight and even operational resourcealongside the financial planninginsight provided.

In many of the emerging markets,economic growth has been less of aconcern – GDP growth of seven oreight percent plus might be difficult toimagine in Europe or North America,but markets such as Brazil, India andChina have seen sustained growth andcontinue to drive forward eventhough the fear of over-heating is an

Historically, IPOs have often beena preferred exit route for privateequity firms, and they do remain aviable option in parts of Asia, forexample. However, this channel hasbeen all but closed for some time inEurope and the USA; overall publicinvestor sentiment and desire to investmight be the issue in some regions,but the perception of private equityhas also acted as a particular brake onthe IPO option in some countrieslargely due to perceived pricing issues.The return of strategic buyers mighthave added to the competitivepressure on the buy-side, but theyhave been a welcome sight on thehorizon from an exit perspective. Ifcorporates present the industry withsomething of a double-edged sword,so too does private equity’s own‘internal’ response to the need to bothput money to work and generatereturns – secondary buyouts. Whilemany practitioners themselves remainvery aware of the need to provide aclear rationale for such deals in orderto convince investors that they are notjust fuelling an internal market inprivate equity assets, they havebecome an established feature of thedeveloped markets. However, even inthe more growth-oriented emergingmarkets they are also gainingsignificance.


The more forensic approach beingtaken by institutional investors maybring with it a greater administrativeburden for private equity firms, but itcan be seen as an integral part of thelonger-term trajectory of an industrythat also includes being under theincreasingly watchful eye of theregulators – given added momentumby the pressures exerted by the macroenvironment, for sure, but somethingthat was already well underway. Whilesome may worry that the inherententrepreneurial spirit of the industry isunder threat, others will see scrutinyand regulation as proof of an industryinstitutionalising as it plays a higherprofile and more significant role ineconomies around the world.Undoubtedly in the West, as morehigh-profile businesses have comeunder private equity ownership,interest from the regulatoryauthorities, politicians and the publicin general has increased markedly, andsuch attention is certainly not alwaysfavourable; indeed it sometimes feelsas if it has become fashionable tocriticise and blame private equity atthe slightest opportunity, not leastbecause of the industry’s perceivedopacity. Elsewhere in the world, theindustry has more quickly gone downa similar path as the desire to promoteprivate equity and growth hassometimes battled with a lingeringscepticism about private equitypractices and a desire to protect aculture of family-owned business.

Maintaining a true course throughsuch choppy waters was always goingto present challenges for investing andexiting. But churn has also been afeature of the fundraising environmentas well. Institutional investors havethemselves faced considerablechallenges in recent times, not leastwithin their private equityprogrammes, which has led to asignificant period of reassessingallocation strategies and the balancebetween investing via re-ups (repeatinvestments with an existing investeemanager) and identifying newmanagers, potentially in new markets.

Private equity firms rarely fail anddisappear overnight, but the ability togenerate returns and raise new funds isthe life-support machine that, ifswitched off, will see firms die slowly.There is still a clear sense that therewill be winners and losers within theindustry. The Darwinian process atwork will undoubtedly ensure thelong-term vitality of the industry, butmany also believe that the increasedintensity this has brought to theselection and monitoring ofinvestments by LPs will continue tobe felt by private equity firms aroundthe world for a long time to come.

Troubled waters perhaps, and oneswhich no doubt will see morecasualties to come, but goodhelmsmanship and a solid crew (and abit of luck here or there) still leave thechance to navigate throughsuccessfully. There is a strong sensewithin the industry, whether indeveloped or emerging markets, that itis a time to focus on the fundamentalsof private equity investing – buildingrelationships, getting your hands dirtyalongside management at the coalface,focusing on performanceimprovement and proving the modelthrough good exits and goodcompany stewardship. This approachthen needs to be effectively andcontinuously communicated,providing a stream of concreteexamples to educate, and in the moredeveloped markets perhaps re-educate, an ever-expanding range ofstakeholders that the private equitymodel does work as a positive catalystfor change and value growth. Withoverall global economic sentimentmaking a shift in the wrong directionduring the latter stages of this researchproject, perhaps even dampeningsome of the signs of cautiousoptimism evident throughout thisreport, the need to support andencourage such catalysts of wealthcreation and economic development –a force for growth – is stronger nowthan ever before.

Global picture:Investment activity

4 Global private equity report 2011 – Global picture

FIGURE 1: SOURCES OF DEALFLOWPERCENTAGE

Western Europe North America Asia Pacific MENA BRICS Global result

Corporate divestments 20 15 23 20 8 17

Family/private 31 52 38 60 68 46

Secondary buyouts 47 30 23 20 10 30

Public markets 1 3 13 0 6 4

Other 1 0 3 0 8 3

“Assuming that the economy willmodestly improve, and notdeteriorate, there should be anincrease in both dealflow andcompleted deals. There’s a lot of pentup seller demand, and a lot of pentup buyer demand, and when thosetwo things coincide, deal flowincreases.”

UNITED STATES survey respondent

“With origination you need to be ableto get through every level of theprocess successfully. You need basichygiene factors, some differentiatingfactors and some compelling factors.On the hygiene factors, you needmoney, a fair price, good processesand well-oiled due diligence. Thedifferentiators are often linked to thepeople you have, your internationalnetworks, your understanding of thebusiness, your relationship withmanagement and your brand. Thewow factors tend to come down to theindividual leading the deal and themore personal factors.”

UNITED KINGDOM survey respondent

“Healthcare continues to be a keysector and we participate in itsconsolidation. Consumer and retailare very active, driven by largedomestic demand. Energy andinfrastructure are other sectors towatch, and ones where there hasbeen a lot of competition from localand foreign strategic partners.”

TURKEY survey respondent

• Firms in family and private ownership continue to be seen as the principal source of private equity dealflow.• Secondary buyouts are a feature of all markets, but are expected to be particularly prevalent in the developed European arena.• Respondents in the emerging markets of Asia Pac and BRICS have the most varied expectations in terms of deal sources.

Global private equity report 2011 – Global picture 5

While the macro headwinds are stillblowing around the world, there is asense within the global private equitycommunity of optimism. With cautionstill the watchword, approaching two-thirds of GPs included within thissurvey nevertheless believe thatinvestment activity will increase over thecoming year. It has been fashionable totalk of the rise of the East both insideand outside private equity, and althoughthere’s no doubt that the developedmarkets have suffered most, recent timeshave served as a reminder of theinterconnectedness and mutual relianceof global markets in the modern era.

Globally, the principal impacts of thedownturn have been to raise the spectreof an industry shake-out and to seelevels of quality dealflow reduced. Thereaction of the private equity industryhas been to align itself with the bestopportunities, wherever they may be.This flight to quality has resulted,inevitably, in increased levels ofcompetition which has also kept pricesfor the best assets high. The strength ofcorporate balance sheets has served tointensify this competitive environment.

FIGURE 2: MOST ACTIVE SECTORS

Consumer

Business services

Industrials and manufacturing

Healthcare

TMT

Financial services

Education

Natural resources

Energy

Infrastructure

Food and agribusiness

Real estate and construction

Software and IT services

FIGURE 3: INVESTMENT ACTIVITY BY REGIONPERCENTAGE

Western Europe 50 43 7

North America 63 30 7

Asia Pacific 66 27 7

MENA 62 38 0

BRICS 72 22 6

Global result 61 33 6

Increase Stay the same Decrease

FIGURE 4: SOURCES OF COMPETITION PERCENTAGE

Western Europe 47 11 38 0 3 1

North America 65 5 30 0 0 0

Asia Pacific 46 29 21 0 4 0

MENA 36 30 15 0 15 4

BRICS 40 32 18 5 3 2

Global result 48 20 26 1 4 1

Domestic Foreign/ Trade Public Family Otherprivate international buyers markets officesequity private equity

• Over 60% expect an increase.• Caution is most clearly expressed in Europe, where over 40% expect it to remain at current levels.• BRICS respondents are most positive, driven particularly by respondents in Brazil and India.

“It is significant that theconsumer sector is citedas the most active. Thiscould change if a doubledip recession does occur.”

STEVE BRADYPARTNER, HEAD OF TRANSACTION ADVISORYSERVICESGRANT THORNTON, US

The reawakening of the corporatecommunity, including the restructuringof larger businesses, means that thetraditional channels of private equitydealflow, namely family- and privately-owned businesses and corporatedivestments, are expected to remain thedominant sources. However,competition within the private equityindustry itself has helped promote anenvironment where secondarytransactions can take hold, with thisbeing an increasingly relevant feature ofboth the developed and more nascentmarkets.

In this new landscape, everythingpoints to the enhanced importance ofnetworks. In emerging markets, thismanifests itself in the need for localpresence and an understanding of localbusiness cultures. Whereas in moreestablished markets, rising competitionhas emphasised the need to self-originate, act fast and develop an angle.

“The two main sources of deals hereare entrepreneur-owned businesseswho are unable to access debtfunding any more, and the publicmarkets which are becominginteresting because of the stockmarket pricing.”

HONG KONG survey respondent

“It’s still a very competitive marketand unfortunately that means thatprice matters most when competingfor deals. In a hot market, it’s alwaysprice and terms, and then theprobability of close. How strongly youcan demonstrate that you candeliver.”



“We’re seeing good private equity dealflow and astrong pipeline. Entrepreneurs and families are comingout of hiding and are looking for finance to supportgrowth.”

ARNAUD LIMAL PARTNER, CORPORATE FINANCEGRANT THORNTON, FRANCE

FIGURE 5: KEY FACTORS IN IDENTIFYING AND WINNING DEALS

Corporate/entrepreneur networks

Advisory relationships

Sector expertise

Local presence

Track record/reputation

Price

Value add proposition

Access to capital

Deal process management

Management chemistry

Speed

Strategic differentiation

“I’d have to say that at this point intime we are more cautious thanoptimistic about the economy.”

CHINA survey respondent


Throughout the downturn, privateequity firms around the world havefound themselves having to focus moreon working with portfolio businesses inorder to help strengthen their positionsin an adverse climate. While the skillsmight have been honed in firefighting,they are now proving useful whereprivate equity firms are operating inlow-growth environments.

Given the low growth in somemarkets coupled with the lack of valueuplift available from leverage or multiplearbitrage, many private equity housesstress the importance of performanceenhancement as a value driver andhighlight their input in a number of keyareas in aiding this. In particular,strategic input is universally seen ascentral to the private equity offering.Around the world, the professionalisationof businesses as they develop underinstitutional ownership is somethingwhich private equity players can and docontribute to. Assistance withoperational systems, financial planningand human resources are oft-citedbenefits that private equity ownershipcan bring to companies.

Portfolio

“With the market as challenging as it is at the moment,adding value is the only way of really unlocking returns.Groups are finding they have to do more and work moreclosely with their portfolio management teams. Some gotcaught out before, and now there’s no going back – ifyou want to generate a return, you have to work for it.”

STEVE LUKENS HEAD OF ADVISORYGRANT THORNTON, US

FIGURE 6: AREAS OF HANDS-ON INVOLVEMENT

Strategic input

Financial planning

Human resources

M&A

Operational input

Professionalisation

Governance

Access to networks

Cost control

Internationalisation

Mentoring

Exit planning

Monitoring

Sector knowledge

Managing banking relationships

Access to capital

Kudos

Innovation


The likelihood that portfoliocompanies will be involved in M&Aactivity varies considerably by companyand GP. However, there is a generalsense that M&A levels will increase, withthis likely to include cross-borderacquisitions. While GPs are mindful ofthe challenges involved in making M&Awork, and indeed the additional culturaland complexity challenges posed bycross-border deals, factors such asrelatively cheap assets and opportunitiesto rapidly access growing markets areserving to encourage activity.

A further aspect of portfolio firmprofessionalisation in which privateequity is playing a role is in relation toEnvironmental, Social and Governance(“ESG”). Governance, in particular, is anarea of GP focus globally, both reflectingthe ‘best practice’ aspect of this approachas well as a recognition of increasingpressure from other stakeholders,including LPs and regulators.

“The value we bring is really aboutboosting growth initiatives, reinforcingcorporate governance andstrengthening management teams.”

SINGAPORE survey respondent

FIGURE 8: PORTFOLIO VALUE DRIVERSPERCENTAGE

Western Europe 17 39 32 3 9

North America 29 49 14 0 8

Asia Pacific 36 45 14 0 5

MENA 26 49 17 4 4

BRICS 35 46 13 2 4

Global result 27 44 20 2 7

Market Performance M&A Financial Multiplegrowth improvement growth engineering Arbitrage

FIGURE 9: ESGPERCENTAGE

Western Europe 41 41 13 5

North America 30 17 17 36

Asia Pacific 33 42 17 8

MENA 0 33 50 17

BRICS 34 38 22 6

Global result 32 35 20 13

Highly Growing Of some Notrelevant relevance relevance relevant

FIGURE 7: HANDS-ON PORTFOLIO INVOLVEMENTPERCENTAGE




MENA 36 64 0

BRICS 25 75 0




The pressure to exit for some is,however, matched by the pressure toinvest for others, namely those who havedry powder to deploy before the end ofagreed investment periods. These pushand pull drivers are the key factors in theincreasing trend towards secondarybuyout activity in recent times.

With what was an acceleratingpopulation of private equity backedbusinesses leading up to the downturn,coupled with the closing of most viableexit routes at the peak of the crisis, theprivate equity industry has found itselfwith rapidly aging portfolios and, withfundraising looming in many cases, aneed to achieve realisations. This isreflected in the fact that approachingtwo-thirds of GPs globally expect to seean increase in exit activity over thecoming year.

Inevitably, secondary buyoutsprovoke debate about their pros andcons. However, in those markets wherethey are an established feature, they haveprovided the lifeblood of the exit marketin an environment where IPOs havebeen very difficult to achieve. Inemerging markets, secondary buyoutsare yet to achieve the same position, butare increasingly seen.

Exit

FIGURE 10: EXIT ACTIVITYPERCENTAGE


Increase 69 53 74 79 50 63

Stay the same 18 40 13 14 36 26

Decrease 13 7 13 7 14 11

“Secondary buyouts work well here,but for different reasons. India is agrowth market dominated by minorityexpansion investments. As a naturalpart of this, the businesses backedneed larger capital injections as they grow and this presents goodopportunities for financial investorsup the scale.”

INDIA survey respondent

• Over 60% of respondents expect to see exit activity increase over the next 12 months.

“The global financial crisis resulted ina lengthening of the holding periodfor portfolio companies and typicallyhas led to a delay of 1-2 years in theinvestment cycle, which has beenused to fix and repair portfoliocompanies. Now that these two years have passed, portfoliocompanies are ripe for exit.”

SOUTH AFRICA survey respondent


The other saving grace for privateequity firms in realisation mode has beenthe appetite of trade buyers. Thishighlights the positive side of thedouble-edged sword for private equitythat is an acquisitive corporatecommunity.

Given the range of competing factorsat play, practitioners find it difficult toform a certain view as to the direction ofreturns for the industry. On the onehand, high entry prices, continuingglobal macro uncertainty and a shortageof debt have applied downwardpressure. On the other, improvingconfidence, a buoyant secondary marketand trade appetite keep optimism alive.Despite this, the prevailing view is thatthe coming period will see both winnersand losers and it will be this thatdetermines the shape of the industrygoing forward.

“There is optimism that exit activity will increase thisyear. The nature of private equity is such that investorsmeasure performance against a benchmark and this ishow LPs look at the world. GPs are engaged in anongoing process of understanding what’s important toLPs; ultimately this comes down to getting capital backand churning portfolios.”

HARISH HVPARTNER, HEAD OF TRANSACTION ADVISORY SERVICESGRANT THORNTON, INDIA

FIGURE 11: EXIT ROUTESPERCENTAGE


IPOs 1 9 5 16 37 14

Trade sale 54 56 62 68 43 54

Secondary buyout 45 35 33 16 20 32

FIGURE 12: AVERAGE RETURNSPERCENTAGE




MENA 29 42 29

BRICS 50 42 8




For private equity firms heading out tomarket, the fundraising environmentremains testing. Practitioners point tothe increasingly polarised nature of themarket in which high performers areable to raise, and even quite quickly,while others find it tough. This is linkedto a flight to quality by LPs which hasseen even some of the most longstandingrelationships reassessed.

Simultaneously, the industry has seena clear shift in the balance of the GP–LPrelationship, with investors increasinglywilling to demand more transparencyand seek demonstrable performance, notleast in newer private equity marketsthat have been sold hard in recent timesand now need to prove they can deliverthe promised returns. In developedmarkets, LPs have sought to find acollective voice with which to put theircase. In particular, initiatives such asILPA and the drive for a particularfund’s LPs to hold closed meetingswithout the GP present illustrate themore ‘forensic’ approach now beingemployed.

Fundraising

“I think it’s a competitive fundraisingenvironment. It’s better than it hasbeen but people still have exposure tobad funds. The denominator issue isdiminishing, as is the liquidity issue,but the overhang is still there andexisting managers are scrapping forre-ups.”


“Fundraising is pretty tough. A lot ofpeople flooded into the market andthere is possibly now a bit of a knee-jerk as people fear conditions are toooverheated.”

BRAZIL survey respondent

“The big problem for the local marketis the total lack of returns made.There just haven’t been enough ofthem and as a result there are somevery poorly-performing funds.”

VIETNAM survey respondent

“The fundraising environment is both positive andnegative. There are plenty of firms hitting the fundraisingjackpot and deservedly so, but equally there are manyplayers who are really struggling. Ultimately, painful asit is for some, it’s probably a good thing for the industry.”

FRANCOISE NOEL-MARQUISPARTNERGRANT THORNTON, FRANCE

FIGURE 13: AREAS OF INCREASING LP DEMANDS

Transparency

Performance

ESG

Fees

Commitment to strategy

Governance

Key man

Fund secondary DD

Differentiation

Value drivers

Alignment

Direct competition

Co-investment

Dealflow


FIGURE 14: FUTURE FUND SIZE VERSUS PREDECESSORPERCENTAGE




MENA 61 31 8

BRICS 75 0 25


Larger Same size Smaller

FIGURE 15: FUNDRAISING ENVIRONMENTPERCENTAGE

Western Europe 9 11 33 27 20

North America 4 22 26 41 7

Asia Pacific 0 13 7 47 33

MENA 0 46 31 23 0

BRICS 3 36 22 33 6

Global result 4 24 26 33 13

Very Positive Neutral Negative Verypositive Negative

• Taking fund size as a measure of the likely future size of the industry suggests that emergingmarket PE firms are confident of future growth.

• Within the developed markets, the picture points more towards a stabilising of the industry size.

There are signs of longer-termconfidence with many GPs expecting tobe able to raise larger funds in the future.This is most notably a feature ofemerging markets, with evidence of theprocess of fund size inflation havingpaused in developed markets.

A clear outcome of the changingsentiment in the investor community isthe expectation amongst GPs globallythat there will be a degree of churnwithin their LP bases. Pressures in thisrespect vary from country to countryand fund to fund, but it is clear thatwhile in some regions the opening up ofdomestic sources of capital is seen as anopportunity, in others the retrenchmentof domestic LPs is forcing GPs to buildincreasingly international investorrelationships. This is, in effect, leavingsome GPs to compete for attentionamongst a broader range of peers byconvincing LPs of the attractiveness oftheir firm and market in an internationalarena.

“It is harder to raise funds now andwe will continue to see a flight toquality. We’re in a situation where thebetter end of town will do well, but therest will find it very tough. It is thesame highly-selective environment onthe deal side as well, with the lendingbanks definitely having an A list of GPs.”

AUSTRALIA survey respondent

“LPs are reducing both their allocations and the number of GPs they want to work with. They have learnt a lot in recent times and are morediscerning about performance and the way they are treated by GPs. Thesedays more than ever, strong performance and transparency are key.”



With the global economic situation stillvery much in the balance, macroeconomic considerations are regarded asthe greatest challenge currently facingthe private equity industry worldwide.The fallout from the downturn has alsotriggered increased attention fromnational regulators seeking to drive moretransparency from financial institutions.The inherent opacity of the privateequity industry has made it a lightningrod in some instances, givingmomentum to a process that had alreadybegun on the back of concerns about jobsecurity and asset stripping as businesseswith larger (often politically sensitive)stakeholder groups came under privateequity ownership in some markets. Thishas added to the challenges faced by theindustry, with firms noting the need toeducate and sell the benefits of privateequity on an ongoing basis.

Overall market outlook

“I think in general the industry has aproblem in generating the types ofreturns to justify the asset class.There just hasn’t been theperformance in recent times.Institutional investors are gettingdisillusioned. That’s a problem theindustry needs to work on.”

CANADA survey respondent

“The reliance on leverage, and alsothe ability of private equity companiesto differentiate themselves bothpresent challenges.”


FIGURE 16: KEY CHALLENGES FACING THE PRIVATE EQUITY INDUSTRY

Macro economy

Regulation

Competition

Performance

LP sentiment

Deal origination

PE perception

PE HR

Access to debt

Portfolio issues

Industry maturity

Exiting

Tax

Geo-political factors

Fiscal environment

Human resources

Secondary buyouts


The bulk of the other key challengesfaced by the industry relate to the needto demonstrate performance in today’shighly competitive environment. Giventhis backdrop, it is no surprise that thekey focus of, and opportunities pursuedby, private equity firms relate to theircore business. While the drivers aresomewhat different in the emerging andmore developed markets, the sharedoutcome is a perceived need to sharpendeal origination and portfoliomanagement processes, with many firmsbeing in the process of augmenting theirteams in these areas. In the maturemarkets, the long-term process ofinstitutionalisation has seen teamsexpand in many areas to support largerportfolios and fundraising ambitions.Paradoxically, there is a opposingpressure to minimise back office costs.In the emerging markets, the rapid development of private equity hasrequired GPs to work to ensure thattheir own development in human capitalterms keeps pace.

GPs that are looking to diversifytheir areas of interest as the global macrotrends play out are most likely to lookfor similar opportunities within newgeographies. Wherever the focus, thecommon factor is the need forcommunication, whether that beintroducing the asset class, re-educatingstakeholders, or demonstrating theability to generate returns.

FIGURE 17: AREAS OF RECRUITMENT PERCENTAGE

Deal doing 37

Portfolio operations 14

Research 11

Admin 4

IR 4

Legal 1

Other 1

N/A 28

FIGURE 18: AREAS OF NEW BUSINESS DEVELOPMENT PERCENTAGE

Core business 48

Geographic opportunities 17

Sector opportunities 9

Asset class opportunities 7

Deal size shift 3

Independence 1

Privatisations 1

N/A 14

“One of the biggestissues for the industry isone of perception. Everytime the industry puts itshead above the parapet, itrisks getting it shot off byeither the press or theGovernment. I think it’ssymptomatic of the factthat when times are hard,people look to blamesomeone.”

MARTIN GODDARD GLOBAL SERVICE LINE LEADER – TRANSACTIONSGRANT THORNTON INTERNATIONAL

“The big challenges to the industry allstem from regulatory issues and thefact that PE has been lumpedtogether with the banks and hedgefunds. All of the resulting scrutiny isleading to more and more admin –and that is not value-adding. There ismassive pressure on resources andthis will translate into problems forreturns. There is also a problemassociated with all the attention onfees and remuneration. If there is toomuch pressure here we will not beable to hire the top people and theywill simply go to hedge funds.”

GERMANY survey respondent

Global private equity report 2011 – Western Europe 15

Confidence in the prospects for dealflowover the coming year is returning slowlyamongst European private equity firmswith around half expecting an increase inactivity. Although this is the lowest levelrecorded in any of the key globalmarkets, very few people actually expectto see investment levels decline.Anticipated sources of dealflow areparticularly varied in Europe. However,most strikingly the importance ofsecondary buyouts is higher than in anyother market.

With dealflow in the region beinggenerally hard won, private equity firmshave sought various ways to get ahead ofthe competition. In the first instance thisinvolves building and consolidatingnetworks both within the corporate andadvisory communities. However, whilsttrack record is still very important, thereis also an increased emphasis on buildingknowledge of markets and the dynamicsof individual businesses and theirmanagement at an early stage in theprocess.

Ultimately, most deals will gothrough some form of intermediationand market testing of the price. This isthe case not least because trade buyershave returned as a key competitor toprivate equity, and one with deeppockets for the right asset strategically.

Western Europe:Investment activity

“I believe secondary and tertiary dealswill continue to be very important,particularly for larger mid-marketdeals. In 2010 the largest proportionof deals above Euro 75m wasaccounted for by secondary buyoutactivity. Under Euro 75m a lot moredeals were primary transactions. Thefact is that we’re seeing corporatesbeing less focused on divestiture, butmuch more acquisitive.”


“There’s more competition from tradebuyers, and I expect this to continueto increase. Trade players are gettingmore confident, and unless theeconomy ends up in a double dip, Ican’t see this changing – they’ll beout in force. There are lots of privateequity houses with money, but thiscan only dwindle over the medium– tolong-term, not increase.”





Sector expertise


Access to capital


Price

Local presence



Speed


16 Global private equity report 2011 – Western Europe


Public markets: 1%

Other: 1%

Secondary buyouts: 47% Corporate divestments: 20%

Family/private: 31%

“Speed is key in deal origination. It is a very competitivemarket and so getting to deals early is crucial. Strongrelationships with intermediaries is a key part of this.”

PAR EKENGRENHEAD OF CORPORATE FINANCEGRANT THORNTON, SWEDEN

FIGURE 3: SOURCES OF COMPETITIONPERCENTAGE

Others: 1%

Family offices: 3%

Trade buyers: 38% Domestic private equity: 47%

Foreign/International private equity : 11%

“It’s a combination of factors, butreally it comes down to yournetworks, increasingly your sectorknowledge and focus, rigour,discipline and tenacity. Clearly youcan’t discount the value ofintermediary networks, but GPs arespending a lot more time on non-intermediated deals these days.There will always be auctions, but youwant to try to avoid them if you can,or at least make sure you have ahead start.”


“Deal sourcing is the same now as it’salways been for us. It’s about being asearly as you can on an asset, and notwaiting for the pitch from banks. It’sabout spending more time withmanagement teams and vendors tounderstand the asset before it comesto market, which means you’re moreprepared and can move faster.”

FRANCE survey respondent

“The market in Italy is split betweenthose deals that are marketed aboveand below the radar. For the formeryou obviously need to have a strongrelationship with the intermediaries,but these are more commodities. Thereal key in Italy is to have a bignetwork of contacts among theentrepreneurs.”

ITALY survey respondent

“It will mainly be secondaries. MostGerman corporates have completedtheir disposal programmes andentrepreneurs are reluctant to sellassets only to see their money getsucked into sovereign debt crises!”



Hands-on involvement with portfolioinvestments has risen to relatively highlevels in Europe versus other parts of theworld and is expected to remain so, withthe key focus of GP efforts typically onstrategic input and M&A. Assistancewith financial planning has also beensignificant, with the majority of GPsreporting that debt renewal will not bean issue over the next 12 months.

European private equity firms aremore cautious regarding portfolioprospects than their counterparts inother parts of the world, with the macroeconomic environment being cited as thechief driver of sentiment.

Portfolio

“The nature of the value drivers depends on thebusiness and what you’re trying to do to it. In somecases it could be a mixture of multiple arbitrage andM&A; in others it might be more organic. You need tobuild a growth strategy to suit the individualcompany.”

MO MERALIPARTNER, HEAD OF PRIVATE EQUITYGRANT THORNTON, UK

“Growing market share throughinnovation is fundamental. Thebusinesses I like are in big marketswith lots of players, some big groupswith lots of legacy systems, and youfind someone smaller with aninnovative approach. The majority ofdeals we do like this would succeedeven if the market stayed flat in mypersonal view.”



Strategic input

M&A

Human resources

Operational input

Financial planning


Professionalisation

Cost control

Access to networks

Mentoring

Exit planning

Monitoring


Governance

Innovation

Sector knowledge

FIGURE 5: PORTFOLIO VALUE DRIVERS PERCENTAGE

Multiple arbitrage: 9%

Financial engineering: 3% Market growth: 17%

M&A growth: 32%

Performance

improvement: 39%


FIGURE 6: CHALLENGES TO CROSS BORDER M&APERCENTAGE

Funding constraints 2

Foreign market credibility 2

Different fiscal environment 2

Currency risk 2

Lack of opportunities 7

Parochialism 9

Management team 13

Lack of PE resource 13

Relative complexity 18

Culture 32

Portfolio M&A support is seen to bemore important amongst Europeanprivate equity firms than elsewhere. Inparticular, crossborder M&A is seen asan increasingly relevant feature.However, with this comes the additionalchallenges of cultural issues and relativecomplexity. These are perhaps throwninto even sharper relief whentransactions are being consideredbeyond European borders in marketssuch as China, which is now on theradar for an increasing number of GPs.

“The main thing is to get the right strategic equity story to be developedand executed. We are keen to pursue a long-term plan that is signed off byboth the management and ourselves.”


“As a whole, and not just in terms of the weak GDP announcementsrecently, the economy is shaky and confidence is low – I just don’t think itfeels good.”


“There are massive culturaldifferences between China and theWest. You can’t afford to ignore Chinaand you need to understand it as bestyou can. Doing business in China isnot to be taken lightly.”


“The benefits of cross-border M&Areally depend on the company – if thecompany is already international,then it is almost business as usual…they will understand what they aredoing and there is a good basis ofdue diligence to draw upon. If thecompany is venturing abroad for thefirst time or it is the first acquisition,it is more tricky. There is more workto be done with the managementteam to convince them and us that itis a good thing to do.”



Sentiment regarding prospects for theexit market are generally positive, with awindow of opportunity seen to haveopened up over the last year. Aroundthree-quarters of European respondentsalso expect exit levels to continue toincrease over the coming year, whichcompares favourably with theircounterparts elsewhere.

Exit


IPOs: 1%

Secondary buyout: 45% Trade sale: 54%

“Secondaries are driving the marketbecause on one side you have peoplewho need to return capital in order tofundraise and on the other you havepeople who need to deploy capital.”

SWEDEN survey respondent

“The main cons of secondary buyoutsare that they almost always come viahighly contested auctions and aretherefore expensive. On top of that,the former owner has normally donea good job with the business makingit difficult to see further growth.Sometimes though, it is just aquestion of fit and it can really workbetter for the second buyer than thefirst.”



The two key drivers of these exittrends are: first, the return of tradebuyers, which, while increasingcompetition on the buyside, is alsoproving a willing source of liquidity forprivate equity assets, and; second, thepressures being felt by many privateequity firms in relation to their ownfundraising cycles and the need to bothdeploy capital and demonstrate returns.The IPO window is seen to be veryfirmly shut in Europe, with theconsequence that, in comparison,secondary buyouts have taken on anadded significance.

The cocktail of competition andpressure to exit is resulting inconsiderable variation in expectationsfor returns going forward. Thereremains a sense that there will bewinners and losers and that a final shakeout within the industry is still to happen.

“Returns have, fundamentally, been pretty strong. Ifthe exit markets aren’t great then, by and large, privateequity firms just sit on investments for longer and waituntil they can get value.”

KAI BARTELSSENIOR PARTNER, HEAD OF M&AGRANT THORNTON, GERMANY

“I think returns will stay the same inthe short term, but longer term theywill decrease. The best performerswill maintain their high returns, butthe discrepancy between the best andthe worst will increase.”


“I think exit levels will increasebecause of the maturity profile ofportfolios at the moment. There havecertainly been some great exitsrecently. The challenge is alwayshaving the patience to allowcompanies to mature.”



Fundraising

“We’ve just come off a fundraisingand it’s incredibly competitive outthere. Pretty much every LP in theworld is reducing the number of GPrelationships they have and will onlyconsider re-ups and new relationshipswith top-tier managers, so it’s veryvery tough.”


“ESG matters are becoming muchmore important. We signed the UN PRIlast year and contributed to AFIC’sWhite Paper on ESG. We have adedicated in-house team and are doinga big appraisal on the subject now. It isextremely important for the image ofthe industry and to satisfy the LPs.”


“LPs are drilling into companies morethan they have in the past – whatmakes them tick, why we did thedeal, where the key threats are.However, most LPs have 70-80 fundinterests, and they just don’t havetime to sit down with every one oftheir GPs and go through things insuch detail.”


Unsurprisingly, European private equitypractitioners continue to regard thefundraising environment as tough byhistorical standards. With manyinvesting institutions still workingthrough their own problems, while theyremain positively disposed towardsprivate equity, they are having to lookclosely at the number and size of theircommitments to the asset class.

For GPs, this sentiment meanshigher levels of LP churn within theirinvestor bases as institutionscontemplate future funds. GPs arereadying themselves for the prospect ofneeding to identify a higher proportionof new investors than in the past and thelikelihood of a stagnation in fund sizes.

In addition, GPs are reporting ahigher degree of LP engagement. Agreater desire amongst investors fortransparency and depth of information isthe key trend here. While areas such asperformance clearly continue to be ofkey importance to LPs, there is also anincreasing focus on ‘new areas’ such asESG and the management of the privateequity firm itself.

“It’s very difficult at the moment. But ifyou look at the past, LP appetite hasnormally returned 9-12 months afterM&A activity has kicked back into gearand liquidity rises. With any luck thatwill be felt in the next year.”



Transparency

ESG

Performance

PE firm management

Fund secondary DD


Differentiation

Co-investment

Key man


Reflecting the underlying positivesentiment with regard to expected dealand exit activity, private equity firms arebuilding capacity in order to capitaliseon the opportunities ahead. In particular,around two-thirds of Europeanrespondents are planning to increasetheir head count over the coming year,with this predominantly being in thecore area of front-line deal-doing.

With increased emphasis beingplaced on self-origination strategies andrecruitment, it is no surprise that themajority of private equity firms stressthe importance of focusing on their corebusiness of identifying qualitybusinesses within their target market.

Private equity players are currentlyfaced with a plethora of challenges, someprivate equity specific, some regulatory,and others reputational. However, themost significant factor relates to thechallenges presented by the state of themacro economy.

Regulatory matters are high on theagenda of GP concerns, not least theintroduction of the AIFMD. Thisparticular initiative is expected not onlyto lead to higher levels of bureaucracyand increased costs, but also to frustratethe dynamism of the industry by raisingbarriers to entry for first time managersand spin-outs.


“Regulation is terrifying. The mindsetout there is that what private equitydoes is terrible. How we combat this Idon’t know. What is certain is thatregulation of the industry is going tobecome a lot more rigorous.”


“We are working on increasing ourbuild-up programme for the portfolioand trying to profit from the fact thatvery good companies are strugglingto raise bank funding and thereforeare turning to growth capitalproviders for the first time.”

SPAIN survey respondent


Macro economy

Performance

LP sentiment

Regulation

PE perception

Deal origination

Competition

PE HR

Access to debt

Portfolio issues

Industry maturity

Exiting

Secondary buyouts



“In these difficult economic times, private equity isfaced with not only an origination issue, but alsopressure from investors, regulators and the broaderpublic. The industry is therefore being challenged tovisibly prove the model and demonstrate it can addvalue regardless of broader economic conditions.”

THIERRY DARTUSHEAD OF TRANSACTION ADVISORY SERVICESGRANT THORNON, FRANCE

“We have been through the worstdownturn since WWII and companieshave demonstrated they have theDNA to survive in a market that getslittle support from government. Themain opportunity is to harness thestrength of those businesses and helpthem into new markets.”

ITALY survey respondent

“You can see that the AIFMDrepresents a challenge, but it will help generate a better understandingof the industry.”

SWEDEN survey respondent

FIGURE 10: IMPACTS OF EU REGULATIONPERCENTAGE

Bureaucracy 38

Costs 20

Barriers to entry 7

Capital adequacy rules 7

Fundraising 4

Less competition 2

Risk perception 2

Transparency 2

N/A 18


Core business 60

Geographical opportunities 16



Deal size shift 2

N/A 8

“Competition is thebiggest issue facing theindustry. You can reallysee the need forconsolidation in themarket – there are toomany players with toomuch committed capital.Those funds with capitalstill to invest will beunder pressure, and thiswill drive up prices.”

RAINER WILTSPARTNERGRANT THORNON, GERMANY

24 Global private equity report 2011 – North America

Price remains king in North America’shighly intermediated and efficientmarket and is seen by many as the keyfactor in winning deals. However,evidence suggests a GP’s sector expertise,as well as the quality of its corporatenetworks, are central elements of theirapproach to deal origination.

North America:Investment activity

“I think there are two key areas interms of deal sources: sponsor-to-sponsor deals will be the biggestarea, followed by independent family-owned businesses. For sponsor-to-sponsor, the market’s been sonegative that they haven’t been ableto sell and so now’s the time.Independent family-owned businessesmay be a driver of deals as there’suncertainty around so this may drivethings through.”


“As it always has been, winning dealscomes down to who pays the highestprice. Of course, you need to be infront of the right intermediaries, butprice is by far the biggestdeterminant of success.”


“I think PE investment activity over thenext 12 months will be increasing. Istill think there’s lots of dry powder outthere and banks are still lending as thedebt markets have softened a bit. Theeconomy is in good shape in Canadabut it’s all subject to companyavailability – whether there arecompanies available to buy. Valuationsare strong so vendors are getting whatthey’re looking for and generallythere’s a willingness to transact.”


“Origination is sector led. We’re callingon companies in specialist areas wherewe’ve invested before and built domainknowledge, that’s how we differentiate.We’re proactive in terms of identifyingcompanies we’re interested in andbuilding up relationships over time,several years prior to any investmentopportunity. By the time an opportunitydoes arise, we already know eachother, and that provides an advantage.”




Price

Sector expertise


Access to capital


Local presence


Track record reputation


Speed

Global private equity report 2011 – North America 25


Trade buyers: 30% Domestic private equity: 65%

Foreign/international

private equity : 5%


Public markets: 3%

Secondary buyouts: 30% Corporate divestments: 15%

Family/private: 52%

Within the North American market,the private equity industry is wellengrained as a key funding source –some estimates suggest that around halfof US mid-market companies are ownedby private equity. North America is oneof the most bullish markets at presentwith regard to anticipated investmentactivity levels, and certainly seems to bea step ahead of Europe in terms ofconfidence.

Reflecting this, and its position as themost established private equity market,the region is seeing high levels ofcompetition between domestic privateequity groups, either on a national basisor within particular regional markets. Asa result, there is evidence of some groupsincreasingly casting their net wider forindefinite opportunities including insome US cases looking north of theborder into Canada.

Family- and privately-ownedcompanies are expected to be theprincipal source of deals this year.Secondary buyouts are also a significantfeature reflecting sophistication andcompetition within the market.

“I think most competition willdefinitely come from competing PEfirms due to the capital overhang –this needs to be put to work in thenext 18-24 months. There’s lots ofcompetition on the sponsor front.Strategics are also a competitiveforce – they have lots of cash on thebalance sheet and can come in andpay a premium; they can swoop in atthe last minute.”


“For us it comes down to finding theright qualified CEOs to do deals with.That’s the key to our business, andhence more networking and researchcontinues to be what we focus on totry and seek out opportunities.”


“Competition for deals over the next 12 months willcome from other PE houses due to the large numberof funds with money that are approaching the tail-end of their investment periods. There’s an urgencyto get deals done and this has led to larger fundsmoving down-market.”

EMILIO IMBRIGLIOPARTNER, HEAD OF ADVISORY SERVICESGRANT THORNTON, CANADA


North American groups typically regardthemselves as hands-on investors, anddon’t expect this to change. Key areas ofportfolio value add are the strategicinput that GPs can bring, plus financialplanning skills. Given the focus ofprivate equity groups on actively drivingorganic growth within portfoliocompanies, M&A input appears to berelatively less significant in NorthAmerica than in Europe.

Despite this, cross-border M&Awithin private equity portfolios isexpected to increase by 40% of NorthAmerican responding GPs, with thistypically being focused on the US andCanadian markets. There are lowerexpectations of international acquisitionsbeyond North America, often as a resultof the perceived relative complexity andcultural issues associated with such deals,and a lack of dedicated resource on theground to overcome these challenges.

Portfolio

“The key drivers of value growthcome from operational improvementssuch as sales and marketingprocesses and resource, productionand sourcing. You can get a bigacceleration in profit growth this way,particular when the market is lessrobust.”


“Firstly, we have a disciplined 100-day plan that we like to put in placewith all our companies. Secondly, weensure there’s an appropriate capitalstructure in place and strong financialengineering. Thirdly, we share astrong sense of discipline with ourportfolio companies.”


“Building value comes down to marketgrowth and performance improvement,not multiple arbitrage. Value-add isdefinitely rooted in the portfoliomanagement expertise that you canbring to bear, but also from the buy-and-build philosophy – tuck-inacquisitions that solidify your standingas an industry leader.”



Strategic input

Financial planning

Human resources

Operational input

Professionalisation


M&A

Mentoring

Access to networks

Monitoring

Cost control

Exit planning

Sector knowledge


“We help to round out a management team. Smaller, private businessestend to have core strengths as well as areas of weakness. For instance, acompany might be strong on sales and marketing, but weak on operations,or have failed to take care of the financial side of things. We help to recruitand evaluate new talent to strengthen the executive team. Secondly, wealso help to prioritise initiatives, initially through 100-day planning. We thenevaluate what we can do to support these initiatives.”


On balance, North American privateequity firms are amongst the mostbullish about the prospects for theirportfolios given the current macroeconomic scenario. Value is seen to bedriven largely by company performanceimprovement with sponsors activelyengaged in this process, often via thedeployment of dedicated portfoliomanagement executives.

“How do you add value? It’s about buildingprofessionalism within the team, putting the rightsystems in place to monitor and manageperformance and being able to drive growth.”

MENDY KWESTELPARTNER, TRANSACTION ADVISORY SERVICESGRANT THORNTON, US



Market growth: 29%

M&A growth: 14%

Performance

improvement: 49%

FIGURE 6: CHALLENGES TO CROSS BORDER M&A

Political risk

Management team

Lack of opportunities

Different fiscal environment

Parochialism

Funding constraints

Lack of PE resource

Relative complexity

Culture

“The biggest complexity with cross-border M&A is that you have no teamon the ground. Integration is an issue.It’s a huge investment by themanagement team, the time it takesto get on a plane and go where youneed to be. There are culturaldifferences and nuances too.”



While over half of North Americanprivate equity firms surveyed anticipatean increase in exit levels, this proportionis lower than the global average.However, this year has seen a relativelybenign exit environment, withrespondents believing that conditionswill remain positive. Interestingly, NorthAmerican GPs have the lowestexpectations globally of exit volumesfrom their own portfolios over thecoming year, possibly as a result of theiranticipated focus on completing newdeals.

Sponsor-to-sponsor deals and salesto strategics are expected to dominatethe exit market, with IPOs less likely,despite showing promise at the start of2011.

Exit


Decrease: 7%

Stay the same: 40% Increase: 53%


Expectations for returns amongstprivate equity firms remain reasonablypositive, with almost 40% ofrespondents predicting rising returnsgoing forward. However, some highlightpotential downward pressure on returns,reflecting high entry valuations, whileothers note that any increase will befrom a low level, with portfoliovaluations having been marked down inmany cases in recent times.

“Private equity firms need to demonstrate realisationsto get LPs to commit to the new funds, and theopportunities to exit are as good as they’ve been in the last five years. It’s the flip side of the high levels ofcompetition amongst PE houses. Added to the strongdemand amongst financial buyers is the growing demandamongst trade.”

TROY MACDONALDNATIONAL CORPORATE FINANCE PRACTICE LEADER GRANT THORNTON, CANADA

“Returns are on the way up. Most folkhave marked their valuations downhard and they don’t want to have towrite anything down twice. So manyassets are probably being held onbooks for less than market value. It’sgoing to be good for investors whenassets are sold and that will boostreturns figures.”


“Sponsor to sponsor deals will be keyas we’re coming up to the end of theinvestment periods for lots of funds. I don’t think it’ll be IPOs, not afterwhat’s happened in recent times.Strategics will also be an importantexit route.”


“I think average returns will get a littlebetter. The economy has been toughand the long term trend has beencompression. Last year there was asmart snap-back in value.”



Fundraising

Fundraising is characterised as havingbeen tough and likely to remain so, withabout half of respondents seeing theenvironment as negative and none as verypositive. Given this, it is unsurprising thatthere is some evidence of stagnation infund sizes, with under half of privateequity firms expecting their next fund tobe larger than its predecessor.

North America’s institutionalinvestor community is undoubtedly theworld’s largest and most sophisticated.Proximity to this pool of capital isreflected in North American GPs havinga high proportion of domestic investorsand also a relatively high level ofconfidence in their ability to generatestrong re-up levels.

However, the more sophisticatedinvestors have been at the forefront ofefforts, such as ILPA, to bring greatertransparency to the LP–GP relationship.Half of respondents report that LPdemands continue to increase, with thedepth and breadth of GP reporting beingthe principal focus of attention.

“In the area of reporting, LPs wantgreater clarity and commitment tostrategy. They want manageralignment with their interests andthey’re being more demanding aboutwritten documents. As for negotiatingon management fees, if it’s not the‘standard deal’ then LPs won’t look atyou. You’ve got to be doing it thestandard way; you’ve got to tick the box.”


“Fundraising seems to have improvedrecently but it’s still very challenging.The Canadians need to raise fromsources outside of Canada becauseso many of the big investors havetheir own direct operations. Thismakes it an extra struggle.”


“I think LPs are looking for morespecific differentiation of strategyand more realised returns. It used tobe the case that you could fundraisewith a strong mark-to-marketportfolio. Now LPs want to see dealsthat have been sold.”


FIGURE 8: PROPORTION OF LIKELY FIRST TIME INVESTORS IN NEXT FUNDPERCENTAGE

Majority: 15%

Minority: 70%

Significant minority: 15%


Not surprisingly, competition is rankedas the most significant challenge facingNorth American private equity players,whereas across all global respondentsconcerns about the macro economicsituation remain paramount.


“I don’t think the US PE market isdiminishing, but there is a definiteelimination of lesser performing funds.There’s an excess of funds right now inthe US and so there’s a purging goingon.”


“Certainly the competitive outlook is much greater than ever. There’s anenormous capital overhang, coupled with low lending rates, coupled withstrategics. When you add all those things together it leads to valuations thatare beyond what we think is rational. On the regulatory side, I think that isthreatened rather than actual. We’re hearing about Dodd-Frank, but it’s similarto the talk on carried interest and tax, we haven’t seen it yet.”


“Our firm is really focusing in on the regulatory environment. ILPA pales into thebackground when you consider registration issues. We’ll be investing in the backoffice in terms of how documents are stored, how data is stored, how we report toLPs. We’ve been transparent in this regard but now that it’s coming directly fromthe Government it’s going to be a headache for our team. It will drastically affectour business – just the cost of being in business.”



Competition

Macro economy

Regulation

LP sentiment

Performance

Access to debt

Deal origination

Exiting

Industry maturity

Tax

PE HR


“To remain ahead in today’s uneasy and highlyregulatory environment, the core focus of privateequity firms should be looking to the fundamentalstrategies to facilitate a constant and incremental planfor growth and improvement – whether that bethrough operational improvements, origination, dealmaking, or overall portfolio management. There isalways going to be a big market in the US. It remainsinherently attractive, with stability and liquidity. Itwill always be attractive.”

WINSTON WILSONPARTNER, ASSET MANAGEMENT SECTOR LEADERGRANT THORNTON, US

In a market which is as highlycompetitive as that of North America,GPs’ plans largely reflect the perceivedneed to stick to what they know andensure that they are able to compete onevery front. US GPs are typically moresophisticated organisationally than firmsin other parts of the world, but half ofthe North American respondents do stillexpect to increase head count over thenext 12 months. While this proportion isslightly lower than elsewhere, it involvesa broader range of appointments,including in areas of portfoliomanagement and back office research, as well as front line deal doing.

“I think we’ll grow our headcount alittle bit but not by too much. We’llprobably take on one new junior, onemid-level career, and one person inoperations. We’re going out to marketagain next year so we want to beready.”


FIGURE 10: HEADCOUNT INCREASEPERCENTAGE

North America Global average

Yes 48 64

No 52 36

Global private equity report 2011 – Asia Pacific 33

Approaching two-thirds of Asia Pacrespondents expect deal activity levels toincrease over the coming year, with theregion receiving increased attention asconcerns of over-heating have crept intothe larger neighbouring Chinese market.This is supported by the belief thatforeign investors will be increasinglyactive in South East Asia inparticular.

The emerging nature of many of theAsia Pac markets is perhaps reflected inthe fact that GPs in the region expect tooriginate from a broader range ofsources than is evident in other markets.Linked to this is the clear need for strongnetworks and a presence on the ground.Also the ability to demonstrate a trackrecord is seen as a differentiator in amarket where such experience is stillbeing built.

The Asia Pac region incorporates adiverse set of markets, both in terms oftheir economies and the nature of theirprivate equity industries. This ishighlighted in a couple of areas,including sector trends, with areas suchas mining and healthcare presentingopportunities in Australia, while theburgeoning middle classes of South EastAsia are driving interest in consumerbusinesses. While Australian privateequity firms predict a decline orplateauing of entry multiples, there ismore evidence of upward pricingpressures elsewhere in the region.

Asia Pacific:Investment activity


Other: 3%

Public markets: 13%

Corporate divestments: 23%

Secondary buyouts: 23%

Family/private: 38%

“I think corporate and privatevendors, public markets andsecondary buyouts will all beimportant sources of deals over thenext year. In particular, I suspect ifyou look out over the coming 12month period you’ll see corporatedivestments and public-to-privatedeals as particularly significant.”


“In Australia, the two-speed economyis alive and well. On the slow-speedside, there will be very little activity ina sector like retail, with the exceptionbeing defensive areas such as budgetretailers and healthcare. Most activityis going to be in the fast-speed areassuch as mining – certainly you can’tget away from mining.”


34 Global private equity report 2011 – Asia Pacific

“You need to get out andget your hands dirty tofind the quality deals inthis market. The keything is to have access toa good network ofcontacts. There arehundreds of potentialdeals there, but the trickis identifying the fewgood ones.”

KON YIN TONGCORPORATE FINANCE DIRECTORGRANT THORNTON, SINGAPORE

“Dealflow will come mainly from entrepreneurial businesses needingcapital. Interest rates are very high so private equity is an attractive sourceof funding.”


“The key factors you need for accessing deals here are dealflow networks,an ability to add value, track record and a strong brand name.”


“Without giving away any trade secrets,I’d say that overseas funds that wantexposure to the resources sector inAustralia presents a big opportunity.There are a lot of people that want toget a piece of this right now.”


“The attraction of the FMCG sector isdriven by the rising spend capacity ofthe middle class in this part of theworld.”


“It’s a difficult market and informationis very closed so you need a strongresearch capability, good localnetwork and understanding of thelocal business culture in order to finddeals.”


“I see the main sources of deals asbeing the de-listing of PLCs,corporate M&A and also PIPE deals.”


FIGURE 2: ENTRY MULTIPLESPERCENTAGE

Australia

Increase 0

Stay the same 40

Decrease 60

Other Asia Pacific

Increase 50

Stay the same 20

Decrease 30

FIGURE 3: KEY FACTORS IN IDENTIFYING AND WINNING DEALSPERCENTAGE (MULTI RESPONSE QUESTION)


Local presence





Sector expertise

Access to capital



Despite the non-control nature of manySouth East Asian transactions, around athird of respondents from the region areseeking to increase their level of hands-on involvement, with a number alsohaving established dedicated portfoliomanagement teams to work alongsidedeal executives.

While ‘governance’ remains the mostimportant element of ESG for privateequity houses in the region, mountingpressure from the LP community, togetherwith perceptions of ‘best practice’, areputting the spotlight on social andenvironmental issues as well. In Australia,in particular, the political climate hasserved to reinforce this with the GreenParty holding the balance of power.

With much of the Asia Pac region, atleast outside Australia, characterised bygrowth capital transactions, it isunsurprising that market growth is acommon driver of value. Whilecompany performance improvement isstill relevant across the region, it is muchmore likely to be the dominant valuedriver in Australia.

Portfolio

“Given the size of business we back, it tends to be the first time they’ve beenowned by anyone other than the family or founders. So a lot of our resourcegoes into putting in place the right systems and infrastructure. Many of themhaven’t had regular boards and reporting regimes, so we work with themanaging director and financial director to introduce a lot more rigour to thereporting. It’s not that we spend three months looking backwards, but having ahistorically accurate picture of trading performance helps you to make moreinformed decisions about the future.”


“There are counter-balancing factorsat work. We continue to see stronggrowth in China, fuelled by domesticconsumption. However, with thecontinual turmoil in the US and theEuro-zone, South East Asia may notbe fully insulated given the exportnature of the region.”



Strategic input

Operational input

Financial planning

Human resources

Governance

M&A

Monitoring

Professionalisation

Access to networks

Cost control

Kudos


FIGURE 5: IMPORTANCE OF ESGPERCENTAGE

Not relevant: 8%

Highly relevant: 33%

Of some relevance: 17%

Growing relevance: 42%

FIGURE 6: HANDS-ON PORTFOLIO INVOLVEMENTPERCENTAGE

Stay the same: 69%

Increase: 31%

“ESG is growing in importance. We have created a position internally tolook after our vision of sustainability and we are putting more measures inplace. But for the investees it is too early for anything to have changedsignificantly.”


“We bring our network, cross-border acquisition experience, ability tomake HR improvements and operational knowledge.”



“The key factor indriving growth is buyingscalable businesses andsuccessfully growingthem. Receiving a boostfrom valuation arbitrageshould be considered abonus.”

TARO ISODAPARTNER, HEAD OF ADVISORY SERVICESGRANT THORNTON, JAPAN

“We take controlling interests andhave two or three people onoperations. We will be increasing thisoperational resource because we seeit as an advantage for us. That said, itis not without its challenges and someothers will say that they see their jobas backing good management teams,rather than getting operationallyinvolved themselves.”


“The most important thing we bring isthe capital the company needs (andanyone who says otherwise is fallingprey to their own marketing hype).Then it is about helping thebusinesses improve their corporategovernance and making them moresophisticated, so that they are readyto go public. Thirdly, it would be thebrand association.”


“Governance is very important andLPs are increasingly interested in thegreen/sustainable credentials of yourfirm and your portfolio companies.”



Private equity practitioners in the AsiaPac region are expecting to seeincreasing levels of exit activity over thenext year. Pressure to achieve realisationsin Australia, in particular, and thegeneral maturation of portfoliosthroughout the region has resulted in80% of respondents stating that anincrease in exits is likely. However, at amicro level, while a larger proportion ofprivate equity firms than in othermarkets expect to see exits from theirown portfolios (over 30% expect to exithalf or more in the coming year), it isalso the case that more private equityfirms in Asia Pac expect to achieve noexits than is the case elsewhere.

With IPO markets remainingdifficult, and in Australia at leastconfidence dented by high profiledisappointments, trade sales are expectedto provide the dominant channel forrealisations.

The range of expectations for thedirection which private equity returnswill take is broader in Asia Pac than inother regions. An equal proportion (circa 40% each) expect an increase or adecrease, with the latter largely driven byexpectations in the Australian market.

Exit

FIGURE 7: PROPORTION OF PORTFOLIO DUE TO EXIT IN NEXT 12 MONTHSPERCENTAGE

Majority: 25%

None: 33%

Half: 8%

Significant minority: 17% Minority: 17%

“I suspect exit activity will go up.There are a number of funds thatneed to demonstrate exits in order toraise capital. There are some withportfolios that are highly geared andcoming to the end of their terms.”


“In this market I suspect it will be an even split between secondaries and trade sales in terms of the key channels to exit.”


“The IPO markets are shut at present, while at the same time some foreigntrade buyers can pay top prices as their cost of capital is much lower.”


“Exit volumes will certainly increase. There’s realmomentum in the market towards exits at the momentdriven by the need for GPs to generate returns and thegeneral maturity of a number of private equity portfolios.”

BILL HUTCHISONPARTNERGRANT THORNTON, VIETNAM


Fundraising

GPs report increasing levels of LPengagement, with demands for greatertransparency topping the list butgrowing pressure also in areas such asESG and fees.

Private equity players in the Asia Pacregion tend to be more negative aboutthe current fundraising environmentthan their counterparts in other regions.While across the board this reflects thebroader economic environment, inAustralia GPs also point to certainspecific factors such as the reducedexposure to the asset class of localsuperannuation schemes, tax issues andconcerns over track record. Elsewhere inthe region, while interest continues togrow, the markets remain ‘frontier’ innature and outside the comfort zone ofmany currently cautious LPs.

Despite this, there is evidence ofgrowing confidence, not least that asignificant proportion of private equityfirms expect their next funds to be largerin size. However, achieving this is likely to involve the capture of asignificant number of new investors,given that an element of LP churnwithin investor bases is expected inmany cases. In Australia, for example,GPs are having to compete more forinternational capital as domestic LPs,traditionally significant supporters of thelocal industry, retrench.

“The fundraising environment is very difficult. The economic situation is notencouraging and international investors have other regional alternatives tolook at.”


“LP demands are definitely increasing, no doubt about it, particularly in areassuch as transparency, reporting standards and, most importantly, fees!”


“I view the current fundraising market as negative. There are a number of differentfactors at work. (1) Local Australian investors are reducing their exposure toalternatives in some cases; (2) there is still a perception that there is uncertaintyover the tax regime; (3) Then there is the individual track record of groups. Thetotal amount raised within the industry is likely to be lower going forward.”



Transparency

ESG

Performance

Fees

Governance

Key man



On one level, the prospects for privateequity development in the Asia Pacregion are undoubtedly positive.Consumer-driven opportunities, awealth of natural resources, andgeographic proximity to the hugemarkets of China and India are allfactors lining up in the region’s favour.

However, other underlying factorsare tempering the speed at which theseopportunities can be realised and this isreflected to a degree in the currentfortunes of the private equity industry.Respondents to this study point to theoften poor public perception of privateequity in the region, as well as the lack ofdebt funding and a shortage ofdemonstrable track record in some ofthe newer markets. In addition, there areregulatory pressures, driven by anindividual country’s political backdropand/or the financial authorities.

These factors, the current difficulteconomic environment, and therelatively young nature of the privateequity industry in the region mean thatthe majority of investors plan to focustheir attention particularly on theopportunities presented within theircore business area over the coming year.This will include making sure they fullyunderstand where their key strengths lieand where improvements can be made.


“We’re interested in the idea of investingin other/new alternative asset classesand innovating in terms of new types ofinvestment.”


“I think globally, the challenge is theperception of the asset class. Thereason why we can’t IPO at themoment is that the media picks up onevery bad thing, but they don’toverplay any success. They like toknock the private equity industryeven though there are plenty ofsuccess stories. It impacts on IPOsand on the trustees of boards that aresetting asset allocations.”



Macro economy

PE perception

Competition

Performance

Access to debt

Portfolio issues

Deal origination

Exiting

PE HR

LP sentiment

Tax environment

Regulation

Human resources

Industry maturity


FIGURE 10: AREAS OF NEW BUSINESS DEVELOPMENT

Core business 44




N/A 31

“Perhaps more than in many other markets there aresigns of clear industry-led opportunities, be it servicerelated opportunities to the natural resources sector inAustralia or the consumer-led growth in parts of SouthEast Asia.

Challenges remain for private equity investors in theAsia Pacific region, namely the volatility of internationaldebt and equity markets and its flow on effects in fundingdeals, raising new funds and achieving suitable exits.However, as we have seen in previous cycles, the fundsthat can raise capital and deploy it successfully shouldemerge as the winners.”

PAUL GOOLEYCORPORATE FINANCE PARTNER, HEAD OF PRIVATE EQUITYGRANT THORNTON, AUSTRALIA

“The big challenges are the macro-economic environment and its effect ondeal flow. Lots of entrepreneurs arelooking at the conditions and the lowmultiples and are persuaded to bidetheir time until they can get a betterdeal.”


“Key issues for this market are theludicrous price expectations out thereand the fact that it is not a liquidmarket. The lack of debt financing fordeals is also a problem.”


“I see the biggest challenges as beingcompetition for deals, regulatorypressure and the difficulties that PEfirms experience in finding new talent.”


“In the more frontier markets, I thinkthat the regulatory environments are notas clear as they need to be. We doexplore these markets and look at thedeal environment, but with a scepticaleye. We won’t invest unless theenvironment is right, but when it is, wewill want to be there!”


Global private equity report 2011 – MENA 41

Private equity in the region is stillcharacterised by growth capitaltransactions, usually sourced fromfamily owners and private vendors. As a result, GPs’ networks amongst the corporate and entrepreneurialcommunities are seen a critical factor in sourcing deals, with local presencealso key.

Despite the rapidly shiftinglandscape in the region, not least as aresult of the Arab Spring, private equitypractitioners in MENA are broadlypositive regarding the outlook for newdeal activity over the coming year.Around two-thirds expect to seeincreasing activity, although the driversvary from country to country within theregion.

MENA:Investment activity


Secondary buyouts: 20%


Family/private: 60%

“In terms of origination, the keysources are local, family-ownedbusinesses seeking a non-familypartner and intending to expand on aregional basis using non-organicgrowth routes. Privatisations are alsoimportant in a few sectors.”

BAHRAIN survey respondent

“The most significant source ofdealflow will be private companies,either family- or entrepreneur-owned. Other sources will be lessimportant. Private equity is relativelynew in Turkey so, while there mightbe some scope for secondaries, it isnot as important as the othersources.”


42 Global private equity report 2011 – MENA

“A lot of factors are important in winning deals, not least of course havingcapital. Sector knowledge helps a great deal as it provides better judgementand know-how. Also any tangible and intangible knowledge gained via otherportfolio companies also helps. Relationships and reputation are critical –being close to local business partners can be an advantage over other PEhouses not based locally.”


Within MENA in general, there is asense that after taking a hit during thedownturn and the recent politicalupheaval, activity levels will start tobuild gradually. Within Turkey,respondents point to a positiveeconomic outlook coupled with agrowing recognition of private equity.

The notable diversity of thecompetitive landscape is highlighted bythe significance of non-institutionalmoney in the form of family offices,Sovereign Wealth Funds (SWFs) andcorporate groups across the wholeregion. However, opinions remaindivided regarding the likely directionthat entry multiples will take; theunanimous view in Turkey that priceswill stay at current levels is not reflectedelsewhere, reflecting the changing GPlandscape and few recent comparables.

“Primarily, proprietary networks drivedealflow, although you cannot justrely on your networks. Sectorexpertise is important too, although itis not sufficient to have that alone.You need the investment bankingguys who have the networks in placeas well.”

UNITED ARAB EMIRATES survey respondent



Local presence

Sector expertise





Access to capital

Speed

Price


“In Kuwait, bothproprietary networks and well-establishedintermediaryrelationships areimportant in finding andwinning deals in thismarket. A strong localpresence, coupled withsector expertise, are alsokey ingredients.”

ABDULLATIF AL-AIBANPARTNERGRANT THORNTON, KUWAIT

“Prices are decreasing, multiples are going down. There is less capitalavailable in the market and that pushes prices down.”


“SWFs get the first look-in on potential deals, followed by semi-Sovereigns, thebig PE houses, the local PE players, then the locally-based foreign PE houses. If you are not here, you miss out; not having a presence on the ground causespeople to question your experience.”



Other: 4%

Family offices: 15% Foreign/international Domestic private equity : 36%

Trade buyers: 15% Foreign/international


private equity : 30%

“In Egypt, the recent political upheavals have led to an extremely volatile situation which has led to areduction in deal flow. However, we are confidentthat when stability returns to the market place anumber of opportunities will present themselves.”

HOSSAM EL BESHERPRINCIPAL PARTNERGRANT THORNTON, EGYPT


From a portfolio company perspective,there is also growing optimism. There isa sense that macro economic prospectsare improving throughout the region(although this is often from a low base),while at the same time, private equitypractitioners increasingly are confidentabout the state of their own portfolios,helped by typically low levels of debt.Likewise, many players highlight thelevel of maturity of their currentportfolios, not least as a result of higherlevels of hands-on involvement withthese businesses over recent times –something that they expect to continue.

Input from investors in the MENAregion tends to focus on strategicdiscussions as well as on more specificareas that help to professionaliseportfolio businesses, including HR andgovernance. Some also point to theexpertise that they can bring in the areaof M&A, and indeed just over a third ofrespondents expect cross-border M&Alevels to increase at their portfolio firms.

Portfolio

FIGURE 4: ECONOMIC OUTLOOK FOR PORTFOLIO BUSINESSPERCENTAGE

Neither positive nor negative: 29%

Very positive: 14%

Positive: 57%

“We are hands on, on all levels, as it’snot just about financing deals. We areabout growth capital, not financialengineering, and it is a collaborativeeffort that involves both operationaland strategic input.”


“We focus on family businesses andbuy and build acquisitions. For us,therefore, it is very much aboutorganic growth – purchasing thebusiness and then creating a highervalue over time.”


“Value uplift is about top-line growthof the business. In this region, atypical private equity investment is agrowth capital investment so there isless value growth from financialengineering and multiple arbitrage.We do use financial leverage, butmuch less than is typical in someother regions.”



“My belief is that the fundamentals of the region are very strong. These include high oil prices; the low number ofdistressed banks; stabilising real estate market including in hard-hit Dubai; a young population of sophisticatedconsumers seeking quality services from foreign and indigenous brands; the need for governments to encouragebusiness in infrastructure, education and healthcare, and to get SMEs more involved in the economic cycle to spurgrowth and create employment.”




Financial engineering: 4%

Market growth: 26%

M&A growth: 17%

Performance

improvement: 49%

“Our main areas of portfolio inputinclude corporate governance,expansion into new markets, and add-on acquisitions.”


“The MENA economy is growing at adecent rate (5% GDP) compared toWestern markets. The market couldbe doing much better, but then I amnot complaining, as it is still betterthan it could be considering thegeneral macro-economic state.”


“The issue for a lot of companies ishow to execute and position yourselfin a rapidly growing market. Marketgrowth may be a key driver, but thechallenge is the strategy and tacticsyou are going to adopt as the marketevolves.”


“In Saudi, the nationaleconomy is growing andthere is a relatively stablesituation in terms of themacro-economic andpolitical outlook. Acombination of growthand stability creates apositive outlook.”

NASSER BARAKATCONSULTANCY DIRECTORGRANT THORNTON, SAUDI ARABIA

With private equity players in the regionhaving invested time and effortprofessionalising and growing portfoliocompanies, there is an expectation thatthe next 12 months will see a renewedfocus on divestments. Many point tomore positive conditions for exiting, withimproved liquidity and buyer interest,which is welcome news for groups thatneed to show realisations prior to anyforthcoming fundraising programme.

As is the case elsewhere, the appetiteof corporate buyers is fundamental to thesuccess of divestment programmes at thispoint in time. However, unlike in manyother markets, there is more interest inIPOs and belief that this channel is aviable exit route. Conversely, keysponsor-to-sponsor deals are not yet abig feature of the market, although somepractitioners do expect to see thembecome more relevant in the future.

With market fundamentals beginningto look more positive – rising valuationsand portfolio companies in better shape– practitioners believe that the longer-term prospects for returns are positive.However, with the stuttering macroeconomy keeping a brake on things,current views on the outlook remainsomewhat mixed.

Exit

“Prospects for returns are good. Private equity valuations are up, return onequity is moving higher.”


“IPOs are available but are not the most preferred route because of thelengthy lock-in periods.”



Secondary buyout: 16%

IPOs: 16%

Trade sale: 68%

“Strategic sales and IPOs will be themost prevalent exit route.Secondaries will happen but won’t bethe most important source yet.”




Fundraising

Private equity practitioners across theMENA region are broadly positiveabout the outlook for fundraising overthe coming year, despite the fact thatthey also tend to be predictingconsiderable churn within their own LP bases going forward.

The MENA region, in general, is onein which, to date, international money hasaccounted for a significant proportion ofprivate equity capital. However, changesin the availability of domestic capital forprivate equity funds are driving concernsover fundraising in some quarters andoptimism in others. On the one hand,domestic money in Turkey has thepotential to be an increasingly significantpart of the landscape; while in other partsof the MENA region, retrenchment ofdomestic groups that have previouslybeen investors in private equity ishighlighted as a negative feature of the market.

Against this backdrop, as withprivate equity markets across the world,GPs report that LPs are becoming moredemanding.

FIGURE 7: FUNDRAISING ENVIRONMENTPERCENTAGE

Negative: 23%

Positive: 46%

Neutral: 31%

“I’m negative on fundraising due to the retrenchment of regional investorsfrom capital markets in the wake of the global crisis (including fromalternative assets such as PE).”


“LPs being increasingly demanding is not so much of an issue. However, as themarket matures over the next 3-4 years, there will be increasing interest inthe secondary buyout market, and you will see greater demands made by LPsas a result.”


“The fundraising environment will improve from what we have seen so far this year.It is difficult to say how things will play out; it is tough convincing investors to part with their money as PE is very much about long term investments – investorshave to wait for their money to work.”


As sentiment begins to improve acrossthe MENA region, private equityplayers are showing signs of augmentingtheir teams in preparation for theopportunities that lie ahead. Threequarters of players expect to increasehead count over the coming year,particularly in the area of front-line dealdoing. This focus on transactional teamenhancement reflects the expectationthat GPs’ principal focus over thecoming year will be on their corebusiness, as well as seeking dealopportunities in neighbouringgeographical markets.

Somewhat surprisingly, given theoverall positive expectations regardingfundraising, LP sentiment is seen byMENA GPs as the biggest challengefaced by the industry at this time.However, it appears that this concern islinked to perceived LP views on the lackof GPs with a demonstrable track recordin the MENA region, rather than areflection on the respondents’ ownfundraising prospects.

The recent political unrest witnessedacross parts of the MENA region is felt,broadly, to be having at least someimpact on the prospects for privateequity in the region. While the dust hasyet to settle, the mood is one of believingthat the undeniable short-termdisruption will ultimately give way toenhanced opportunities.


“Yes, the political unrest has impacted the region in a big way. Political issues are abig factor in the decision-making process for potential investors, and the recentturmoil has slammed the brakes on investment returns – people don’t want to takethat big a risk, particularly SWFs. However, in the long term it will be business asusual as this region has the potential to be hugely successful for PE.”




LP sentiment

Competition

Regulation

Deal origination

Portfolio issues


Industry maturity

PE perception

Performance

PE HR

Exiting


“In the long term theunrest that this region hasseen will have a positiveimpact as it will bringstability and growth,although it will meanshort term volatility.Although the next 12months will be disruptive,the short term volatilitywill lead to mid-termopportunities.”

DAVID FISHERCEOGRANT THORNTON, MIDDLE EAST ADVISORYSERVICES

“The challenges are fundraising, findingand winning deals (family businesses toinvest in), and the fact that, in general,the PE market is still young in thisregion. The industry needs to be able todemonstrate good results to illustrate atrack record of delivering.”


“Turkey is still on a learning curve andentrepreneurs are still trying tounderstand what PE does and bringsbeyond money. In a short time we willsee an exponential growth in PE-backed deals. Competition will remaintough especially for good deals as thisis not yet a mature market so thenumber of transactions are limited.”


“The Middle East country that has really been affected by the recent politicalunrest is Egypt, where there were meaningful levels of private equity activity.The other countries affected, namely Libya and Syria, did not have much PEactivity. In countries like Turkey and Saudi there has been no real change – theyare very stable and private equity activity continues. We are looking to doinvestments in the GCC economies.”


“We see the SME space as a growth opportunity in the region, focusing ongrowth capital deals rather than buyouts for small– and medium-sizedenterprises.”


“The key challenge for private equity in this region is to develop the valueproposition beyond the money. A lot of funds are very domestic and a lot ofwhat is being done does not have a value-add component. Business ownersand institutions have access to different sources of capital so private equityneeds to demonstrate what its value-add is in real and measurable terms.”



Core business 36




N/A 14

FIGURE 10: LASTING IMPACT OF POLITICAL UNRESTPERCENTAGE

No impact: 18%

Major impact: 27%

Some impact: 55%

50 Global private equity report 2011 – BRICS

The BRICS countries are the mostbullish with regard to expectations forrising activity levels, with Brazilian GPsthe most positive of all. The BRICScountries continue to be predominantlygrowth capital markets in private equityterms, the exception perhaps beingSouth Africa where a more establishedbuyout market exists. Family and privatebusinesses provide the key source ofdealflow and, as such, GPs put particularemphasis on their own corporate andentrepreneur networks in identifyingopportunities. While a host of otherfactors are also listed as significant, manyof the top ranked are in some way linkedto the importance of self-origination andfinding a successful angle in thesecompetitive markets.

BRICS:Investment activity


Other: 8%


Public markets: 6%

Secondary buyouts: 10% Family/private: 68%

“In China the key deal source isprivate/family-owned companies.Growth equity deals will remain themain source of dealflow. It willdefinitely not be the public marketsor corporate divestments.”


“Deals are likely to originate mainlyfrom private businesses looking toraise capital from private equity forthe first-time. There is an increasedawareness and willingness to do so.”


“The competition is from domestic PEhouses and international PE players.The public markets are depressed sothere is limited competition from thatquarter at the moment.”


Global private equity report 2011 – BRICS 51

“In India, family- and privately-ownedbusinesses are the keysource of private equitydealflow. As a result, awhole range of factors areimportant in sourcingdeals, includingnetworks, intermediaryrelationships, sectorknowledge, localknowledge, track recordand proven speed ofexecution.”

SID NIGAMPARTNER, HEAD OF M&AGRANT THORNTON, INDIA

“There is competition from domestic and international PE houses. Strategicbuyers will also start to come back. Typically, they have deeper pockets thanPE houses and can add value by creating synergies so will be willing to pay ahigher price for assets.”


“Where PE firms are under pressureto get realisations on deals you areseeing some secondary buyouts. Thepublic-to-private market is tough.Overall, it’s generally the smaller dealmarket where activity is happening.”


“Colombia is probably the safest ofthe newer markets, though Peru alsohas promise. Chile has issues but isstill an important area. Further downthe line there may be potential tomove into Spain and Portugal,reversing the main trend currently.”

LATAM survey respondent





Local presence


Sector expertise

Price


Access to capital


Speed


”Reputation, longevity and a proven ability to execute deals are allimportant in finding opportunities. If you have that, the intermediaries willshow you everything, but if you fail a few times that will change. Once in,you have to show that you can connect with the entrepreneurs and relate totheir realities. They have quite a choice of PE houses to look at and goodnews travels.”


“There is more deal intermediation than there used to be, due to lessdifferentiation in the markets. PE firms need to be more market savvy, withgreater experience and business knowledge. We are seeing the early stageevolution of what happened in the UK and US when PE firms becameestablished there.”


“In terms of competition, for growth capital it is the proliferation of local andinternational PE funds that have sprung up. In the emerging buyout area it isstill the large international houses.”


“Prices will start to weigh in favour of PE, as the market softens. However,competition is increasing so that will offset the lower prices to a degree.”


The main sources of competitionremain private equity specificthroughout the BRICS, with manyplayers attracted to the consumer-relatedopportunities of these growtheconomies, as well as development-linked sectors such as infrastructure,particularly in Brazil and India. With thevolume of opportunities available withinthe BRICS markets themselves, thetendency is for GPs to focus their effortsin their domestic region. Where they docross borders, it tends to be to countriesstill within the same cultural sphere ofrecognition.

Competing pressures on pricinginclude strong economic growth andrising competition versus a fear ofoverheating.


Other: 2%

Family offices: 3% Domestic private equity : 40%

Public markets: 5%

Trade buyers: 18% Foreign/international


private equity : 32%


Governance is a further area highlightedin terms of PE input to portfolio firms,and an appreciation of the issues aroundESG appears to be on the rise across theBRICS countries. The key driver of thisis the perception that it represents ‘bestpractice’, but there are also evidentpressures from a number of sources, eg LPs, portfolio managers, regulators,that are at play here.

Many BRICS-based GPs stress thathands-on involvement in investees isimportant. Particularly noteworthy isthe range of areas in which GPs seethemselves getting involved, with thekey inputs including strategic directionand financial planning, the latter beingrelatively more significant within theBRICS countries than elsewhere, andoften focused on areas such as budgetingand cost management.

Portfolio

“Market growth is the main driver ofvalue, but we also try to makeoperational improvements to ourportfolio companies.”


“PE firms really need to be hands-onto deliver value, and many are. I don’tsee that changing. The key areas arestrategic input and financialplanning.”



Strategic input

Financial planning

M&A

Human resources

Governance

Access to networks

Operational input

Professionalisation

Exit planning

Mentoring

Cost control

Monitoring

Sector knowledge




“Top line is the most important driver of growth. Beyond that, working capitalimprovements and expansion also drive value growth. Financial engineeringwill contribute, but this is not significant since mid-market deals have lowerlevels of debt and lower multiples have been paid for them.”


Overall, performance improvementremains the most important value driverat portfolio firms but private equitypractitioners based in the BRICScountries are broadly positive about theeconomic outlook and its impact ontheir portfolios, with those based inBrazil and India generally the mostpositive of all. The typically low levels ofleverage in BRICS PE deal structures hasalso meant that debt has not been a causeof stress for too many companies.However, this optimism is laced with anelement of caution relating to potentialslow down and perceived marketvolatility. Despite this, market growth isstill seen as a relatively more importantvalue driver in BRICS countries thanelsewhere.

FIGURE 5: PORTFOLIO VALUE DRIVERSPERCENTAGE


Financial engineering: 2%

Market growth: 35%

M&A growth: 13%

Performance improvement: 46%

“In China, building value comes down to earningsgrowth. Private equity firms cannot rely on arbitrage inthe current climate. They need to demonstrate that theyhave delivered tangible improvements to the business,such as improvements to the performance andstrengthening of the management team.”

LIU DONGDONGPARTNER, NATIONAL LEADER – ADVISORY SERVICESGRANT THORNTON, CHINA

“Generally speaking, theconsciousness of ESG issues isincreasing amongst Indianentrepreneurs, but it is very much a work in progress.”



“Put simply, we identify the drivers ofgrowth for each individual company andthen help them to execute a businessplan. The key is getting the managementteam sold into the plan.”

RUSSIA survey respondent

“Even five years ago, ESG issues werenot as closely followed, but now,driven by the LPs and the largerinternational players, it is growingrapidly. It forms part of our duediligence process, our complianceprocess and the post-deal activities.It’s perhaps not as widespread amongsmaller local investors, but it will be.”


FIGURE 6: IMPORTANCE OF ESGPERCENTAGE

Value driver: 3%

LP pressure: 13%

Perceived best Manager awareness:

practice: 39% 10%

Regulation: 19%

Deal selection: 16%

“There is an increased need forimprovement in governancestandards. We assist investeecompanies in becoming more sociallyresponsible and investor friendly.”


“We focus on strategic rather thanoperational issues. The main areas ofinvolvement are governance systems,financial controls and developingmanagement teams. We also helpportfolio companies with growth andacquisition opportunities in newmarkets.”


“ESG issues are not very important inChina, although increasinglycompliance needs to be in order.”


This complex picture is echoed in thevarying expectations regarding futurereturns. GPs in countries such as Braziland India are particularly negative in thisrespect, often expecting downwardpressure as a result of high entry pricesin recent times.

Exit


China Hong Kong India South Africa Brazil Russia

Increase 25 20 25 67 71 100

Stay the same 0 80 50 33 29 0

Decrease 75 0 25 0 0 0

Distinctions can also be drawnwithin some countries, with Hong KongGPs slightly less pessimistic than theirmainland counterparts. This is primarilya reflection of the state of the IPOmarkets. Across the BRICS countries,the importance of IPOs as an exit routeis notably higher than in other regions.But, while public market sentiment isperceived to be working in privateequity’s favour in places such as Brazil,Hong Kong and India, this is currentlyless likely to be the case in mainlandChina, Russia and South Africa.

Expectations for exit activity varybetween the BRICS countries,highlighting the differing points in theevolution of the private equity industryreached in each. While half of all BRICS-based respondents expect to see increasingexit levels over the next 12 months, manyGPs in mainland China and India expectto see falling levels of realisations. The mood within these larger, moreestablished markets, which already havesome track record of exits, is moresubdued than in areas such as Brazil,where many portfolios are only nowcompleting their first cycle.


“Exits will increase. There are lot ofportfolios reaching maturity in Russiaand this will be the main driver.”



In this market I suspect it will be aneven split between secondaries and

trade sales in terms of the keychannels to exit.

“With the region predicted to have one of the fastest growing economies, and private equity beingincreasingly viewed as a viable option, we are expectinghigh levels of activity in the South African privateequity market in the next three to five years.”

JEANETTE HERNHEAD OF CORPORATE FINANCEGRANT THORNTON, SOUTH AFRICA

“I believe exit activity will decrease,mainly because of the weaksentiment in the market. It’s a buyer’smarket not a seller’s market at themoment.”


“IPOs and trade sales are key here. Also, the secondary market is growing in Asia, but is still small at the moment.”


“I think there will be downwardpressure on returns. Because of thevery high multiples paid over the lastcouple of years the likelihood is thatthey will fall.”



Fundraising

Ultimately, performance is king in privateequity and no more so than in marketsthat have been sold on the promise of highrewards and are now faced with realisingthis potential in tougher economic times.Unsurprisingly, therefore, GPperformance and its communication arethe key areas in which LPs are seen to beapplying pressure.

The increasingly critical eye beingturned by LPs on private equity meansthat the initial sense of opportunity in thenow ‘more emerged’ markets, such asChina and India, is to a degree beingreplaced by a more pragmaticappreciation of the risks, particularly ascompetition levels in these markets haverisen. At the same time, the importance ofinternational money in all these regionsleaves an individual country’s GPsvulnerable to LPs shifting their attentionto the latest highest growth markets.

Despite the challenges, GPs in theBRICS countries expect to raise largersuccessor funds, highlighting theongoing potential of these markets asthey continue to develop.

“The overall fundraising story isprobably negative. There are lots ofpeople raising and while the macrostory might be good, the actual trackrecord for returns is very patchy andsome firms will struggle.”


“Fundraising remains tough and aschallenging as it has been in the lastfew years. Until money is returned toLPs from older investments,fundraising will remain challenging.”


“LP demands are increasing. Dealingwith them is never an easy process,even if you have a good track record.”


“LPs are increasing the pressure interms of reporting, terms andperhaps most importantly in trying togenerate the metrics that will helpthem to differentiate the goodperformers from the not so goodperformers.”


“More than ever, you need to have atrack record and LPs want to know themanagement team in depth.”



Performance

Transparency

ESG

Fees

Value drivers

Key man

Dealflow

Alignment of interests

Differentiation


Regulatory matters are seen as thebiggest challenge facing the BRICSprivate equity markets. With the rapidgrowth of the private equity sectorwithin these markets, they have alsoreceived increased attention fromfinancial regulators keen to ensurecontrolled growth. But even without thewatchful eye of the authorities, thesemarkets would still find themselveswrestling with the challenges internal tothe industry of rapid growth, namelyhigh levels of competition and a shortageof talent.


“We are definitely expanding. We havealready moved from two to fourpartners in the last year, and over thenext 12 months we will look to addfurther mid-level investmentprofessionals.”


“Following the presidential electionsthere will hopefully be less corruptionand local government intervention, andthis will result in opportunities.”


“As the market develops people will haveto think harder about their strategy. Inthe past they did well in multiplearbitrage between public and privatemarkets, but things have changed.”


“We will be recruiting in the areas ofportfolio management and also analystsat entry level. I would also say it isdifficult recruiting good quality privateequity staff with suitable experience andknowledge in deal doing.”


“LATAM as a whole needs to show thatit can deliver good exits as well asinteresting investment opportunities.There is some macro economic riskfor Colombia, especially on theappreciating currency, but it’s notmajor.”



Regulation

Macro economy

Deal origination

Competition

Performance

PE HR

PE perception

LP sentiment

Fiscal environment

Access to debt

Exiting


Portfolio issues

Tax


FIGURE 10: AREAS OF RECRUITMENTPERCENTAGE

Deal doing 44

Portfolio operations 14

Research 14

IR 11

Admin 3

Legal 3

Other 3

N/A 8


Core business 47




Deal size shift 3

As some of the BRICS countriesarguably move from being ‘emerging’ to‘emerged’, there are signs that many ofthe players in the market areinstitutionalising by building their coreteams as well as ‘supportinginfrastructure’. More GPs plan toincrease headcount in the BRICScountries than elsewhere, including areassuch as research, portfolio managementand investor relations. This is nowheremore the case than in China.

The emphasis on building investmentteams reflects the most oft-cited focus ofprivate equity firms over the comingyear, namely sticking to core businessand proving that they can deliverreturns. Also in markets such as India,China and South Africa, GPs point tothe importance of new geographies asthey seek to identify opportunities.


“The big opportunity lies in the improvement of prospects for Africa. Finallyit’s getting its act together – politically and economically – i.e. legals,regulations and ease of doing business are slowly getting better. This iscoupled with the African consumer spending more. If all this continues wehope to fundraise by June 2012.”


“It is a very large market and there are tremendous opportunities to findcompanies that were completely below the radar 3 or 4 years ago but whichare growing very strongly. But they are still not necessarily that visible and thatmeans you have to look outside of the tier 1 cities to find them and thereforeneed to expand and develop your network.”


“The main challenge is maintaining a strong investment discipline: India has arecord of seeing spikes in activity and this could affect returns and hinderdevelopment. The second area is regulatory risk. But this is not a new thing inthe market and the best investors can turn it into an advantage by the way theyare able to deal with often unpredictable changes.”


“We will be needing to increase our team size, primarily in terms ofinvestment staff and also on the compliance side. On this latter point, thelocal financial regulator has brought in onerous new compliance standardswhich we will have to meet.”


“China, India, Brazil –these are all now majormarkets on the privateequity stage. As theycement their positionsthey need to continue tobuild track record,proving that they can addvalue to their investmentsand generate strongreturns.”

LINK COSTAPARTNERGRANT THORNTON, BRAZIL


This report provides a global snapshot ofthe opportunities and challenges withinthe private equity industry as seen froma practitioner’s perspective. Thedifferences in what it means to be anactive player in specific global marketsare examined, as are the key themes thatresonate around the world.

During autumn 2011, 144 interviewswere conducted with top executivesfrom private equity firms. Respondentsincluded industry GPs in five principalregions/categories: • Western Europe• North America (USA and Canada)• Asia Pac (Australia and South East

Asia)• MENA (including Turkey)• BRICS, Brazil (and broader

LATAM), Russia, India, China,South Africa.

Sample and methodology

FIGURE 1: SAMPLEPERCENTAGE

MENA: 10%

Asia Pacific: 11% Western Europe: 33%

BRICS: 25% North America: 21%

Participants were identified from anumber of sources including industryassociations, market directories andcontact networks.

The interviews were conducted onan unattributed basis and werestructured loosely around the variousstages of the private equity cycle,incorporating new investment activity,portfolio management, exiting andfundraising. This approach enableddetailed exploration of likely trendsthroughout the cycle and identificationof key pressure points within the chain.

Interviews included a mixture ofquantitative and qualitative questions.This report includes graphs and chartsderived from both the quantitative dataand, where appropriate, the coding ofresponses to qualitative questions toprovide statistics highlighting keytrends. Some charts will also reflectmulti response questions.

FIGURE 2: WESTERN EUROPEPERCENTAGE

France 20

Germany 15

Italy 9

Spain 6

Sweden 11

United Kingdom 39

FIGURE 6: BRICSPERCENTAGE

Brazil/LATAM 25

China/Hong Kong 25

India 25

Russia 8

South Africa 17

FIGURE 4: ASIA PACPERCENTAGE

Australia 30

Singapore 30

Vietnam 40

FIGURE 5: MENAPERCENTAGE

Bahrain 13

Turkey 40

United Arab Emirates 47

FIGURE 3: NORTH AMERICA PERCENTAGE

Canada 33

United States 67



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Grant Thornton is one of the world’sleading organisations of independentlyowned and managed accounting andconsulting firms. These firms provideassurance, tax and advisory services toprivately held businesses and publicinterest entities.

More than 2,500 partners provideclients with distinctive, high quality and personalised services in over 100countries. This gives Grant Thorntonthe ability to operate as both a local andglobal partner, sharing knowledge, skillsand resources with corporate clients andentrepreneurs across the world. Ourspecialist teams work with the privateequity industry and its leaders globally.

For a detailed list of Grant Thorntonmember firms and contact details pleasevisit www.gti.org

Grant Thornton member firms

Global overview and Western Europe Martin Goddard Global service line leader – TransactionsGrant Thornton International T +44 (0)20 7728 2770E [email protected]

North America Steve Lukens Head of AdvisoryGrant Thornton US T +1 212 542 9640 E [email protected]

Asia Pacific Bill Hutchison Advisory services partnerGrant Thornton Vietnam T +84 8 3910 9100 E [email protected]

MENA David Fisher CEOGrant Thornton Middle East Advisory services T +971 (0) 4 447 3874 E [email protected]

BRICS Harish HV Head of Transaction advisory servicesGrant Thornton India T +91 80 2430 800 E [email protected]

Grant Thornton contacts

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© 2011 Grant Thornton International Ltd. All rights reserved.References in this publication to ‘Grant Thornton’, ‘we’ and ‘our’ refer to either Grant Thornton International Ltd, aglobal organisation of member firms, or one or more of the individual member firms of the global organisation,each of which is a separate legal entity and has no liability for each other’s acts or omissions. Grant ThorntonInternational Ltd, a UK private company limited by guarantee, does not provide services to clients. Services aredelivered independently by the member firms. Grant Thornton International Ltd and the member firms are not aworldwide partnership.