global private equity report 2012

The search for growth

GLOBAL PRIVATE EQUITY REPORT 2012

Contents

01 Foreword

The Private Equity life cycle

04 Fundraising

09 Investment activity

15 Portfolio

19 Exits

Special report

22 The search for growth

Appendix

32 Sample and methodology

33 Grant Thornton contacts

GlossaryBRICS Brazil, Russia, India, China and South AfricaCEO Chief Executive OfficerESG Environmental, social and governanceGP General partnerIPO Initial public offeringIR Investor relationsIRR Internal Rates of ReturnLATAM Latin AmericaLP Limited partnerM&A Mergers and acquisitionsMENA Middle East and North Africa (including Turkey)N/A Not applicablePE Private equityTMT Telecommunications, media and technology

Between July and September 2012, 143 interviews were conducted withtop executives from private equity firms. Respondents included industrygeneral partners from five principal regions/categories:• Western Europe• North America (USA and Canada)• BRICS (Brazil and LATAM, Russia, India, China and South Africa• Asia Pacific (Australia and South East Asia)• MENA (Middle East, North Africa including Turkey).

The full methodology can be found on page 32.

The views and opinions in this report expressed by those private equity survey respondents providingcomments or quotes are theirs alone, and do not necessarily reflect the views and opinions of Grant ThorntonInternational Ltd or any of its member firms.

Global private equity report 2012 1

Foreword

MARTIN GODDARDGLOBAL SERVICE LINE LEADER – TRANSACTIONSGRANT THORNTON INTERNATIONAL

Challenging timesAt the time of producing our second global reportinto trends and attitudes within the global privateequity (PE) industry, we find it confrontingnumerous challenges. There is a need to capture a share of the burgeoning funds available from anincreasingly vigilant and discerning Limited Partner(LP) community and to deliver best in class. All ofthis in an economic environment where growthrates are declining and, in some economies, havedisappeared completely. Furthermore, the industryis also being repeatedly challenged by theincreasingly negative perception of private equity in the public arena. Nowhere is this increasedawareness and negative sentiment greater than in North America.

With the public more conscious of privateequity and the industry high on the media’s agendafor a number of reasons, it is fascinating to see howprivate equity is responding and adapting to this

new found recognition in its core markets and inlocations where the private equity story is still in itsinfancy. Not only is private equity more aware ofits public image and its increased regulatorydemands, but the industry has become far moremindful of how it approaches fundraising andachieves the growth demanded by its investors.

For many, fundraising will be the definingchallenge of the next 12 months. In what is alreadya highly competitive market, many private equityfirms in the process of preparing for fundraising are compelled to give serious thought to what willattract LPs. LP churn is expected in the nextgeneration of funds as the power shifts further intothe LP’s favour. This is compounded by the factthat LPs are increasingly unconstrainedgeographically. They have many more optionsavailable and this enables them to wield greaterpower and influence.

FIGURE 1: KEY CHALLENGES FACING THE PRIVATE EQUITY INDUSTRYPERCENTAGE TOTAL RESPONSES

Regulation 15

Macro economy 15

Competition 10

Fundraising/IR 8

Performance 7

Dealflow 6

PE model 6

Pricing 5

Exiting 5

Tax 5

PE Perception 5

Others 13

In last year’s inaugural report, we reflected onthe key regional themes and issues for privateequity. We noted that different markets each havetheir idiosyncrasies, challenges and drivers, but thatthere was evidence highlighting global convergencein terms of private equity practice. There remainsome fascinating regional trends from this year’sresults, which indicate that practitioners in NorthAmerica have an increased confidence about theirability to invest, raise debt and generate returns,whilst MENA stands out as a region whereoptimism is at its highest and where we expect tosee a marked increase in PE activity in the short to medium term. In contrast, Western EuropeanGeneral Partners (GPs) anticipate continuingchallenges in a local market, which is flat at best.

2 Global private equity report 2012

The search for growthThis year, the report focuses on how private equityfirms are attempting to secure growth for theirfunds and their portfolio companies in a worldwhere many economies are experiencing limitedgrowth, if any at all. There is no doubt thatglobalisation is no longer the preserve of the largestmultinationals. Companies of all shapes and sizesnow need to be adept at looking beyond boundariesin the relentless pursuit of growth. Accessinginternational markets, businesses, investors,consumers and potential acquirers are now allfundamental strategies for PEs and their portfoliosin order to exceed their returns objectives.

The on going financial turmoil in the West andcreeping uncertainty in the sustainability of theeconomic growth seen in ‘emerging markets’,means that where some see challenges, others will see opportunities.

Many Western European and North Americanfirms are restricted geographically by the terms ofinvestment imposed upon them, albeit that there isgrowing evidence of PE support for theinternational development plans and growth ofportfolio companies. Perhaps in the case of NorthAmerican funds, renewed confidence in their owneconomies’ prospects is also a contributory factorto a less adventurous international strategy.

The recent news of the launch of a networkbetween four leading European mid-market firmsillustrates how firms are seeking innovative riskaverse ways to access global markets withoutcommitting significant resource and capital.

This year’s report indicates that the majority ofrespondents from both MENA and BRICS arenow seeking to access markets outside of theirhome countries in the search for growth throughinvestment or by opening offices. With manyexciting growth economies within their regions, inmany cases there will be “proximity investment”into neighbouring high growth markets.

63% OFNORTH AMERICANRESPONDENTS SEE THE IMAGE OF PRIVATE

EQUITY DETERIORATING, WHILST

53%OFMENA RESPONDENTS SEE AN

IMPROVEMENT


New frontiersGiven that a central role of the private equitycommunity is to seek new growth opportunitiesand then to act as a catalyst for that growth, manyof today’s investors are finding themselves at thecentre of the evolution of a true global economyand the continuing search for new corporatefrontiers.

While there are perhaps few ‘true’ frontiermarkets left, the shifting of the geopolitical andeconomic picture constantly impacts on where thenext opportunity may lie.

This time last year, for example, it would havebeen hard to imagine Myanmar being highlighted as frequently as it has been this year as a marketwith considerable potential for private equityinvestment.

Likewise, the strengthening of the Japanese Yen has prompted a wave of interest from Japanesecompanies in acquiring foreign businesses. Thistype of activity has not been seen since the 1980s,with exit-hungry private equity firms keen to takeadvantage as potential vendors.

As a continent, it is perhaps Africa that has theimage of the last frontier for private equity, but even this region is already attracting considerableattention as investors from established markets likeSouth Africa and MENA.

SummaryGrowth remains the key and is driving theglobalisation of the PE industry at all levels.Whichever route to growth is taken and whicheverstage of the PE life cycle you are focussed on, youcannot escape geographical influences, particularlyat this time when economic and political conditionsdiffer so significantly from region to region.

At the same time, private equity is also acting as a driver of globalisation. When globalisation is a component of the growth strategy, it can betempting to focus too much attention on emergingmarkets, however, the international opportunitywill vary considerably. For one PE the next frontiermay be investing or accessing funds in aneighbouring country. For another it could beabout assisting a portfolio company to access a new market, or to outsource manufacturing to alow cost environment.

The search for profitable growth remainsfundamentally about strategy rather than puregeographical expansion.

With fundraising high on the agenda, growthnot only remains vital to the success and longevityof individual firms, but also for the subsequentsuccess of the private equity industry as a whole, as regulators, media and politicians seek to observeand judge, supposedly in the public interest.

Behaviours are changing in all aspects of theprivate equity industry, not least, as this reportshows, how and where firms search for growth.


The Private Equity life cycle:Fundraising

51%OF BRICS RESPONDENTS SEE THE FUNDRAISING ENVIRONMENT ASVERY NEGATIVE

The fundraising environmentAs is being widely reported, the fundraisingenvironment is still characterised as very tough, andindeed many GPs feel it is getting tougher with allregions recording more negative sentiment this yearcompared to last.

This is especially evident in Asia Pacific andBRICS regions where over 50% of respondents seethe fundraising environment as very negative, andanother 30% see it as negative. Indeed the BRICSshow the steepest decline in this measure since 2011and it is the Indian PE firms in particular that havethe most negative outlook on the ability to raisenew funds. This is a significant shift from only afew years ago where fundraising in these once high growth territories led to significant fundsbeing raised.

North America and MENA are the regionswhere there is some positivity about raising newfunds, but even here, only around 20% ofrespondents feel positive about prospects. ManyGPs point to a divided market in which a selectgroup of top-performing managers are raising funds with relative ease, while the rest are finding it very difficult.

The fundraising environment is evolving andthere remains a considerable amount ofapprehension in the PE industry as to what the finaloutcome will be for their firm. For now, if firms feelconfident or upbeat about raising new money, theyremain in a small minority and perhaps have a hugecompetitive advantage that will bear fruit in thecoming years.

FIGURE 2: HOW DO YOU VIEW THE CURRENT FUNDRAISING ENVIRONMENTPERCENTAGE OF RESPONDENTS

ASIA PACIFIC20122011

BRICS20122011

MENA20122011

NORTH AMERICA20122011

WESTERN EUROPE20122011

VERY POSITIVE POSITIVE NEUTRAL NEGATIVE VERY NEGATIVE N/A


Fund sizeDespite the challenging environment, almost half(45%) expect their next fund to be larger than itspredecessor. However, sentiment is slightly lessbullish than in 2011, when 56% expected the fundto be larger and there is now a higher proportion ofrespondents expecting no growth in their fund sizethis time round.

It is the MENA region where PEs are mostconfident about raising larger funds. This is the firstsign in the research of the apparent confidenceinherent within this market when compared to theother regions. Whether this is due to a PE marketthat has yet to mature or due to the genuine growthprospects of a region yet to be established, eitherway this is the region where optimism is at itsgreatest.

“The market is dividing. Some will find itcomparatively easy, some will find it almostimpossible and will need to restructure. Thefundraising experience can be very positive for certaintypes of strategy and neutral for others. If you have anattractive investment thesis with proven performancethen your offering will be attractive to LPs.”

DAN GALANTEGRANT THORNTON US

“Fundraising is hard. The two or three firms that are seen as the topperformers have found it easy and been quick to raise. With thesuperannuation funds there is still money there, but there is a realflight to quality and consistency.”

Australian survey respondent

“Amongst those raising India-specific fundsthere is a real split – a few good funds that areOK and a lot that are struggling to raise secondgeneration vehicles.”

Indian survey respondent

“The next fund is likely to be slightly bigger toaccount for the low leverage environment.”

German survey respondent

FIGURE 3: FUTURE FUND SIZE VERSUS PREDECESSORPERCENTAGE OF RESPONDENTS

ASIA PACIFIC 39 46 15

BRICS 48 44 8

MENA 60 30 10

NORTH AMERICA 48 48 4

WESTERN EUROPE 38 49 13

LARGER SAME SIZE SMALLER

FIGURE 4: FACTORS CONSIDERED IMPORTANT IN ATTRACTING LPSPERCENTAGE OF TOTAL RESPONSES

Track record 37

Team 15

Coherent strategy 14

Differentiated 6

Dealflow 5

Consistency 4

IR focus 3

Operational value add 3

Longevity 3

Fund structure 2

Succession 2

Others 6

Attracting LPsUnsurprisingly, a demonstrable track record isthe key attribute that GPs feel they need to exhibitin order to successfully attract LP commitments intoday’s market. 100% of respondents in AsiaPacific note that track record is an importantfactor, as LPs increase their own due diligence onPEs and their ability to discriminate in generatingreturns. Two other key areas in which GPs feel theyneed to impress are:i) in the presentation of a coherent, and often

differentiated, investment strategy and ii) a team that inspires confidence, attracts and

selects good return investments and delivers this strategy.

“European GPs need a very sharp answer to the question‘why invest in Europe right now?’ – basically you needto be able to show a strategy that can generate growth inthe current environment.”

THIERRY DARTUSGRANT THORNTON FRANCE

“Demands are increasing in terms of informationand due diligence during the fundraising stage,and then information and reporting in theinvestment phase. There’s also more attentionon terms – in particular, LPs want to know whatthey will get in return for committing early.”

UK survey respondent

“No matter what anyone says – there is only onething you need to demonstrate and that’s howyou have performed in the last four years. Sure,team stability and long-term track recordthrough the cycles are all well and good, but it’swhat you have done in the last few years thatreally matters.”

Spanish survey respondent



LP pressureThe shift of power in the fundraising processcontinues to move towards the LPs at a rapid rate.Many LPs are using this power to apply anincreasingly structured and focused investmentprocess, not dissimilar to that used by privateequity firms themselves. The shoe certainly appearsto be on the other foot.

The results of the research show that there is nolet-up in the pressure PEs are feeling from LPs.Indeed two thirds of GPs see LP demandsincreasing further in the future.

Transparency and improved communicationare, not surprisingly, still the key areas in which LPsare exerting more pressure, especially in relation toon-going portfolio performance issues and the wayin which the GP’s stated strategy is being executed.However, with an increasing number of GPs in themarket seeking to raise new capital, the past yearhas seen a renewed focus on issues surroundingfund terms and conditions and, in particular, thetopic of fees.

There is a fourfold increase in reported pressure on fees from LPs and this will continue to have substantial implications on PE firms andthe fundraising process.

It appears as though this is creating aninteresting paradox whereby LPs need moreinformation and transparency yet the PE firms mayhave more slender resources from which to fundincreases to back office functions. This appears toreaffirm the view expressed last year, that the gulfbetween the winners and losers is widening and thatonce the dust settles, there will be casualties as theweak and underperforming firms who cannot meetthe demands of LPs fall by the wayside.

FIGURE 5: AREAS OF INCREASING LP DEMANDSPERCENTAGE OF TOTAL RESPONSES

Transparency

Fees

Governance/ESG

Performance

Co-investment

Commitment to strategy

Alignment

Value drivers

Dealflow

Reference taking

2012 2011

4042

296

1323

620

51

34

11

12

11

10

“LPs want to negotiate onmanagement fees and to co-investwith the GPs on favourable terms tothem.”

South African survey respondent

“Yes, there has been some demandfor segregated accounts from someof the bigger LPs and there has beendeal-by-deal fundraising for Renminbiinvestments.”

Chinese survey respondent

“Demands are not increasing in termsof returns, but they are in terms of theagreements, such as the managementfees, governance and the sharing ofreturns.”



Changing LP basesLooking at the composition of LP bases across theglobe, there is once more an element of negativity inthe responses, with an increasing number of PEsexpecting to see some LP churn in their next fund.

Re-up levelsRe-up levels are expected to fall: a major issue for PEs in an environment that we have alreadyestablished as being challenging and more intense.North American GPs tend to be most positiveregarding re-up rates, which supports the findingthat they are generally less concerned about currentfundraising conditions.

Family officesWith continuing uncertainty in the coreinstitutional investor market, a large proportion ofGPs expect to see family offices better representedin their next funds. This is expected particularly inWestern markets and Asia Pacific, but less so inMENA, reflecting the fact that domestic familiesare already big investors in the region.

Domestic vs. internationalIn terms of geographic sources of LP capital, thepicture is very similar to 2011, with around half of GPs explaining that their investor bases are atleast 50% accounted for by domestic LPs.

However, there are huge regional differences inthis respect. 100% of North American respondentsstate that domestic LPs are likely to make up themajority of their LP bases, highlighting that theNorth American market appears to remain self-sufficient for funding.

Conversely, in the BRICS and Western Europeonly around 20% expect domestic investors to be inthe majority. The reasons for this are very differentwith European investors shying away from localinvestments and looking elsewhere, whilst theBRICS trend indicates that the majority ofinvestment in those countries is still expected tocome from overseas and Western markets.

“In the next fund, first-time investors with us willaccount for a higher proportion than currently.We expect to lose LPs through no fault of oursor theirs.”

French survey respondent

“I think the number of family offices will increase –they are looking more and more at overseas markets.”

IAN COOKSONGRANT THORNTON US

2012:

40%OF NEXT FUNDS TO BE MAJORITY FUNDED BYFIRST TIME INVESTORS

2011:

24%OF NEXT FUNDS TO BE MAJORITY FUNDED BYFIRST TIME INVESTORS

FIGURE 6: PROPORTION OF DOMESTIC LP INVESTORS IN FUNDPERCENTAGE OF RESPONDENTS

ASIA PACIFIC 27 18 18 37

BRICS 42 23 4 8 23

MENA 33 67

NORTH AMERICA 100

WESTERN EUROPE 6 35 35 9 15

GLOBAL RESULT 15 22 15 5 43

NONE MINORITY SIGNIFICANT MINORITY HALF MAJORITY


Sources of dealsThere is continuing speculation in Europe andNorth America, where debt for equity swaps tookplace within the global financial crisis, regarding thepotential deal flow originating from banks sellingassets that they took control of during thedownturn. Although thus far, this has largely failedto materialise.

As far as corporate divestments are concerned, itis interesting to note that their expected importanceis on the rise in Western Europe and NorthAmerica. Boards are looking to realise cash to shoreup balance sheets or to use the downturn to tidy uptheir corporate structure and create shareholdervalue by selling off non-core assets.

“Secondary transactions will be the mostsignificant source of deals over the next 12months owing to the number of funds thatcommitted capital four or five years ago. This will provide a key investment stream. ”

Russian survey respondent

“Banks remain very supportive of manyunderperforming assets, perhaps conscious of creatingfurther negative goodwill with the public and media.”

MARTIN GODDARDGRANT THORNTON INTERNATIONAL

The Private Equity life cycle:Investment activity

FIGURE 7: EXPECTED SOURCES OF DEALFLOWPERCENTAGE OF RESPONDENTS

CORPORATE DIVESTMENTS

FAMILY/PRIVATE

SECONDARY TRANSACTIONS

PUBLIC MARKETS

OTHER

33

47

16

13

FIGURE 8: KEY FACTORS IN IDENTIFYING AND WINNING DEALSPERCENTAGE OF TOTAL RESPONSES

Corporate/entrepreneur networks

Track record/reputation

Advisory relationships

Sector expertise

Local presence

Price

Value add proposition

Management chemistry

Access to capital

Strategic differentiation

Speed

Deal process management

2012 2011


Deal originationWith plenty of capital chasing relatively few qualityopportunities, the emphasis in originating dealsremains focused on relationships. Whilst corporateand entrepreneur networks are still seen as the mostimportant factor, though less so than last year, it isstill very much the case that GPs realise that theycan’t just rely on this to originate and win deals,reflecting the increasingly competitive environment.

Emphasis is needed on more factors now,including showing a track record and some strategicdifferentiation. Most interestingly, and the onefactor that has notably increased year on year, is theneed to build rapport and a good relationship withthe management team. This result shows how PEsare further relinquishing power, this time topotential investee companies. Private equity, itappears, has in part evolved from a provider ofgrowth finance to being seen as an investor whonow need to articulate their own growth strategy toconvince management teams to partner with them.Both parties in a transaction need to evidence andillustrate how each of them will deliver value andgrowth to ensure the investment succeeds.

In highly competitive markets, such as the US,it is notable that price has risen in importance as a deal-winning factor which reflects the circa. $1 trillion of uninvested PE funds that are chasingtransactions.

2224

1310

1212

1111

910

88

78

73

56

41

11

16

“Many of the deals are intermediated so you needto have strong links with advisors, but increasinglyyou need to have a good reputation and strongreference points in the owner networks. Beingable to pay the top price also helps.”


“Local presence and a big enough team to source proprietary dealsare both key in Brazil. That said, the investment banking network isvery developed and it is possible, when you have good relationshipswith them, to convince them to sell assets outside of competitiveprocesses.”

Brazilian survey respondent


New deal activityGlobally, private equity investment activity isexpected to stay the same or rise over the comingyear, although expectations are more cautious thanthey were in 2011.

Unsurprisingly, Europe’s confidence regardingdeal activity has taken a significant hit with only27% expecting an increase in activity this yearcompared to 50% last year.

As is becoming apparent throughout the report,the North Americans are again appearing to enjoy abuoyant market, with no respondent expecting adecrease in activity and just under 60% expectingan increase in activity. This sentiment is also sharedby those in MENA further illustrating that thismay well be the up and coming region for PEactivity.

However, it is within the BRICS where themost significant and perhaps most surprising resultsare. While growth has slowed to a degree in SouthAmerica, there is still a good level of underlyingconfidence. Expectations for deal activity remainhigh as many private and investee companies thathave benefitted from a decade of growth look tosome form of M&A activity in the next year.

It is in the Chinese and Indian markets wherethere is a substantial downturn in confidenceregarding deal activity.

The Chinese slowdown has been predicted bymany and is starting to occur, albeit growth remainsabove 7% and no doubt this is impacting ontransaction activity confidence. India is under morethan just economic pressure, with political burdensand policies having an adverse effect on corporategrowth. It is here where the PE industry may seethe greatest change over the next year, despite beingregarded by many as a PE hot spot.

“I expect private equity investment activity to increaseover the coming year. There is a bunch of money still onthe sidelines that people are looking to put to work;funds that were raised in 2007 and 2008 now havecommitment periods that are close to expiry.”

STEVE LUKENSGRANT THORNTON US

FIGURE 9A: EXPECTED INVESTMENT ACTIVITY BY REGIONPERCENTAGE OF RESPONDENTS


BRICS 46 22 32

MENA 60 33 7

NORTH AMERICA 59 41


INCREASE STAY THE SAME DECREASE

FIGURE 9B: INVESTMENT ACTIVITY – KEY BRICS MARKETSPERCENTAGE OF RESPONDENTS

LATIN AMERICA2012 78 222011 89 11

INDIA 2012 33 22 452011 78 22

CHINA2012 33 11 562011 25 50 25



SectorsOverall, the top four sectors for private equity in2012 are the same as those in 2011: consumer,healthcare, business services, and industrials &manufacturing, though notably the interest inconsumer markets is significantly down on 2011,underlining the cautious view PEs have of theglobal economy and the spending power of theworld’s population.

On the contrary, healthcare has shown thegreatest increase in interest, and is the only sector torank in the top four across all regions. These resultsfurther underline the willingness to capitalise on theongoing demographic shifts of an ageing populationand continued demand for high quality healthcareprovision in higher growth countries.

Around the world, different sectors areexpected to take on greater significance in differentregions. The BRICS countries expect to see amaterial uptick in activity in financial services. The more mature Western markets are likely to see more business services related activity and,interestingly in Europe, certain types ofmanufacturing are in demand, where the quality of skilled manufacturing businesses and intellectualproperty remain of great interest to PEs. Thesebusinesses have little competition from the highgrowth economies due to their inherent skill baseand expertise which is in high demand across theworld.

1922

1912

1515

1213

75

55

55

44

45

43

34

24

13

“Healthcare and education remain key sectors for Australian GPs given the ageing population andskill shortages being experienced. There are lots of high quality, profitable healthcare companies inAustralia that can compete on the international stage. This area, and education, are generally lessvolatile too and continue to be supported by government policy.”

PAUL GOOLEYGRANT THORNTON AUSTRALIA

“Growth in business services shouldoutpace other sectors as companiesare outsourcing more and relying onthird parties more.”

United States survey respondent

“The main sectors are still all theconsumption-driven ones – fromconsumer products to financialservices and even infrastructure.”


“Entry multiples in India are fallingand I expect they’ll continue to do so,although not as fast as those in thepublic markets are falling.”


FIGURE 10: FORECAST MOST ACTIVE SECTORS – OVERALLPERCENTAGE OF TOTAL RESPONSES

Consumer

Healthcare

Business services

Industrials & manufacturing

Financial services

Education

TMT

Food & agribusiness

Natural resources

Software & IT services

Energy

Infrastructure

Real estate & construction

2012 2011


CompetitionPrivate equity remains its own largest competitorfor new deals, but trade buyers continue to pose asignificant threat where their strategic angle, sectorknowledge and strong balance sheets can enablethem to move quickly and sometimes pay apremium.

This is particularly evident in the developedmarkets, but also, interestingly, in Asia Pacific asstrategics look to tap into the favourable growthenvironment.

PricingGlobally, entry multiples are expected to stay thesame or start to decline, with this picture beingsimilar across all regions.

In Western markets, it appears that GPs expectprices to remain similar to last year. However, thismasks the continuing polarisation in those M&Amarkets where the quantity of private equity andtrade capital chasing opportunities are enhancingmultiples for top quality assets, whereas lowerquality opportunities struggle to obtain interest and consequently attractive price.

Expectations for a fall in multiples are notablystrong in the BRICS and Asia Pacific. Once more,this trend is most striking in India, where thecooling off of overheated public markets in recenttimes is expected to finally translate into fallingprivate sector multiples. Lower deal activity andlower multiples provide a forecast for the next 12months that may lead to a stagnant PE industry, at least until some of the political and fiscal issuesalleviate.

With the quantity of uninvested funds and thehigh prices being one of the key differentiators forGPs in the North American market, it is nosurprise that this region has the highest expectationof price increases globally, although even here onlyaround a quarter of GPs expect to see this.

“Trade buyers have been more active than PE fundsrecently. However, we don’t always see them ascompetition as such, as they can potentially be co-investors and we like the strategy of partnering up with a strategic.”

Vietnamese survey respondent

“Strategics have emerged in the last six months as veryaggressive buyers. These are mainly US-based strategics.In our size range – north of $30m EBITDA – we are alsostarting to see some international buyers from Europe,South America and Asia.”


FIGURE 11: EXPECTED SOURCES OF COMPETITIONPERCENTAGE OF RESPONDENTS

DOMESTIC PRIVATE EQUITY

FOREIGN INTERNATIONAL PRIVATE EQUITY

TRADE BUYERS

PUBLIC MARKETS

FAMILY OFFICES

OTHER 27

21

45

12 4

FIGURE 12A: EXPECTED ENTRY MULTIPLES BY REGIONPERCENTAGE OF RESPONDENTS


BRICS 11 38 51

MENA 13 74 13

NORTH AMERICA 25 64 11



FIGURE 12B: ENTRY MULTIPLES – KEY ASIA PACIFIC MARKETSPERCENTAGE OF RESPONDENTS

CHINA/SE ASIA2012 10 32 582011 40 20 40

INDIA2012 11 89 2011 11 56 33


FIGURE 13: EASE IN SECURING DEBT FINANCEPERCENTAGE OF RESPONDENTS

Very easy Easy Mixed Difficult Very difficult

NORTH AMERICA WESTERN EUROPE


Debt financeAccess to debt remains problematic for new deals; despite this, over three quarters of respondents state that sources ofleveraged finance have not changed significantly, but there is a strong focus on protecting existing bank relationships.

Debt funding is less of a consideration and an issue inmarkets where growth capital is of more significance (egMENA, Asia Pacific), but is widely perceived to be difficult to obtain if it is required, due to less developed debt marketinfrastructure and/or legislative constraints on debt funding.

In particular it is worth noting the different views of GPsbased in North America and Western Europe; while access todebt is considered relatively easy (if expensive) by the former,Europeans still see it as a significant challenge, particularly forlarger deals. However, the two markets remain closely linked,and some respondents believe the US will start to suffer if theeurozone challenges are not resolved soon.

In these Western markets, traditional lenders are willing tolend to quality opportunities. That said, alternative sources ofdebt are beginning to emerge in the form of specialised debtfunds and increased use of vendor finance in some cases.

The issue of ‘problem loans’ is generally not felt to be assignificant as many may have feared, although concerns appear to be more apparent in Western Europe than in North America.European respondents see the debt maturities as a major issue,providing another piece of evidence to suggest that the NorthAmerican market has a buoyant outlook.

“The buoyant European bond market and the differentmainstream leverage market is creating an interesting shiftof where PEs are and may go to raise debt.”

MICHAEL NEARYGRANT THORNTON IRELAND

“Debt funding is fine in the US, although financialuncertainty in Europe may well impact this.”


“The market is split and it really depends on the asset: if it is one with a good credit history and well known to the banks then raising debt is easy. If not, it can be verydifficult. The banks are so risk averse.”


21

54

38

149

33

20

11

FIGURE 14: EXTENT TO WHICH APPROACHING WALL OF DEBT MATURITIES ISEXPECTED TO BE AN ISSUEPERCENTAGE OF RESPONDENTS

Major Of some importance Minor Not an issue

NORTH AMERICA WESTERN EUROPE

13

4144

9

33

23

37


Economic outlookA trend to a more cautious economic outlook isparticularly evident in North America, wheregenerally positive economic conditions are offset byconcerns regarding Europe and the US Presidentialelection.

Overall sentiment in Western Europe has heldup better than might have been expected given thescale of current economic travails. This perhapsreflects the fact that many GPs have dealt withproblems in their portfolios and focused their new investment activity on more defensive sectors.

Even in some of the markets which haveexpanded rapidly over recent years, the speed ofgrowth has slowed noticeably and practitioners areincreasingly realising that these economies are notimmune to the impacts of the global downturn.

In keeping with this, across the BRICSsentiment is slightly more negative this time; whilethe outlook in Brazil remains broadly positive,sentiment is more split in India and China, withsome investors in the former having becomenotably bearish.

The Private Equity life cycle:Portfolio

“There are too many external forcescausing people to be cautious; thefinancial crisis in Europe, theslowdown of the Chinese economyand the high unemployment in NorthAmerica.”

Canadian survey respondent

“Growth is slowing down in Brazil, butit is still strong compared with mostdeveloped markets andrelatively isolated from macroproblems elsewhere.”


“Some of the portfolio companies areseeing shakiness because of thecurrent conditions – others less sobecause they are in less cyclicalareas. However, if the worst happens,they’ll all be in trouble.”


FIGURE 15: ECONOMIC OUTLOOK FOR PORTFOLIO BUSINESSESPERCENTAGE OF RESPONDENTS

VERY POSITIVE POSITIVE NEUTRAL

NEGATIVE VERY NEGATIVE

10%

53% 30% 7%

6%

46%

29% 15% 4%

2011

2012


Creating valueThe drivers of value growth amongst portfoliobusinesses globally are seen to be very similar tothose reported in 2011.

Performance improvement at the companiesthemselves remains the top ranking factor, with itssignificance showing consistency over the last 12months.

Where there has been a change, it is often as aresult of market growth increasing in importance –this is particularly the case in MENA, drivenespecially by GPs in the UAE and Turkey.

The importance of performance improvement isechoed by the fact that virtually all private equityfirms now position themselves as having hands-oninvolvement in their portfolio companies, witharound half characterising their engagement as ‘veryhands-on’.

The proportion of people expecting their levelof engagement to increase has also risen since lastyear, especially in Western Europe, where growth isincreasingly difficult to come by, but also in Indiaand Brazil, where more control deals are likely totake place as the markets mature.

It is still relatively uncommon for firms to havea dedicated portfolio team (it is only the case foraround 30% of respondents). Most firms prefer for the deal executives who negotiated the deal tofollow an investment through its life (possiblysupported by operating partners and externalresource), as it is felt that this helps with thecontinual cementing of the managementrelationship.

FIGURE 16: WHAT IS CONSIDERED THE MOST IMPORTANT DRIVER OF GROWTH WITHIN YOUR PORTFOLIOPERCENTAGE OF TOTAL RESPONSES

Performance Market growth M&A growthimprovement

Financial Multipleengineering arbitrage

43 29 19

36

“You are generally banking on marketgrowth, but, to be safe, you also haveto drive value via organic means andcost cutting etc.”

UAE survey respondent

“We seek to create global niche leaders, so itcan be about making multiple acquisitions allover the globe (we did 11 or 12 acquisitionswith one firm) or it can be about shiftingmanufacturing bases to China or Poland orMexico. Or it might even be about outsourcingmanufacturing completely to third parties.”

Norway survey respondent


Operational engagementIn terms of the private equity firms’ view on theways in which they contribute most to thedevelopment of their portfolio companies, the threetop factors remain unchanged and were shown tobe increasingly important, these being: strategicinput, financial planning and human resources.

The importance of top-quality management isaccentuated in difficult trading conditions, with this reflected by the increasing importance of GPintervention in senior recruitment.

Also it is worth noting that if improvinggovernance and overall professionalisation ofportfolio companies are combined this wouldbecome a top three ranked factor, reflecting itsincreasing importance. This was most prominent in countries including Brazil, India and Russia, asprivate equity managers become more directlyinvolved in their portfolio businesses.

In Western Europe, it is notable that thesignificance of helping companies tointernationalise, as well as the role of managementmentoring, are rated particularly highly comparedwith other regions, reflecting the relatively lowgrowth prospects in domestic markets. Supportingthis, assistance with M&A is another key area inwhich private equity firms will be able to supporttheir companies going forward.

FIGURE 17: AREAS OF HANDS-ON INVOLVEMENTPERCENTAGE OF RESPONDENTS

Strategic input

Financial planning

Human resources

Governance

M&A

Operational input

Professionalisation

Access to networks

Access to capital

Internationalisation

Mentoring

Exit planning

Managing banking relationships

Cost control

Monitoring

Sector knowledge

Kudos

ASIA PACIFIC BRICS MENA NORTH AMERICA WESTERN EUROPE

“We’re very hands-on. We’re one ofthe few private equity firms in Chinathat does buyout deals and bynecessity we have a lot of moneyinvested in each company, so we like to be hands-on.”


“We see control deals becoming morecommon and these will require muchmore operational input.”


“Our hands-on involvement willincrease, partly because the marketdictates that, but also because toavoid the highest entry multiples weare increasingly looking at the assetsthat need more attention, and we’redoing more buy-and-builds.”



Environmental Social Governance (ESG)ESG is a subject that is of at least some relevance to GP respondents globally, and for many it isgrowing in significance. Only really in NorthAmerica is there notable evidence of private equityfirms attaching little relevance to the subject,although views in China are also rather mixed.

The trend towards growing awareness of ESGreflects the fact that private equity practitionersare moving on from simply seeing adherence toESG principles as ‘best practice’ and a necessity to meet the demands of regulators and LPs.

Despite increasingly widespread recognition ofthe importance and necessity of engagement withESG, some GPs do highlight the additionaladministrative burden that compliance brings.

“Since last year’s Grant Thorntonsurvey, we have designed andimplemented a complete ESGprogramme at company level and weare now rolling this out across theportfolio. It has gained us an awardfrom a top global fund-of-funds. It isan increasingly important issue.”

Vietnamese survey respondent

“It’s a constant focus. We implementan ESG review at the time ofacquisition or just after to identifyareas to improve and then work toimplement. It’s changing because ontop of the environmental and socialimpact there is also an economicimpact.”


“We are getting pressure from LPs onthis so it is an increasing trend. Weare trying to make it a more formalprocess and one that has businessand economic rationale too, not justan administrative exercise.”

Swedish survey respondent

2842

2111

2010

1722

1010

45

FIGURE 19: RELEVANCE OF ESGPERCENTAGE OF RESPONDENTS

NOT RELEVANT OF SOME RELEVANCE

GROWING RELEVANCE HIGHLY RELEVANT

13%

20%

35% 32%

12%

1

8%

39% 31%

2011

2012

FIGURE 18: DRIVERS OF ESG ADOPTIONPERCENTAGE OF RESPONDENTS

Perceived best practice

Regulation

Deal selection

LP pressure

Value driver

Manager awareness

2012 2011


The exit environmentCompared with last year, fewer GPs expect to seeincreasing levels of exit activity over the coming 12 months.

This masks two contrasting trends. On the onehand, the pressure on PEs to show exits ahead offundraising shows no sign of abating. On the other,buyers continue to be highly selective and, as a result,many selling GPs report that their pricing expectationsand requirements are often still not being met.

However, almost half of respondents do expectto see increasing levels of exits, with many feelingthat they have to rise from current low levels.

On average, activity is expected to be fairly wellbalanced in terms of buying and selling amongstparticipating private equity firms, particularly in themore developed markets of North America andWestern Europe, but also in Asia Pacific.

A number of respondents indicate that theyintend to buy and sell in equal amounts in anygiven year, while others highlight the stage they are at in the PE cycle as the key determinant of thebalance. In the MENA countries, in particular, thefocus in the post Arab Spring environment is muchmore likely to be on future growth and investmentopportunities than exits.

The Private Equity life cycle: Exits

“Exit levels should stay broadly at the same levels as PE houses need to realise their investments and return capital to their investors. Economic conditions andvaluations will influence this to some extent, but what will make more of a difference will be the health of corporate balance sheets and the state of the debt markets.”

MO MERALIGRANT THORNTON UK

15% DECREASE IN EXPECTED EXITACTIVITY FROM 2011 TO 2012

FIGURE 20: EXPECTATION FOR BALANCE OF BUYING AND SELLINGACTIVITYPERCENTAGE OF RESPONDENTS

BUYER NEUTRAL SELLER

4

9%

25% 26%


Exit routesWith corporates continuing to enjoy healthybalance sheets, trade sales are consolidating theirposition as the exit route of choice for PE-backedcompanies.

Several respondents comment on the relativelyhigh prices trade buyers are able to pay in order tosecure high quality assets that they believe willbring strategic synergies. These synergies areincreasingly tied to globalisation, with the majorityof GPs expecting overseas corporates to featuremore and more as potential acquirers of portfolioassets.

Opinions of secondary buyouts vary from theWestern markets, where they are often seen as anecessity to generate liquidity, to the moreemerging markets where they are increasingly seen as a sign of industry maturity.

Initial Public Offerings (IPOs) are becomingeven less relevant as an option for liquidity and thisis evidenced by specific regional trends.

There are some noteworthy differences inBRICS and MENA this year, where IPOs areexpected by several respondents to be replaced bysecondary deals in terms of significance. This is ofnote, because last year these regions were seen asthe largest drivers of IPO exit activity around theglobe and nowhere is this trend more stark than inBrazil.

“Exit activity is likely to pick up as a result of fundcycles. Funds have a lot of money they are going tohave to spend, which will drive demand and enticepeople to sell. At the same time, people have beenholding off divesting, but there comes a time whenthey need to sell.”

TROY MACDONALDGRANT THORNTON CANADA

“Strategics are viewed as the holy grail becausethey are willing to pay out for synergies with thecompany. We’ve been increasingly adopting adual-track strategy where we prepare a firm forIPO and then sell to a strategic or financialsponsor.”


FIGURE 21: EXPECTED EXIT ROUTESPERCENTAGE OF RESPONDENTS

IPOs

TRADE SALES

SECONDARY BUYOUTS

“Trade sales have to be what you plan for – preferably to international buyers.”


38

55

7


“Certainly the LPs are not so keen on them, butsecondaries will become a useful tool to providesome liquidity.”

Hong Kong survey respondent

“It might be a little more competitive than thelast 12 months, but what will certainly happen isthat the gap between the best and the worstreturns will widen.”


Exit returnsGlobally, this year’s findings suggest that therelative negative sentiment indicated last yearremains, as the majority of respondents expectreturns to stay the same, while a third expectreturns to get worse.

The countries with the most optimisticoutlook are the UAE and, interestingly, Indiawhere returns have perceived to have been verylow to date, and is a positive news story from acountry that appears to have many factorsimpacting negatively on the PE market. Those atthe other end of the spectrum include respondentsin Western Europe, Asia Pacific, Brazil, Russiaand Canada.

Pressure on returns reflects a variety ofindustry-specific and macroeconomic factors,including: high prices on the buy-side linked tolevels of competition for quality assets; generallypoor exit conditions, particularly the weak capitalmarkets; the overall lower growth environment;and increasing costs as a result of regulation.

In addition, it is also noted that the higherequity contribution to deals now may apply furtherdownward pressure to returns in the medium term.

A number of respondents make the point thatwith PE firms tending to hold on to assets wherepossible in the hope that conditions will improve,IRRs may fall while multiples are forecast to sufferless.

“IPO markets were very important to the industry, buthave been totally closed for over a year. When thathappens trade sales have to take up the slack.”

WANDER PINTOGRANT THORNTON BRAZIL

FIGURE 22: EXPECTED AVERAGE RETURNS 2011 VS. 2012PERCENTAGE OF RESPONDENTS

2012 18 49 33

2011 35 39 26


FIGURE 23: EXPECTED AVERAGE RETURNS BY RESPONDENT REGIONPERCENTAGE OF RESPONDENTS

ASIA PACIFIC2012 21 50 292011 38 24 38

BRICS2012 21 38 412011 29 42 29

MENA2012 59 33 82011 50 42 8

NORTH AMERICA2012 18 50 322011 34 45 21

WESTERN EUROPE2012 5 60 352011 35 35 30



High growth opportunitiesThe research of the private equity life cycle paints arelatively negative picture of the industry in termsof confidence and future activity and returns. Inthis special report on the search for growth, weinvestigate where GPs from around the world areseeking to expand or invest to ensure they maximisetheir returns and take advantage of economieswhere growth is most likely in the medium term.

High growth markets offer local PEsopportunities to drive expansion in neighbouringcountries, creating pan-regional franchises.

The term ‘emerging markets’ has becomemisleading, encompassing an extremely broad rangeof countries and scenarios. While the growth inthese countries outstrips that seen in Westernmarkets, the search for growth leads local privateequity firms to keep a watchful eye on wheretomorrow’s dealflow will originate, particularly as some of their home markets show signs of over-heating.

Whereas a move to new unknown territoriesmay be a risk too far for many western funds,investors based in high growth regions typicallyhave good visibility of the next frontier marketswithin their region. They often see them as anopportunity to access attractive economic growthbased on favourable demographics and improvingsocio-political circumstances, as well as mitigatingrisks in any one market.

Special report: The search for growth

“Yes absolutely – we are looking atopportunities in North Africa already. We may well need an office there too.”


“Where private equity can add significant value is by helping companies to globalise, expand throughacquisition and set up direct operations in overseasmarkets.”

ISAC STENBORGGRANT THORNTON SWEDEN

FIGURE 24: DO YOU INTEND YOUR FIRM TO MAKE INVESTMENTS OR OPEN OFFICES IN NEW HIGHGROWTH MARKETS OVER THE NEXT 2-3 YEARS?PERCENTAGE OF RESPONDENTS WHO HAVE EXPRESSED AN INTENTION, BY REGION

Asia Pacific BRICS MENA North WesternAmerica Europe

INVEST OPEN OFFICE

44

65

22

67

27

43

2013

13

11

FIGURE 25: ATTRACTIONS OF NEW MARKETSPERCENTAGE OF TOTAL RESPONSES

Economic growth 30

Demographics 14

Market size 13

Low PE penatration 10

Stability 9

Business culture simalarities 6

Home market unattractive 5

Others 13


Attractions of new marketsAs well as the high growth characteristics of manyof these frontier markets, another particularattraction for GPs is the current low penetration of private equity. While this almost always comeswith a large slice of risk, PEs are attracted by theunder-served nature of these countries and theopportunities this can bring to those willing to play a pioneering role.

The risks associated with entering thesemarkets are somewhat mitigated for GPs operatingfrom regional hubs by factors including similar timezones and potentially similar business cultures.

In practical terms, accessing dealflow in thesefrontier markets can involve investments made outof the regional hub or the opening of a local office.The former is the preference of many, although inMENA in particular, more GPs do plan to extendtheir network on a regional basis over the comingyear.

“For the true ‘emerging’ markets the attraction is thatthey are largely uncharted and have relatively lowprivate equity penetration.”

KEN ATKINSONGRANT THORNTON VIETNAM

“Compared to previously, we’re no longer making investments outsidethe US. As a fund we are back to the US and moving down-marketand doing smaller deals. Smaller deals require more time withmanagement and it’s much easier for us to do a two-hour planejourney within the US than travel out to India to help a smallercompany.”


“Brazil is overheating, so I would say Colombia,Mexico and perhaps certain parts of CentralAmerica are of interest.”

Peruvian survey respondent

North Americanrespondents

Europeanrespondents

North America

Latin America

Africa

Russia& CIS

MENA

Europe

India

FIGURE 26 : FUTURE GLOBAL INVESTMENT OPPORTUNITIES FOR NORTH AMERICAN AND WESTERNEUROPEAN PRIVATE EQUITY FIRMSTHIS CHART HIGHLIGHTS THE REGIONS IDENTIFIED BY RESPONDENTS IN EUROPE AND NORTH AMERICA WHICH ARE LIKELY TO BE OF INTEREST FOR INVESTMENT IN THE FUTURE


“PEs are actively seeking ways to access the newand high growth economies. Teams and contactsare being set up and this access is starting to beseen as an important differentiator for manyWestern PEs.”

KAI BARTELSGRANT THORNTON GERMANY

“Private equity in emerging markets ischallenging because of the governance risks andthe absence of deep capital and M&A marketsto enable exits. An understanding of the localsituation is key to success in these markets.”

HARISH HVGRANT THORNTON INDIA

South EastAsia

China, Japan, Korea

The next move of Western PEsIn the relatively low growth Western markets, PEs are acutely aware ofthe new geographical opportunities, but often do not plan to explorethem in great depth for new deal opportunities.

Perhaps not surprisingly given the cultural similarities, a mutualattraction is evident between North America and Western Europe,although while Europeans are enticed by the improving status of the US economy, American GPs expect to see more distressed opportunitiesoriginating from Europe.

When describing areas of perceived opportunity, GPs in the lowergrowth markets of Western Europe and North America list a range ofcountries throughout the world. While some of these are markets in closeproximity to the GP, many are more distant; the ‘gateway’ emergingmarkets of Brazil, India, and China are often mentioned. The ‘virgin’frontiers, whilst on the radars of Western based GPs appear to be of lessinterest for direct investment, especially from those in North America.

Despite this awareness of new geographical opportunities, manyWestern GPs do not plan to seek new deal opportunities in these highergrowth regions. For reasons of remit, resource, expertise, and scepticismof opportunities versus risk, many prefer the relative safety of drivingperformance in businesses in their lower growth domestic markets.

Supporting this, LPs more than ever need to be convinced that a GPsstated strategy can be delivered, and therefore any hint of investing inunfamiliar territories is likely to make them nervous.

However, this does not mean that the international door is closed interms of the growth opportunities that it can offer. Western PEs areincreasingly assisting their portfolio companies to grow internationally,either to access new markets, benefit operationally or enable them tobecome more attractive to international buyers.


“Turkey is the name that’s mentioned a lot. I think the bigger playersare looking at the Far East. But a lot of them now are retrenching andsaying, well actually, perhaps the markets that we know are betterthan the markets that we don’t know and perhaps there is a cyclicalplay, an economic cyclical play in UK, Europe, North America. NorthAmerica is bouncing already. So what I hear from LPs is interest inwhat’s happening in the Far East, and America and other exoticplaces, but the reality is that perhaps it is safer closer to home.”


Indianrespondents

FIGURE 27: GLOBAL INVESTMENT OPPORTUNITIES FOR PRIVATE EQUITY IN KEY HIGH GROWTHMARKETS – CHINA & INDIATHIS CHART HIGHLIGHTS THE COUNTRIES AND REGIONS IDENTIFIED BY RESPONDENTS IN CHINA AND INDIAWHICH ARE MOST LIKELY TO BE OF INTEREST FOR PRIVATE EQUITY INVESTMENT IN THE FUTURE

KEY:COUNTRY MENTIONSREGIONAL MENTIONS


“We have a strong China bias and wethink it will continue to be the pillar,but there is some promise fromIndonesia, Singapore, Malaysia andless so Myanmar.”


“South East Asia generally isattractive – Indonesia, Malaysia, etc. These countries have stableeconomic growth, but it’s probablymostly because competition inGreater China is so much keener than it was.”

Hong Kong survey respondent

“We very much believe the bestopportunities to make money willremain in India and China in thelonger term. The interest we see inSouth East Asian economies is aflavour of the month thing.”


Chineserespondents

The next move for Chinese and Indian PEsChina and India are two of the largest global economies and theycontinue to experience growth above and beyond that of the Westerneconomies. As such, internal demand is still a big driver and focus ofdomestic GP attention.

Given the significance and success of these countries it may besurprising to note that even GPs based in these countries considerinternational opportunities.

However, and maybe unsurprisingly, the focus of their attention isSouth East Asia, underlining the point that regional investment remainsmore attractive and less risky than investing further afield for PEs.

China-based GPs, if they are not entirely focused on their domesticmarket, have a particular eye on South East Asia. Indonesia tends to bethe key focus of Chinese GP attention in the region. However, someChinese GPs also highlight markets as diverse as India, Africa, SouthAmerica and Europe as potentially being of interest from a private equitystand point.

The trend is similar for Indian GPs. While South East Asia is alsoregarded as a key area of private equity opportunity, Indian GPs are likelyto identify a geographically diverse set of opportunities, including someWestern markets, Russia and Australia.


“Both local and international funds are becoming moreactive in South East Asia. There is increasing awarenessabout countries such as Indonesia, Vietnam, Thailand andMalaysia. A number of deals are happening in each placeinvolving local and international players. They havestrong economies. Australia also has a vibrant privateequity community. Indonesia is probably the mostattractive country, thanks to its growing middle class.”

CAROL CHENGGRANT THORNTON CHINA

Latin Americarespondents South Africa

respondents

MENArespondents

FIGURE 28: FUTURE GLOBAL INVESTMENT OPPORTUNITIES FOR PRIVATE EQUITY IN KEY HIGH GROWTHMARKETSTHIS CHART HIGHLIGHTS THE COUNTRIES IDENTIFIED BY RESPONDENTS IN KEY HIGH GROWTH MARKETSWHICH ARE LIKELY TO BE OF MOST INTEREST FOR PRIVATE EQUITY INVESTMENT IN THE FUTURE


“Outside of Brazil, the two morepromising new markets are Peru andColombia. They have strong growth,stable politics and the companiesneed cash to expand. In terms ofsector, it will be pretty much thesame as in Brazil – consumer-oriented, business services etc.”


“Our view is that post-conflictcountries offer the best opportunitiesfor private equity – Iraq, Ethiopia andAlgeria being good examples.”

Egyptian survey respondent

“We help with acquisitions more than anything else when it comes tointernational growth. Geographicallyit really depends – our Singaporeaninvestees typically want to get intoGreater China, while our Chineseinvestees want to get into Singaporebecause they see it as a springboardto the West.”

Singaporean survey respondent

Asia Pacificrespondents

The next regional moves by PEs in high growth regionsWhile South East Asia is viewed by private equity investors across theglobe as an attractive source of future private equity opportunities, it israre for investors based outside the region to have a detailedunderstanding of the prospects at a country level. GPs based in the regionitself highlight a broad range of ‘frontier markets’ outside of the moreestablished hubs, with the most promising perceived to be Indonesia,Malaysia and Myanmar.

The presence of Myanmar on this list illustrates how the opportunitieson GPs’ radar may be very embryonic, but reflect an awareness of geo-political developments and the structural opportunities at the countrylevel that these can bring. A similar pattern is in evidence within theMENA region, where the post Arab Spring environment is expected toyield a landscape conducive to private equity activity.

Africa is sometimes described as the final continental frontier forprivate equity, and the views of South African GPs provide an interestinginsight into specific African countries showing most promise. Ghana andTanzania are notable markets in this respect.

LATAM-based GPs point to the attractions of several up-and-comingmarkets on the continent, building out from Brazil as the pre-eminentmarket in the region. Peru and Colombia, in particular, are drawingattention due to their relatively strong growth and the volume of growingbusinesses that require injections of capital to fulfil their expansion plans.

Another market attracting much attention at present is Turkey, bothfrom MENA based firms and Western Europeans, who recognise itswestern style consumer dynamics, favourable demographics, and a mid-market with ‘Mittelstand’ characteristics.


“There is interest in the rest of Africa from privateequity players who are looking for investee companiesthat have the ability to expand into other Africancountries. Such businesses are more attractive tobuyers (especially international trade buyers). We seeopportunities in West Africa, countries like Ghana,and in Central Africa, countries like Zambia, whilst in East Africa, countries like Tanzania.”

JEANETTE HERNGRANT THORNTON SOUTH AFRICA


Global buyersStrategic acquirers are expected to continue toprovide the dominant exit route for PEs in the nearterm. Moreover, the trend is for trade purchasers tobe foreign, with approaching three quarters ofrespondents expecting at least half of trade sales tobe international.

Globally, China and Japan, Europe and NorthAmerica are the regions from which most GPsexpect non-domestic strategic buyers to originate.

Of particular interest is the expectedsignificance of Japan, reflecting the fact that thestrong Yen coupled with sluggish domestic demandis encouraging international expansion. PEsglobally expect to see Japanese buyers, and this isparticularly the case in Europe, India and AsiaPacific.

Cash rich Indian corporates are also expected tobe active, but typically only in Europe and to alesser extent parts of Africa and the Middle East.

Interestingly, few Chinese GPs expect AsiaPacific corporates to be active in their market, with most international bidders for their portfoliosexpected to originate from Europe, North Americaand to a lesser extent Japan.

Balancing this trend, European GPs expect tosee considerable interest from Chinese strategicsgoing forward, as well as from those based in theUS. In turn, US portfolios are expected to be ofinterest to European trade buyers, underlining thecontinuing strength of the relationship between thetwo continents.

“I expect potential buyers to be more international – most likelyfrom the USA, but also from Europe, China and Japan. However, thisis also coupled with cash-rich Turkish conglomerates bidding forcompanies.”

Turkish survey respondent

“Our recent exits to strategics have been toEuropean and US firms. We have had interestfrom and conversations with Chinese buyers butgetting the deal done has been a differentmatter. They have not yet proved that they havewhat it takes to do this.”

Australia survey respondent

FIGURE 30: REGIONS EXPECTED TO BE SOURCE OF NON-DOMESTIC ACQUIRERSPERCENTAGE OF RESPONDENTS

ASIA PACIFIC 11

BRICS 42

MENA 2

NORTH AMERICA 21

WESTERN EUROPE 24

FIGURE 29: EXPECTED ORIGIN OF TRADE BUYERSPERCENTAGE OF RESPONDENTS

DOMESTIC

50/50

INTERNATIONAL

31%

“Strategic buyers are certainly originating fromdeveloped Western markets like the US and Europe,but we have also been seeing a lot of Japanese buyersthat are very interested in the technology andtelecoms areas in particular. Their currency is verystrong – it’s like a return to the mid-late 1980s.”

DAVID ASCOTTGRANT THORNTON UK

OF BUYERS THOUGHT TOCOME FROM CHINA, JAPANOR KOREA

52

28

20


Supporting portfolio internationalisationPrivate equity firms are playing an increasing role asa catalyst for the internationalisation of mid-marketcompanies.

Across the world, a large majority of GPsreport that their portfolio companies are seekingtheir support to develop their businessesinternationally. For the GPs themselves this canalso provide a channel for accessing high growthmarkets indirectly without having to make newinvestments beyond existing remits.

Almost all respondents expect the levels ofcross-border M&A activity for their portfolio toincrease or at least remain at current levels. Indeed,GPs see this as an important way in which they canadd value to companies, drawing on their M&Aexpertise and often international contact networks.

GPs also feel that they can add value in helpingtheir portfolio businesses to build internationalsales, and this is particularly the case with WesternEuropean and MENA based investee companies.To a slightly lesser extent, but also significant, is theassistance that GPs feel they can offer investees interms of international supply chain developmentand the use of overseas outsourcing services.

In a sense, this internationalisation angle can be viewed as a symbiotic relationship between GPsand their portfolio companies, both assisting eachother with moves into geographies that otherwisemay be less accessible without their relationship.

Final commentsWith growth and returns limited to a minority ofinvestments in the West, PEs in those territories arenow having to access the high growth regions toattract investment and investment opportunities.

How they do this is yet to be decided, butalready a number of firms have set up teams oroperational centres to illustrate to LPs andmanagement teams that they can support growthopportunities globally.

PEs are under increasing pressure todemonstrate access to these growth territories toLPs and management teams looking to expand.Those that don’t look to invest in some way inthese areas may be left behind to fight for fundingand opportunities in their domestic markets,where times are tough and competition high.

“Local and regional PEs have to present a globalcapability now. It is becoming a necessity. We seenetworks of PEs increasing in popularity and it is nosurprise to see a Pan-European one already set up. Thiswill be one of many.”

DAVID FISHERGRANT THORNTON MIDDLE EAST ADVISORY

“I think it’s about certainly making acquisitions of complementarybusinesses outward of the UK. In terms of which geographies, I thinkit’s quite difficult to generalise because it comes down to thespecifics of where any particular investee company is operating;there are some in America, South America and some actually out inthe Far East, so we’re going to more far-flung areas than justContinental Europe.”


FIGURE 31: AREAS IN WHICH PORTFOLIO COMPANIES ARE SEEKING GP SUPPORT OUTSIDE THEIRDOMESTIC MARKETPERCENTAGE OF RESPONDENTS

MAKING ACQUISITIONS

SUPPLY CHAIN DEVELOPMENT

OUTSOURCING SERVICES

PORTFOLIO COMPANY SALES GROWTH30

38

14

18

APPENDIX 1FIGURE 32: RESPONDENTS BY REGIONPERCENTAGE OF RESPONDENTS

ASIA PACIFIC BRICS MENA NORTH AMERICA WESTERN EUROPE

APPENDIX 2FIGURE 33: RESPONDENTS BY REGION – COUNTRY BREAKDOWNPERCENTAGE OF RESPONDENTS

ASIA PACIFICAustraliaSingaporeVietnam

BRICSBrazil/LATAMChina/Hong KongIndiaSouth AfricaRussia

MENAUAETurkeyEgyptBahrain

NORTH AMERICAUSCanada

WESTERN EUROPEUKFranceGermanyScandinaviaItalySpain


AppendixSample and methodology

This report provides a global snapshot of theopportunities and challenges within the privateequity industry as seen from a practitioner’sperspective. The differences in what it means to be an active player in specific global markets areexamined, as are the key themes that resonatearound the world.

Between July and September 2012, 143interviews were conducted with top executivesfrom private equity firms. Respondents includedgeneral partners in five principal regions/categories: • Western Europe• North America (USA and Canada)• BRICS (Brazil (and broader LATAM), Russia,

India, China, South Africa)• Asia Pacific (Australia and South East Asia)• MENA (including Turkey).

Participants were identified from a number ofsources including industry associations, marketdirectories and contact networks.

The interviews were conducted on anunattributed basis and were structured around thevarious stages of the private equity life cycle,incorporating new investment activity, portfoliomanagement, exiting and fundraising. Thisapproach enabled detailed exploration of likelytrends throughout the cycle and identification ofkey pressure points within the chain. In addition,particular questions were posed this year on GPs’experiences of the role of internationalisation ontheir business and that of their portfolio companies.

Interviews included a mixture of quantitativeand qualitative questions. This report includesgraphs and charts derived from both thequantitative data and, where appropriate, thecoding of responses to qualitative questions toprovide statistics highlighting key trends.

11%

2

6%

10% 21% 32%

383824

2424241612

4733137

6337

4018171177

Grant Thornton contacts

GlobalMartin GoddardGlobal service line leader – transactionsGrant Thornton InternationalT +44 (0)20 7728 2770E [email protected]

AfricaJeanette HernGrant Thornton South AfricaT +27 (0)11 322 4562E [email protected]

AustralasiaPaul GooleyGrant Thornton AustraliaT +61 2 8297 2586E [email protected]

BrazilWander PintoGrant Thornton BrazilT +55 11 3886 4800 E [email protected]

CanadaTim OldfieldGrant Thornton CanadaT +1 416 360 5004E [email protected]

Central Eastern EuropeMaciej RichterGrant Thornton PolandT +48 61 625 1463E [email protected]

ChinaCarol ChengGrant Thornton ChinaT +86 (10) 8566 5365E [email protected]

FranceThierry DartusGrant Thornton FranceT +33 (0) 1 56 21 06 21E [email protected]

GermanyDr Kai BartelsWarth & Klein Grant Thornton AGT +49 40 4321 862 13E [email protected]

IndiaHarish HVGrant Thornton IndiaT +91 80 2430 800E [email protected]

JapanYoshi KawamuraGrant Thornton Masters Trust, Inc.T +81 3 5288 7067E [email protected]

MENADavid FisherGrant Thornton Middle East Advisory ServicesT +971 (0) 4 447 3874E [email protected]

NordicsIsac StenborgGrant Thornton SwedenT +46 (0)8 563 070 47E [email protected]

RussiaIvan SapronovGrant Thornton RussiaT +7 495 258 99 90E [email protected]

South East AsiaKen AtkinsonGrant Thornton VietnamT +84 8 3910 9108E [email protected]

United KingdomMo MeraliGrant Thornton UK LLPT +44 (0)20 7728 2501E [email protected]

United StatesDan GalanteGrant Thornton UST +1 312 602 8290E [email protected]

www.gti.org

© 2012 Grant Thornton International Ltd. All rights reserved.References to “Grant Thornton” are to the brand under which the GrantThornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firmsare not a worldwide partnership. Services are delivered independently bymember firms, which are not responsible for the services or activities of oneanother. Grant Thornton International does not provide services to clients.

global private equity report 2012

Business

private equity industry

private equity firms

global private equity

private equity story

private equity regulation

private equityis

global private locations

greaterprivate equity