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privcapDigest/ The Monthly Magazine
of Privcap.comMay 2013
This publication is exclusively for Privcap subscribers © 2013 Privcap LLC
Mega-Manifest DestinyIs PE becoming the new Wall Street? by David Snow
in this issue:
Can Unions and PE Get Along?/ 06 Fundraising’s New Rules / 09Coming Home: The Real Estate Rebound / 12T.J. Maloney: Deal Hunter / 15
privcap Digest / May 2013 / 2
2 / Contents
privcap LLC
David SnowCo-founder and CEOGil TorrenCo-founder and President
Content
Matthew MaloneEditorial DirectorTanya KlitchMedia Manager
Design
Miguel BuckemeyerArt DirectorVasheena DoughtyProduction
Contributors
Tom Stein & Tim DevaneyDanielle Fugazy
Contacts
EditorialDavid Snow / dsnow@privcap.com(646) 233.4558Matthew Malone / mmalone@privcap.com (646) 801.2337Sponsorships & SalesGill Torren / gtorren@privcap.com(646) 233.4559For subscriptions, please call 855-PRIVCAP or email subscribe@privcap.com
about privcap Digest
Privcap Digest is a monthly publication exclusively for Privcap subscribers. It offers in-depth features and edited summaries of the most recent and important thought-leadership from Privcap.com. The Privcap editorial team has extensive experi-ence reporting on the global alternative investment industry.
For inquiries about the Digest, please contact Matt Malone at mmalone@privcap.com.
Copyright © 2013 by Privcap LLC
All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechani-cal methods, without the prior written permission of the Privcap LLC. For permission requests, contact Gill Torren at gtorren@privcap.com.
in this issue
QuotableA roundup of market intelligence shared on Privcap.com
Snow’s NotesIs PE the new Wall Street? By David Snow
Getting AlongCarlyle’s Brian Bernasek on working with unions. By Danielle Fugazy
Deal Story: South Beach Diet MidOcean Partner’s Ted Virtue on its recent acquisition
Must See Privcap’s upcoming programming schedule
FeaturesFundraising’s New RulesOur experts explain how to adapt to the changing dynamics of raising money
Coming HomeDan Vene on the real estate rebound. By Tanya Klitch
ESG in the Emerging MarketsPE pros looking to make good on ESG would do well to observe the world’s developing economies
Deal Hunter Lincolnshire Management’s T.J. Maloney on maintaining deal flow. By Danielle Fugazy
From Our SponsorsExpert Q&A Steven Menkaer of McGladrey
Interview transcripts in this issue have been edited for clarity and length.
0304060708
09121315
16
Up Front
privcap Digest / May 2013 / 3
professionals from the following firms and organizations recently appeared on privcap: New Mountain Capital • ConceptONE • Cambridge Associates • Independence Capital Partners • ILPA • Castle Harlan Partners Group • Argosy Private Equity • Adams Street Partners • Cogent Partners • StepStone Group • Sound Harbor Partners Zurich Alternative Asset Management
Quotable/
I stay away from social media. I would jokingly call this a reverse
Russian roulette. There’s only one chamber without a bullet.”Axel Tillmann, RVC-USA, from “From Russia, With Capital” )Link
That availability of local capital can really be an important detonator
for the development of the industry.”Cate Amrbose, LAVCA, from “The Colombia Private Equity Opportunity” )Link
You see volatility in the markets, and from our point of view, volatil-
ity is really what creates opportunity. If the world had perfect information and asset flows were consistent, everything would move in a very rational line.”Erik Falk, KKR, from “Credit Investing in An Uncertain World” )Link
One of the challenges in this industry is that GP’s don’t really
know how to communicate effectively with LP’s. They don’t really understand the questions that we ask because it’s really not their day job.”Andrea Kramer, Hamilton Lane, from “Effective IR for GPs” )Link
I think most people in the private equity community probably get
things strategically close to right. But the key difference is how you execute it, how you monitor it and how you bring it to fruition.”Frank Schiff, MidOcean Partners, from “MidOcean’s 100 Day Plan” )Link
I think it’s constantly being in front of those individuals that
have the potential to bring you an opportunity is really the key to the business.”TJ Maloney, Lincolnshire Management, from “How Lincolnshire Does Deal Origination” )Link
A roundup of market intelligence shared on Privcap.com
3 / Market Intelligence
On Camera
privcap Digest / May 2013 / 4
very ten years or so, the private equity industry wrings its hands over what exactly it should call itself. The repel-lent “corporate raiders” gave way to the still-ominous phrase, “lever-aged buyouts.” “Private equity” ar-
rived as a sanitized, hostility-free alternative, though it, too, has acquired a pejorative edge. Nonetheless, it appears that “private equity” is here to say.
But the industry has a new naming problem—while “private equity” is a technically accurate term for a certain kind of investing, it is now being applied to the entire range of investment and advisory activities now overseen by firms that started life as LBO shops.
Blackstone is one of the largest real estate in-vestment firms in the world; in fact, its property arm is larger than its private equity group. “Private equity” firm Oaktree is a dominant credit investor. Mitt Romney’s former “private equity” firm has five major business lines, only one of which is focused on traditional private equity.
But what else to call the collection of firms that continue to diversify their businesses as they grow? Perhaps “private equity” will take on a useful designation that is independent of its roots, much as “investment banking” defines a range of activi-ties on Wall Street, most of which are neither investing nor banking.
A distinctive term is necessary because these firms are unique entities on Wall Street, even as they increasingly are coming to define the Wall Street of the 21st century. And while all firms remain different by way of strategy, resources and culture, they are all getting into similar busi-nesses and geographies. It is as if a treasure map to a new kind of Wall Street powerhouse has been unearthed, and everyone is racing to find it.
To see what the race looks like, I created a back-of-the-napkin comparison of eight of the biggest multi-strategy firms to see who was and wasn’t in certain strategies and certain parts of the world (page 5). I’ve given each a “diversification” score based on the breadth of their operations.
A few observations:
• Of the largest eight firms, only Bain and TPG are not publicly traded. How long can this last?Perhaps the current senior partners at thesetwo firms say they have no interest in goingpublic, but what about the next generation?
• Every firm now manages a credit strategy, in some cases enormous platforms like Black-stone’s GSO. Credit and buyouts seem to marry very well, all the way down to the middle market, where BDOs and lending divisions have proliferated.
• All eight have operations in North America, Western Europe and East Asia.
Some of the strategy/geography “holes” are notable, and could indicate the next big hire or acquisition. Blackstone does not offer any direct hedge funds, though it has one of the largest hedge fund-of-funds platforms. By contrast, its acqui-sition of the Credit Suisse secondaries division means it is now in the business of managing the fund interests of rival private equity firms, despite having its own direct private equity investment
Market analysis by Privcap CEO David Snow
It is as if a treasure map to a new kind of Wall Street powerhouse has been unearthed, and everyone is racing to find it.
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4 / Commentary
Snow’s Notes
Mega-Manifest DestinyIt’s only a matter of time before the big firms known as ‘PE shops’ are all in the same businesses and geographies
privcap Digest / May 2013 / 5
platform. Bain is the last of the “megas” with no real estate division. Apollo, despite being a master of the capital markets, offers no advice-for-fee in this area, like Blackstone and KKR. Another hole—Carlyle is everywhere in the world but Russia. But it’s the only firm with a presence in Africa.
In ten years will any of these firms (if they remain independent entities) remain holdouts for any of these strategies or geographies? Not likely. And the list of businesses lines operated by “private equity firms” may very well be twice as long. ■
L Follow David Snow on Twitter @SnowsNotes
5 / Commentary
* For comparative purposes, the Goldman Sachs entry is a compilation of unitsfrom the firm’s merchant banking as well as asset management businesses.
StrategiesPrivate Equity X X X X X X X XReal Estate X X X X X X XCredit X X X X X X X XHedge Funds X X X X X X
Infrastructure/Energy X X X X XAsset Management X X X XCapital Markets X X XListed Products X X X X X
GeographiesN. America X X X X X X X XL. America X X X XW. Europe X X X X X X X XEE/Russia X X XMENA X X X XAfrica XIndia X X X X X X XAsia/Pac X X X X X X X X
Diversification points: 10 13 14 15 14 8 7 8
TPGBlacksto
ne
KKRGoldman *
Carlyle
Apollo
BainOaktre
e
Mega-PE Diversity Grid A look at the business lines and geographic operations of seven of the largest diversified alternative investment firms. Each firm is awarded a “diversity point” per strategy and geography.
privcap Digest / May 2013 / 6
6 / Takeaway
By Danielle Fugazy
Brian Bernasek of The Carlyle Group says unions and PE can get along
nion negotiations are part of life for most private equity firms, and more often than not both sides emerge worse for wear. Just look at Ripple-wood Holdings, whose union dealings
with Hostess left it looking like a Twinkie stuffed in the bottom of a backpack.
Unions: the “Win-Win” WayClick to watch this video at privcap.com
Yet Brian Bernasek, a managing director with the Carlyle Group, says it doesn’t need to be that way.
“When you come at an opportunity with the mind-set that everybody can win, then you can find opportunities that you might not otherwise,” says Bernasek.
Bernasek focuses on investment opportunities in the industrial and transportation sectors—industries with a history of an active union workforce. Over the years, he has been actively involved in several such investments, including Allison Transmission, AxleTech International, and the Hertz Corp.
Allowing the union to participate in the upside of private equity ownership is often key. While Carlyle owned Allison Transmission, Bernasek structured a labor agreement with the local United Auto Workers union that gave workers a bonus plan with the same incentives provided to management. The union had had no bonus participation under its prior owner, General Motors.
Legacy union contracts are often the biggest hur-dle. To reduce costs but appease existing workers, Bernasek implemented a two-tier wage program that gave veteran employees greater financial upside than new hires. “This allowed us to hire more people, which the union appreciated and liked,” says Bernasek. “But it allowed us to do it in a more cost-effective way.”
Under Carlyle’s ownership, revenue increased by approximately 15 percent, additional product lines were developed, and debt was lowered.
The trick to doing a successful deal with a compa-ny that has a union presence is gaining the union’s trust, something Bernasek admits is a challenge. “There’s a hurdle that we have to get over every time we have a discussion with the union,” he says. “We have to make them understand that there is an opportunity for a win-win. A lot of it is reference-based. What you’ve done in the past matters.” ■
“ When you come at an opportunity with the mind-set that everybody can win, then you can find opportunities that you might not otherwise.”
The Carlyle Group
Investment: Allison Transmission Headquarters: Indianapolispurchase date: 8/07 purchase price: $5.58 billion (with Onex Corp.) Fund investment was made out of Carlyle Partners IVGrowth: Under ownership grew EBITDA from $544 million to $712 millionExit: Went public 3/12 (NYSE: ALSN)
7 / Deal Story
privcap Digest / March 2013 / 7
MidOcean partners ⬌ south Beach Diet
As told by Ted Virtue, CEO, MidOcean Partners
Dr. Agatson succeeded as a preventive cardiologist and bestselling author, but Ted Virtue of MidOcean Partners said the doctor needed help with professionally managing his booming health and lifestyle brand. With more than 23 million copies of The South Beach Diet in print and a vibrant website sub-scription base, MidOcean’s objective was to elevate the brand with a relaunch of its high-protein diet bars, cereals and smoothies. Hear the whole story at )Link.
The Story
Success in the Slimming Sector
MidOcean and ACI Capital acquired a majority stake in Jenny Craig for
$115 million in 2002, then sold it to
Nestlé for about
$600 million in 2006.
Click to watch this video at privcap.com
“ We’re in the early stages of this deal, but we bought the deal at a very attractive price. It’s a great brand and one we think has an enormous amount of opportunity to grow into a major brand category.” –Ted Virtue
The DetailsThe companyThe South Beach Diet sells health products including books, a subscription-based website and a line of branded food products.
Investment Date August 2011
Founded by Florida-based cardiologist Dr. Arthur Agatston, who wrote The South Beach Diet in 2003
MidOcean’s past investments in health brands:LA Fitness (Europe), Jenny Craig and Vitaquest
privcap Digest / May 2013 / 8
Must see /Upcoming programs on Privcap.com
8 / Calendar
Upcoming programs on Privcap.com
calendar May 6, 2013
The ILpA Benchmark The launch of a private equity index and how GPs can use it as an IR tool
Information Overload: Meeting Lp Demands for Data How GPs can deliver data that holds real weight with LPs
Leon Black for The Melanoma Research Alliance The founder of Apollo Global Management co-founded MRA as part of his personal war against melanoma
May 13, 2013
Brazil: Real Assets Panel on how capital can be deployed into real assets in the Brazilian economy
Transformative Marketing: Growing a portfolio Company A Privcap conversation with Mike Duda of Consigliere Brand Capital
May 20, 2013
The Overhang: Overhyped? Defining overhang —and whether LPs should consider it before investing in a fund
Alvaro Goncalvez Q&A A Privcap conversation with Alvaro Gonçalves, CEO of Stratus Group
Richard Jaffe Q&A A Privcap conversation with Richard Jaffe, co-head of the Private Equity Group at Duane Morris
Inside the Multilateral Investment Fund The MIF’s Susana Garcia-Robles on private sector development in Latin America
May 27, 2013
Randy Mehl Q&A A Privcap conversation with Randy Mehl, a partner with Baird Capital’s U.S. Private Equity Team
Keynote from Scott Budoff A Privcap conversation with Scott Budoff, partner at Saw Mill Capital
privcap Digest / May 2013 / 9
New rules of private equity FundraisingThe balance of power between LP and GP has shifted, possibly changing the fundraising landscape forever. Firms are being forced to rethink their investment strategies and demonstrate competence like never before. Fundraising also costs more, takes longer, requires more travel, and is just generally harder.
Three leading PE professionals—John Greenwood of Pantheon Ventures, Mounir Guen of MVision Private Equity Advisers, and Russell Steenberg of BlackRock Private Equity Partners—explain how GPs can adapt to the new rules of fundraising, and ultimately succeed.
Key Findings
Finding 1
Expect everything to be more difficult
A fundraise isn’t what it used to be—general part-ners must work twice as hard to raise half as much.
One of the tallest hurdles for GPs is fund size, Guen said. “If you’re going to raise about $3.5 billion, there are basically 20 investors globally that will constitute the main portion of that. If those 20 don’t common-rate your number-one core holding, you have gaps. And the only way to fill them—because there is a lack of other mega-investors—is by going to a broader list. And that completely changes the topography and the dynamic of the fundraise.”
For starters, it drastically increases the number of potential investors GPs have to process. And that means more travel, longer lists to review, more next steps, and more to-dos—all while LPs are expecting quicker response times.
Another obstacle for GPs: The portfolios of limited partners are more mature than ever, and most LPs are now trying to prune the number of GP relationships they manage. “If you’re a new GP, it’s very difficult,” Greenwood said. “Not only do you need to impress them that you’re somebody who deserves their allocation of capital; you also need to demonstrate why you should replace another GP relationship that fund manager has.”
9 / Deep Dive
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Click to watch this video at privcap.com
➊ Expect everything to be more difficult ➋ GPs must demonstrate deep insight ➌ Your next fund will be different from your last fund ➍ Cash-on-cash has maximum cachet ➎ LP “influencers” are more influential than ever
privcap Digest / May 2013 / 10
investors then start negotiating.“We’re seeing investors showing up with lists
and saying, ‘You’re not going to get to the first close without us. This is our list of conditions of what your business will look like. We don’t want you in the fundraise more than 12 months or even nine months.’ All sorts of things are now emerging.”
Finding 4
Cash-on-cash has maximum cachet
Today, confusion over private equity valuations reigns. That means LPs are more interested than ever in a GP’s cash-on-cash record.
Greenwood said IRRs are still important, but noted that there are a lot of variables in calculat-ing an IRR. “The beautiful thing about cash-on-cash is we can all understand it. It’s a full-cycle measure of how an investment has performed. It takes away the complexity of trying to wrestle with valuation issues, the impacts that time can have on IRRs with relatively short hold periods. Being able to demonstrate that you’ve bought a company as planned, developed the company as you planned, and were able to successfully exit that for cash is really the full cycle that we’re all ideally looking to understand.”
Steenberg added that numbers are only part of the equation in measuring a GP. “Let us not forget that returns are the result of an investment process. And it is that investment process that you really have to do the due diligence on, to ascertain whether or not they were lucky getting those returns or whether they were actually ‘good.’”
He said BlackRock does not focus solely on cash-on-cash or IRRs in due diligence. “The a sin-gle biggest reason I’ve found in 30 years of private equity why general partners don’t deliver the returns that they have in the past, it’s because they strayed from that discipline of process that allowed them to do so well. It’s in those areas that the real due diligence has to go on if you’re going to assure yourself that it’s a group you want to put money with.”
10 / Deep Dive
Finding 2
Gps must demonstrate deep insight
LPs are tightening their focus on industry and operating expertise, and that is influencing not only investments but GP marketing strategies. Partners who want to impress LPs must demon-strate that they have the industry insight and operating chops required to deliver returns.
“There’s two features here,” Guen said. “The first is ‘How and what have you done with the company? And can you repeat this?’ But the most important—and the new aspect that’s come into play—is ‘how and what do you do with problems?’ An ability to tenaciously work through your difficult investments, and to put in the resources and the understanding to pre-serve capital, is what investors want to see. The last component that they consider is the ability to deliver—and to consistently deliver.”
Steenberg recalled that in the late ’80s and early ’90s, every GP raising money said exactly the same thing: “I have proprietary deal flow.” Today it’s, “I have operating skills.”
“From a due-diligence point of view, it is the challenge of the limited partners to verify that,” he said. “It’s to understand what those operating skills are, and how and if they add value. Like pro-prietary deal flow, operating skills can be elusive.”
Finding 3
Your next fund will be different from your last fund
The balance of power between GP and LP has shifted, and this has serious consequences for limited-partnership agreements and fundraising.
Guen described the new dynamic this way: “The investors stare at the marketing plan, they stare at the fundraise, and they take a view on whether it will achieve its targets.” And because GPs are urgently trying to get to the first close,
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“ If you’re a new GP, it’s very difficult. Not only do you need to impress them that you’re somebody who deserves their allocation of capital; you also need to demonstrate why you should replace another GP relationship that fund manager has.”–John Greenwood
privcap Digest / May 2013 / 11
in the recent year or two is gatekeepers,” he said. “Not only do they represent important capital, but they’re also winning capital in new areas, in Asia and the Middle East, in Europe.”
The key to unlocking gatekeepers is to under-stand who they are and how they operate, then work closely with them. And remember, Guen said, “you can’t sell a gatekeeper, because a gate-keeper structures a portfolio and executes the portfolio that they believe is best for clients.”
Private equity is now more complex than ever, Steenberg observed. The GP model has had to evolve to meet the intricacies of the world, “and where you’re seeing it the most is on trans-parency and communication and in dealing with a limited-partner base. In the old days, it was ‘Give me the money and go away for 10 years—I’ll just send it all back to you.’ Those days are long, long gone.”■
Finding 5
Lp “influencers” are more influential than ever
The re-up rate for follow-on funds stands at just 50 percent—a daunting number for GPs about to fundraise. Those partners who succeed often do so by leaning on “influencers,” those LPs whose investments are closely monitored by other LPs.
Guen said there are two approaches to raising new capital. There’s the traditional way—meet with several hundred investors and see who sticks—but he advises against it, “because if they have issues with you, that can proliferate.”
Alternatively, a GP can target influential inves-tors and hope they amplify the fund rate. “One group of investors that have had a lot of influence
11 / Deep Dive
“ The single biggest reason I’ve found in 30 years of private equity why general partners don’t deliver the returns that they have in the past, it’s because they strayed from the discipline of process that allowed them to do so well.”–Russell Steenberg
Participating in the Privcap thought-leadership series “The Fundraising Market” are John Greenwood, Pantheon Ventures; Mounir Guen, MVision Private Equity Advisers; Russell Steenberg, BlackRock Private Equity Partners; and David Snow of Privcap
privcap Digest / May 2013 / 12
12 / Insight
By Tanya Klich
In the early days of the Great Recession, real estate investments piled up like so much radioactive waste. It wasn’t just bad loans and tight credit that drove deal activity to a halt for large institutional investors. The fallout called into question the viability of the asset class as a whole.
coming HomeClick to watch this video at privcap.com
Yet with U.S. growth showing increasing signs of stabilization, the world of private capital is once again putting billions to work in commercial— and even residential—real estate. Dan Vene, the recently departed head of real estate capital-raising at Fir Tree Capital, sat down with Privcap to discuss the real estate rebound and long-term outlook. What’s driving the renewed interest in real estate investing today?
We had a lost decade in stocks. If you look at a 10-year Treasury rate today, coupled with an inflation rate of three percent, you still have a negative real rate of return in the fixed-income market. So most investors looking at real estate today are looking for yield. They also demand more conservative underwriting, because several of them got burned in the last downturn, when you had unrealistic assumptions built into these models. When we think about what the market is looking for, clearly they’re looking for more stable managers and less financial engineering.
Can you describe how investors are looking to invest? Is the interest more in commingled funds or direct opportunities?
They have generally looked at joint ventures and direct real estate ownership as an additional vehicle. What tends to happen is that an offering or a project is put in front of them, and they have maybe two or three weeks to decide if it’s suitable for them. That takes a lot of work. They start to remember why they liked the fund model. So I think what we saw in 2008 and 2009 was a knee-jerk reaction saying, “I’m not going to invest in funds for the time being. I’m going to look at other ways to get exposure to the real estate asset class.” What happened in reality? They realized that many of these fund managers made mistakes, but there are also a tremendous number of high-quality managers that did exactly what they said they were going to do. Those managers are now prevail-ing and easily raising capital. ■
The real estate rebound with Dan Vene of Fir Tree Capital
’88 ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’04 ’06 ’08 ’10 ’12-24%
-20%
-18%
-12%
-8%
-4%
0%
4%
8%
12%
18%
20%
24%
10 City Composite 20 City Composite
Perc
enta
ge ch
ange
, yea
r ago
Housing Up Sharply from the S&P/Case-Shiller Home Price Indicies
Source: S&P Dow Jones Indices & CoreLogic
privcap Digest / May 2013 / 13
13 / Insight
How esg creates value in emerging MarketsEnvironmental, social, and governance (ESG) mandates are now fundamental to due diligence. Increasingly, private equity firms active in emerging markets are adding ESG programs to their toolkits—often at their LPs’ insistence.
ESG is especially important in the emerging markets, where many businesses are growing rapidly and in need of systems for improving performance and mitigating risk. Three emerging-markets private equity veterans—Jeremy Cleaver of CDC Group, Sandile Hlophe of Ernst & Young, and Dushy Sivanithy of Pan-theon Ventures—share success stories and cautionary tales about how ESG can create value and, when neglected, put value at risk.
Click to watch this video at privcap.com
. CONTINUES ON NEXT PAGE
Bio
Sandile Hlophe, Ernst & YoungSandile Hlophe is a chartered accountant and the Transaction Advisory Services leader for Africa at Ernst & Young. He is a member of the Ernst & Young Africa Execu-tive team and the EMEIA TAS Leadership team with extensive transaction advisory, mergers & acquisitions, project finance, debt advisory and financial restructuring experience. The TAS team advises capital markets leaders and c-suite executives on the capital agenda with regards to raising, investing, preserving and optimizing capital.
Bio
Dushy Sivanithy, Pantheon Ventures Dushy Sivanithy is a principal with 9 years of private equity experience.
Focused on the evaluation, selection and monitoring of European investment oppor-tunities and is a member of the European Investment Committee.
Dushy has specific responsibility for German and Central and Eastern European Primary Funds. He also focuses on venture and cleantech funds in Europe.
Prior to joining Pantheon, Dushy worked for Hermes Private Equity as an analyst on both fund and direct investments. Previously, he worked for Morgan Stanley as a research analyst in the investment banking division, primarily involved in the telecoms and media sectors.
Dushy received a BSc in Biochemistry from the University of London. He is based in London.
Bio
Jeremy Cleaver, CDC Group Cleaver joined CDC in 2011 and is a Port-folio Director responsible for sourcing, executing and monitoring fund-of-funds investments in Africa. Prior to joining CDC, Jeremy worked for the Asian Development Bank (ADB) in Sydney as a private sector development specialist. Jeremy holds a BSFS from Georgetown University and a MBA from Columbia Business School.
privcap Digest / May 2013 / 14
14 / Insight
An Ounce of Prevention Dushy Sivanithy
It’s easy to measure the costs that go into an ESG program, but it’s often difficult to measure its benefits. In some sense, ESG is like any precautionary measure: You never truly know what you prevented.
“We looked at a secondaries deal in Africa with very nice underlying investments and a very steep discount available,” said Sivanithy. “Through our ESG work, we found a co-investor in one of those deals that we were very uncomfortable with and discussed it with the general partner, who we felt hadn’t managed the issue appropriately.”
It turned out the co-investor was under indictment in the United Kingdom, and Pantheon decided it would not be a good idea to be involved with the person, even at a distance. “Despite the significant discount and [the fact that] we quite liked the assets, we decided to walk away from that deal,” Sivanithy said. “We feel that was still the right decision. The issue did eventually resolve itself, but we weren’t willing to take that risk.” ■
Extracting ESG ValueJeremy Cleaver
From an ESG perspective, some of the most complicated investments are those in the mining, natural resources, and energy industries. Regulatory and environmental issues abound.
So how should investors approach such sectors?CDC is involved in the mining industry, but it invests at the exploration stage, not in businesses doing
the extraction. “What we find is the exits for those exploration-stage businesses are to the large global mining companies like BHP Billiton or Rio Tinto or, indeed, to list on stock exchanges,” said Cleaver. “For both of those exit routes, clear and functioning ESG policies and systems are absolutely critical.”
He added that ESG issues are especially important in mining because companies in the sector can change very quickly once a resource is discovered. “It changes from a couple of guys with a spade and a pan to a very large operation which is looking to identify a resource—and then quickly extract that resource,” he said. “From a governance perspective, there need to be fast and significant changes at several intervals over the period of exploration.”■
Doing Well by Doing Good Sandile Hlophe
A small investment in ESG up front can significantly increase long-term returns.Hlophe recalls a client in Africa that acquired a sporting goods retailer just before the most recent soccer
World Cup, held in South Africa. In the diligence process, the client emphasized issues like the sustainabil-ity of the manufacturing process and its use of domestic raw materials.
The client also took a close look at how the retailer could better engage with the local community by funding soccer clinics and programs at schools. “That in itself was a massive investment,” Hlophe said. “[The client] paid a premium, because they invested significantly in driving out an ESG program through-out the portfolio investment.”
The investment paid off in 2011, a year after the soccer fanatics left town. When the company did not get the price it hoped for in the private market, it decided on an IPO and leveraged its good reputation in the community. “Through an IPO, they actually got much more significant value in that exit,” Hlophe said. “That’s a very good example whereby paying attention to ESG during the investment strategy—making sure you follow through and execute on that—added real significant outside value in the exit.” ■
privcap Digest / May 2013 / 15
15 / Takeaway
By Danielle Fugazy
Sustaining deal flow is hands on work, says Lincolnshire Management’s T.J. Maloney
veryone in the private equity indus-try knows that sustaining deal flow is harder than ever. Some firms rely solely on investment bankers, others cold call, and others a combination of
the two. At Lincolnshire Management, a team of dedicated “sourcing” professionals calls on poten-tial target companies. What’s significant is that it’s not a group slapped together in haste—it was formed almost 26 years ago.
“Part of the thinking is that you have to source on a geographic basis,” says T. J. Malo-ney, Lincolnshire’s president. “Deals that you’ll see on the West Coast don’t tend to come to the East Coast. Sometimes you’ll find that businesses in the Midwest are not particularly interested in talking to financial people in New York, but they are comfortable with fellow Midwesterners. The same is true for the Southeast.” To address those regional preferences, Lincolnshire staffs satellite offices in Atlanta, Chicago, and Los Angeles.
Deal HunterClick to watch this video at privcap.com
“We have a number of Europeans in our New York office that cover different parts of Europe and source deals there as well,” says Maloney.
In Maloney’s view, the structure puts the firm in a position to find strong investment opportunities and develop a macro view. “We’re generally looking at somewhere between 700 and 1,000 opportunities a year,” he says. “We know we never see all the opportunities that are out there, but we think calling companies makes us better investors and gives us a leg up in terms of finding a good opportunity in a particular sector. When we see one particular industry suddenly putting 10 or 12 businesses for sale, we might say, ‘Maybe something is going on in that industry that should make us a little skeptical.’”
It’s an approach that appears to be bearing fruit. The firm deployed more capital in 2012 than in its first 15 years of existence, including acquisitions of firms such as PADI, True Temper Sports Inc., and the National Pen Company. “We think it’s a good time to put out capital,” says Maloney. “We see the economy slowly recover-ing—and with slow recoveries, you don’t want to invest early. You want to invest late. We think that we have gotten the timing right. It’ll be a few years before we’ll know if that assumption is correct, but that’s our belief.”
The firm’s record is strong. In 2012, Oliver Gottschlag, a professor of management strategy at HEC in Paris, teamed with Dow Jones to deter-mine the best-performing private equity firm of the past 10 years. They included firms that had raised at least two funds during the period with aggregate capital exceeding $500 million.
Lincolnshire’s ranking? Fifth. ■
“ A recent study evaluated PE performance over the past decade among firms that have raised two funds and managed aggregate capital over $500M. Lincolnshire ranked 5th.”
privcap Digest / May 2013 / 16
How does a McGladrey engagement with a pri-vate equity client typically begin and evolve?
The first phase of engagement is usually when the funds are considering a purchase
transaction. They want to “kick the tires” and gain a deeper understanding of the numbers. We typically involve our transaction advisory group specialists who focus on evaluating the quality of a company’s financial information. By using people that have experience working on manufacturing companies, we can identify some of the weaknesses, and/or potential opportunities. This way, the private equity groups have a good grasp of the companies where they may invest a sizeable amount of funds.
If the transaction proceeds, our services can evolve. Larger deals may need help integrat-ing new systems. We’ve seen this happen in carve out situations. Some clients need help with transitioning to, different reporting sys-tems and improved reporting to private equity groups.
Then we roll into other important processes, such as tax returns, tax structuring and all the compliance steps. Those are just as critical as the upfront costs because you’ve got to make sure that everything is properly structured and that the financial statements can ultimately be audited. We have seen many instances where getting our firm involved right after the trans-action can improve the financial reporting process and ensure strong coordination with the tax and consulting groups. ■
16 / From Our Sponsors
Steve Menaker, Assurance Partner, Eastern Region Manufacturing Leader, McGladrey
email: Steve.Menaker@mcgladrey.com Web: www.mcgladrey.com
Expert Q&A with Steve Menaker, Assurance Partner, Eastern Region Manufacturing Leader, McGladrey
expert Q&a/
Snapshot
Expertise: 30 years of experience in public accounting, focusing on value creation and due diligence support to financial and strategic buyers
Education: BSBA in Business/ Accounting from the University of North Carolina
Click to watch this video at privcap.com
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