KKR Goes Public

KKR Goes Public After Long Delay

(Oct. 1, 2009) I am a little late reporting this, but I guess that is fitting. Kohlberg Kravis Roberts is finally a public company after merging with its Amsterdam-publicly listed affiliate. Although the firm is yet to be listed on the New York Stock Exchange, Euronext is a big step toward that aim.

“Our missing [sic] is to create attractive returns for our investors,” KKR founder Henry Kravis and George Roberts said. “This transaction is a milestone that will enhance this mission and provide capital to grow our firm.”

The listed European partnership, KKR Private Equity Investors, has been renamed KKR & Co. (Guernsey). KPE shareholders own 30% of the combined company, while KKR’s executives own the rest. And while the plan may eventually be to raise capital for the firm, KKR neither issued new shares, nor did its executives sell any of theirs.

Over the summer, KKR shelved its planned listing in New York to offer better terms to KPE investors. It was the third time the firm has postponed plans to go public since first announcing them two years ago.

Source

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Private Equity Fund Law

The Legal Protections Funds Have When Investors Fail

Many institutional investors and high net worth individuals have fallen on hard times, opening up the possibility of limited partners failing to meet capital requirements for private equity funds. When a limited partners goes bankrupt, the general partners of the fund may also take a loss. An important case in bankruptcy involved the limited partners of several private equity funds who sought and received recognition of insolvency proceedings commenced in the British Virgin Islands.

According to the NY Law Journal, in the event that an investor fails to meet a capital commitment, the manager of a private equity fund has the following recourse:

(i) offering the defaulting limited partner's unfunded commitment to another limited partner or a third party,

(ii) withholding distributions to the limited partner,

(iii) offsetting distributions to the limited partner against unfunded capital calls,

(iv) compelling forfeiture of all or a percentage of the limited partner's interest in the fund,

(v) charging interest to the limited partner on the unfunded amount until such amount is satisfied, and

(vi) initiating a lawsuit against the defaulting limited partner.

However, a limited partner under bankruptcy protection may be sheltered from some of these actions, according to §362 of the Bankruptcy Code. Section 362 gives automatic stay to many actions based on pre-bankruptcy agreements and often a bankruptcy court order is required to enforce any capital calls agreed upon before the LP filed for bankruptcy.

The problem in limiting the fund's ability to enforce capital calls or forfeit the defaulting party's stake is that it may inhibit the fund's investing. If an investor cannot pay the capital commitment then a deal may have to be put off or canceled entirely. The NY Law Journal says that this restriction on the general partner from enforcing capital calls "could detrimentally effect a fund's ability to make investments in portfolio companies or satisfy expenses, and thereby interfere with the fund's operations."

There seems an unfair advantage given to the defaulting party if the investor receives all the benefits of the partnership agreement without fulfilling the entire obligation. Luckily, the NY Law Journal suggests several ways to remedy this unfortunate situation:

Negotiate With the Debtor/Limited Partner: Often the defaulting investor values his stake in the fund and will be willing to negotiate different terms or a suitable compromise so that he can keep his partnership interests.
Relief from the Court: As previously noted, by appealing to the bankruptcy court for relief, a general partner may be able to still make capital calls or other remedies. The GP will have to show that by not receiving the investors' capital the fund is suffering and the court may lift the stay.
Setoff or Recoupment: The Journal explains: "Section 553 allows a creditor to offset a debt owed to it arising before the commencement of a case against a claim of the debtor against the creditor also arising prior to the commencement of the case.
Alternatively, the general partner may exercise the equitable remedy of recoupment, pursuant to which a creditor reduces the amount of debt owed to a debtor by the amount owed by the debtor to the creditor. Recoupment is an equitable defense; it is like setoff in the sense that one obligation reduces another, but in the case of recoupment the obligations arise out of the same transaction."
Assumption or Rejection of the Partnership Agreement: "The general partner also may make a motion with the court seeking to compel the debtor/limited partner to assume or reject the partnership agreement (or other fund governing agreement) pursuant to §365 of the Bankruptcy Code."

The Journal also suggests several ways to protect the fund against this situation in the pre-bankruptcy period, see this article for the full explanation of each measure.

Automatic Triggering of Capital Calls
Setoff/Recoupment Provisions
Covering Shortfalls in Capital Contributions
Cross-Default Provisions
Capital Calls Secured by Partnership Interests

It is important for General Partners to consider the unfortunate possibility that investors will default on obligations to the fund. I am not a lawyer, but the authors of the piece that this explanation of private equity and bankruptcy courts is based on are Richard F. Hahn and Michael E. Wiles are partners, and Bryan R. Kaplan is an associate, with Debevoise & Plimpton. Disclaimer: consult a legal professional before following any of the preceding suggestions. Source

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The Family Office Report (Free Download)

The Family Office Report

The Family Office Report is 65 page e-book on single and multi-family offices. If you are looking to learn more about family offices this guide will help you understand the family office industry. The Family Office Report was produced by the Family Offices Group, has a $250 value and is now free to download through completing the form below.

Benefits of Reading the Family Office Report:

Grow More Effective Family Office Relationships
Better understand Trends Affecting Family Offices
Learn more about the services offered by single and multi-family offices
Raise more capital from HNW wealth management firms and family office institutions
Position your firm or career in line with family office trends and industry challenges

Download the Family Office Report by typing in your first name and primary email address below:

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Leveraged Loans

Sperling of THL Partners Talks Leveraged Loans

Scott Sperling, co-president at Thomas H. Lee Partners LP, believes that the credit markets are large enough and active enough to refinance current leveraged deals. However, he remains "cautious" and "concerned" after the credit crisis and does not completely discount the estimated $430 billion of leveraged loans. Many of these loans will be called in 2012-2014 but buyout firms will likely try to extend these bank maturities. Sperling is optimistic about his buyout firm and others being able to restructure these loans, "the capacity exists within the market," he says. E-mail subscribers can view the following video here.

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Private Equity Fund PowerPoint

Private Equity Fund Marketing PowerPoint Presentation

In the last decade, marketers have adapted new technologies to attract investors or business partners. However, the PowerPoint presentation remains a standard and effective way to market and present to an audience. Fund marketers and business owners trying to attract investors will benefit from having a solid, professional PowerPoint. Every fund will have a different presentation but there are some common threads for making a great PowerPoint. Here are some tips on improving your PowerPoint presentation.

Private Equity Fund PowerPoint Improvement Tips

Update your PowerPoint quarterly: Most potential investors are likely to have already seen your one pager which is updated monthly. The presentation should mention your performance but the main purpose of it is to present your team's pedigree, investment process and risk controls. Hire a professional editor to spend 1 hour reviewing the presentation after each major review, this typically costs less than $100.

3 Areas of Focus: As mentioned within the bullet point above the three areas of focus within your presentation should be team pedigree and experience, investment process and risk controls. Many managers tend to be very high level while describing their investment process and risk controls, often times using terms which are seen too often within generic industry presentations. You have to let out enough of your strategy within your marketing materials so that others know there is actually something there. Solid returns alone, even within these recent markets is not enough, you must provide some explanation of your consistent process, system and parameters for operating. Please see the following bullet points for advice on each of the three most important sections of your PowerPoint presentation

Team Pedigree: Take the time to describe all of the relevant experience that your team holds and try to explain those experiences in ways that mesh well with your firm's investment process and approach to managing risk and executing deals. Many times certain types of experience can be valuable to managing a portfolio of investments but many times that connection needs to be spelled out within the presentation. If after creating this section you realize that your team consists of just one or two professionals without a long industry track record consider beefing up your close advisory board with industry veterans and experts in risk and portfolio management. It is important to retain capital raising talent as well, but without proper portfolio and risk management professionals or advisory professionals in place you may just spin your wheels. As you expand your team make sure and include a team hierarchy tree to your presentation, this may include your advisory team and a few service providers or research groups which you work with daily and rely upon for operations.

Investment Process: This is the most common area of PowerPoint presentations which needs improvement. I have found it easiest to try to break your investment process into 3-5 steps which could then as appropriate be broken down further during a due diligence phone call or within meetings with potential investors. I would start with a single page displaying the 3-5 step investment process your firm uses, I would follow this by 1-2 pages explaining each step of the process in great detail. This should be written with extensive enough detail not to bore seasoned investors but general enough not to lose amateur investors. Described the tools you follow, valuation process, the decision making process, research inputs, parameters for refining the universe of potential investments and triggers that may affect how the portfolio is constructed at each step. Providing a few private equity deal case studies within this part of the PowerPoint may be helpful. Use real life examples from the previous quarter and update these frequently so that analysts will be able to read into your decisions in context of the recent market conditions.

Risk Management Techniques: Analyzing the risks in investing in a certain industry or especially with young companies is a key concern for investors. Your risk management techniques can be placed within a separate section of the presentation or tacked on to the end of your investment process section within your PowerPoint. It is hard to go over-board on explaining with granularity what risk management techniques your firm employs. Start with the status quo, what tools, research, stop loss provisions and industry analysis methods does your fund rely on? Next move on to proprietary models you may be using, exclusive industry and potential investment research or experience which provides additional insight into how to manage risk within your portfolio.

More is More. It is often better to go overboard with details on your investment process and risk management details rather than not provide enough information. That said, never let your presentation grow to over 25 pages unless you have 3 or more products being presented within a single presentation. Getting your PowerPoint right is about balancing transparency and granularity with confusion and information-overload. Everyone is busy and often getting someone to invest 3 minutes to review your one pager can be a challenge of its own.

See another private equity fund marketing article

See guide to private equity marketing materials

Please consult your compliance officer or legal consultant before following tips from this website.

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Select Medical IPO

Select Medical Holdings Headed for IPO

Another sign of a resurgence in private equity activity is the initial public offering of Select Medical Holdings Inc. The company is owned by two private equity firms Welsh Carson Anderson & Stowe and Thoma Cressey Bravo LLC who hope to see their shares valued at $1 billion if shares go for $12. The private equity owners stands to almost double their money invested. As the stock market strengthens more buyout firms are considering taking their portfolio companies public.

Buyout firms are lining up IPOs to repay debt used to purchase companies and return profits to their investors. KKR & Co., Silver Lake and Fortress Investment Group LLC are among those planning share sales amid a 57 percent gain by the Standard & Poor’s 500 Index since March 9.

“In an environment in which private-equity performance has suffered, the ability to demonstrate cash-on-cash returns by exiting investments at an attractive valuation is compelling and may help firms raise future funds,” said Andrew Wright, a partner at law firm Kirkland & Ellis LLP in New York.

Select Medical plans to sell 33.3 million shares today at $11 to $13 apiece, raising as much as $433.3 million, according to a U.S. Securities and Exchange Commission filing. The stock is set to begin trading tomorrow on the New York Stock Exchange.

Bankers arranged about $1.5 billion in financing for the Select Medical purchase by New York-based Welsh Carson and Thoma Cressey of Chicago, which subsequently split into two firms. The transaction was valued at $2.1 billion including assumed debt, according to data compiled by Bloomberg. Source

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Private Equity Skills

What Skills Students Should Learn for Private Equity

I've been traveling for the last three weeks and during the flights I have been going through some white papers that I'd been meaning to read. One particularly interesting paper is by a professor at Stetson University titled "Understanding the Skills Needed for Careers in Private Equity Investing." The research identifies a major disconnect between general finance education and that needed for investing in private equity.

Although many professionals receive a general business school education and work one or two years at an investment bank or other finance firm, it would be great if an MBA included a more focused study on private equity to prepare graduates for a very unique field. There are signs of a shift toward educating students on private equity is the Tuck School of Business's Center for Private Equity and Entrepreneurship as well as the University of North Carolina's Kenan-Flagler Private Equity Fund which is largely run by students. I hope that more research is done to show how students and business schools would benefit from a curriculum with a strong focus on private equity.

It's crucial that students at least have a basic understanding of how to value companies, structure a deal, complete accurate due diligence, manage a portfolio and negotiate with investors and keep them satisfied. The price for on-the-job training for a venture capitalist could be millions of dollars from your investors, so it's important to have a curriculum that addresses specific skills necessary for working in private equity. The skills that private equity professionals should have beyond the existing MBA and finance degree curriculum are:

Being able to realistically value businesses in an illiquid start-up context
Contractually structuring the investment
Maintaining an effective personal network to both ensure adequate deal flow, and also assist portfolio companies in securing critical resources
Possess the negotiating skills associated with both purchasing and selling an investment
Be able to coordinating thorough and effective due diligence

If you have not developed these skills or your business school has not addressed these needs, the author prescribes ways to improve these crucial areas:

Do not rely on the “general business requirements” to meet these skills.
Some of these skills are process skills, meaning that they are developed by practice – not merely through understanding the process.
Due diligence is on virtually no one’s curriculum. There are great books available and free resources online to give you at least a surface knowledge of this area.
A course in private equity investing can be demonstrated to accomplish the purposes of the business capstone class, and might be offered in lieu of Strategic Management, for example.

To read the full white paper, see here.

See our private equity career guide for more information on what you need to succeed in private equity

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Private Equity Golden Age

Silver Lake CEO Predicts Private Equity "Golden Age"

The CEO of Silver Lake, a large private equity firm focused primarily in technology and growth industries, has a rosy prediction for the near future of private equity. Silver Lake CEO and co-founder, Glenn Hutchins, forecasts "The financial markets may be on the cusp of a new 'golden age' for private equity."

The financial crisis which has brought ruin to many private equity firms and their portfolio companies may now be ending as credit markets open up and the stock markets recover. Hutchins points out some important and promising indicators but he does not provide a clear explanation for why it will be a "golden age" rather than simply a return to average private equity activity. After all, even a very modest recovery in the industry will be seen as a significant improvement but it would still fall short of the boom a few years back.

"Now that the sort of panic of '08 is over and capital markets seem to be returning to some degree of normality ... companies will be able to access debt and equity markets like they have in the past. And that is no surprise," Hutchins said.

But he added that investors needed to be mindful that valuations in 2007 should not be defined as normal. They were an "overshoot in another way," he said.

"Now risk premiums are at attractive levels. Investors are being paid to take risk again. That means when you look back on this, when you get back to economic recovery, this will have been a good time to invest," Hutchins said.

"If you need financial engineering to enter a deal and multiple expansion to exit a deal, then your business is fundamentally challenged," Hutchins said. Source

Read more about Silver Lake at our Private Equity Tracker profile.

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Tear Sheets

Tips on Creating Your Fund's One Pager

Whether you design your one pager marketing piece by yourself, hire a designer or work together with a third party marketer you need to make sure that it includes certain elements and characteristics so you will not turn off potential investors. Your one pager is your most important piece of marketing material.

Less is more, make sure that your one pager includes some white space and that the font is not too small. Size 8 or 9 font is too small. Readers will glaze over if your one pager is not easy to read so don't worry about cramming every statistic or detail onto it as you possibly can. Make it easy to consume and institutional feeling.
Disclosures: Check with compliance but be careful writing the marketing copy of the one pager in one font and then writing disclosures in a much smaller font. I have never seen a one pager without disclosures.
Performance: Include performance since inception, performance year-to-date, performance vs. S & P 500, and performance vs. most appropriate alternative investment benchmark such a Tremont Long/Short Index, etc.
Elevator pitch: Place this near the top of your one pager, what exactly makes your fund unique? What is your truly Unique Selling Proposition that will catch the investors attention. This should be defined very carefully and repeated during phone calls, meetings, within marketing materials and through your company emails. You should be able to summarize it within 1-2 sentences.
Investment Process: Detail your investment process steps, if possible use symbols or pictures to show the segmented steps of the process to make it easier to understand, at least at a high level.

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Placement Agents Pay to Play

4 More Firms Settle in Placement Agent Pay to Play Scandal

The use of placement agents has come under fire following a public investigation into the practice and investigations into whether a pay-to-play scheme is used in attracting capital from pension funds. The most recent development is that New York Attorney General Anthony Cuomo's investigation into pay-to-play arrangements between the state's pension fund and placement agents for private equity firms has forced four more firms to settle. Reforming the current system has been met with some resistance especially from firms who argue that outlawing the use of placement agents puts smaller and new private equity firms at a significant disadvantage in raising capital.

The four private equity firms are: Access Capital Partners, Falconhead Capital, HM Capital Partners and Levine Leichtman Capital Partners. Each has agreed to adopt the rules proposed by Mr. Cuomo barring the use of placement agents to attract funding from pension funds. Additionally, each firm will pay a total $4.5 million in damages. Carlyle Group and Riverstone Holdings already settled with the Attorney General.

“With seven firms now having signed our code of conduct, momentum is building in the industry to make our code the national standard to eliminate pay-to-play in public pension funds across the country,” Cuomo said.

Six people have been indicted so far in the scandal at the New York State Common Retirement Fund. Two have pleaded guilty for their role in the scheme which paid kickbacks to a pair of top aides to former New York Comptroller Alan Hevesi, whose office oversees the Common Retirement Fund.

HM Capital and Falconhead both employed a firm run by a key Hevesi aide indicted in the scandal, Hank Morris, while Access and Levine Leichtman unknowingly hired firms that split fees with Morris. Access had hired Barrett Wissman, who has pleaded guilty for his role in the pay-to-play scheme, who in turn allegedly paid off Morris to win the firm business. Source

Meanwhile, the SEC's proposed guidelines that aim to clean up the pay-to-play system may have a very damaging effect on new and smaller private equity firms. The current system (ethical, or not) enables small and newly launched private equity firms to net capital from investors that it otherwise probably would not have access to. The big buyout shops are able to use name recognition and a proven track record to entice investors without the need of placement agents, although some big firms use them anyway.

Without using such agents, small and new funds will have a tougher time raising money, critics say. While large, established firms are well known enough to simply contact a pension fund directly, smaller funds without a brand or history have a far tougher job getting heard. "I think the proposal's a bit draconian, particularly on banning placement agents," said Steven Kaplan, a professor of finance at the University of Chicago.

Supporters of the placement agent industry -- which includes brand name firms such as Credit Suisse's (CSGN.VX) placement agent unit and Blackstone Group's (BX.N) Park Hill Group -- argue that their role has no similarity with political fixers, and they should not be tarred with the same brush. Source

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Private Equity Real Estate Tips

Private Equity Real Estate Tips for Success

One of the most common requests I receive from readers is to cover private equity real estate in more detail. There is a great deal of information on real estate and private equity but very little on private equity real estate funds. I am working to fill this void so if you have any white papers, articles, videos or personal insight please contact me at Theo@peblogger.com I came across this document on private equity real estate funds. The author, Deloitte, prescribes five areas to focus on to achieve success in private equity real estate.

Attracting capital

Build and sustain an exceptional investment yield track record.
Build and maintain an eminent and well-regarded team of advisors, including bankers, accountants, lawyers, and other specialists.
Obtain access to qualified investors.
Make sure that satisfied and loyal investors receive timely and effective communications, including financial and tax reports.
Establish, promote, and protect a brand that exudes quality, skill, and integrity.

Sourcing and qualifying investment opportunities

Do the right things to make people want to do business with you: Demonstrate that you understand the important issues, you conduct due diligence effectively and efficiently, and you have credibility to close.
Build an extensive network of joint venture partners who are trustworthy and skillful.

Fund and investment structuring

Structure investments that are suitable, attractive, and efficient for domestic individuals, tax exempt institutions, and a variety of foreign investor profiles.
Establish best practice fee structures that align your interests with those of your investors.
Determine the right degree of leverage on investments and for the fund overall.
Structure investments to minimize federal, state, and foreign income, and asset & transfer tax costs, thereby providing optimal after-tax yield to investors and you.

Investor reporting and operational excellence

Develop and operate properties efficiently and effectively.
Build and retain a skilled team at the advisor level.
Comply with all financial and tax regulatory matters in a timely fashion.

Exit strategies

If desired, effectively recycle capital within a fund.
Correctly gauge ideal timing for closing a fund and starting a new one with the same investor group.

Source

The preceding advice is from Deloitte and is not necessarily suggestions from this website, please see a qualified legal consultant.

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Government Private Equity

Government & Private Equity

When Government Policies Effect Private Equity

In the aftermath of the financial crisis, federal and state legislators and regulators have been considering ways to monitor the private equity, venture capital and hedge fund industries. I just spent a week in Washington, D.C. and streets and buildings around the Capital were crowded with lobbyists and policy-makers working to push legislation through. While all these bills do not specifically concern private equity firms, many affect their portfolio companies and the industries they compete in.

With President Obama in the White House and the Democratic majority in Congress, private equity firms are bracing for major changes in areas outside of finance such as labor unions, health care, economic policy and energy. Changes on any of these fronts will inevitably effect some private equity firms and the companies they are invested in, according to panelists at a recent Private Equity Analyst Conference.

In economic policy, the recovery of the financial system and the stimulus packages are important in reviving consumption in portfolio companies from retail to manufacturers. The drastic revamping of the health care industry could have significant effects on the medical and bio firms that venture capital firms hold. The energy sector may benefit from a Democratic government hoping to "go green" and give some of these environmental startups a chance. With Obama and Congress taking on so many issues in the last few months, private equity firms and venture capitalists are unsure of what to expect.

"Policy does impact the bottom line of portfolio companies," said Mark Heesen, president of the National Venture Capital Association. He added that venture investors have been moving more heavily to doing deals in life sciences and clean technology, both areas that are heavily regulated.

Private-equity firms are also intently focused on broad financial system reform, even the portions of it that don't appear directly related to their business. Bryan Corbett, a principal with the Carlyle Group, mentioned as one example the impact that higher reserve requirements at banks are likely to have on private-equity firms.

Speakers were also concerned about the regulation that is specifically targeting the private-equity industry, especially legislation that would require all private-equity and venture capital managers to register with the Securities and Exchange Commission, and new proposed rules that might ban the use of placement agents in soliciting capital from public pension funds. Source

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Private Equity Principles

Investor Group Issues Private Equity Principles

A trend reported in this blog is the push by private equity investors for better terms. The financial crisis and poor returns by private equity firms has given limited partners a window to apply some pressure in negotiating the LPA.

A clear signal of this is the Institutional Limited Partners Association's latest publication of Private Equity Principles. This document is issued by the ILPA, which represents 220 institutional investors in private equity funds and more than $1 trillion in private equity funds under management. The association explains that it created the guidelines in order to align the limited partner's interest with the general partner. According to the ILPA, there has been a shift away from what benefits the investor. To counter this trend, the Principles are designed "in order to (i) correctly align interests between general partners and limited partners, (ii) enhance fund governance and (iii) provide greater transparency to investors."

Although the document does not propose a dramatic shift in compensation--the 2 and 20 model "has typically worked well to align interests"--the Association advocates for other changes in the existing partnership structure. Most importantly, the proposed guidelines call for: strengthening clawback provisions; ensuring management fees are put toward operational costs; managers should have a significant equity stake in the fund; investors should have greater influence in the direction of the fund and its investments; greater transparency in the fund.

The Private Equity Law Review has summarized the key elements of the Private Equity Principles, if you'd like to read the guidelines follow this link:

Waterfall Structure

The LP’s capital contribution plus preferred return should be paid first, before any distributions are made to the GP’s carried interest
Establish GP carry escrow accounts with reserves of 30% or more to cover potential claw back liabilities
Carry on recapitalizations should be paid only when the full amount of LP capital is returned on the recapitalized investment

Calculation of Carried Interest

Carried interest should be calculated on net profits, not gross profits
Carry should not be paid on current income
Carried interest should be calculated only on an after-tax basis

Claw back

Claw back liabilities should be determined and reported periodically
Claw back liabilities should be paid within 2 years and should be gross of taxes paid
Effective joint and several claw backs should be implemented to make sure that full claw back liabilities are met

Management Fee Structure

Management fees should be based on reasonable operating expenses and reasonable salaries, so that fees are not excessive.
Management fees should reduce upon formation of follow-on fund and at the end of the investment period
The management fee should be used to pay all normal operating costs of the GP, including interactions with the LPs. The LPs should have the power to review the partnership expenses annually
Placement agent fees should be paid by the GP
All transaction, monitoring, directory, advisory and exit fees should accrue 100% to the benefit of the fund.

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Private Equity Bubble

Private Equity and Bubbles in the Last Decade

The Deal, along with some major private equity players, has taken a look back at the last decade and what they expect for the future of private equity. Richard Friedman of Goldman Sachs remembers when GS's private equity arm got caught up in the tech bubble and he explains why he does not expect private equity to repeat that mistake. Yet many firms in the industry have chased hot sectors only to find the bubble burst.

The Deal's David Carey sees the last decade as two large bubbles which brought incredible returns for some savvy (and some lucky) investors and left other private equity managers scratching their heads wondering how they didn't see it coming. According to Carey there are two simmilarities in the bubbles: "First, as David Rubenstein (pictured), co-founder of the Washington buyout giant Carlyle Group, points out, the industry is very much "a captive of the markets" and "not countercyclical." And second, the titans of private equity, or a significant portion of them, are just as prone as the Average Joe to get caught up in investment fads and fashions and to emulate the unenlightened, noncontrarian masses." This is a pretty honest remark for Rubenstein, admitting that he and his private equity colleagues do not have any real advantage that protects them from bad investments.

It's interesting reading some of these stories and insights gained over the last ten years, like Global Crossing, the telecom firm that attracted a good amount of private equity investment despite some glaring red flags. One common problem that plagued the industry in the dot-com bubble was a lack of understanding by private equity firms of the businesses they were sinking capital into. This is a big problem that we've covered on this blog where investors will chase a hot industry of which they have no prior knowledge. Not only is it hard to manage an investment in a sector you do not understand but it also makes your firm highly vulnerable because you probably won't predict a decline in the industry. There are lessons to be learned from the private equity veterans that can help today's new firms avoid old mistakes.

Read the whole story, Between Reality and the Mirage.

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Link to This Resource: Private Equity Bubble

http://privateequityblogger.com/2009/09/private-equity-bubble.html

DLJ Real Estate Capital Partners

DLJ Real Estate Capital Partners | Private Equity Real Estate

DLJ Real Estate Capital Partners is a private equity real estate firm based in New York. Its managers include Mr. Kamil M. Salame and Mr. Steven Carter. The private equity real estate firm is based in New York, New York. According to a company profile:

"DLJ Real Estate Capital Partners focuses on single asset repositionings, corporate divestitures, international acquisitions, joint venture programs, entity investments, development opportunities, and capital market dislocations. It seeks to make investments in both technology and global real estate. The fund typically focuses its international investments in Western Europe and Japan. It seeks to invest in excess of $20 million and holds its investments between three years and five years. The fund considers investments structured as either equity or debt or a combination thereof, if it meets its return criteria."

I am adding DLJ Real Estate Capital Partners to our database of private equity firms. Our team will research DLJ Real Estate Capital Partners to find contact details for at least one high-level employee or executive at DLJ Real Estate Capital Partners. To get your copy of the Private Equity Directory, visit this link.

Tags: DLJ Real Estate Capital Partners investments, DLJ Real Estate Capital Partners private equity firm, DLJ Real Estate Capital Partners private equity, DLJ Real Estate Capital Partners management, DLJ Real Estate Capital Partners contact, DLJ Real Estate Capital Partners website, DLJ Real Estate Capital Partners LP, DLJ Real Estate Capital Partners group, DLJ Real Estate Capital Partners news, real estate private equity firms

Link to This Resource: DLJ Real Estate Capital Partners

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Private Equity Industry Update

Private Equity Industry Video Update | THL Partners

Following yesteday's look at the "new normal" of private equity, here is a good video update on the private equity industry from a partner at a major private equity firm. The economic recovery is still very shaky and private equity firms and investors are having to decide when is the right time to get back in the market again. Scott Sperling of Thomas H. Lee Partners, one of Boston's largest private equity firms, says his firm is aggressively looking for new opportunities especially in the services and business outsourcing sector as well as retail but that this recovery is "fragile." He also mentions the gap in valuation between what the company is valued at in the public market and what private equity firms think it is actually worth. E-mail subscribers can watch the video here.

Companies are still valued higher than private equity firms are willing to pay, and in order to pay 7-9 times cash flow Sperling says he must be certain that the economy is stable. Part of this may be a hope on the buyout side that these companies would be willing to sell for less than they are worth due to economic pressure. Sperling closes with the negotiations between the FDIC and private equity firms and the recent regulation, advocating strongly for lowering the reserve requirement so that private equity firms and their companies are not competitively disadvantaged.

See our tracker profile of Thomas H. Lee Partners
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Tags: private equity investors, private equity update, news, trends, industry data, one year later private equity, 2009, 2008, economic crisis, private equity fdic, banks, fdic regulations, capital

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Private Equity India Companies

Private Equity Talks with India Companies Stall

Private equity investment in India companies has developed impressively despite the recession but talks have stalled between top consumer retain chains and private equity firms. Large retail chains including Tata's Croma and Videocon's Next and Planet M disagree with buyout firms over valuation.

Private equity firms are trying to get a stake of the rapidly expanding consumer durables sector which is expanding an estimated 15-20% riding an increase in demand. Yet firms such as Northbridge Capital, TVS Capital Funds, SAC Capital Partners, Citi Venture Capital International (CVCI), Avigo Capital Partners and Samara Capital are struggling to buy up stakes in Indian retail companies. Buyout firms are valuing the specialty retailers far less than what the businesses optimistically project. Part of the issue is that the private equity firms are skeptical of the emerging retail market as it is less developed as that of other countries'.

Most of the chains are still in a learning and correction stage. Valuations are dependent on such factors, especially in an uncertain market,” said the CEO of a leading PE fund, who asked not to be named.

Private equity funds usually pick up around 15-20% stake in retail chains or companies with an eye on returns within the next 3-5 years. Valuations of retail formats are determined by factors such as turnover, number of outlets, sales per sq ft and gross margins.

The new age chains are selling a large number of premium products such as LED (light emitting diodes)/LCD (light crystal display) TVs, top-end refrigerators and front-loading washing machines. Organised retail currently constitutes 9-10% of the total Rs 60,000 crore consumer durables, IT & telecom market. Retailers are not in a mood to bargain. These chains, backed by some of the largest corporate houses in the country, are not willing to accept anything less than what they feel is ‘a fair valuation’. Source

Read about the increase in India family office investors
Other articles about private equity in India: Private Equity India; Value of Private Equity Deals in India Drops; Private Equity Boom in India

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Tags: private equity india, indian private equity, buyout india, private equity and india companies, private equity retail, private equity retailers, durables, valuation, india valuation

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Private Equity Industry 2009

Thoughts on 2009's "New Normal" in Private Equity

It seems everyone is trying to anticipate changes to the private equity industry and how it will effect individual firms and investors. Whether it is the FDIC allowing private equity firms to invest in banks, states outlawing the use of placement agents, a boost in the IPO market or a recovering public market; there are major changes taking place following the major financial crisis. Some of these changes may be permanent while others will likely be temporary and adapt as the economy recovers.

Australian private equity blog Carried Interest recently looked at what the long-lasting fundamental shifts will be, those that last at least 3-5 years. I was writing a comment on his predictions but it evolved into a small essay so I've included it here. He believes that the "New Private Equity Normal" will include the following factors--to which I added my two cents:

Fewer firms: Carried Interest estimates a 30-50% reduction in the number of private equity firms in the next few years. I find this a bit high, if nothing else simply based on the volume of e-mails I receive from individuals and firms looking to open a private equity firm. Whenever a financial industry has a tough year observers speculate that a huge portion of the industry will dissolve. For example many observers were writing the epitaph for the hedge fund industry at the end of last year but August marked the sixth straight month of positive returns and hedge funds are posed to have the best year in a decade. I hesitate to suggest that private equity is about to have such a massive and rapid recovery.

But there is enough monetary incentive remaining as the 2/20 model has not been drastically reduced and investors are returning slowly. In 2009 fundraising was off to a dismal start in Q1 but increased 28% in Q2. It's to be expected that fundraising would be incredibly tough but as confidence returns to the market I don't see much warranting a cut in the industry by half.

As for existing portfolio companies, these firms should do better as the economy recovers and consumption increases (unless it's a double-dip recession as Nouriel Roubini suggests). If the capital many private equity firms have had to inject does not overburden them with debt and if portfolio companies are able to generate profits again, then most firms may be able to escape bankruptcy. Of course, it's tough to estimate anything in this economy but most economists have agreed that the worst is behind us in the financial markets at least. A recovery in the IPO market also suggests that private equity activity will recover in the next year as more buyouts take their companies public and find new investments. I think it might be healthy for the industry if it consolidates a bit but a reduction by 30-50% is quite severe and, I think, unlikely.

Much less debt: I do agree with Carried Interest on the reduction of debt, but maybe not to the 50/50 debt to equity ratio as a standard. It's hard to imagine that big buyout firms will limit their debt use without a strong push from investors but maybe they are realizing that the potential risk and the concern to investors warrants a shift.

Tougher fund terms: This is an almost certain reality and I believe the terms that limited partners are able to push through will remain the standard unless private equity firms are able to have an amazing year that demands reevaluating their agreements. Again the 2/20 model will largely stay intact it seems although some firms have reduced their fees to entice wary investors especially at new private equity firms. However limited partners are gaining ground in other areas such as distribution waterfall, greater influence on the investments through advisory boards, and other aspects of the LPA. I tend to see term agreements as a tug of war and as institutional investors succeeded in gaining ground it takes twice the effort for private equity firms to recover that loss especially without a really great year.

Longer hold periods: Considering the losses that private equity firm's portfolio companies racked up in the recession, it's reasonable that PE backers will want to hold onto these investments longer in order to realize their full value. There was a time this decade where buyouts departed from investing long-term, but that may be over.

Continued development of GP operating skills: Private equity has been evolving its methods and strategies consistently over the last two decades and the pressure to keep increasing returns will ensure that General Partners continue to develop and implement new techniques and ways to increase profits. As Carried Interest writes, "Leverage and multiple expansion are no longer available to drive easy returns. GPs are going to have to build value through earnings growth . . . and that means (really) helping improve portfolio company performance. McKinsey predicted this trend years ago, but the credit boom and strong equity markets allowed many PE managers to cheat, to rely purely on financial engineering. The future? Look at firms like KKR. They have a team of 40 consultants called Capstone whose sole focus is on building value within the KKR portfolio."

As always, this is not financial advice nor is it a guaranteed prediction of the private equity industry. Please see a qualified legal or financial consultant before following any prescriptions in this website.

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Tags: private equity industry, private equity normal, private equity industry 2009, evolution, buyout industry, buyout 2009, investors, activity, initial public offering, private equity groups

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Private Equity Firms in NYC

Firm Name | Private Equity Profile

As you are probably aware, we offer a large database of private equity firms complete with contact details and information on each firm. We update the database frequently to ensure that it is up-to-date and provides the most value for you possible. During the last update, I calculated that 25% of the U.S.-based private equity firms are located in NYC. This should not come as a surprise, New York has long been seen as the private equity and financial hub of the world. If you would like to view the contact details for the close to 200 private equity firms in NYC, visit Private Equity Directory.

I receive many emails asking for a list of Private Equity Firms in NYC. Here is a list I've made from a list of the Top Private Equity Firms to only show the Top 15 New York Private Equity Firms by assets raised over last 5 yrs (billions).

Goldman Sachs Principal Investment Area = 49.05 billion
Kohlberg Kravis Roberts = 39.67 billion
Apollo Management = 32.82 billion
Blackstone Group = 23.3 billion
Warburg Pincus = 23 billion
Cerberus Capital Management = 14.9 billion
AIG Investments = 14.22 billion
Fortress Investment Group = 14 billion
Clayton Dubilier & Rice = 11.38 billion
Lehman Brothers Private Equity = 10.22 billion
J.C. Flowers & Co. = 7 billion
New Mountain Capital = 6.69 billion
MatlinPatterson = 6.67 billion
W.L. Ross & Co. = 6.65 billion
Welsh Carson Anderson & Stowe = 5.88 billion

For a directory of private equity firms including many private equity firms in NYC follow this link.

Tags: list of private equity firms in NYC, NYC private equity firms, Buyout firms in NYC, New York City private equity firms, NYC private equity, private equity firms

Link to This Resource: Private Equity Firms in NYC

http://privateequityblogger.com/2009/09/private-equity-firms-in-nyc.html

Raising Capital for a Fund

Using Marketing Strategies to Raise Capital

When people think of capital raising they think of it as unique from the general business areas of sales and marketing, however, raising capital is essentially selling a product (the fund) to investors. Therefore some tested marketing and sales principles can be applied to raising capital for a private equity fund. Yet by the same token, some strategies do not transfer to capital raising.

Think of a sports car that has a well-produced commercial with more advertising flash than information on the product. Consumers are excited by the advertising and go out and buy the car. For one month it is a great car but then the consumer realizes that it is really inefficient and costs more to maintain than the initial cost of the car. The marketing campaign for the car was able to generate buyers and the car company makes a lot of profit from this. Although that car was defective, the car company can still produce many others and consumers will probably not remember that faulty sports car. This is not the case in private equity.

First, there are less investors in private equity funds than there are car buyers. Therefore, if your fund fails to satisfy its investors, word will get around and it will be difficult to find new investors. Secondly, investors are committing large portions of their personal wealth or, in institutional investors, the wealth of others. They will usually pay more attention and do greater due diligence on the fund than a buyer of a product would. Thus, a slick marketing campaign will only get investors interested but it does not ensure that they will invest in the fund. There needs to be substance behind your fund marketing because investors will be asking a lot of due diligence questions to measure whether your fund is capable of producing returns.

Unlike products such as a car or a computer, a fund is expected to succeed its entire life, which could be as long as 10-12 years. Most commodities--except maybe wine and baseball cards--are expected to lose value each year but funds are expected to consistently satisfy investors expectations and hopefully improve upon these expectations annually. Additionally, these limited partners are not casual investors, rather they are sophisticated accredited investors who will probably see through an empty marketing strategy.

Now that we've seen how general sales and marketing does not always transfer to private equity capital raising, here are some ways that you can employ traditional strategies in your fund marketing campaign.

Persistence: Every good sales man knows that it takes more than a great product to achieve success. Investors may resist even the most qualified fund managers because they are uncertain about the market or just need to be prodded a bit. Fund marketing requires persistence so keep track of potential investors, even if you cannot get them to commit to this fund perhaps they will be interested in the next.
Keep a Large List of Potential Clients: I know fund marketers who keep information on hundreds of potential, current and former clients. These marketers realize that having a broad reach in the industry is essential to raising capital. It's not enough just to simply have the contact details for these investors, you need to build a relationship with each one. I would suggest scheduling at least a quarterly call to your most important sources for capital and at least annually contacting the less frequent investors. This keeps you in their mind and will help you know as soon as they are looking to invest in a fund.
Everyone Should Know Some Marketing Strategy: Even if you are the manager of your fund, you should still have at least a basic knowledge of marketing. Your marketing and sales team may be the ones who attract the clients but ultimately management will be the ones responsible for closing the deal and maintaining investor confidence. If you do not have the people skills to talk with your investors or the marketing know-how to generate interest in your funds then you will have trouble raising capital and keeping whatever investors you are able to attract.
Read About Marketing: You may be a seasoned marketer with a successful strategy but you could always improve your current methods. Reading free articles on this blog or others about marketing and sales will be helpful in keeping up with new trends and ideas. Another great refresher is Jeffrey Gitomer's collection of helpful and concise marketing books such as the Sales Bible and Little Red Book of Selling.

I hope this has illuminated some of the differences and parallels between general marketing techniques and capital raising strategies.

If you want to learn more read private equity fund marketing.

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Tags: private equity fund marketing, private equity sales, private equity marketing, sales and capital, capital raising techniques, private equity fund capital raising, capital raising private equity

Link to This Resource: Raising Capital for a Fund

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Private Equity Spain

Spain Private Equity

Spain Housing Crisis Halts Private Equity Firms

Spain has been one of Europe's largest leveraged buyout hubs in recent years but a crumbling economy, brought on by the housing market meltdown and a severe decline in consumption, has private equity groups looking elsewhere. Several private equity firms invested in construction and building supply companies which was a highly profitable sector until the housing meltdown, this year there have been no private equity deals in Spain's construction industry.

In both 2007 and 2008, Spain ranked as the 5th most
active private equity market in Europe in terms of deals. Now, Spain is ranked 11th and it is uncertain whether it will fall further as other European nations begin to recover and Spain's economy still struggles. Private equity investors have reason to distrust Spain's buyout market as even deals made in the last few years are fighting to stay afloat to rough economic waters.

"The Spanish economy is shrinking fast, and it will become poorer compared to other countries," said Jaime Hernandez Soto, co-founder and partner of local firm MCH Private Equity and the chairman of Spain's private-equity association Ascri. "You have to be careful with what you're buying right now, because so many companies will have to downsize to reflect a smaller economy."

Mr. Hernandez Soto said he expects deal activity to pick up slightly in the second half of the year and into 2010, though it isn't likely to return to recent years' levels any time soon.

The housing market's collapse has hit some private equity portfolio companies focused in construction while others escaped before the crash such as Nmas1's machinery rental firm General de Alquiler de Maquinaria SA, which Nmas1 bought for almost $40 million in 2004. The Spanish buyout group intended to use the purchase of General to acquire other companies in the industry and grab a share of the €1.9 billion market value, and it did so quite successfully. Nmas1 used GAM to buy up three small firms and complete 5 more buyouts of larger companies becoming a giant in the industry.

In 2006, Nmas1 generated €189.9 million in an initial public offering of GAM making a massive return on its initial investment in the company. Nmas1 was able to avoid the housing collapse while other private equity firms piled on trying to duplicate such success stories. In 2006 private equity firms invested $437 million in the Spanish construction sector but then the housing bubble burst and investment fell to just $119 million in 2007 and $22 million last year.

While Nmas1 was able to avoid the housing crisis others were not so lucky. In 2006, Advent International Corporation purchased a heavy machinery rental firm, Hune, at the peak of the bubble. Like GAM, Hune completed several acquisitions to increase its size in the industry but left Advent with debt estimated to be between €400 million and €500 million. That debt became more concerning as demand for Hune's machinery dropped, reportedly leading Hune to consider selling its majority stake in Hune. 3i Group PLC had a deal go sour in a similar way forcing it to sell its stake in a concrete business after demand plummeted. Now, no firms are willing to step back into the construction sector.

Buyout firms didn't invest directly into home building in Spain, but they were big backers of the construction-services firms and manufacturers of such products as tiles and stone, which are highly sensitive to a housing bust.

"Some funds made their investments in the construction sector a bit late," Mr. Hernandez Soto said. "Now, they're suffering." Source

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Tags: private equity spain, private equity in spain, Spain buyouts, Spanish buyouts, GAM, Nmas1 buyout, 3i plc private equity, private equity construction, private equity building, housing market

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Raising Capital for a Fund

Using Marketing Strategies to Raise Capital

Spain Private Equity

Spain Housing Crisis Halts Private Equity Firms

September 2009