Leading Edge

Theories and ideas formulated by private equity and venture capital experts to push forward thinking and practice in the industry

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• The Global Economic Impact of Private Equity Report 2010 21 Dec 2009. Source: World Economic Forum. The recent financial crisis has resulted in a heightened interest on the part of policy-makers to understand the impact of both traditional financial institutions, such as banks and insurance companies, and alternative investment asset classes, such as private equity and venture capital, on the global economy.

• The real-world limitations of private equity performance persistence 09 Dec 2009. Source: Peracs. Oliver Gottschalg. The performance of a private equity fund manager’s previous funds is widely used by investors as an important, if not the most important, criterion to assess the manager’s quality and to decide on commitments to a new fund. This makes intuitive sense and is in line with the finding of so-called “performance persistence” in the leading academic studies on private equity  performance. A recent study, conducted by Peracs in conjunction with the Buyout Research Program at HEC Paris, further examines the real-world implications of performance persistence in private equity.

• Accounting diligence pays off when investing in PIPEs 02 Dec 2009. Source: Ernst & Young. Sales of PIPEs (private investments in public entities) have gained momentum in the last two years as corporations seek capital without adding leverage. While some PIPEs involve the private sale of new or existing common shares, private equity firms and other investors often prefer investments that can offer upside returns and downside protection. These instruments are typically in the form of debt or convertible preferred stock. Terms may include penalty payments if the issuer fails to register the underlying common shares by a specified date, beneficial provisions with respect to pricing and seniority, and sweeteners that allow investors to buy additional shares at a discount to market. While attractive to investors, such terms can create hurdles for issuers.

• Private equity in the post-boom era: What’s next? 27 Nov 2009. Source: Grant Thornton. The credit crisis and the US recession significantly altered the private equity industry: Exit opportunities, fundraising and deal making have all changed dramatically. This white paper, produced by Grant Thornton and the Association of Corporate Growth, explores liquidity opportunities and the fundraising market in the post-boom era.

• The new buy-out: how the financial crisis is changing private equity 25 Nov 2009. Source: Partners Group. In late 2008, Leon Black declared, "traditional private equity is dead," and signaled that his firm, Apollo Management, would seek investment returns in the credit markets during the coming years. For Black, who has a successful track record in distressed debt investments, the debt market offered an obvious opportunity after plunging to its lowest trading levels in history in the wake of the financial crisis. Also, his prediction of a moratorium on large-scale "traditional" leveraged buyouts has largely been fulfilled. But the events of the past year have shown that private equity is not dead. It is, however, meaningfully different. It has evolved to adapt to the new economic environment, or new world, created by the financial crisis.

• Private equity, brand equity – a study of the relevance of brand in the private equity industry 24 Nov 2009. Source: BackBay Communications. BackBay Communications, a public relations and marketing firm, recently conducted the BackBay Communications Private Equity Brand Survey. The goal of this study was to examine the importance of private equity firms developing and maintaining a positive brand. The company was curious about whether industry participants felt a strong brand was important. With which audiences it is most vital for general partners to have positive brand recognition. How private equity brands are built and maintained. And which private equity firms the industry believes have the strongest brands.

• Inalytics and GLG examine what makes an asset manager skilful 09 Nov 2009. Source: Inalytics, GLG Partners. Rick Di Mascio, Simon Savage. A recent study in America confirmed the finding that high school grades are the most accurate predictor of student success in the first year of college. This is immediately intuitive. In a similar way, the past performance of investment managers is often imagined to be a useful predictor of future returns. In our industry, intuition does not correspond with reality as a good period of performance is just as likely to be followed by a poor one, write Rick Di Mascio of Inalytics and Simon Savage of GLG Partners.

• Tripolar private equity investment world set to emerge after economic crisis, says Adveq 04 Nov 2009. Source: Adveq. Private equity fund of funds Adveq believes that investors are today, and for the first time, facing the prospect of a tripolar private equity investment world in which each of the three major private equity regions – the USA, Europe and Asia – will operate on the basis of their own rules. In addition, and as a consequence of the economic crisis, valuations, refinancing arrangements and exit markets will present the most significant challenges for the sector in the future, according to Adveq.

• Secondary market in private equity, according to Watson Wyatt 30 Oct 2009. Source: Watson Wyatt. As the recent market crisis has unfolded, one area of the private equity landscape that commentators suggested would inadvertently benefit from the market conditions was secondary funds and their limited partners (LPs). The reality to date appears to have been somewhat different, with very few transactions clearing the market (at the time of writing) due to a continued dislocation between buyers’ and sellers’ pricing expectations. The purpose of this paper is to explore this dynamic and consider the prospects of the secondary market moving forward.

• Are SWFs welcome now? - perspectives from Vale Columbia Center on Sustainable International Investment 23 Oct 2009. Source: Vale Columbia Center on Sustainable International Investment. Veljko Fotak, William Megginson. Until the end of 2007, western media, governments and regulators often seemed more concerned about protecting domestic firms from investments by sovereign wealth funds (SWFs) than about attracting capital inflows. Politicians in many countries called for the regulation of sovereign foreign investments at that time, when SWF investments were growing rapidly. In fact, during 2006 and 2007, countries that introduced at least one regulatory change (many of them related to such investments) making the investment climate less welcoming for multinational enterprises accounted for 40 per cent of all FDI inflows.

• Navigating your portfolio through turbulent waters 15 Oct 2009. Source: Grant Thornton. Private equity firms and their portfolio companies are experiencing some of the toughest conditions since the industry’s inception. How is it possible to navigate in these treacherous times? This white paper explores the current state of private equity firms’ portfolio companies, examines some of the most prevalent practices for helping them in this difficult economy, and offers best-practices prescriptions for success.

• Private equity fees and terms - revisions proposed by Watson Wyatt 12 Oct 2009. Source: Watson Wyatt. Negotiating terms has previously been challenging due to limited capacity in high quality general partners   and the restricted ability of limited partners  to pool their bargaining power. The former has clearly contributed significantly to the latter, according to global consulting firm Watson Wyatt.

• Shifting sands: limited partners' perspectives on the future of private equity 09 Oct 2009. Source: Ernst & Young. The private equity industry has been dramatically altered in recent times and looks very different now than it did only two years ago, before the financial crisis and global economic downturn. The current downturn has not only affected the private equity industry, but also limited partners who invest in private equity funds. To gain a deeper understanding of the current perspectives of limited partners on these unusual market conditions and on the private equity industry, we met with key limited partners globally to ask them how they see the present private equity environment and how they view the future.

• The impact of private equity ownership on corporate tax avoidance 29 Sep 2009. Source: Harvard Business School. Brad Badertscher, Sharon P Katz, Sonja Olhoft Rego. In recent years, private equity firms have been broadly criticized based on the substantial tax benefits enjoyed by their owners and managers. Editorials have inflamed public opinion by accusing private equity firm owners and managers as having excessively low tax rates, and pointing out that the substantial wealth generated by private equity firms can pay for sophisticated tax planning, including the use of offshore investment companies based in tax havens.

• Capital Dynamics: Perspectives - private equity portfolio risk management 22 Sep 2009. Source: Capital Dynamics. Christian Diller. Liquidity management is one of today’s key challenges in private equity. With both distributions and draw downs currently at a record low, investors have been granted a temporary reprieve from the liquidity issues experienced late last year. However, as soon as signs of economic recovery start to strengthen, draw downs are expected to accelerate as GPs take advantage of attractive prices. This is further compounded by the substantial amounts of un-invested commitments.

• Corporate venture capital contracts – a reason for inferior corporate VC performance 07 Sep 2009. Source: Douglas Cumming. Financial contracts between entrepreneurs and venture capitalists have been characterised as one of the most important and distinguishing features of VC investment. Financial contracts are vitally important to the VC investment process because contracts minimise information asymmetries and agency problems and appropriately provide incentives for both the entrepreneur and value-added VC investor(s) to add value to the enterprise.

• Changing terms: how modifying a company’s debt affects financial reporting, according to Ernst & Young 20 Aug 2009. Source: Ernst & Young. As the economic downturn affects corporate earnings, freezes credit markets, reduces market capitalisation and leaves companies at risk of defaulting on debt obligations, many businesses are seeking ways to restructure, replace or modify the terms of their outstanding debt to cut costs and strengthen their balance sheets. Such changes require different accounting treatments and have different financial reporting and tax implications for the issuer, depending on whether the modification is significant, whether the debt is considered to be modified or replaced and whether the change in terms meets criteria for extinguishing existing debt or restructuring troubled debt.

• NVCA's 4-Pillar Plan to restore liquidity in the US VC industry 13 Aug 2009. Source: NVCA. In April the National Venture Capital Association (NVCA) unveiled a set of recommendations aimed at addressing the capital markets crisis for venture-backed companies in the US. During the last decade, the number of initial public offerings (IPOs) by venture-backed companies has declined to alarmingly low levels, culminating in the 2008 drought when only six companies entered the public markets.

• Private equity returns and disclosure around the world 23 Jul 2009. Source: Douglas Cumming, Uwe Walz. To obtain more funds from the institutional investors, private equity fund managers may report inflated valuations of private investee companies that are not yet sold. However, such overvaluations may result in a reputational cost when those investments are realised.

• Alternatives: private equity at the crossroads, according to State Street 03 Jul 2009. Source: State Street. The private equity industry is reeling from the financial crisis and economic downturn, with the value of portfolio companies under pressure and widespread contraction expected across the industry as fund distributions and new investor commitments have slowed to a crawl. Nevertheless, according to State Street’s annual hedge fund and private equity survey, half of institutional investors polled planned to increase their allocation to private equity over the coming year, reflecting significant opportunity for long-term growth from investment managers with extensive, solid track records at a time when the valuations of new investment opportunities are extremely attractive.

• Selling French distressed assets: an increasing tendency to trigger the deep pocket’s liability 02 Jul 2009. Source: Dechert. Olivia Guéguen and Isabelle Marguet. The disposal of a subsidiary is not necessarily the end of the story for the former shareholder. It is indeed a well-established principle under French law that, in case of a subsequent bankruptcy situation of the sold subsidiary, the seller’s liability can be triggered if it is evidenced that the selling shareholder is responsible for mismanagement acts (whether as de jure or de facto manager) having generated a deficiency in assets, write law firm Dechert’s Olivia Guéguen and Isabelle Marguet.

• The Next Wave in Effective Green Investing - a presentation by C Change Investment's Russell Read 29 Jun 2009. Source: AltAssets. Energy and materials technology advances are likely to be centre stage in the world from an investment and basic research perspective, according to Russell Read, former CIO of CalPERS and CEO of green investment firm C Change Investment, in this presentation originally delivered at NewNet’s Private Equity and Venture Capital Clean Energy Investor Forum.

• Role of private equity in institutional investor portfolios to increase, says fund of funds manager Adveq 09 Jun 2009. Source: Adveq. Private equity is set to play an increasing role in institutional investors’ portfolios in the future and investors will need to more actively manage their private equity allocations in the context of their overall asset management in order to deliver future returns, according to global private equity fund of funds manager Adveq.