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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• Demystifying the credit crunch 14 Jan 2009. Source: Private Equity Council and Arthur D. Little. The term "credit crunch" has entered the popular lexicon. Barely a day passes when the media is not opining on the topic. Rarely does an economic event have such a profound ripple effect on institutions and individuals throughout the world. Understandably, policy makers are working to respond to the credit crunch and its aftershocks. Thoughtful policy in this area will flow from a solid grasp of the evolution of the issue and current trends in global financial and capital markets, as well as an understanding of the many new products and terms that even some of the financial world's best and brightest have acknowledged they do not fully comprehend, according to this article by the Private Equity Council.

• Perspectives - Capital Dynamics quarterly newsletter December 2008 17 Dec 2008. Source: Capital Dynamics. The recent market developments have placed the buy-out market under continuing pressure. As managers apply mark to market accounting in their September reports, companies are being reduced in value, and more writedowns will be seen over the next several quarters, according to Capital Dynamics.

• Private equity after the crunch: a route map for the new investment landscape 10 Dec 2008. Source: IFR Market Intelligence. Edited by Ross Butler. Private equity has enjoyed a meteoric rise over the past five years. Deal volumes surged from $163bn in 2002 to $518bn in 2007. But just as the industry passed the landmark $2trn in assets under management, the credit crunch closed off private equity’s vital source of leverage and the buyout boom came to an ignominious halt. However private equity remains one of the very few parts of the financial markets with cash to invest. As asset prices tumble and business performance drops off, private equity is in a strong position to pick up the pieces.

• Toward a more liquid and efficient secondary market for venture capital assets 19 Nov 2008. Source: Millennium Technology Ventures. Dan Burstein and Sam Schwerin. The growth of secondary investing has been one of private equity's megatrends in recent years. This trend was originally fueled by the business of trading limited partnership interests in the largest and best-known private equity and venture capital funds. A recent report indicates that over $15bn was raised in 2007 alone for funds specialised in secondary investing.

• Alternative Investment Quarterly: SEC and FSA clamp down on short selling of financial firms 19 Nov 2008. Source: ISI Publications. Elliot R Curzon, Jennifer Epstein, David A Vaughan, Richard L Heffner, Alan Rosenblat, Patrick, W Dennis and Darina F O’Connor, Dechert LLP. The US Securities and Exchange Commission and the UK Financial Services Authority have released regulations designed to limit short selling of financial firms and increase market transparency and liquidity. On 17 September 2008, the SEC issued an emergency order, adopting a new temporary rule imposing restrictions designed to curb naked short selling and the resulting delivery failures and a new anti-fraud rule applicable to short sellers who fail to deliver securities by the delivery dates (the ‘September 17 Order’). The FSA also had agreed to introduce new requirements to prohibit the active creation or increase of net short positions in publicly quoted financial companies from midnight 18 September 2008. This Alternative Investment Quarterly article, written by Dechert, discusses three further emergency orders issued by the SEC on 18 September 2008, as amended by the SEC on 21 September 2008, and expands on the FSA’s short selling limitations announced on 18 September 2008, including further requirements and amended informal guidance issued by the FSA on 23 September 2008.

• How they started, global brands: how 21 good ideas became great global businesses 12 Nov 2008. Source: Crimson Publishing. Edited by David Lester. Lots of us have ideas we think would make great businesses, yet most of us never do anything about these ideas. Probably, because we just would not know where to start. But what if you took the first step? Where could it lead? This book by Crimson Publishing, edited by David Lester, looks at some of the great success stories.

• Round up the usual suspects 04 Nov 2008. Source: Weil, Gotshal & Manges. Christopher Machera, Joshua Peck. We may only be in the early stages of the current distressed cycle, but a significant number of portfolio companies of private equity sponsors have already found their way into bankruptcy. One of the unfortunate consequences of bankruptcy is frequently the search by the debtor and its creditors for potential claims against the usual suspects, including the private equity sponsors who effected the LBO and owned the portfolio company, according to Christopher Machera and Joshua Peck of Weil, Gotshal & Manges.

• Dragons or Angels 29 Oct 2008. Source: Crimson Publishing. Modwenna Rees-Mogg. Dragons or Angels by Modwenna Rees-Mogg, (Crimson Publishing) reveals the truth behind Dragons’ Den and compares it to the reality of securing private investment in today’s business environment. Split into three parts, ‘The Dragons’ Den story’, ‘How to raise money from investors’ and ‘How to become an investor’, this eye-opening book will appeal to budding entrepreneurs and investors alike.

• Breaking up is hard to do - and must be done carefully 24 Oct 2008. Source: Weil, Gotshal & Manges. Joanna Bliss, Jeffrey Friedman, Frank Martire. The recent Delaware Chancery Court case, Hexion Specialty Chemicals v Huntsman, provides a number of valuable practice tips to private equity sponsor buyers in negotiating acquisition agreements and in evaluating their ability to walk away from an agreement, according to Joanna Bliss, Jeffrey Friedman and Frank Martire of Weil Gotshal & Manges. Two of the messages for private equity sponsors from the Huntsman decision are that: (i) carefully negotiating provisions in an acquisition agreement, even seemingly mundane or 'boilerplate' provisions, matters and (ii) missteps in evaluating your ability to terminate an agreement can be costly.

• Seeking differentiation at a time of change: global private equity report 2008 22 Oct 2008. Source: PricewaterhouseCoopers. After the unprecedented financial events of the past year, private equity is operating in an environment where fundraising will become more competitive. What is more, as the turbulence affects the ‘real economy’, so investing will be more difficult, according to this PricewaterhouseCoopers report.

• The Long Game 20 Oct 2008. Source: Weil, Gotshal & Manges. Mark Soundy. Those involved in private equity are no strangers to making hard business decisions. Now, says Mark Soundy of Weil, Gotshal & Manges, managing partners may need to employ those skills uncomfortably close to home.

• Private equity must adapt to a new environment 08 Oct 2008. Source: Capital Dynamics. With the burst of the debt bubble in July 2007 the debt markets have fundamentally changed. Most prominently no new LBO mega-deals have been announced since 2007. A considerable number did close eventually but the large amount of hung debt that peaked at around $340bn had burdened banks' balance sheets to a degree that prohibited further deals of that size. Volumes dropped significantly and shifted away from larger to smaller deals. Towards the second quarter and throughout the summer it seemed that debt markets started to recover slowly, according to Capital Dynamics.

• Private equity: capitalism's misunderstood entrepreneurs and catalysts for value creation 01 Oct 2008. Source: The Independent Review. David Haarmeyer. Leveraged buy-out firms, which have grown rapidly in recent years, create economic value by curbing the resource waste and corporate malfeasance that can hold back or sink public companies. Unfortunately, ignorance about what they do, the threat they pose to incompetent corporate managers and poor money managers, and biases against highly profitable financial enterprises may provoke a legal and regulatory backlash that would discourage the economically beneficial activities that they and other types of private-equity partnerships undertake, according to this article from David Haarmeyer. It was originally published in the autumn 2008 issue of The Independent Review.

• High-net-worth individuals and sustainable investment study 24 Sep 2008. Source: Eurosif. The role of high-net-worth individuals is increasingly becoming relevant to investors that are seeking returns while engaging on sustainability issues. This inaugural study on European HNWIs and sustainable investment market from Eurosif, sponsored by Bank Sarasin & Co. and KPMG, finds that there is indeed significant interest in this space, and it is growing quickly.

• Equity investor: don't jump in the directorship pool unless you know where the rocks are 17 Sep 2008. Source: Global Compliance Services, Holland & Knight. Steven A Lauer, Christopher A Myers. When taking a significant equity position in a business organisation, many investors seek a board seat in order to protect that investment. They often make such investments in firms that have not issued publicly traded securities. Such a role makes a great deal of sense from the investor's perspective, but does it carry with it unexpected potential risk and responsibility, ask Steven A Lauer and Christopher A Myers of Global Compliance Services and Holland & Knight. If so, what does that risk represent? Can such an investor take steps to ameliorate that potential risk? If so, what steps should he or she take when assuming such a role?

• Three deals: three ways - a look at recent Shariah-compliant acquisition financings 10 Sep 2008. Source: Lovells. Elliott Doucy, Rustum Shah. This article from Elliott Doucy and Rustum Shah of Lovells explains the challenges to applying Islamic finance to a leveraged buy-out and considers the opportunities for the acquisition finance market arising from the growth of Shariah-compliant products.

• Acquisition Finance 10 Sep 2008. Source: Tottel Publishing. Tom Speechley, Macfarlanes. The new, fully updated edition of 'Speechley on Acquisition Finance' offers a practical guide to acquisition, from traditional MBO transactions to more complex multi-layered acquisitions financing and public bid-financing. For each scenario, it provides a full picture of the transaction structure and process - from the initial financial and commercial stages, through the due diligence process and the legal documentation process to funding and completion. It also explores the documentation process (including a detailed look at the various legal documents required) and the issues which typically arise during this stage of the deal. Written by Tom Speechley, Macfarlanes.

• Knee-deepening insolvency 20 Aug 2008. Source: Weil, Gotshal & Manges. Michael Weisser, Hayward Majors, Kyle Gann. Many private equity professionals have previously been schooled in keeping in mind the interests of all constituencies of a troubled portfolio company, including creditors, as it approaches insolvency. However, a recent United States Bankruptcy Court for the District of Delaware decision has potentially taken this mantra to new heights and provides valuable lessons for private equity sponsors dealing with companies teetering on the brink of insolvency, especially with respect to engaging in self-dealing transactions and deepening the insolvency of a company to the benefit of the private equity sponsor, according to Michael Weisser, Hayward Majors and Kyle Gann of Weil, Gotshal & Manges.

• Happy Birthday Mr Borrower 13 Aug 2008. Source: Weil, Gotshal & Manges. Doug Warner, Stuart Hills, Michael Nicklin and Paul Libretta. It goes without saying that the leveraged finance markets have become a nastier, more brutish place for private equity sponsors in the year since the beginning of the credit bust. However, it appears that the more things change the more things stay the same. Although some of the familiar features of leveraged buy-outs in the last few years, such as generous leverage ratios, stapled financing, equity bridges, covenant-lite loans, PIK toggle notes and liberal equity cures, are gone from the current market, much of what remains is similar to the heady days of the first half of 2007. This article from Weil Gotshal & Manges summarises what has changed and what remains the same in the leveraged finance markets in the US and Europe one year into the credit crunch.

• Loss rates in the European mezzanine market 30 Jul 2008. Source: Partners Group. Christian Ebert, Dr Michael Studer. The European mezzanine market offers attractive investment opportunities across different economic environments. This paper investigates the loss rates of European mezzanine investments using transaction data from 229 fully realised mezzanine investments made during the 1989-2001 time period. Partners Group shows that the loss rate is overall very low but exhibits significant year-over-year volatility. Building portfolios that span multiple vintage years improves risk-adjusted returns significantly.

• Beyond the credit crisis: the impact and lessons learnt for investment managers 29 Jul 2008. Source: KPMG. Since the summer of 2007, banks have suffered significant losses as a result of one of the biggest crises ever to hit the financial services sector, the so-called credit crisis. So far, banks have been the focus of attention as bearing the brunt of the credit crisis impact. But what of the fund management sector? This report from KPMG asks how fund managers have been affected by the credit crisis – and what strategies they are adopting in response.

• Private equity as an asset class 23 Jul 2008. Source: Wiley Finance. Guy Fraser-Sampson. Guy Fraser-Sampson draws upon 20 years of private equity experience to provide a practical guide to mastering the intricacies of this highly specialist asset class. Aimed equally at investors, professionals, and business school students, it starts with such fundamental questions as 'What is private equity?' and progresses to a detailed analysis of venture and buy-out returns.

• Sovereign wealth funds and the global private equity landscape 16 Jul 2008. Source: Norton Rose LLP. The liquidity crisis in the global financial community has been a constituent part in pushing sovereign wealth funds into a glare of publicity. Recent high profile investments made by sovereign wealth funds into leading US and European banks and some of the larger global private equity funds has generated discussion, courted controversy and raised hopes within the global investment community, according to this report from law firm Norton Rose LLP.