Major PE Activity in 2014 The Abraaj Group acquired Fan Milk International – one of the biggest ever privateequity investments in an African FMCG business. The investment took the group’s commitments in Africa beyond the US$2bn mark.
To study buyout market cyclicality, we make more detailed “apples-to-apples” comparisons of buyout characteristics over time by combining the results in Kaplan and Stein (1993) for the 1980s buyout wave with those in Guo et al. (2007) for the last ten years. Both papers study public-to-private transactions in the United States. First, we look at valuations or prices relative to cash ﬂow. To measure the price paid for these deals, we calculate enterprise value as the sum of the value of equity and net debt at the time of the buyout. Firm cash ﬂow is calculated using the standard measure of ﬁrm-level performance, EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. Figure 3 reports the median ratio of enterprise value to cash ﬂow for leveraged buyouts by year. The ﬁgure shows that prices paid for cash ﬂow were generally higher at the end of the buyout waves than at the beginning. (The ﬁrst privateequity wave began in 1982 or 1983 and ended in 1989; the second began in 2003 or 2004 and ended in 2007.) The more recent period, in particular, exhibits a great deal of cyclicality, ﬁrst dipping substantially from 2000 through 2002, and then rising afterwards.
structuring, and managing privateequity investments require considerable expertise. Gaining such exper- tise requires a critical mass of investment activity that most institutional investors cannot attain on their own. Managers of privateequity intermediaries are able to acquire such expertise through exposure to and participation in a large number of investment oppor- tunities. Although institutional investors could also specialize in this way, they would lose the benefits of diversification. Finally, intermediaries play an important role in furnishing business expertise to the firms in which they invest. Reputation, learning, and speciali- zation all enhance an intermediary’s ability to provide these services. For example, a reputation for investing in well-managed firms is valuable in obtaining the ser- vices of underwriters. Likewise, specialization allows an intermediary to more effectively assist its portfolio companies in hiring personnel, dealing with suppliers, and helping in other operations-related matters.
80. PrivateEquity Limited Partnership Agreements, N AKED C APITALISM , https://nakedcapitalism.net/documents.html [https://perma.cc/PC42-HXVR] (last visited Sept. 12, 2019). 81. See, e.g., Pat Garofalo, The Real Scandal in PrivateEquity? It’s the Taxes, T HE A TLANTIC (Jan. 17, 2012), https://www.theatlantic.com/business/archive/2012/01/the-real-scandal-in-private- equity-its-the-taxes/251463 [https://perma.cc/25LY-CFE6] (“[T]here’s no value added by letting privateequity managers treat the paycheck they receive as capital gains: that particular tax loophole just lets very wealthy money managers avoid paying the top tax rate, for no real reason.”); Josh Kosman, Why PrivateEquity Firms Like Bain Really Are the Worst of Capitalism, R OLLING S TONE (May 23, 2012), https://www.rollingstone.com/politics/politics-news/why-private-equity-firms-like-bain-really-are-the- worst-of-capitalism-241519 [https://perma.cc/8H6M-3XFE] (describing privateequity as “a predatory system created and perpetuated by Wall Street solely to pump its own profits”); Steven Pearlstein, The $786 Million Question: Does Steve Schwarzman—or Anyone—Deserve to Make That Much?, W ASH . P OST (Jan. 4, 2019), https://www.washingtonpost.com/business/the-786-million-question-does-steve- schwarzman--or-anyone--deserve-to-make-that-much/2019/01/04/ea9f9e9c-0df1-11e9-84fc-
However, the jury is still out on a large number of issues that deserve further attention. First, there is a need to open up the black box of privateequity and better understand how these investors work. The European Union has plans to introduce rules which will force privateequity investors to be more transparent, making privateequity a little bit less private, which enables future research to more closely look inside the black box. Second, there is a need to better understand how privateequity impacts the total tax revenue of a country. It is clear that privateequity makes use of a tax deduc - tibility of interest. However, there are many other tax implications involved that have not been investigated empirically. Third, there is a need to investigate the impact of privateequity at the industry and country level. We know surprisingly little about these real effects of privateequity, even though it is important for policymakers to know before introducing rules to limit privateequity takeovers in their country. I plan to look into these wider effects of privateequity as part of my future research agenda.
The typical privateequity firm is organized as a partnership or limited liability corporation. Blackstone, Carlyle, and KKR are three of the most prominent privateequity firms. In the late 1980s, Jensen (1989) described these organizations as lean, decentralized organizations with relatively few investment professionals and employees. In his survey of seven large leveraged buyout partnerships, Jensen found an average of 13 investment professionals, who tended to come from an investment banking background. Today, the large privateequity firms are substantially larger, although they are still small relative to the firms in which they invest. KKR’s S-1 (a form filed with the Securities and Exchange Commission in preparation for KKR’s initial public offering) reports 139 investment professionals in 2007. At least four other large private firms appear to have more than 100 investment professionals as well. In addition, privateequity firms now appear to employ professionals with a wider variety of skills and experience than was true 20 years ago.
While the European privateequity industry has been growing strongly, all the growth has been focused on buy-outs rather than venture capital. As recently as 2002 around 30 percent of European funds were raised for VC investments, with the remainder allocat- ed to buyouts. However, in recent years, despite the various efforts of governments to boost the VC indus- try, funds raised have stagnated as the privateequity industry as a whole has grown strongly. This has resulted in a significant fall in VC as a proportion of total funds raised: within Europe only 15 percent of total funds raised over the period 2005–07 were tar- geted at VC. The corresponding growth in the share, and absolute value, of buyout funds has been mainly associated with the growth of very large buyout funds that are capable of taking over companies worth sev- eral billion euros. This trend can be seen in Figure 3.3, which shows the growth in the scale and nature of pri- vate equity transactions in Europe in recent years, in particular the growth of the billion euro plus deals. But as the deals have got larger, the targets have become familiar companies, often household names, which helps to explain the growth in media, political
T he Islamic privateequity (IPE) market has grown dramatically over the last few years. There are some similarities between venture capital (VC) and some traditional methods in Islamic financing. In medieval Islamic societies it is hard to pinpoint the starting of IPE but there were partnership arrangements similar to those practiced in conventional privateequity (PE). But both academicians and professionals argue that the VC activity started in 1946 when General Doriot, a French born and a Harvard educated businessman, established the American Research and Development Corporation (ARDC). It grew in Silicon Valley in the 1970s. Intel and Microsoft are amongst the most famous projects financed through VC. Without the intervention of venture capitalists none of these would have seen light of day or at least achieved such a spectacular rate of development in such a short period (Queyrel, 2006).
In the highly competitive and dynamic corporate world of today, business leaders and entrepreneurs are often looking to access privateequity on a swift, professional and uncomplicated manner; as well as on much favorable terms and conditions as those offered by commercial banks and traditional financial institutions.
Figure 2 shows that the share of value creation through the use of leverage was 8% higher dur- ing the period between 2001 and 2006 than during the period between 1989 and 2000. Fur- thermore, it shows that the leverage component – as expected - has been of increasing impor- tance during the last years, while EBITDA growth decreased by 16% during the same span. During both periods, EBITDA growth was generated by sales growth, whereas the relative share of EBITDA margin improvements dropped considerably by 11%. In summary, it can be said that privateequity portfolio companies have used the friendly capital markets environment since 2001 to use the abundant leverage to drive sales growth, amongst other things.
Idinvest Partners has been engaged in an initial consideration of Socially Responsible PrivateEquity (SR-PE) since 2002, and we believe strongly in the need to incorporate extra-financial factors (Environmental, Social and Governance, or ESG) in our business lines (funds of funds, secondary transactions, growth capital and debt/mezzanine), while at the same time maintaining a high level of performance.
Panel C shows that the caricature of LBOs occurring in old and declining industries is no longer true, and never really has been. In fact, LBOs have always taken place in a wide range of industries. Although mature industries such as chemicals, machinery, and retailing still provide popular buyout targets, there fraction of LBOs undertaken in high-growth, “high-tech” sectors such as computers and biotech, has been growing significantly in the last decade. The drop in activity is particularly pronounced in the retail sector, which accounted for almost 14% of the number of transactions in 1970’s and 1980’s, compared to less than 6% of transactions in the 2000’s. It would be interesting to investigate the reasons for these trends in more detail. One potential explanation is that the changing industry mix of LBOs simply reflects a change in the industry composition in the economy as a whole. Alternatively, it may be the case that privateequity firms are deliberately broadening their industry scope beyond the mature, high cash flow, high debt capacity type of industries that they initially targeted. We leave this question for future research.
It was noted at the start of this section that in 2000 IFC concluded that the only countries with enough deal flow to support country-dedicated funds were the BRICs and South Africa. Where deal flow was insufficient at the country level to provide the selectivity needed to support a country-dedicated fund, fund managers and investors turned to sub-regional or regional funds as a way of getting a large enough deal base. While broadening geographic coverage remedied the deal flow issue, it made the fund manager more distant from each individual market. The growth in deal flow across multiple countries since 2000 has now made dedicated country funds viable in a wide range a countries (refer Chart 1) and this in turn has improved the quality of the privateequity opportunity in emerging markets by enabling fund managers to become much closer to the markets in which they are investing.
DOI: 10.4236/ojbm.2019.73074 1092 Open Journal of Business and Management ket. Behavior occurs from time to time. In China, the real development of pri- vate equity funds is actually after 1999, the rapid development of the capital market blinds the original authenticity of the capital market, and also hides the hidden dangers that may exist in the privateequity market . In addition, the varieties of China’s capital market are relatively single, and a large number of funds are often accumulated in a single financial variety in the same way of op- eration and organization, which implies huge potential risks in the market. For the long-term operation of privateequity funds, in addition to facing market risks, more direct credit and moral hazard, lack of laws, and increasingly fierce market competition, many fund managers have serious short-term behavior, fund operation and contract design are not only not Risk control mechanisms also lack external monitoring mechanisms.
The privateequity funds often obtain a majority stake in the portfolio company to ensure influence on the board and thus active ownership (Isaksen and Biørnstad, 2006). This control is achieved so that the strategic measures needed to assure value creation can be implemented. Active ownership means that the fund, in addition to contributing capital, actively collaborates with the company's board and management on its development. The privateequity fund will assist the company in strengthening management expertise, delivering operational improvements and accessing new markets. This participation, however, consumes a lot of time and resources, and so privateequity funds will usually not have more than 3-5 portfolio companies per employee (Nygård and Normann, 2008). To be able to drive this kind of value growth, specialized expertise is a prerequisite. BO requires skills in the fields of restructuring, strategizing and growth, while for VC abilities within marketing, product development and research are of higher priority.
Given all fixed input parameters the algorithm calculates the privateequity index in three phases. In the first phase the algorithm calculates the result of the objective function for every individual estimation parameter G t (for example 10%) and two surrounding values of this parameter (9% and 11%) based on an initial step size h = 1 (1 / h = 1%). Consequently the algorithm calculates for every individual estimation parameter which of the three values minimises the objective function most. If all combined local minimising values minimise the global minimum the combination of the related growth values is used as the next “initial” sequence of estimation parameters. If all combined local minimising values do not minimise the global minimum the step size is doubled (1 / 2 = 0.5%, the three values are now: 9.5%, 10%, 10.5%) with a maximum of h = 1024. In every run all estimation parameters are adjusted to minimise the objective function. Once the algorithm has found the region of the (sub-) optimal solution the gains in each run become smaller and smaller. It is up to the end user to determine at what moment the (sub-) optimal solution is reached (depending on the number of predetermined runs or the change in decrease of the objective function per run).
Notwithstanding the considerable attention privateequity receives, there continues to be substantial confusion about what privateequity does and whether this creates value. Calls for more aggressive regulation of the industry reflect a skeptical view of privateequity as—at best—a zero-sum game, in which profits are generated only at the expense of other constituencies. The standard defense of privateequity points to its corporate governance advantages as a source of value. This Article identifies an overlooked and increasingly important way in which privateequity creates value: privateequity firms act as gatekeepers in the debt markets. As repeat players, privateequity firms use their reputations with creditors to mitigate the problems of borrower adverse selection and moral hazard in the companies that they manage, thereby reducing creditors’ costs of lending to these companies. Privateequity-owned companies are thus able to borrow money on more favorable terms than standalone companies, all else being equal. By acting as gatekeepers, privateequity firms render the debt markets more efficient and provide their portfolio companies with an increasingly valuable borrowing advantage. Ironically, then, debt may well be private equity’s greatest asset.
This paper uses a unique and proprietary dataset to calculate Basel II and CRD capital requirements under the internal models approach. Where Suarez et al. (2006) criticize the implementation for PrivateEquity on more fundamental points that are in fact applicable to the whole accord and are in line with Danielsson et al. (2001), we take the methodological implementation as given and focus on the final regu- latory capital requirements these models produce, since that is what is ultimately experienced by the market. We show that the Basel II simple risk weight capital requirements are on the high side, but that the CRD risk weights are likely to be too low. This counteracts the goal set by BIS to create incentives for banks to invest in a more sophisticated risk-management system. We also discuss several externalities of this regulation and the implications of our results. In a sensitivity analysis, we show that the capital requirements resulting from an internal model are relatively stable.
Best-in-class privateequity firms have a post-close plan in place which establishes a governance standard within the timeframe of the initial 100 day plan. This governance standard establishes processes, outlines structures and relationships and defines roles in a manner which is clear to all stakeholders. An ideal gov- ernance standard will be based on guiding principles which should be agreed upon by both the privateequity firm and the management team of the portfolio company. For example, the two parties can agree to a series of shared aspirations and the measurement and accountability metrics by which to achieve these objectives. Other guiding principles include the estab- lishment of boundaries which allow management and ownership to have a degree of autonomy in the deci- sion making process. Lastly a key principle which should be agreed upon is a code of conduct and an ethics framework.
Marisa had previously been with Standard Bank’s investment banking division since 2004 where she initially spent 6 years in the infrastructure and project finance, and thereafter was with the leveraged finance team. Most recently she has been part of the Infrastructure Equity team working on privateequity investments in the sector.