International investments in private equity asset allocation markets and industry structure

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International Investments in Private Equity This page intentionally left blank International Investments in Private Equity Asset Allocation, Markets, and Industry Structure Peter Cornelius AMSTERDAM • BOSTON • HEIDELBERG • LONDON • NEW YORK • OXFORD PARIS • SAN DIEGO • SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Academic Press is an imprint of Elsevier Academic Press is an imprint of Elsevier 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA 525 B Street, Suite 1800, San Diego, CA 92101-4495, USA 84 Theobald’s Road, London WC1X 8RR, UK First edition 2011 Copyright Ó 2011 Elsevier Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (+44) (0) 1865 843830; fax (+44) (0) 1865 853333; email: permissions@elsevier.com Alternatively you can submit your request online by visiting the Elsevier web site at http://elsevier.com/ locate/permissions, and selecting Obtaining permission to use Elsevier material Library of Congress Cataloging-in-Publication Data Cornelius, Peter, 1960International investments in private equity : asset allocation, markets, and industry structure / Peter Cornelius – 1st ed p cm Includes bibliographical references and index ISBN 978-0-12-375082-2 Private equity Investments, Foreign I Title HG4751.C75 2011 332.67’3–dc22 2010038319 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-12-375082-2 For information on all Academic Press publications visit our website at books.elsevier.com Printed and bound in USA 11 12 10 Contents Foreword Acknowledgements About the author List of abbreviations xi xiii xvii xix Introduction 1.1 From a closed to an open market view 1.2 Private equity fundamentals 1.3 Global markets and investment flows 1.4 What’s next? 1.5 Strategic conversations with general partners 11 12 Part One 13 Private Equity as an Asset Class Organization, value creation, and performance 2.1 Forms of private equity 2.2 Capital demand, capital supply, and market organization 2.3 Terms and conditions 2.4 Value creation and returns 2.4.1 Buyouts 2.4.2 Venture capital 2.4.3 Performance differences, persistence, and selection skills 2.5 Getting exposure to private equity 2.6 Summary and conclusions Appendix 2.1: Private equity fund structures around the world 15 16 19 21 23 23 31 34 37 42 44 Global benchmarks 3.1 Benchmark characteristics 3.1.1 Benchmarks for mature private equity markets 3.1.2 Benchmarks for nontraditional private equity markets 3.2 Benchmark performance 3.2.1 Benchmarking returns in mature markets 3.2.2 Benchmarking returns in nontraditional private equity markets 3.3 Summary and conclusions 49 50 50 58 59 59 65 66 vi Contents Private equity in diversified investment portfolios 4.1 Returns, risk, and correlations 4.2 The stale price problem 4.3 Managing dynamic risk 4.4 Why allocations to private equity vary so much? 4.5 Summary and conclusions Appendix 4.1 Measuring market risk in private equity 69 70 73 77 79 82 83 Designing private equity programs in open markets 5.1 Bottom-up versus top-down planning 5.2 Diversification strategies in a closed economy 5.2.1 Market segments 5.2.2 Vintage years and market timing 5.2.3 Industries 5.3 Diversification in an open economy 5.4 Determining the asset mix 5.5 Summary and conclusions 87 87 90 90 92 94 99 102 105 Part Two Markets, Investment Flows, and Due Diligence 107 Global markets, regional penetration, and country risk 6.1 Global private equity and the size of regional markets 6.2 Why penetration rates vary so much? 6.3 The quality of the business environment and permissible markets 6.4 Assessing country risk 6.4.1 Economic risk 6.4.2 Political risk 6.4.3 Governance risk 6.4.4 The risk heat map 6.5 Summary and conclusions Appendix 6.1: A brief guide to publicly available sources that may help investors assess the quality of the business environment 109 109 115 121 127 128 129 130 131 133 Private equity funds and cross-border acquisitions 7.1 The internationalization of private equity fund investments 7.1.1 Exporting the US venture capital model 7.1.2 The internationalization of buyout funds 7.2 Measuring cross-border investment flows in buyouts 7.3 Comparing cross-border private equity fund investments with mutual funds 7.4 Summary and conclusions 139 141 141 144 149 Cross-border fund commitments, due diligence, and the allocation matrix 8.1 Cross-border fund-raising: empirical evidence 134 155 157 159 160 Contents 8.2 8.3 8.4 8.5 vii The growing importance of emerging economies as suppliers of private equity capital Due diligence in cross-border commitments 8.3.1 General due diligence principles 8.3.2 Due diligence in nontraditional markets and real options The allocation matrix Summary and conclusions 164 170 170 173 177 180 Regional integration: the case of Europe 9.1 European financial integration 9.2 How integrated is Europe’s private equity market? 9.2.1 Fund-raising 9.2.2 Investing 9.2.3 Integrating central and eastern Europe 9.3 Why has Europe’s private equity market not become more integrated? 9.4 Summary and conclusions 183 184 186 187 191 194 10 Fund investments and currency movements 10.1 Exchange rate movements: empirical evidence 10.2 The impact of exchange rate movements on fund investments and benchmarking 10.3 Skills or (bad) luck? 10.4 Are exchange rate movements predictable? 10.5 Currency crashes and early warning systems 10.6 Should limited partners hedge their exchange rate risk? 10.7 Summary and conclusions 203 204 Part Three What’s Next? 227 11 What’s next? Private equity in the era of deleveraging 11.1 Global deleveraging and the future of leveraged finance 11.2 Ten trends shaping the future of private equity 11.2.1 Increased equity contributions in leveraged buyouts 11.2.2 Smaller deals and smaller funds 11.2.3 Greater emphasis on company strategy and operational improvements 11.2.4 Growing share of PIPEs and minority deals 11.2.5 Redefining GP/LP relationships 11.2.6 A greater role for coinvestments and direct investments 11.2.7 Emergent economies in a globalized private equity market 11.2.8 Corporate social responsibility (CSR) in private equity investments 229 230 238 238 240 196 199 209 214 215 219 221 225 241 241 242 243 244 245 viii Contents 11.3 11.2.9 Private equity firms as the new merchant banks 11.2.10 Tightening regulation Summary and conclusions Part Four Strategic Conversations with General Partners 245 246 247 249 12 Chasing deals globally: expansion strategies and risk management of leading private equity firms 12.1 US private equity firms 12.1.1 The Blackstone Group 12.1.2 Hellman & Friedman 12.1.3 Kohlberg Kravis Roberts & Co 12.1.4 Vestar Capital Partners 12.2 European private equity firms 12.2.1 Actis 12.2.2 Apax Partners 12.3 Private equity firms in nontraditional markets 12.3.1 Abraaj Capital 251 253 253 256 260 263 267 267 271 273 273 References Index 279 289 For Heike and Paul 292 Collateralized loan obligation market (CLO), 230, 235 Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), 81, 82n8 Company strategy, 241 Conroy, R M., 74, 75, 76 Coordinated Portfolio Investments Survey (CPIS), 155 Cornelius, P., 95, 150 Corporate governance, 256, 275 Corporate social responsibility (CSR), 245 Correlation impact, 75f Correlation matrix, 74t Corruption, 120, 131 Corruption Perceptions Index, 136 Country level bias, 157 Country of management approach, 150 Country rankings market attractiveness and, 133 permissible markets and, 126 Country risk, 101 assessing, 127 economic risk and, 128 governance risk and, 130 heat map assessing, 132f in investor’s portfolio, 101 political risk and, 129 risk heat map and, 131 Covrig, V., 156 CPIS, see Coordinated Portfolio Investments Survey CPPIB, see Canadian Pension Plan Investment Board Credit markets, 11 Cross-border acquisitions, capital transactions, commitments, 170, 173 fund-raising, 160 investment flows, 149 investments, 179 private equity funds, 9, 155 Cross-country differences, 121 CSR, see Corporate social responsibility Index Currency crashes, 219 exchange rates and, 208f, 209f fund, 211t from fund-raising, 205t, 206t hedging, 222 movements, 10 options, 223 regional, 207t swaps, 223 Currency risk, 256, 262, 266 in international investments, 10 investment process with, 268 LPs influenced by, 214 portfolio diversification and, 101 in private equity, 212, 213 D Da Rin, M., 119 De Santis, R A., 185 Debt LBOs using, 3, 31n15, 240t leveraged buyouts using, 3, 31n15, 230 Degosciu, M., 86 Delaware Limited Partnership, 44 Demand side, 125 Denominator effect, 77, 93 De-smooth, 75 Destination market, 153t Direct investments, 41, 243 Distressed funds, 66 Distressed partnerships, 56, 57, 57f Distributed to Paid-In (DPI), 26 Diversification, 245 international portfolio, 100 of investments, 276 in open economy, 99 of portfolios, 76, 101 of private equity portfolios, 7, 90 of risk, 72 Diversification strategies industries and, 94 market segments in, 90 market timing in, 92 vintage years in, 92 Index Doing Business Report, 126, 135 Domestic assets, 101n9 Domestic financial development, 144n4 DPI, see Distributed to Paid-In Driessen, Joost, 85 Due diligence, 272 cross-border commitments, 170 nontraditional markets/real options of, 173 principles of, 170 in nontraditional markets, 173 principles of, 180 Dynamic risk, 77 E Early warning systems (EWS), 219, 220n6 EBITDA projections, 236 ECB, see European Central Bank Economic Freedom Index, 136 Economic risk, 128 Economies, advanced, 244f The Economist, 135 Efficient frontier correlation impact of, 75f for simple 3-asset example, 74f EIF, see European Investment Fund Emerging economies foreign exchange reserves in, 164, 167f globalization and, 244 pension fund portfolio limits of, 170t private equity capital supplies by, 164 private equity trends in, 244 world GDP by, 244f Emerging Europe, 115 Emerging market funds IRR from, 28 performance of, 29 pooled five-year net IRR for, 29n10 vintage year statistics of, 29 Emerging markets institutional investors in, 180 investments in, 266, 269 net capital flows to, 165t nontraditional investment strategies in, 146 293 pooled end-to-end returns of, 66f private equity markets in, 116 regional private equity firms in, 201t SWFs in, 168t EMS, see European Monetary System EMU, see European Monetary Union English Limited Partnership, 44 Enterprise value, 18f Equity contributions, 238 Equity investing, 156t eStandards Forum, 136 EU, see European Union EUR, see Euro Euro (EUR), 204 Europe benchmarks/venture capital partnerships in, 56f buyout funds geographic exposure of, 195t returns/risk/Sharpe ratios of, 26, 101t vintage year IRR, 24f, 25f vintage year pooled IRR in, 59F, 64f buyout markets in, 53, 61, 101 fund-raising gap of, 149 high-yield debt market of, 230 indexes of, 50 integration of financial markets, 183, 184, 199 process of, 192 restrictions to, 196 investments in, 265 LBO fund-raising-to-investment ratio in, 149f mezzanine funds in, 56, 57 private equity firms, 267 Actis, 267 Apax Partners, 270 private equity funds capital management of, 189t, 193t distribution in, 187f integration lacking in, 196 investments in, 197f raising, 192f private equity markets, 294 Europe (Continued ) CEE integration of, 194 fund-raising of, 187 integration of, 186 investing in, 191 regional integration of, 10 short-term securities in, 185 U.S buyout firms deals of, 145t U.S companies from, 186 venture capital fund investments in, 113 venture capital markets, 55 vintage year mean IRR in, 64f European Central Bank (ECB), 184 European expansion, 264 European Investment Fund (EIF), 113 European Monetary System (EMS), 184 European Monetary Union (EMU), 184 European Private Equity and Venture Capital Association (EVCA), 186 European Union (EU), 183 EVCA, see European Private Equity and Venture Capital Association EWS, see Early warning systems Exchange rate movements, 204, 209 fund investments impacted by, 209 individual transactions and, 214 predicting, 215 private equity portfolios impacted by, 210 Exchange rates bilateral, 208 currency and, 208f, 209f inflation differentials offset by, 218 investment performance influenced by, 203 IRR/MM impacted by, 216t LP’s risk with, 221 pooled mean IRR influenced by, 210t, 212t unpredictability of, 225 Exit strategy, 270 F Factor-driven stage, 111 Fama, E F., 84, 102 Index Fama-French model, 84, 85 FASB, see Financial Accounting Standards Board Fee structures, 22 Financial Accounting Standards Board (FASB), 235 Financial crisis, 83 Financial globalization investment opportunities through, 158 measuring, 140 in private equity, 157 in venture capital, 141 Financial integration, 184 Financial leverage, 276 Financial markets, 183 Financial option pricing models, 176 Financial Stability Forum, 136 Foreign Corrupt Practices Act, 262 Foreign exchange reserves, 164, 167f Foreign exchange risk, 203, 204f Foreign funds, 100 Foreign investments, 160 Foreign markets with investment opportunities, 257 venture capital penetrating, 142 Foreign private equity acquisition, 148f Foreign private equity funds, 102 Forward contract, 223 Four-Factor Model, 78n5 Fragmentation, market, 200 Frankel, J A., 219 Fraser-Sampson, G., 49, 172 French, K R., 84, 102 French buyout funds, 194 Froot, K A., 222 Fund capitalization, 91f Fund commitments, 211t Fund currency, 211t Fund investments, 95, 209 Fund managers, 36t, 172 Fund size, 153f Fund-raising, 21 with buyout funds, 92f cross-border, 160 of Europe, 187 Index Europe’s gap of, 149 global, 17f global integration in, 180 global market of, 224 global/currency from, 205t, 206t of private equity markets, 187 regional currency and, 207t Funds of funds, 39, 175 Futures markets, 223 G Gadiesh, O., 23 GBP, see British pound GCR, see Global Competitiveness Report General partners (GPs), see also Limited partners large growth capital funds of, 147 LP relationships redefined with, 242 management company investments of, 42 private equity funds raised by, 16 strategic conversations with, 12 Generalist funds, 97 Gilson, R J., 119 Glenisla, 260 Global Competitiveness Report (GCR), 126, 134 Global dry powder, 111f Global markets fund-raising of, 113 investment flow in, Global private equity funds, 44, 140f managed assets of, 110f regional market size and, 109 Global Venture Capital and Private Equity Country Attractiveness Index, 121 Globalization, 254 asset classes and, 238 deleveraging and, 230 economic cycles and, emerging economies and, 244 fund-raising and, 17f integration and, 180 of investments, 254 295 LPs strategy of, 266 private equity markets and, 133 of private equity model, of transactions, 41f, 112f of venture capital, 122t, 143f of venture capital firms, 142n3 Golden Circle, 37, 38 Goldman Sachs Mezzanine Partners V, 38 Gompers, P A., 76, 84 Gottschalg, O., 30, 30n12, 31, 31n15, 172 Governance risk, 102, 269 country risk and, 130 cross-country comparison and, 127n10 Governance structures, 23 GPs, see General partners Great Recession, 115n5, 129 Groh, A P., 121, 125, 126 Gross-of-fees, 33f, 34 Guo, S., 23 H Harris, R S., 74, 75, 76 Hau, H., 150, 156, 157 Heat map, risk, 131, 132f Hedging strategies, 222 Heesen, M., 54 Hellman & Friedman, 12, 253, 256 Herfindahl index, 98f HH, see Hirschman-Herfindahl index High net worth individuals (HNWI), 79 High-yield bond market, 235 High-yield debt market, 230 Hirschman-Herfindahl (HH) index, 97, 97n5 HNWI, see High net worth individuals Home bias, 150n7 aggregate buyout fund, 151 buyout funds with, 151, 155 in equity investing, 156t at fund level, 151f fund size v., 153f in private equity funds, 152 statistics, 152t 296 Horizon IRR in buyout funds, 61, 65f in private equity funds, 61 in venture capital funds, 61, 65f Hotchkiss, E S., 23 Human capital, 269 Hwang, M., 31 I IASB, see International Accounting Standards Board IFIs, see International Financial Institutions IFRS, see International Financial Reporting Standards Ighodaro, Adiba, 267 Illiquidity asset class, 42 in private equity investments, ILPA, see Institutional Limited Partners’ Association ILPA Private Equity Principles, 242, 243 IMF, see International Monetary Fund India, 146f Individual funds, 38 Individual investors, 34 Individual portfolio companies, 150 Individual transactions, 214 Industries in buyout funds, 97f, 98f in closed economy, 94 diversification strategies of, 94 private equity portfolios selection of, 99 specialization of, 98n6 vintage year performance of, 95 Inflation differentials, 218 Initial Public Offerings (IPOs), 119 Innovation-driven stage, 111 Institutional investors, 80, 80f, 180 Institutional Limited Partners’ Association (ILPA), 22, 242 Integration CEE countries, 194 Europe’s restrictions to, 196 financial, 184 Index of financial markets, 183, 184, 199 global fund-raising, 180 private equity funds lacking in, 196 process of, 192 regional, 10 restrictions to, 196 Internal rates of return (IRR), 5, see also Horizon IRR cash flow and, 30n12 dollar-weighted, 96t emerging market funds with, 28 European vintage year, 25f exchange rates impacting, 216t exchange rates influencing, 210t, 212t mean vintage year, 28f pooled, 26 pooled five-year net, 29n10 pooled-mean vintage year, 60 regressing vintage year, 27n8 vintage year, 24f vintage year mean, 64f International Accounting Standards Board (IASB), 235 International Financial Institutions (IFIs), 116n6 International Financial Reporting Standards (IFRS), 131 International investments, 10 International Monetary Fund (IMF), 235n4 International operations, 265 International portfolio diversification, 100 International transactions, 256 Internationalization of buyout funds, 114 Investment decisions benchmarks role in, 66 cash-flow models in, 78 of LPs, 176 market attractiveness influencing, 126 Investment opportunities cross-border capital transactions and, financial globalization offering, 131 foreign markets with, 257 of LPs, 22n6 Index Investment-driven stage, 111 Investments, see also Private equity investments in Asia, 272 capital, 128 cross-border, 179 with currency risk, 268 current account balances and, 166t direct, 41, 243 diversified, 277 in emerging markets, 266, 269 in Europe, 265 Europe’s private equity markets, 191 exchange rate movements impacting, 209 exchange rates influencing, 203 exit strategy with, 270 financial crisis/alternative, 83 foreign, 160 fund, 95, 209 global, 254 global markets flow of, of GPs, 42 international, 10 mutual funds/cross-border private equity funds, 155 pension funds strategies in, permissible, 126 in private equity funds, 39, 197f private equity skills of, 42 risk in, 132 strategies in, 275 supply side, value/destination market of, 153t in venture capital funds, 113 Investors business environment quality assessment sources for, 134 buyout firms/venture capital firms and, 162t in emerging markets, 180 individual, 34 institutional, 80, 80f, 180 top-down approach of, 89 venture capital and, 162t 297 Investor’s portfolio, 157 with bottom-up planning, 268 capitalization-weighted, 104 country risk in, 101 domestic assets in, 101n9 private equity share in, 79 rule-based strategy and, 93 top-down/bottom-up selection process of, 268 IPOs, see Initial Public Offerings IRR, see Internal rates of return J J-curve effect, 25 Jones, C M., 85 Jorion, P., 221 Junk bonk market, K Kacperczuk, M., 95 Kaminsky, G L., 221 Kaplan, S N., 236n7, 27n8, 29, 30, 31, 34, 35, 50n1, 85, 88, 141 Kaufmann, D., 127n10, 135 Kendall, J , 144n4, 150, 155 Kho, B.-C., 157 KKR, see Kohlberg Kravis Roberts & Co Kohlberg Kravis Roberts & Co (KKR), 12, 21n4, 42, 245, 253, 260 Korteweg, Arthur, 86 Kraay, A., 135 Kravis, Henry, 260 L Lane, P R., 155, 184 Latin America, 262 Latin American Venture Capital Association, 121 LBOs, see Leveraged buyouts Leeds, R., 115 Legal risk, 130, 132 Lehman Brothers, 229, 235, 247, 263 Lerner, J., 37, 76, 84, 88, 89, 111, 119, 120, 177 298 Leveraged buyouts (LBOs) debt used in, 31n15, 231, 240t equity contributions in, 238 fund-raising-to-investment ratio, 149f junk bonk market with, value creation through, 24 Leveraged finance, 230 Leveraged loan markets, 231, 232f Liechtenstein, H., 121, 125, 126 Limited partners (LPs) capital commitments of, coinvestment opportunities of, 22n6 currency risk influencing, 214 exchange rate risk influencing, 221 globalization strategy and, 266 GPs relationships redefined with, 242 investment decisions of, 176 in private equity funds, 38t private equity markets with, 139 private equity portfolios of, 254 secondary markets and, 40 specialist funds/generalist funds of, 97 Limited partnership agreement (LPA), Limited Partnerships Act of 1907, 44 Lintner, J., 69 Litterman, R., 103 Ljungqvist, A., 31n13, 84, 85 Loan loss provisions, 231, 233n2 Lodhi, Omar, 273 Long-horizon models, 221 LPA, see Limited partnership agreement LPs, see Limited partners M M&A, see Mergers and acquisitions MacArthur, H., 23 Madoff, Bernhard, 174, 174n7 Managed assets, 110f Management company, 42 Market attractiveness, country rankings and, 133 investment decisions influenced by, 126 Index Market segments capital allocation in, 179, 180 in diversification strategies/closed economy, 90 investors top-down approach in, 89 Market-neutral allocations, 105 Markets, see also Buyout markets; Emerging markets; Foreign markets; Global markets; Private equity markets; Regional markets; Secondary markets; Venture capital markets asset prices market-to, 110n2 closed, credit, 11 destination, 153t diversification strategies timing and, 92 equilibrium returns, 103 financial, 183 fragmentation, 200 futures, 223 global private equity, 133 high-yield bond, 235 high-yield debt, 230 junk bonk, leveraged loan, 232f nontraditional, 173, 273 nontraditional private equity, 58 open, penetration variation of, 115 permissible, 121, 126 reward-to-risk ratio, 84 risk in, 83 troughs, 93 typology, 117t Markowitz, H., 69 Martin, Ian, 261 Mastruzzi, M., 135 Mathonet, P-Y., 105, 214 Mature market returns, 59 McKinsey, 35 McLeavey, D., 101 McMillan, I C., 176 Mean-variance approach, 102 Index MENASA (Middle East, North Africa, South Asia), 273, 274, 275 Merchant banks, 245 Mergers and acquisitions (M&A), 183 Merton, R C., 176 Metrick, A., 78n5, 22, 73 Meyer, T., 105, 214 Mezzanine funds, 56, 57, 237 in benchmarks, 57f challenges of, 66 Milesi-Ferretti, G M., 155 Minority positions, 262, 270 MMG, see Multinational Management Group Model Double Tax, 198 Monte Carlo simulation, 73, 105 Moritz, M., 142 Mossin, J., 69 Multinational Management Group (MMG), 271 Mutual funds, 155 N National Venture Capital Association (NVCA), 54 NAV, see Net asset value Net asset value (NAV), 21 Net capital exporters, 164 Net capital flows, 165t Net-of-fees, 33f, 34 New Normal, 11 Newly industrialized economies in Asia (NIACs), 164, 168t Ng, L., 156 NIACs, see Newly industrialized economies in Asia Nontraditional investment strategies, 146 Nontraditional markets due diligence in, 173 in private equity, 58, 65 private equity firms in, 273 Norway, 218f NVCA, see National Venture Capital Association 299 O O’Connell, Daniel S., 263 OMERS, see Ontario Municipal Employees Retirement System Ontario Municipal Employees Retirement System (OMERS), 243 Ontario Teachers’ Pension Plan, 243 Open economy, 99 Open market, Operational improvements, 241 Optimal allocations, 75 Organization process, 104f P Pastor, L., 78n5 Peng, L., 86 Pension funds, 197, 198 investment strategies with, portfolio limits of, 170t US, Performance differences, 34 Permanent capital, 21 Permissible investments, 126 Permissible markets business environment and, 121 country rankings and, 126 Persistence, 34 Petroulas, P., 185 Phalippou, L., 22, 30, 30n12, 31, 31n15, 60n2, 85 PIPE, see Private investment in public equity PME, see Public market equivalent Poland, 194, 196 Political risk components of, 81 country risk and, 83 Ponzi scheme, 174n7, 83 Pooled end-to-end returns, 66f Pooled five-year net IRR, 29n10 Pooled IRR, 26 Pooled mean IRR, 210t, 212t 300 Portfolio diversification, 76, 101 investors, 157 model, 76 Positive skewness, 88n1 Potyomkin, Grigory, 174n8 Powers, Brian, 256 PPP, see Purchasing power parity PREQIN, see Private Equity Intelligence Private equity allocations varying in, 79 attractiveness index of, 126 AUM, 111 average equity contributions of, 240f benchmarks, 67 capital, 164 capital allocated to, 87 CAPM framework and, 98n8 currency risk in, 212, 213 cycles in, 27f global economic cycles influencing, return expectations in, desmoothing returns in, 75 diversified portfolio and, 76 evolution of, 239t exposure to, 37 financial globalization in, 157 foreign acquisition of, 148f foreign exchange risk in, 203, 204f forms of, 16 fundamentals of, global flows in, 140f global fund-raising in, 17f global venture capital country attractiveness and, 122t globalization model of, institutional investors commitments to, 80, 80f investment skills required in, 42 investor’s portfolio shares of, 79 limited partnership, 19n2 market risk measured in, 83 mean vintage year IRR, 28f in MENASA, 275 minority positions in, 262 Index New Normal in, 11 optimal allocations to, 75 raw/adjusted data allocations to, 76t regional penetration of, 116t returns history of, 28 returns index of, 43f returns measured from, 26 risk assessment in, 77 in secondary markets, 39 transactions by country in, 111 trends in, 238 coinvestments/direct investments, 243 company strategy/operational improvements, 241 corporate social responsibility, 245 emerging economies, 244 GP/LP relationships redefined, 242 new merchant banks, 245 PIPE growth/minority deals, 241 regulation tightening, 246 smaller deals/smaller funds, 240 value creation in, Private equity firms direct investments in, 41 in emerging markets/regional, 201t Europe Actis, 267 Apax Partners, 271 European expansion and, 264 leading funds of, 252t, 253 as new merchant banks, 245 in nontraditional markets, 273 nontraditional markets/Abaaj Capital, 273 United States average equity contributions of, 240f Blackstone group, 253 Hellman & Friedman, 256 KKR, 260 Vestar Capital partners, 263 Private equity funds, see also Buyout funds; Global private equity funds; Venture capital funds asset class of, 15 as capital blind pools, 20 Index capital management of, 189t, 193t capital raised by, 19, 198 cash flow of, 31n13 coinvestments in, 39, 243 cross-border acquisitions by, 9, 155 currency movements influencing, 10 distribution in, 187f Europe raising, 192f Europe’s distribution of, 187f exporting venture capital model, 141 fee structures of, 22 foreign, 102 fund managers growth of, 36t gaining access to, 37 global, 44 global dry powder of, 111f GPs raising, 16 home bias in, 152 horizon IRR in, 59 integration lacking in, 196 internationalization of, 141 investments in, 39, 197f leading funds of, 252t, 253 LPs in, 38t performance differences of, 37 public stocks compared to, 5, 29 raising, 192f regional funds in, 261 selection of, 35 terms/conditions of, 21 upside risk of, 34 in U.S., 44 Private Equity Intelligence (PREQIN), 28, 57, 65, 167 Private equity investments, 245 of Brazil/China/India, 146f cross-country differences in, 121 demand side and, 125 in Europe, 197f illiquidity risk in, international portfolio diversification and, 100 Private equity markets of Asia-Pacific, 145 benchmarks, 50 301 CEE integration of, 194 in emerging markets, 116 in Europe, Europe’s investing in, 191 fund-raising of, 187 global, 133 integration of, 186 investing in, 191 with LPs, 139 nontraditional, 58, 65 organization of, 20f performance in, 42 regional economies with, 113 regional integration of, 10 of U.S., 3, 174 Private equity portfolios bottom-up v top-down planning of, 87 diversification of, 7, 90 exchange rate movements impacting, 210 industry selection in, 99 of LPs, 254 with top-down planning, 178 Private investment in public equity (PIPE), 3, 241 Providence Equity Partners, 94 Prudent Man provision, 15, 94 Public market equivalent (PME), 29 Public markets benchmarks in, 49 venture capital compared to, 34 Public stocks, 5, 29 Public-to-private deals, 24 Purchasing power parity (PPP), 217 Norway and, 218f RMB/USD v., 219f Q Quigley, J M., 31, 86 R Real estate funds, 16 Recessions, 93 Regional currency, 207t 302 Regional distribution, of buyout funds, 154t Regional economies, 111, 113 Regional funds, 261 Regional integration, 10 Regional markets buyout, 113f global private equity funds and, 109 venture capital, 112f Regional private equity penetration, 116f Regional-fund approach, 255 Regressing vintage year IRR, 27n8 Regression analysis, 35 Regulation tightening, 246 Regulatory restrictions, 160 Regulatory risk, Reinhart, C M., 221 Renminbi funds (RMB), 146, 148n5 Reputational risk, 273 Resecuritization, 233 Residual Value to Paid-In Capital (RVPI), 26 Restoring American Financial Stability Act, 246 Return expectations, Returns buyout funds, 26 buyout funds distribution of, 62t, 101t buyouts and, 23 dispersion, 60n2 performance differences/persistence/ selection skills and, 34 private equity history of, 28 private equity index of, 43f private equity measuring, 26 in simple 3-asset example, 73t on venture capital, 23 venture capital distribution of, 60, 63t on venture capital funds, 88f vintage year, 26 Rey, H., 150, 156, 157 Rhodes-Knopf, M., 85 Richardson, M P., 31n13, 84, 85 Richardson, Neil, 261 Index Risk in asset classes, 72t asset prices/stale prices and, 77 buyout funds distribution of, 101t diversifiable, 72 private equity assessment of, 77 in simple 3-asset example, 74t upside, 34 Risk heat map, 131, 132f Risk management, 175 Risk-adjusted returns, 103n12 RMB, see Renminbi funds Roberts, George, 260 Rogoff, K S., 221 Roll, R., 69n1 Rose, A K., 219 Rosner, Rob, 265 Rubinstein, David, 238 Rule-based strategy, 93 RVPI, see Residual Value to Paid-In Capital S Sand Hill Econometrics (SHE), 32n16, 32f Savings, 166t Schmid, Peter, 267 Schoar, A., 29, 30, 31, 34, 35, 85, 119, 177 Scholes, M., 176 Schwarzman, Stephen, 253 Secondary markets, 224n8 fund interests in, 41f global transactions in, 41f LPs and, 40 private equity in, 39 Securities Act of1933, 241 Securitization, 233 Selection skills, 34 Sensoy, B A., 50n1 Sequoia Capital, 142n3 Serfaty-de Medeiros, K., 223 Sharpe, W F., 69 Sharpe ratio, 70, 101t, 105 SHE, see Sand Hill Econometrics Index Short-term securities, 185 Simple 3-asset example correlation matrix in, 74t efficient frontier for, 74f expected returns/risk in, 73t Solnik, B., 101 Solvency capital requirement, 81 Song, W.-I., 23, 119 Sørensen, M., 86, 111 Sørensen, O., 141 Sortino ratio, 103n12, 105 South African Rand (ZAR), 204 Sovereign Wealth Funds (SWFs), 40, 139 in emerging markets, 168t growing influence of, 167n2, 167n3 Specialist funds, 97 Spence, M., 39n17 Stale prices asset prices/risk and, 77 portfolio model adjusted for, 76 problem of, 73 Stambaugh, R., 78n5 Standard Dimson approach, 75 Stein, J., 27n8 Stiglitz, J., 39n17 Strategic conversations, 12 Stro¨mberg, P., 236n7, 31n14, 50n1, 111, 141 Stuart, T., 111 Stulz, R M., 157 Sunderland, J., 115 Supply side, investments, Swedish funds, 194 Swensen, David, 2, 15, 39, 76, 79 SWFs, see Sovereign Wealth Funds SWOT (strengths/weaknesses/ opportunities/threats), 121 T Target allocations, 90 Teı¨letche, J., 73 Thomas, J M., 221, 236 Thomson VentureXpert (TVE), 24, 49, 50n1, 59, 100, 150 Three-Factor Model, 102 303 Top-down planning investor’s portfolio with, 268 private equity portfolios with, 88, 177 Total Value to Paid-In (TVPI), 26 Transaction values, 111n3, 112f Transparency International, 126 Transparency International Corruption Perceptions Index, 126 Trend investing, 94 Treynor, J L., 69 Tse-Chun Lin, 85 TVE, see Thomson VentureXpert TVPI, see Total Value to Paid-In U United Kingdom, 192, 194 United States (U.S.) asset correlation matrix for, 72t benchmarks buyout partnerships forming, 53f venture capital funds, 54, 55f buyout firms in, 145t buyout funds capital invested abroad by, 154 dollar-weighted IRR, 96t fund capitalization, 91f fund-raising by, 92f horizon IRR in, 61, 65f quarterly returns in, 71f regional distribution of, 154t return distribution of, 62t returns, 26 returns/risks/Sharpe ratios of, 101t vintage year IRR, 24f vintage year pooled IRR, 59f, 64f buyout markets in, 101 buyout partnerships in, 59 buyout returns of, 26, 70 European companies in, 186 high-yield debt market of, 230 LBO fund-raising-to-investment ratio in, 149f mezzanine funds in, 56, 57 peers, 12 304 United States (U.S.) (Continued ) pension funds in, private equity firms average equity contributions of, 240f Blackstone group, 253 Hellman & Friedman, 256 KKR, 260 Vestar Capital Partners, 263 Private equity funds in, 44 private equity market of, 3, 174 venture capital funds bottom-up analysis of, 104, 105 horizon IRR in, 61, 65f investments in, 113 quarterly returns, 71f return distribution of, 63t returns of, 88f vintage year, 32 vintage year IRR, 33f vintage year pooled IRR, 32f venture capital market in, 21 venture capitalists performance in, 88 United States dollar (USD), 204 Unleveraged venture capital, 31 Upside risk, 34 U.S, see United States USD, see United States dollar V Value at risk (VaR), 78, 81 Value creation buyouts and, 23 through LBOs, 24 performance differences/persistence/ selection skills and, 34 in private equity, venture capital and, 31 van Agtmael, Antoine, 116 van Putten, A B., 176 VaR, see Value at risk Venture capital, 31, 71n2, 85 agency problems facing, 141 A-list of, 88n2 benchmark partnerships forming for, 54t Index benchmarks in, 55f financial globalization in, 141 foreign markets penetrated by, 142 global, 143f global firms in, 142n3 investors and, 162t IPOs factor in, 119 public market compared to, 34 returns distribution of, 60 Sand Hill Econometrics index of, 32f unleveraged, 31 U.S performance of, 88 value creation and, 31 Venture capital funds, 17, 90 bottom-up analysis of, 104, 105 buyout funds v., 17 gross/net-of-fees of, 33f, 34 horizon IRR in, 61, 65f investments in, 113 quarterly returns, 71f return distribution of, 63t returns of, 88f U.S benchmarks in, 54, 55f vintage year, 32 vintage year IRR, 33f vintage year pooled IRR, 61f Venture capital markets attractiveness index of, 126 attractiveness of, 125f in Europe, 55 regional evolution of, 112f in U.S., 55 vintage year mean IRRs in, 64f Venture capital model, 141 Venture capital partnerships, 56f Vestar Capital Partners, 12, 253, 263 Vintage year, 25 buyout funds/pooled IRR, 59F, 64f in diversification strategies, 92 emerging market funds statistics of, 29 industries performance and, 95 IRR, 24f, 25f mean, 28f mean IRR, 64f pooled-mean IRR, 60 Index 305 PREQIN benchmarks of, 65 regressing, 27n8 returns, 26 venture capital funds, 32 venture capital funds IRR, 33f Vintage year pooled IRR in buyout funds, 59F, 64f venture capital funds and, 61f Woodward, S E., 31, 86 World Competitiveness Yearbook (WCY), 135 World Economic Outlook Database, 134 World Factbook, 137 World GDP, 244f Write downs, 231, 233n2, 234t W Yasuda, A., 22 Yermo, J., 167n2 Warnock, F E., 157 WCY, see World Competitiveness Yearbook Weisbach, M S., 31n14 Wongsunwai, W., 177 Y Z ZAR, see South African Rand Zimmermann, Heinz, 86 This page intentionally left blank [...]... Haftung GmbH & Co Kommanditgesellschaft General Partner Hirschman-Herfindahl (index) High net worth individual International Accounting Standards Board Investidores em Capital de Risco International capital asset pricing model International Finance Corporation International Financial Institution International Financial Reporting Standards Institutional Limited Partners’ Association International Monetary... and although there will be growing pains in many markets, there are many reasons to conclude that private equity investing will increasingly be a global enterprise A related change will be a shift in the ranks of who is raising private equity According to the Emerging Market Private Equity Association, 26 percent of the total amount invested by private equity funds in 2009 went to companies based in. .. of individuals in the private equity industry and in academia Many ideas in this book have been developed or refined in numerous conversations with my colleagues at AlpInvest Partners, investment professionals at other limited partner organizations, general partners of private equity funds, representatives of private equity associations, and researchers teaching private equity courses at leading business... the globalization of the private equity model, and the opportunities and risks that arise from it, is still well ahead of what investors in private equity may find in the literature on the subject Analyses of cross-border investments and trade in financial services in private equity have remained surprisingly rare—as if markets outside the United States had developed largely in isolation.1 As market... managers and limited partners in private equity funds, the literature has grown equally rapidly In these studies, readers find answers to many questions ranging from the performance characteristics in individual market segments to the due diligence process in selecting private equity funds and the planning of an investment program How does private equity create value? How are private equity markets. .. become available, there is an increasing body of literature analyzing the European private equity market and, more recently, new markets in emerging economies At the same time, the growing importance of private equity in financial intermediation around the globe has allowed researchers to undertake comparative studies, examining the drivers of private equity activity and returns in a cross-section of countries... venture capital and private equity activity is going to take place outside its traditional hubs of the United States and continental Europe (especially Great Britain) In particular, it is likely that the industry s focus will be increasingly on the emerging markets The trend toward increased globalization of the private equity industry was evident from the first days of the 21st century The industry downturn... demand dynamics in individual markets; and finally, Part IV contains conversations with leading private equity fund managers on their global expansion strategies and risk management 1.2 Private equity fundamentals Part I contains four chapters In setting the scene for the rest of the book, Chapter 2 starts by defining what we mean by private equity This is necessary as there remains a surprising degree... under 8 International Investments in Private Equity management This discussion is followed by an analysis of regional trends In this context, we pay particular attention to the catch-up process in the emerging markets where private equity is assuming an increasingly important role in financial intermediation as their economies grow and their prosperity rises However, this process has been uneven, and while... diligence work when they examine investment opportunities abroad A key issue 10 International Investments in Private Equity foreign investors face lies in the substantially greater information requirements, both at the macro- and micro levels, to assess investment risks relative to the expected returns This applies especially to investments in emerging markets Are local private equity firms, which tend
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