Standing tall Why distinctive PE firms will flourish Global private equity watch 2013

Transcription

1 Standing tall Why distinctive PE firms will flourish Global private equity watch 213

2 Contents 2 Creating firms of distinction 3 Head for the exit 4 Stand out from the crowd: diversification 1 The path ahead 11 PE reaches steady state 13 Fund-raising edges up 17 US leveraged sees record year, but Europe trails 18 High variation in activity at a regional level 19 Secondary buyouts a major source of new deals 22 Exits fall as IPOs decline and strategic buyers step back 23 Emerging markets 24 China 26 India 28 Latin America 3 Africa 34 Key contacts

3 Executive summary Creating firms of distinction Private equity (PE) is no stranger to evolution. It has always sought to take advantage of the new opportunities change brings, on both macro and micro levels. PE has proven itself highly adaptable and able to spot and implement new ways of conducting business to stay ahead of the game. It s just that now, the pressures PE firms face are greater than ever. Diversify, stand out from the crowd, strive for excellence Competition in the PE industry is intensifying. Asset managers are moving into the PE space, and PE managers in emerging markets are building capacity and starting to expand geographically. And limited partners(lps) seem to have more leverage themselves whether they are taking tentative steps toward investing directly in companies or seeking to negotiate more favorable economic terms with general partners (GPs). At the same time, regulatory pressure has mounted as PE has come under the umbrella of alternative investment rules, making the business of raising capital and investing in private companies ever more complex. However, as our report demonstrates, PE is finding new and creative ways of growing in stature. Firms are capitalizing on their key strengths, talent and knowledge base to achieve distinction in an increasingly crowded market. For some, this means diversification across asset classes and/or geographies to extend their reach into new territories. For others, standing out from the crowd means a relentless focus on being the best in class in their chosen strategy. As we move into 213, we are seeing an improvement in exit markets, with IPOs a particular focus. We cannot tell how long the window will remain open, but the evidence so far suggests that PE is making the most of the opportunity to sell high-quality portfolio companies on the public markets. As we note, there is still much more to be done to manage the exit overhang that exists in the industry, but current activity levels suggest some cause for optimism. We are confident that PE will find ways of working through this. The most distinctive firms will be the ones that stand tall and flourish in what is becoming an evermore competitive and complex environment. Jeff Bunder Global Private Equity Leader Standing tall: why distinctive PE firms will flourish Global private equity watch 213 1

4 Creating firms of distinction Achieve distinction in an increasingly crowded market. PE is no stranger to evolution. It has always sought to take advantage of the new opportunities change brings, on both macro and micro levels: PE has historically proven itself highly adaptable and able to spot and implement new ways of conducting business to stay ahead of the game. It s just that now, the pressures PE firms face are greater than ever before. 2

5 Head for the exit The biggest challenge for PE lies within firms own portfolios. PE is sitting on a record number of unrealized investments, many of them made during the boom years of 25 to 27. This is an aging portfolio that challenges the three- to five-year holding period that characterized the industry until the crisis. Over the last two years, many firms have taken the opportunity to refinance companies, giving them extra time to work with portfolio companies to generate value and pushing back the need for realization. However, the exit overhang now has to be an overarching priority for all firms. To put this into perspective, we estimate there are now more than 7 companies in PE portfolios in Europe acquired since 24 that had an entry enterprise value (EV) of 15 million or more. In the US, there are nearly 6 companies that had an entry EV of US$15 million or more awaiting realization. On an aggregated basis, the entry EV of these US investments is over US$7 billion. Emerging markets face a similar issue. LPs are looking to increase their exposure to emerging markets, but there is growing evidence to suggest that many are now more cautious in committing capital to markets such as India and China, where fund-raising figures for 212 were flat and down, respectively. A lack of consistent distributions is a contributing factor to the reduction in fund commitments. Addressing this exit overhang will be far from easy. IPO markets globally have been subdued over the last year and continue to be so. Meanwhile, corporations, particularly in Europe, are taking a cautious stance when it comes to acquisitions M&A values were down last year, and volumes remained flat. It remains to be seen if the large M&A deals announced in the first quarter of 213 are a sign of a more sustained return to corporate M&A activity. Improving credit markets in the US, and more recently in Europe, may help as PE is more able to acquire companies through secondary buyouts. Some are also underperforming assets looking for an uptick in economic conditions in order to reach break even. Whatever the prevailing market conditions, however, the impetus for an exit must come from the companies current owners. Part of the answer lies in seeking ways of reinvigorating businesses that were bought at the peak of the market. Many PE firms now have considerable operational resources that they can bring to bear on existing portfolio companies to improve performance. Indeed, our annual studies on how PE creates value demonstrate that PE is able to significantly improve areas such as productivity (up 6.9% on average across all European markets, according to our European study) and that 45% of PE returns in Europe for exits to the end of 211 and 57% in the US to the end of 21 were attributable to value creation. Notwithstanding these impressive results, PE must focus still more on the companies it holds if returns as measured by the internal rate of return (IRR) are not to be dragged down. Exits need equal importance to new deals within PE firms. PE must also find new ways of incentivizing management teams particularly those operating in companies acquired at high valuations in the boom times to focus on the exit and therefore ensure that all possibilities are explored. PE needs to at least double the current pace of exits. To achieve this in what is set to be a challenging market for the foreseeable future, firms will need to prepare portfolio companies early on for sale. This means continuing to add significant value to businesses but also putting in place well-defined exit strategies for each company individually and by casting the net ever wider in the search for potential buyers. By way of example, in our latest European exit study we found that US and Asia-Pacific trade buyers accounted for around half of sales to strategics by PE in 211, double the proportions seen in the 25 to 27 period. Many of these buyers, particularly in Asia-Pacific, need time and detailed information to get comfortable with acquisitions. If PE exit trends are to beat the wider M&A market, firms need to spend time understanding what individual buyers are looking for and tailor their companies equity story to appeal to them. The world s corporations are sitting on unprecedented levels of cash, estimated at up to 1 trillion in Europe and over US$1.8 trillion in the US, while Asia-Pacific has many companies, such as Honda, Mitsubishi, Samsung and China Mobile, with billions on their balance sheets. If PE is to persuade strategic acquirers to part with some of their cash, it must ensure that its portfolio is highly attractive to these potential buyers. In today s uncertain world, corporations need compelling reasons for embarking on M&A strategies and a PE firm s portfolio needs to provide them. Only by making existing portfolio companies a top priority will PE clear the backlog of exits that remains from the boom era. Standing tall: why distinctive PE firms will flourish Global private equity watch 213 3

6 Stand out from the crowd: diversification While clearing a backlog of portfolio companies is an important focus, PE firms are increasingly looking for new ways of leveraging their brands, talent and experience as active managers to stand head and shoulders above new competitors that are entering the market. We see three key means of achieving this. Top five private equity firms by AUM Private equity Real estate Credit and marketable alternative 35% 36% 37% 45% 5% 1. Diversify the platform One of the ways firms have been differentiating is by diversifying into new lines of business. Firms are increasingly leveraging their strong brands in PE by expanding into advisory and capital markets services and becoming multi-asset managers. The result is that large firms in particular derive less from the traditional leveraged buyout (LBO) model in terms of returns and capital-raising. In 23, buyout assets accounted for 46% of all private equity capital. By 212, this had dropped to 38%. The trend is even more pronounced at the largest firms. In 28, PE assets accounted for 48% of total assets under management (AUM)at the top five firms; by 212, this had fallen to just 33%. PE is aggressively positioning itself for a larger share of the alternatives capital. Buyout dry powder as a % of all PE assets 17% 48% 28 Source: Preqin, 1-Ks 15% 49% 29 17% 45% 21 17% 38% % 33% 212 Diversification by business line is being led primarily by the publicly listed US-based firms as they seek to more closely align with investors desire for more consistent earnings. This is a trend that may well continue as more firms seek IPOs. Of the top 1 PE firms, 6 are now listed, with The Carlyle Group and Oaktree Capital having joined the ranks of the publicly quoted in 212. The drivers behind this move are clear: firms are utilizing public currency to provide liquidity to aging founders and to attract or retain key professionals. Buyout Non-buyout 54% 46% 56% 44% 54% 46% 52% 48% 56% 44% 54% 54% 46% 46% 57% 43% 61% 62% The diversification trend is driving new strategies for PE on their quest for growth as they look for ways to adapt to the market. 39% 38% Jeffrey Bunder, Global PE Leader

7 PE firms are also seeking to build up asset management capability to expand the franchise and active management expertise. LPs look to be reducing the number of relationships they have to manage not just in their private equity portfolios, but in other asset classes, too. The larger, more diversified firms can provide investors with the option of committing to a suite of asset classes under one roof. While this is a trend that has been playing out over the last few years, there are recent signs that this is building momentum. The Carlyle Group, for example, has acquired all or part of three new business lines over the last few years: Vermillion Asset Management to build up capability in commodities; Claren Road Asset Management, a hedge fund business; and PE fund of funds AlpInvest. In 21, TPG announced a joint venture with real estate manager Caruso Capital Partners and GSO/Blackstone acquired the Collateral Management Agreements for nine collateralized debt obligation (CDO) and collateralized loan obligation (CLO) funds from Callidus. And 3i and Fortress Investment Group have expanded into fixed income via acquisitions of the UK operations of Mizuho Investment Management and Logan Circle Partners, respectively. In addition, KKR last year bought hedge fund manager Prisma Capital Partners. Yet it s not just the very largest firms that are venturing into new areas in their quest for diversified income streams and to take advantage of the brand. Our analysis of the top 1 firms in the Private Equity International 3 ranking shows that the tier below has also started to branch out. Among the top 1 2 firms, 4% now have a debt or credit arm and 2% a real estate business. In the top 2 5, 37% have credit funds, 1% run hedge funds, 3% have fund of funds operations, 13% real estate and 1% now run some other kind of business line. Of these top 2 5, 43% have at least one line of business above and beyond traditional PE. One key strategy for PE is therefore to act as a consolidator in the alternatives space. While many of the skills required to manage different alternative assets vary significantly, those with strong brands and a proven ability to gather capital from institutional investors will be the firms that can attract top talent in a variety of investment fields. Percentage of PEI 3 firms operating in additional segments Top 1 Top 2 5 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Debt/credit Hedge funds Fund of funds Real estate Other Source: PEI 3 Standing tall: why distinctive PE firms will flourish Global private equity watch 213 5

8 In addition to providing investors with a choice of assets, the GPs relationship with LPs is evolving in other ways, too. While just 7% of LPs currently have separate accounts with PE fund managers, a recent Preqin study found that 35% would consider doing so in the future. Separate accounts, which are already commonplace in other asset classes, give large investors more control over their investments (in addition to fee reductions), allowing them to build out and tailor portfolios to meet their specific liquidity schedules and risk profile. For PE fund managers, offering separate accounts gives them access to larger pools of capital than they might otherwise have with off-the-shelf fund products. Recent examples include New Jersey Division of Investment and CalPERS agreeing to separate accounts with The Blackstone Group worth US$1.8 billion and US$5 million, respectively, and the Texas Teacher Retirement System negotiating two separate accounts worth US$3 billion apiece with Apollo Global Management and KKR. 2. Diversify by geography Yet the growth of AUM through the addition of new business lines is only one way of standing out from the crowd. PE is also leveraging its talent and active management expertise by capturing some of the world s most compelling growth stories. It is increasing its geographic reach into new markets. PE s shift to global investing is not new. Over the last decade, and particularly since the onset of the financial crisis, PE managers have been looking for ways to expand as economies in the more developed markets have remained stalled. LPs, for their part, have also been seeking increased exposure to emerging markets. The result has been a rebalancing of the industry along more global lines. China is already the third-largest market in the world in terms of PE dry powder with US$47 billion available for investment, behind the UK with US$76 billion and the US (US$464 billion including all fund types, such as growth capital, venture, and real estate). Given that 1 years ago the Chinese PE market was still very much in its infancy, this growth is nothing short of remarkable. PE is employing a variety of strategies to seize the opportunity that emerging markets have to offer, from raising local currency funds (TPG, The Blackstone Group, The Carlyle Group and Morgan Stanley have all raised renminbi (RMB) funds in China) to partnering with local funds to secure access to new deals and gain insights into the nuances of different market dynamics. Recent examples of the latter include, in Brazil, JP Morgan s tie-up with Gávea Investimentos, The Blackstone Group s 4% stake in Pátria Investimentos, and in China, the partnership involving The Carlyle Group, Prudential Financial and the Fosun Group. Yet while the focus until recently was on seeking out opportunities in the largest economies Brazil, India, China PE is in the early stages of looking into new emerging markets that are starting to show increasing signs of promise. Many newer markets to PE, such as Indonesia, Turkey, Colombia, Peru and Western and Eastern Africa, now exhibit many of the same dynamics at play in the more established and well-trodden emerging markets. They, too, have rapidly growing middle classes with increasing disposable incomes, more stable governments that are seeking to build out the infrastructure needed to develop their economies and that are becoming increasingly receptive to PE investments. Yet they do not suffer from the intense competition that markets such as China, India and Brazil currently display. Firms that can act on opportunities in these fast-growing markets, while also mitigating the risks involved in investing in uncharted territory, will reap the kind of rewards open to true pioneers. We are already seeing increasing but limited activity across many markets in Latin America, Africa, Southeast Asia and Eastern Europe while many funds circle these new jurisdictions looking for evidence to support a more focused effort. While assets under management of the PEI 3 in both the US and Europe declined between 21 and 212, they have been rising in some of the key emerging markets over the same period, with the main beneficiaries being Asia-Pacific and South America and, to some extent, Africa. It s a trend that is set to continue: a recent survey by the Emerging Markets Private Equity Association found that 75% of LPs expect their commitments to emerging markets to increase over the next two years, while only 26% said they would increase their exposure to developed markets over the same period. 6

9 PEI 3 AUMs by manager region North America PEI 3 total AUM: 21 US$933b 211 US$93b 212 US$917b EMEIA South America PEI 3 total AUM: 21 US$6.6b 211 US$9.2b 212 US$15.4b PEI 3 total AUM: 21 US$318b 211 US$3b 212 US$284b Asia-Pacific PEI 3 total AUM: 21 US$38b 211 US$42b 212 US$72b Source: PEI 3 75% of LPs plan to increase commitments to emerging markets 212 PE investment in frontier markets (in US$ billions) MENA Source: EMPEA, Preqin Sub-Saharan Africa Latin America ex-brazil 4.9 CEE & CIS Emerging Asia ex-china Standing tall: why distinctive PE firms will flourish Global private equity watch 213 7

10 212 Dry powder amount by region (in US$ billions) Source: Preqin Latin America Emerging Europe MENA Emerging Asia Indeed, firms located in frontier markets now have around US$21 billion in dry powder to fund new deals. The largest concentration of this is in emerging Asia, including Thailand, Indonesia, South Korea and Malaysia. Firms are, with increasing frequency, establishing offices in Singapore to use as a base to invest into Southeast Asia. These frontier markets are clearly top of mind among firms: our recent Capital Confidence Barometer found that emerging Asia is where most investors plan to increase their activity over the next 12 months. Also topping the list were Russia and Eastern Europe. Cracking these markets will require a good deal of determination, courage and a highly discriminating strategy only by finding the very best businesses to back and local partners can PE be successful. The growth inherent in many of these markets may forgive some mistakes, but PE will need to learn quickly what does and does not work in each economy. As a result, some international firms may choose to co-invest in these markets before striking out on their own, and others may hire in exceptional talent. The rest may well seek to acquire all or part of local firms or seek joint venture arrangements with them. 3. Strive for excellence in core markets The third path open to PE firms is simply to stick to their knitting and execute PE as a single asset class. Those that opt for this must strive to be the very best in their chosen strategy. As LPs increasingly have the choice of committing to firms with a variety of asset classes or a menu of geographies, firms that concentrate on a particular market, investment strategy or sector must provide compelling evidence that their focus can provide outstanding returns. Over the years, many firms in the US, followed by those in Europe, have developed specialist sector or strategy expertise. There is evidence to suggest that many LPs are willing to support such firms where they see the specialist knowledge as providing a particular edge not just in sourcing deals, but also in adding value and sourcing good exit routes. Firms that can demonstrate expertise in sectors of high demand, such as the oil and gas industry, or those that offer a unique perspective on markets that are experiencing rapid change, such as financial services, are achieving fund-raising success. In Europe recent examples include AnaCap Financial Partners and HitecVision and in the US Kayne Anderson Capital Advisors. Indeed, in the first half of 212, 23 sector-specialist funds in the US raised over US$13 billion, according to Dow Jones LP Source, the strongest half year for this type of fund on record. This attests to the development of specialist funds, but also to strong LP appetite for them. This trend toward specialization is also even starting to become apparent in some of the more developed emerging markets, where competition for deals has intensified over recent years. In our recent Asia-Pacific private equity outlook 213 report, 87% of respondents said that sector specialization was important in the region, with 49% saying that it was very important in identifying the high-potential players in a given industry and in defining the right strategy for the business following investment. There are even some sector-focused funds emerging in the region: L Capital Asia, which is targeting brands, is seeking US$1 billion; BioVeda, a China-focused life sciences venture capital firm; and Tsing Capital, a Chinese cleantech venture capital firm. 8

11 PE s agility has allowed firms to adapt to niche sectors with laser-sharp focus in order to understand the businesses they own and add value. Michael Rogers, Global Deputy Sector Leader, Private Equity LPs are increasingly scrutinizing every aspect of a firm s operations. They are looking for excellence in all areas, from deal sourcing to operational experience and high-quality networks that are likely to help with realizations. Past performance, while still important, has become less of an indication for them as to whether a firm will achieve outstanding returns in the future. They are seeking evidence of improvements made to companies during the downturn as a means of assessing how effective fund managers are at working their portfolios to achieve maximum performance. While many generalist funds may struggle in this environment, those that can prove they are top quartile, have an experienced core team with a disciplined approach and, importantly, demonstrate recent high-quality exits despite the more challenging M&A and IPO markets will attract capital. The current bifurcated fund-raising market, in which some funds raise with relative ease while others take many months to reach their target, is one manifestation of how discriminating LPs have become. Meanwhile, new sources of capital are emerging around the world. As new LP bases in new markets open up, the fund-raising dynamic changes. Firms will need to take a more global approach to fundraising. This will require expanded investor relations teams that spend even more time on the road than they currently do to build and foster relationships throughout the world. Standing tall: why distinctive PE firms will flourish Global private equity watch 213 9

12 The path ahead PE stands at an inflection point. With the worst of the crisis now behind them, firms must act decisively to ensure that they stand out from the crowd to potential portfolio companies, LPs and talented professionals looking for their next career move. We are already seeing competition intensify within the alternative assets space. And as economies around the world start to stabilize, this will only increase. For example, there are large asset managers, such as BlackRock, building out capacity in PE and other alternative assets. These will give many of PE s largest and most established names a run for their money. As we ve outlined in this report, these PE firms are increasingly seeking to consolidate what is a highly fragmented alternatives space in a bid to attract investors, increase their market share and bring in experienced managers to create new platforms. As a relatively new development, this strategy is not yet proven. The risks involved in such ambitious expansion are high. These firms will need to ensure that only the best people are recruited and the highest-quality systems are implemented internally. Lowered thresholds or deviation from a proven model in one area of the business can damage hard-earned brands in others. It s only over time that we will be able to judge the success or otherwise of this type of diversification. In emerging markets, increased competition both from local and regional players as well as the global PE firms means that deal sourcing and buying well, enabling firms to achieve good, riskadjusted returns, have become more challenging. Hence PE s move toward the more uncharted territory of frontier markets. Again, this type of diversification is not without risk, and over time, some firms will retreat with their fingers burned. Limited partners, such as sovereign wealth funds and some larger pension funds, are also increasingly seeking to invest directly in companies as a means of deploying large amounts of capital more efficiently with lower fees. Investors such as the Abu Dhabi Investment Authority have been building teams over recent years to effect this strategy. Others are increasingly seeking co-investment rights as a way to deploy capital side by side with PE funds. As a result, only firms that can demonstrate outsized returns relying on a particular skill set, industry insight or in-built talent for investing will remain successful. And, as the first few months of 213 show signs of a thawing IPO market and a pick-up in M&A, firms that can capitalize on increased activity levels to work through the exit overhang will flourish. So far, PE has shown itself more than equal to these new sources of competition. But it is highly likely there will be still more new entrants to the market. As a result, PE must continue to find new ways of differentiating itself, striving for excellence and standing tall in a crowded environment. 1

13 PE reaches steady state PE s reputation for innovation and creativity have propelled the industry forward in times of adversity. PE funds are demonstrating that they continue to have what it takes to thrive and expand. Last year continued in the vein of 211, with global economic growth slipping to 3.2% from 3.9% the previous year, according to the International Monetary Fund. Concerns about the Eurozone rumbled on and uncertainty prevailed about the outcome of the US elections, after which the political wrangling continued over the fiscal cliff. In addition, growth slowed in some of the key emerging markets, such as China, India and Brazil. Standing tall: why distinctive PE firms will flourish Global private equity watch

14 Against this somewhat sluggish backdrop, PE proved itself able to capitalize on opportunities where they arose while maintaining a relatively steady state in other areas. Global PE fund-raising was up 1% to the highest level seen since 29, driven largely by the success of global funds in attracting commitments. As we enter 213, there is a strong pipeline of funds on the road, which will boost PE s current US$358 billion of uncalled commitments to fund new deal activity. Faced with the prospect of low interest rates, many investors are seeking opportunities to increase overall returns, and this plays to PE s track record of delivering strong performance. PE was also able to capitalize on the strong credit markets seen in 212. Driven by continued central bank interventions, low interest rates enabled firms to refinance existing portfolio companies, chipping away at the refinancing wall and pushing back maturities. In the US, 212 saw high-yield issuance hit a record high, and leveraged loans had their most active year since 27. In Europe, refinancing activity jumped from 1.2 billion in 211 to 6.6 billion in 212. Meanwhile, a slow M&A environment, particularly in the first half of 212, meant that investments and exits closed the year down from 211 figures, although the overall figures mask regional variations. New deals were up in the Americas, down slightly in Asia-Pacific and down significantly in the EMEA region. We would expect exits to improve over 213 as PE s dry powder increases to fund secondary buyouts. We may also see the pipeline of companies ready to go public unblock if stock market conditions continue to improve over the year. As an opportunistic and entrepreneurial investment model, PE has already demonstrated that it is able to take advantage of improving conditions where they arise even if only temporarily. In 213, we expect PE to seize the opportunity of available deal financing, particularly in the US, to fund new deals and exit existing portfolio companies. The macroeconomic picture will continue to be challenging through 213, but PE firms that can source the right investment targets and support post-deal growth and value improvement should be able to generate traditional PE returns levels. Key PE statistics at a glance PE funds closed 1,73 1, Committed capital US$61.9b US$63.5b US$285.1b US$253.3b US$256.6b US$282.3b Announced PE deals 3,349 2,68 1,847 2,265 2,36 2,233 Announced PE deal value US$733.6b US$218.9b US$137.9b US$24.2b US$223.1b US$25.9b Average PE deal equity component 3.87% 38.85% 45.51% 41.37% 37.95% 37.73% PE-backed M&A exits US$33.b US$14.4b US$69.b US$223.b US$231.2b US$197.9b PE-backed IPOs US$58.4b US$1.8b US$16.8b US$34.8b US$38.5b US$22.2b Sources: Preqin, through 31 December 212; Dealogic includes sponsored entry and exit deals and PE-backed IPOs through 31 December 212; S&P LCD, December 212 release 12

15 Fund-raising edges up After a flat 21 and 211, the total raised by PE funds globally increased by 1% in 212 to US$256 billion. This increase was driven in large part by a number of successful global fund-raisings. As a result, the average fund size increased to US$479 million in 212, up from US$425 million in the previous year. PE firms raised a total of 589 vehicles in 212. Fund-raising grew 1% in 212, yet remains well below boom-era highs Annual global PE fund-raising, (in US$ billions) Committed capital Number of funds closed ,73 1, Source: Preqin, December 212; ROW and emerging markets includes Latin America, Africa, Australia and Asia-Pacific regions Several large fund-raisings by global funds drove an uptick in average fund sizes Average PE fund sizes, (in US$ millions) Source: Preqin, December 212; ROW and emerging markets includes Latin America, Africa, Australia and Asia-Pacific regions Interestingly, many of the largest funds raised by PE houses were targeted outside the more traditional buyout space. The biggest fund raised in 212 was Blackstone s seventh real estate vehicle, which received commitments of US$13.3 billion. Oaktree Capital Management and Fortress Investment Group both raised significant distressed debt funds totaling US$5 billion and US$4.3 billion, respectively. The largest buyout fund raised in 212 was Advent International Corporation s Global Private Equity VII fund, which attracted US$1.8 billion of capital. Largest funds closed in 212 (in US$ billions) Fund Type Size Closed Blackstone Real Estate Partners VII Real estate 13.3 Q412 Advent International Corporation Global Private Equity VII Buyout 1.8 Q412 BC European Cap IX Buyout 8.6 Q112 Global Infrastructure Partners II Infrastructure 8.3 Q412 AXA Secondary Fund V Secondaries 7.1 Q212 Green Equity Investors VI Buyout 6.3 Q212 Coller International Partners VI Secondaries 5.5 Q312 Oaktree Opportunities Fund IX Distressed debt 5 Q312 Ares Corporate Opportunities Fund IV Buyout 4.7 Q312 Fortress Credit Opportunities Fund III Distressed debt 4.3 Q212 Source: Preqin, December 212 Standing tall: why distinctive PE firms will flourish Global private equity watch

16 Dry powder by region (in US$ billions) North America ROW 3% 5% 8% Europe ROW as a percentage of all buyout dry powder 7% 9% 1% 1% 12% 14% 15% $358b US$358 billion in dry powder available, with Asia and the emerging markets making up an increased share $ Source: Preqin, December 212; ROW and emerging markets includes Latin America, Africa, Australia and Asia-Pacific regions However, funds in the US still hold the bulk of unspent commitments US$189b US$116b US$53b US Europe Asia-Pacific and the rest of the world 14

17 Asia and emerging markets see rising percentage of PE dry powder The global value of PE s dry powder has fallen from its 29 peak. However, firms still have significant uncalled commitments to fund new deal activity. At the end of 212, PE firms had US$358 billion, a fall from the US$392 billion recorded at the same time in 211. Most of this resides in the US, where firms held US$189 billion, while in Europe, the figure was US$116 billion. Both of these figures have been in decline since 29. However, dry powder in Asia- Pacific and the other emerging markets has been rising and last year stood at US$53 billion, up from US$49.1 billion in 211. As a result, their share of available capital for investment as a percentage of the global total has increased further over the last year and now stands at 15%. Lower activity against the backdrop of subdued M&A PE investment activity levels declined in 212, with the number of acquisitions falling 3% to 2,233 from the 2,36 announced in 211. The value also dropped, by 8%, to US$25.9 billion from US$223 billion the previous year. This trend is in line with the fall seen in global M&A volume for 212, which declined by 6% to 42,129. M&A value, meanwhile, remained constant, boosted by a number of large deals in the final quarter of 212. Indeed, Q4 212 saw the highest M&A value since Q4 27. And while the value of deals withdrawn fell 55% over 211 figures, the time taken to complete deals was the longest since 25. From announcement to completion, deals took an average of 53 days, suggesting a higher degree of caution among buyers as global economic growth continued to stall. Larger deals a dominant force in the market Despite the overall fall in PE deal values for the year, the second half saw a significant and encouraging uptick, although primarily in the US. The value of new deals by PE firms increased 42% in H2 to US$12 billion from US$85 billion in H Average deal values remained broadly stable, as did purchase price and debt multiples, both of which had been creeping back up over 21 and 211 following a sharp correction in the aftermath of the financial crisis PE acquisitions and valuations (in US$ billions) Deal value Purchase price multiple Debt multiple x 5.8x 6.4x 4.2x 4.1x 4.x 6.7x 4.6x 7.x 4.8x 8.1x 5.3x 8.x 5.4x 9.3x 6.2x 8.7x 4.9x 7.2x 4.x 8.1x 4.7x 8.4x 8.3x 5.2x 5.3x Sources: Dealogic through 31 December 212 includes sponsor-backed acquisitions and excludes repurchases, spinoffs, splitoffs and add-ons; S&P LCD, December 212 release. Purchase price multiple calculated using average purchase price divided by adjusted earnings before interest, taxes, deduction and amortization (EBITDA). Debt multiples calculated using average debt-to-adjusted EBITDA ratio for LBO transactions for companies with EBITDA greater than US$5m Standing tall: why distinctive PE firms will flourish Global private equity watch

18 Drilling down further into the figures, the analysis reveals that the 2 most active PE houses accounted for 13% of announced deals (both acquisitions and exits) and as much as 49% of value. The most active firm was The Carlyle Group, which announced 67 deals in total, with a value of US$35 billion. Of these, 4 appear in the top 1 deal rankings: the US$4.9 billion acquisition of DuPont Performance Coatings, the US$3.5 billion acquisition of Hamilton Sundstrand, the US$3.3 billion deal to buy Getty Images and the US$3.1 billion Focus Media deal. The latter of these, which Carlyle completed with China-based co-investors CDH China Holdings Management and CITIC Capital Holdings, demonstrates one of the approaches global firms are taking as they seek to access local deals in markets such as China: organizing club deals with locally based firms. Other notable deals in 212 include the US$7.2 billion acquisition of US-based EP Energy Corporation by Riverstone Holdings and Apollo Global Management and BC Partners deal to acquire US-based Cequel Communications Holdings for US$6.6 billion. The third-largest deal of the year was for a UK-based company: Terra Firma Capital Partners bought Annington Homes for US$5.1 billion. Most active PE firms in 212 (in US$ billions) Firm Total value Deals Carlyle Group LP Goldman Sachs Capital Partners Apollo Global Management LLC KKR & Co. LP Blackstone Group LP CVC Capital Partners Ltd Advent International Corporation Bain Capital Partners LLC Permira Ltd Oaktree Capital Management LP Sources: Dealogic through 31 December 212 includes buy-side and sell-side transactions Top PE deals announced in 212 (in US$ billions) Date announced PE buyer Target Industry Deal value 24 Feb 12 Riverstone Holdings, Apollo Global Management LLC EP Energy Corp. Oil and gas $ Jul 12 BC Partners Ltd. Cequel Communications Holdings I Telecommunications $ Nov 12 Terra Firma Capital Partners Ltd. Annington Homes Ltd. Real estate $5.1 3 Aug 12 Carlyle Group LP DuPont Performance Coatings Materials $ Jul 12 Carlyle Group LP, BC Partners Ltd. Silver II Borrower SCA Hamilton Sundstrand Industrials Industrials $ Aug 12 Carlyle Group LP Getty Images Inc. Professional services $ Aug Feb 12 Carlyle Group LP, CDH China Holdings Management Co Ltd., CITIC Capital Holdings Ltd. Advent International Corporation, Goldman Sachs Capital Partners 5 Aug 12 Advent International Corporation Focus Media Holding Ltd. ( %) Professional services $3.1 TransUnion Corp. Financial services $3. AOT Bedding Super Holdings LLC (majority %) Consumer products $3. 5 Jun 12 Thomas H Lee Partners LP Party City Holdings Inc. Retail $2.7 Sources: Dealogic through 31 December

19 US leveraged sees record year, but Europe trails Underpinning much of this activity has been a strong credit market in the US. Continued central bank interventions kept interest rates low, leaving fixed income investors searching for higher yield by moving further out on the risk spectrum. In the US, financing is available for all types of deals, including refinancings helping PE chip away at the refinancing wall and push maturities back dividend recaps and new acquisitions. Over the year to the end of December, total US-sponsored leveraged loan issuance reached a total of US$234 billion, the highest recorded since the boom times of 26 and 27. In addition, US high-yield bond issuance reached record levels. The sponsored high-yield market reached US$116.1 billion, outstripping the 21 issuance figure of US$9.6 billion. While much of this was driven by PE s need to refinance existing debt packages, the availability of debt capital also enabled many of the large transactions on the previous page. Demand for credit investments came from an influx of yield-seeking investors, including CLOs, retail investors and hedge funds. CLO issuance exceeded US$454 billion in 212, more than a 3% increase from 211. In Europe, the picture was markedly different. Last year, the credit markets experienced a significant decline as the crisis surrounding the Eurozone took its toll. Declining confidence in the region has increasingly moved investors away from assets at the riskier end of the spectrum; instead they prefer to invest in safer assets. European senior loan volume in 212 was 23.4 billion, a 3% decline from the 33.3 billion issued in 211. However, PE in Europe still increased its refinancing activity considerably. In 211, the total refinanced was 1.4 billion, but it reached 6.6 billion in 212, according to figures from the Centre for Management Buy-Out Research. Secondary deal value as a percentage of all PE acquisitions hit a new high in US-sponsored leveraged loans and high-yield issuance, (US$ billions) Source: S&P LCD, December 212 release Leveraged loans High yield CLO formation is a key enabler of PE financing. In 29, the market was essentially dead, but has since recovered: 212 volumes more than quadrupled the prior year s CLO formation (in US$ billions) Source: S&P LCD, December 212 release Standing tall: why distinctive PE firms will flourish Global private equity watch

20 High variation in activity at a regional level The overall new deal figures also mask a significant difference in activity levels across regions, with EMEA witnessing a steep decline over the full year. The Americas saw a modest increase in deal activity, with 1,83 deals executed in 212, up from 1,5 in 211. In value terms, PE acquisitions in the region were up by 4% from 211 figures, with US$115.9 billion announced in 212. The third quarter was most active, with US$39.8 billion in new deals recorded the highest quarterly total since Q4 21. Asia-Pacific, meanwhile, saw a modest 4% decline in deal activity over 212, to US$32.6 billion. As with the Americas, the third quarter saw the most deals announced by value (US$14.6 billion). However, the EMEA region saw a significant reduction in both value and volume terms over the previous year. In 211, sponsors announced 935 deals valued at US$77.5 billion; in 212, there were just 837 PE deals worth US$57.6 billion. This is a fall of 1% by volume and 26% by value. However, the value of deals in the final quarter of 212 almost doubled from previous quarters to a total of US$2.1 billion. Several large deals accounted for this increase, including one of the largest deals of the year globally: Terra Firma Capital Partners US$5.1 billion investment in Annington Homes. Global M&A activity by value and volume (in US$ billions) Value Volume 5, 4, 37,135 43,65 41,921 37,27 41,857 44,879 42,192 31,588 3, 27,79 25,358 23,187 23,187 23,362 2, 1, Sources: Dealogic through 31 December 212; excludes repurchases, spinoffs, splitoffs and add-ons PE acquisitions by region (in US$ billions) Americas value Asia-Pacific value EMEA value Total number of deals Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q Q4 Q4 Sources: Dealogic through 31 December

21 Secondary buyouts a major source of new deals Last year was the year of the secondary buyout. This kind of deal accounted for nearly a third of all PE acquisitions by value, the highest percentage since at least 2. However, most of these deals were US-based. Sponsors announced US$39.8 billion of secondary buyouts involving US targets. This is more than three times the US$12.1 billion value announced in 211. Secondary deal value as a percentage of all PE acquisitions hit a new high in % 3% 25% 2% 15% The largest secondary buyout was the US$6.6 billion deal by BC Partners and the Canada Pension Plan Investment Board to acquire Cequel Communications. Goldman Sachs, Oaktree Capital Management and Quadrangle Group were the exiting sponsors. Other notable secondary buyouts include the US$3.3 billion Carlyle Group acquisition of Getty Images from Hellman & Friedman and the deal to acquire TransUnion Corporation for US$3 billion by Advent International Corporation and Goldman Sachs from Madison Dearborn Partners and Pritzker Group. 1% 5% % Source: Dealogic through 31 December Notable PE secondaries in 212 (in US$ billions) Date announced Target Buyer Seller Deal value 18 Jul 12 Cequel Communications Holdings I BC Partners Ltd. Quadrangle Group LLC, Goldman Sachs Capital Partners, Oaktree Capital Management LP 14 Aug 12 Getty Images Inc. Carlyle Group LP Hellman & Friedman LLC $ Feb 12 TransUnion Corporation 5 Aug 12 AOT Bedding Super Holdings LLC (majority %) Advent International Corporation, Goldman Sachs Capital Partners Advent International Corporation 5 Jun 12 Party City Holdings Inc. Thomas H Lee Partners LP Source: Dealogic through 31 December 212 $6.6 Madison Dearborn Partners, Pritzker Group $3. Ares Management LLC, Teachers Private Capital $3. Berkshire Partners LLC, Advent International Corporation, Weston Presidio Capital $2.7 Standing tall: why distinctive PE firms will flourish Global private equity watch

22 Consumer goods, retail and services account for 37% of last year s PE deals Oil and gas 8% Telecom 8% PE deals Materials 8% Industrials 7% Consumer goods 14% Utilities 2% Financials 11% Technology 11% Health care 8% Retail 9% Services 14% PE acquisition by industry (in US$ billions) increase Consumer goods, services and retail all active in Oil and gas Materials Industrials Consumer goods Health care Services Telecom Utilities Financials Technology Retail Source: Dealogic through 31 December 212 2

23 Consumer-focused deals regain popularity By sector, consumer-focused investments saw the some of the largest increases by value in 212, largely as more positive economic news and rising consumer confidence became evident in the US. Together, consumer goods and consumer and professional services accounted for 28% of 212 deal values/volumes. The sectors with the greatest year-over-year value gains were consumer goods, consumer and professional services, retail, and oil and gas services. Technology activity declined in value terms, with fewer of the larger deals that characterized 211 in evidence in 212. The decline in financial/real estate services is mainly due to the fact that 211 saw one particularly large deal: Blackstone s US$9.4 billion acquisition of nearly 6 shopping malls from Centro Properties. PE has performed well in a tough environment PE has performed well in an exceptionally difficult climate. PE funds have outperformed many other asset classes over three- and five-year horizons, including most equity indices and alternative assets. However, it has underperformed many fixed income indices over the same period. The Venture Economics all-pe index has returned 4.9% over the last five years, significantly higher than US and global equities, which have been highly volatile over the period since the crisis and have returns of 2% and -3.4%, respectively. In addition, we find evidence that PE returns are marginally uncorrelated with most other asset classes: approximately 3% to 4% with equities, 3% with bonds and 4% with hedge funds. PE funds have outperformed every asset class over the last five years 6% 4% 2% % -2% -4% Five-year asset class returns MSCI World Ex US HFRI fund of funds composite MSCI Emerging Markets Russell 2 Managed futures Private equity Global investment grade - Barclays global aggregate Sources: Morgan Stanley US Investment Monthly Databook, December 212; PE represented by Venture Economics all-pe index; represents a six-month reporting lag PE returns remain marginally uncorrelated with most other asset classes. As a result, PE remains attractive for institutional investors seeking diversification. Sachin Date EY Private Equity Leader Europe, the Middle East & Africa Standing tall: why distinctive PE firms will flourish Global private equity watch

24 Exits fall as IPOs decline and strategic buyers step back PE exits proved harder to achieve in 212 than 211. Last year s figures are down from the previous year, with a 7% decline in volume and a 23% fall in value, reaching a total of 967 worth US$22.1 billion. Exits via IPO saw the largest fall in a year that proved difficult for companies looking to list regardless of their ownership structure. PE-backed IPOs were down 5% by volume to 11 and 42% by value to US$22.2 billion. As the figures suggest, there were few of the large exits via IPO that characterized the first half of 211. The largest deal of 212 was in Asia: IHH Healthcare s US$2.1 billion listing in Singapore and Kuala Lumpur. Yet while the Asia-Pacific region was dominant in terms of IPO activity more generally in PE-backed deals, the Americas accounted for 74% of total IPO proceeds. One European IPO made it into the top five PE-backed IPOs with the US$1.2 billion listing of Ziggo by Cinven and Warburg Pincus. Exits via M&A also registered a drop of 8% by volume and 14% by value to 857 valued at a total of US$197.9 billion. The decline in trade sales was driven by an overall slowdown of acquisitions by strategics, although it s interesting to note that the more general decline of 25% was rather higher, suggesting that PE portfolios hold greater attractions for buyers than the wider business population. Meanwhile, exits via secondary buyout had a strong year, increasing by 28% during 212. Notable exits included KKR s disposal of a partial stake (45%) of its investment in Alliance Boots Holdings to Walgreens in a deal valued at nearly US$7 billion. Despite the 212 decline in value and volume, PE firms are optimistic about the outlook for exits. In a recent Capital Confidence Barometer survey, 43% of PE executives said they expected to increase their exit activity over the next 12 months. PE exits by M&A and IPO, 2 12 (in US$ billions) PE M&A exits Global PE IPOs Global Source: Dealogic 31 December