Is Private Equity Staging a Comeback?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Before I delve into the latest topic, I received an important message from Ellie Brown of International Medical Corps:

Dear Leo,

International
Medical Corps is a global, humanitarian, nonprofit organization,
founded by volunteer doctors and nurses and dedicated to saving lives
and relieving suffering through relief and development programs. Our
emergency response team is in Haiti responding in force and I would
like to ask for your help to get the word out to the readers of Pension
Pulse.

There are still
thousands of patients seeking treatment of which approximately 80% are
in need of surgery and are running out of time - especially with the
tremendous aftershocks still devastating this country.

The
team is treating crush injuries, trauma, substantial wound care, shock
and other critical cases with the few available supplies - And they're
in it for the long haul. I would love your help spreading the word by
blogging or tweeting about IMC's rescue efforts. We've put up a blogger
friendly widget here on our site:

http://www.imcworldwide.org/haiti

With
the widget it's really easy to let your readers know that donating $10
to help the people of Haiti is as simple as sending a text message of
the word "haiti" to 85944. If you have any questions just let me know
and I will do my best to help you out. If you are able to post the
widget or tweet, I would appreciate it if you could send me the link.

Thanks so much,

Ellie
[e-mail]

Please give whatever you can to this wonderful organization. I am going
to post the widget on my blog as soon as I can, but please visit their
site and see the great work they're doing.

Now, back to pensions. On Tuesday, Reuters reported that Ontario Teachers to acquire UK education provider:

One
of Canada's largest pension administrators, the Ontario Teachers'
Pension Plan, has agreed to buy a leading British provider of special
needs education, for an undisclosed sum.

The
private equity arm of Teachers, a pension plan with over C$87 billion
($84 billion) in net assets, agreed to buy Acorn Care and Education Ltd
from British mid-market private equity firm Phoenix Equity Partners,
the UK firm said in a statement.

Terms
of the deal were not disclosed, but a report in Britain's Financial
Times pegged its value at about $245 million. Teachers could not be
reached for immediate comment.

The
Canadian private equity industry, a global leader, is homing in on
acquisition opportunities at home and abroad in the wake of the global
financial crisis.

Experts
say dealmaking in the private equity space will likely grow in 2010 as
the spread between bid and asking prices narrows and targets come up
for sale, with deep-pocketed pension funds like Teachers leading the
way.

Acorn, which provides
facilities for children with special needs, operates 10 schools across
England and has grown through acquisition from just two schools in 2005.

It put itself up for sale in late 2009.

Teachers
invests and administers the pensions of 284,000 active and retired
teachers in Ontario and is one of Canada's largest investors.

The
fund's private equity arm, which manages around C$10 billion and owns
companies across the globe, has been actively seeking growth.

Its
director, Erol Uzumeri, has in the past described the current
investment climate as "the best investment opportunity of my lifetime."

Teachers announced plans in early January to buy AIG Inc's Canadian mortgage insurance business, with assets of C$274 million.

Reuters did report that Canadian private equity deals seen jumping in 2010:

Infrastructure
renewal, government stimulus spending and the end of the traditional
income trusts will drive Canadian private equity deals higher in 2010,
according to a top industry player.

Gregory
Smith, the president of the Canadian Venture Capital and Private Equity
Association (CVCA), told Reuters that buyout firms could participate in
as many as 30 percent more deals this year than last, helped in part by
narrowing spreads between the buy and sell on potential deals.

"I think you'll see investment activity improve, enhanced investment
activity," Smith said weeks ahead of the official release of CVCA
figures for 2009 and for its 2010 outlook.

"The
difference between January 2010 and January 2009 is that in January
2010 people actually have a view. People this year are prepared to make
commitments based on their outlook."

There were some 100 deals done by private equity firms in 2009,
slightly more than in 2008 but well below peak deal volume of 140
before the global economic crisis.

Canadian income trusts lose their favored tax status 2011, forcing them
to reassess strategies from ones aimed at giving investors regular cash
payments to ones focused on increasing production and growth.

Larger trusts, many of them oil and gas companies in Western Canada,
will mostly opt to become corporations, but smaller companies in
sectors like manufacturing and food distribution will have to seek
other options.

"You probably
need a market cap of C$500 million ($487 million) to effectively get
the attention of investors and analysts and have sufficient liquidity,"
said Smith, who estimated 50 to 100 companies could fall into that
category.

"Less than that and PE (private equity) provides a compelling alternative," he said.

Canada needs about C$200 billion to replace aging infrastructure, from
schools and bridges to water and waste water facilities, and for
electricity generation.

Smith
said investments related to revamping infrastructure, and stimulus
spending announced by the government during the recession, will form
the focus of private

equity buyout activity this year.

He pointed at recent financing activity in public markets as a sign of a strong market for fund-raising in 2010.

Onex Corp,
one of Canada's best-known buyout companies, said early this month it
boosted its stake in a new fund by 60 percent due to optimism about
near-term investment opportunities.

Toronto-based Onex, with stakes in sectors as diverse as electronics,
health care, cosmetics and movie theaters, said it would boost its
stake in Onex Partners III to $800 million from $500 million, bringing
the total fund size to $4.3 billion.

"That is indicative of how fundraising will come back in 2010," Smith said.

Smith
said the outlook for venture capital was poor, predicting investment in
the already struggling sector could plunge 30 percent in 2010, for
another dismal year.

He
predicted venture capital activity would be worth about C$1 billion in
2009, 30 percent less than in 2008, when it also had a poor showing.

Venture
capital is risky in the best of times, so you can imagine how bad it is
during these challenging times when banks are unwilling to lend past
three year terms. But private equity is staging somewhat of a comeback,
and it couldn't come soon enough.

Marietta Cauchi of Dow Jones Newswires reports that in the UK, buyouts hit a 25-year low as debt dries up:

The
value of buyouts fell 72% in 2009 to hit a 25-year low as debt to fund
deals remained elusive and sellers refused to drop prices, according to
research released Tuesday.

Deal value was just GBP5.5 billion last year, compared with GBP19.7 billion in 2008 --a level not seen since 1995, said the Centre for Management Buyout Research, or CMBOR.

Meanwhile the volume and value of private equity-backed buyouts at 117
deals and GBP4.7 billion respectively were also the worst for a quarter
of a century.

"Overall the
end of this decade has seen very low levels of buyout activity compared
to a far more buoyant private equity market in 2006-2007," said
Christiian Marriott, Director at Barclays Private Equity which sponsors
the research.

"In addition, of the total recorded deal
value of GBP4.7 billion in 2009, GBP1.2 billion is related to one
transaction--the buyout of NDS Group," he added. The U.K. digital
pay-TV company was taken private by Permira in a transaction that left
the private-equity firm with a 51% stake in the digital pay TV
specialist. News Corp. (NWSA), which owns Dow Jones, the publisher of
this newswire, holds the remaining 49%.

Large buyouts which
require higher multiples of debt were the hardest hit and private
equity buyers were forced to stump up significantly higher amounts of
cash to fund acquisitions--the average equity contribution rose to 64%
in 2009, from 48%, said CMBOR.

However
there is evidence that confidence is returning to the buyout market as
the value of buyouts backed by private equity firms in the
fourth-quarter of 2009 rose 48% to GBP843 million, from GBP636 million
the previous quarter, it added.

Further, confidence is
also returning to public markets and a slew of initial public offerings
by private equity-owned companies are coming to market including
Blackstone Group's (BX) Travelport which earlier Tuesday confirmed
plans to float its shares on the London Stock Exchange in a transaction
valuing it at around $3 billion, London's largest IPO in nearly two
years.

Finally, Steven Davidoff of the NYT's Dealbook reports on the evolving IPO market, circa 2010. Read this article carefully and note the conclusion:

Ultimately,
while there are reasons for optimism, the numbers appear to show that
the market for initial offerings is in transition. It would behoove
market participants and regulators to take a hard look at market
structure again, including these important issues, through a lens other
than Sarbanes-Oxley.

I am very cautious on
private equity and other private market assets like real estate and
infrastructure. Given the macroeconomic uncertainty, I think pension
funds should think long and hard before committing capital to private
assets.

Ultimately, what matters most is whether or not we're
heading into a protracted inflationary cycle or deflationary
episode. If it's the latter, private markets are cooked.

Comments

[aus_punter]

A private equity fund (presumably for profit) buying a string of schools for children with special needs.......i mean.....wtf !?!?!?!? 

That is scraping the fucking barrel.  I thought that was a joke at first

[Anonymous]

Dont be an idiot, people participating in pensions and 401ks are going to be unable to afford the ponzi scheme known as Fraud Street. No more blind contributions from Main Street.

The only comeback is the slaughter of the US dollar and the bankers ad thugs that got us here.

[Chopshop]

forget the inflation / deflation argument ... there is only one thing that Pension Fund BoD's ought concern themselves with ~ fungibility.  period.

thus far ~ major fail across the board.

thanks for your posts, Leo, always enjoy your take on the pension space.