2013-09-17 Private Equity Focus 1H2013 · As in the past, this report is divided into three main...

Private Equity FocusPrivate Equity FocusFreeman & Co. LLC

Issue 8Mid-Year 2013 Edition

September 2013

New York

FIG PE Overview p. 2

Asset Management p. 3

Banks & Brokerage p. 4

Inside this Issue: Cautious OptimismMost private equity sector pundits (including us) were calling a “new normal” followingthe financial crisis – meaning prolonged modest deal activity and a lack of mega-dealscompared to the boom time years of 2003-2007. As we finish the third full year of post-crisis life, it still seems as though everyone was correct.

In the overall private equity market (all sectors), deal activity has been relatively flat

Financial Technology p. 5

Specialty Finance p. 6

Business Services & Insurance

p. 7

In the overall private equity market (all sectors), deal activity has been relatively flatsince 2010, with increases in certain areas (exits, recaps) offsetting decreases in others(new fundraising, large LBOs).

However, when comparing 2013 to the preceding three years, there are more signals ofpositive momentum that make us cautiously optimistic about private equity dealactivity. This report covers these trends regarding private equity overall, with a particularfocus on the financial services sector (“FIG”). We see the following dynamics currentlyshaping the market:

Exit Strategies p. 8

Credit Outlook p. 9

General PE Data p. 10

F & Co. Transactions p. 11

p g

1. Continued improvements in credit availability, creating an increasingly positive dealenvironment

2. Efforts to reduce the existing capital overhang, driving an increase in sponsor-to-sponsor transactions

3. Strong equity market performance, creating a favorable environment for PE exits,but not for new investments as valuations are relatively high

Financial Institutions Private Equity Transactions (1,2)

F & Co. Publications p. 12

Indices at August 31, 2013

4. Continued ups and downs in the financial services sector, with certain sub-sectorsmore favorable to PE investors than others.

B)

$30 3

$34.9

250

300 $40

DJIA 14,810

NASDAQ 3,590

S&P 500 1,633

FTSE 100 6 413 tal

Tra

nsa

ctio

n V

alu

e ($ # o

f Tran

sactio

ns

$30.3

$27.1

$9.9

154 160

109

100

150

200

250

$

$20

$30

FTSE 100 6,413

10-yr US T-Bond 2.75

USD per GBP 1.55

USD per Euro 1.321) All deal statistics in this report include closed transactions only (entry and exit transactions)

To

t

50

0

50

$-

$10

2010 2011 2012 1H 2013

Entry Exit Sponsor to Sponsor # of Transactions

2) All data reflects global financial services deal activity for 209 PE firms which invest in financial institutions. Freeman & Co. believes this data set is representative of total activity in financial institutions PE

Michael Kasper

Christopher Pedone, CFA

Jacob Kornreich

Thomas Bashwiner

Director

Associate

Analyst

Analyst

+ 1 (212) 830-6164

+ 1 (212) 830-6166

+ 1 (212) 830-6186

+ 1 (212) 830-6192

[email protected]

[email protected]

[email protected]

[email protected]

As in the past, this report is divided into three main sections:

• FIG PE Overview, including deal activity and entry/exit trends within private equity for financial institutions;

• Sub-Sector Focus, including trends in Asset Management, Banks & Brokerage, Business Services, FinancialTechnology Insurance and Specialty Finance; and

Mid Year 2013 Issue

FIG PE OverviewOverall deal value in private equity (across all sectors) was generally flat from 2010-2012, similar to deal activity for thefinancial services sector In FIG reported deal value has been between $30bn and $35bn per year and was just under

Technology, Insurance and Specialty Finance; and

• Current Topics, including topics important to PE investors in FIG such as the macro outlook, the general private equityenvironment, fundraising, credit and exit options.

Deal Value by Sub-Sector

financial services sector. In FIG, reported deal value has been between $30bn and $35bn per year, and was just under$10bn in 1H 2013. Due to some seasonality in deal flow and some delays in deal reporting, we expect full year 2013 tobe approximately on par with the recent past.

For example, there has already been a$4.4bn sponsor-to-sponsor buyout of aninsurance broker in August 2013,Hellman & Friedman’s purchase of Hub$34.9

$

$40

Hellman & Friedman s purchase of HubInternational from Apax Partners andMorgan Stanley’s PE arm. The deal isexpected to close in the second half of2013.

As we will discuss later in this report, exittransactions, and sponsor-to-sponsor

1H 2013Annualized

F&Co.2013

Estimate

$19.8

$25.0

$30.3

$3 9

$27.1

$9 9

$15

$20

$25

$30

$35

De

al

Va

lue

($

B)

Top Ten FIG PE Transactions LTM (all transactions are PE entries unless otherwise noted)

transactions specifically, are prevalent inour “top deals” lists, with exitsrepresenting eight of the top ten deals inthe last 12 months ending June 2013(see table below).

$9.9

$0

$5

$10

2010 2011 2012 2013

AM BBD BNSS FT INS SPEC

Rank Private Equity Firm Sector Portfolio CompanyCloseDate

Value$MM

1Buyer: Onex CapitalSeller: Goldman Sachs

Insurance USI Holdings Corp. 12/27/2012 $2,300

2 Cerberus (partial exit) Banks & Brokerage Aozora Bank 1/21/2013 $1,700

3 GTCR Specialty Finance Premium Credit Limited 11/1/2012 $1,450

Top Ten FIG PE Transactions LTM (all transactions are PE entries unless otherwise noted)

4 TPG Capital (partial exit) Business Services PT Bank Tabungan Pensiunan Nasional Tbk 5/10/2013 $1,300

5 JC Flowers + Co. Specialty Finance Cabot Credit Management 5/15/2013 $1,208

6 The Carlyle Group (exit) Business Services Open Solutions Inc. 1/14/2013 $1,015

7Buyer: Bain CapitalSellers: Oak Hill, General Atlantic

Business Services Genpact Ltd. 10/25/2012 $1,004

8Buyer: TPG CapitalSeller: GTCR

Financial Technology Eze Software Group 4/9/2013 $950

9Buyer: CVC Capital PartnersSeller: Stone Point Capital

Business Services Cunningham Lindsey Group Inc 12/10/2012 $930

10 The Carlyle Group (exit) Insurance China Pacific Life Insurance 1/8/2013 $796

Source: Freeman & Co.LTM: 12 Months Ending June 30, 2013 AM: Asset Management BBD: Banks & Broker-Dealers

BNSS: Business Services FT: Financial Technology INS: Insurance SPEC: Specialty Finance

Deal activity in the Asset Management sector in 1H 2013 outpaced 1H 2012 activity in terms of number of dealscompleted. In 1H 2013, seven Asset Management deals closed, compared to just three deals over the same time periodin 2012 The total value of deals which closed and where deal value was disclosed was only $128 million in 1H 2013

Private Equity Focus

Sector Review: Asset Management

in 2012. The total value of deals which closed and where deal value was disclosed, was only $128 million in 1H 2013,but both 2012 and 2011 experienced a similar trend with the bulk of deal value closing during the third and fourthquarters. Almost 90% of annual deal value closed during 2H 2011 and 2H 2012.

The largest asset management transaction in the past 12 months was Lee Equity Partners’ September 2012 acquisitionof Edelman Financial Group. Lee Equity Partners acquired a 54% stake in the firm from T. Rowe Price Associates andother investors for $263 million in cash. The second largest transaction was the November 2012 majority sale of K2Advisors to Franklin Templeton with consideration of $183 million. TA Associates held a minority stake in K2 Advisorssince 2007. Freeman & Co. acted as financial advisor to K2 Advisors in both transactions.

High operating margins and free cash flow have historically attracted private equity to the Asset Management sector.However, key person risk, volatility of earnings (particularly performance fees) and high beta to the stock market haveprevented the sector from becoming a mainstay of private equity funds. Unsurprisingly, pricing reflects these risks andtends to favor larger, diversified, management fee heavy managers with higher valuations.

Deal ActivityPublicly Traded Asset Management Firms:Enterprise Value / LTM EBITDA

25.0x 30$3,000

ise

Val

ue

to L

TM

EB

ITD

A

10.0x

15.0x

20.0x

$973

$2,371 $2,156

12

26

19

10

15

20

25

$1 000

$1,500

$2,000

$2,500

Num

ber o

f Transa

ctionTr

ans

act

ion

Valu

e (

$M

M)

Top Deals LTM (all transactions are PE entries unless otherwise noted)

En

terp

ri

0.0x

5.0x

$128

7

0

5

10

$0

$500

$1,000

2010 2011 2012 2013

ns

Tota

l T

Total Transaction Value ($MM) # of Transactions

Rank Private Equity Firm Portfolio Company Close Date Value $MM Transaction Type1 Lee Equity Partners The Edelman Financial Group 9/20/2012 $263 Acquisition2 TA Associates K2 Advisors, L.L.C. 11/1/2012 $183 Sale3 Warburg Pincus Capital First Limited 11/6/2012 $139 Acquisition4 LLR, FTV Capital Good Harbor Financial 4/17/2013 $75 Growth equity5 Vulcan Capital Silvercrest Asset Management Group 6/26/2013 $53 Sale: IPO6 Lovell Minnick ClariVest Asset Management, LLC 12/26/2012 not reported Sale7 Century Capital Management BroadStreet Capital Partners 2/11/2013 not reported Acquisition8 Rosemont Foundry Partners 2/1/2013 not reported Acquisition9 Lovell Minnick Kanaly Trust 12/14/2012 not reported Acquisition10 Rosemont Lateef Investment Management 12/1/2012 not reported Sale

Note: private equity deals tracked in the Asset Management sector include portfolio company investments only (excludes strategic investments in investment managers at the GP level)

Source: CapitalIQ, Freeman & Co.LTM: 12 Months Ending June 30, 2013

Private equity deal activity for 1H 2013 in the Banks & Brokerage sector exceeded all other financial institution sectors.Ten deals with a combined value over $4.0 billion closed during the first six months of 2013, including two large sales ofAsian banks by PE firms

Mid Year 2013 Issue

Sector Review: Banks & Brokerage

Asian banks by PE firms.

Cerberus’ January sale of the Japanese commercial lending institution, Aozora Bank, was the largest deal of 1H 2013.The follow-on public offering raised $1.7 billion. Aozora had seen a three-fold share price increase since the end of2008. The sale represents a growing trend in the sector’s private equity activity: many firms are capitalizing on improvingmarket conditions to exit bank deals. The Banks & Brokerage sector’s second largest transaction during the last 12months further emphasizes this theme. TPG Capital sold a portion of its stake in Indonesia’s seventh-largest bank, BankTabungan Pensiunan Nasional (BTPN), to Sumitomo Mitsui Banking Corp. TPG had acquired a 71.6% stake in BTPNduring 2008.

On the brokerage side, private equity firms are expected to remain a catalyst in broker-dealer consolidation. Improvedeconomic conditions and the possibility of rising interest rates support potential positive momentum in equity sales &trading and research businesses for the first time in several years. However, trading volumes remain depressed, withoutany clear sign of a turnaround, creating a significant headwind for trading-oriented B-Ds. Firms are also likely to seekexits or consolidation opportunities for fixed income broker-dealers acquired in the aftermath of the financial crisis. There-entrance of bulge bracket financial institutions into the fixed income market and the unexpected hesitancy of there-entrance of bulge bracket financial institutions into the fixed income market and the unexpected hesitancy of theUnited States government to expand the primary dealer list have complicated the original investment thesis in thesegment.

Broker-Dealer Financial Performance Deal Activity

60%45$8,000

20%

-10%

0%

10%

20%

30%

40%

50%

% C

ha

ng

e

$6,558 $6,670

$3,657 $4,008

39

33

15

20

25

30

35

40

$3,000

$4,000

$5,000

$6,000

$7,000

Num

ber o

f Transa

ctionTr

ans

act

ion

Valu

e (

$M

M)


-40%

-30%

-20%

Jan

-10

Mar

-10

May

-10

Jul-

10

Se

p-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Se

p-11

No

v-1

1

Jan

-12

Mar

-12

May

-12

Jul-

12

Se

p-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

AMEX BD Index DJIA S&P 500

14

10

0

5

10

15

$0

$1,000

$2,000

2010 2011 2012 2013

ns

Tota

l T

Transaction Value ($MM) Number of Transactions

Rank Private Equity Firm Portfolio Company Close Date Value $MM Transaction Type1 Cerberus Aozora Bank 1/21/2013 $1,700 Sale: Public Offering2 TPG Capital PT Bank Tabungan Pensiunan Nasional Tbk 5/10/2013 $1,300 Sale3 Buyers: Carlyle, Stone Point; Sellers: Lovell Minnick, Vestar Duff & Phelps, LLC 4/23/2013 $669 Acquisition4 Warburg Pincus Webster Financial Corp. 12/20/2012 $201 Sale: Public Offering5 General Atlantic XP Investimentos CCTVM S/A 2/26/2013 $200 Acquisition6 JC Flowers BTG Pactual S.A. 1/11/2013 $114 Sale: Public Offering7 Pine Brook Road, Castle Creek Community Trust Financial Corporation 12/17/2012 $85 Acquisition8 Lovell Minnick TriState Bank 8/21/2012 $50 Acquisition9 Foundation Capital, Norwest Equity Partners Motif Investing 2/28/2013 $25 Venture Capital10 Warburg Pincus Cortview Capital Securities 3/5/2013 not reported Sale

LTM: 12 Months Ending June 30, 2013 Source: Bloomberg, Freeman & Co.

Financial Technology is another sub-sector that has traditionally been attractive to private equity firms. Althoughtransaction volumes have fallen, total deal value remains strong, and interest is especially high in areas with stronggrowth expectations Steady evolution of technology used in both the capital markets and investment management


Sector Review: Financial Technology

growth expectations. Steady evolution of technology used in both the capital markets and investment managementcreates opportunities for private equity firms to deploy capital and harvest gains from boom-era investments.

The lack of volatility in equity markets has led to a slump in equity trading volumes since 2010. During that time, trading-related technologies leveled off in growth or shrunk and private equity firms have taken note, making few newinvestments in that niche. However, fixed income trading, traditionally an asset class that has been more voice-driventhan equities, has been an area of innovation. We expect new electronic trading technologies to be adopted once thecompetitive landscape thins and the network effect these new trading systems demand takes hold.

Investment technology for the buy-side, on the other hand, has seen very significant activity in 2013. The largest FinTechdeal over the past 12 months was the sale of Eze Software Group out of ConvergEx to TPG Capital for almost $1 billion.This transaction monetized the front end trading systems business of ConvergEx, a leader in electronic agency equityand options execution backed by GTCR and BNY Mellon. TPG also acquired a stake in Advent Software in 1H 2013, apublicly traded provider of technology services to the investment management industry – further evidence of the PEfirm’s bullish view on the sector. A combination of these two firms would create one of the most powerful, if not the mostpowerful technology provider to investment managerspowerful technology provider to investment managers.

US Exchanges Shares Volume (1) Deal Activity

(1) Electronic order book trades

30$4 500

ades

in E

quity

Sha

res

(MM

)

200

300

400

$2,418

$3,364

$4,088

16

24

2020

30

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

Num

ber o

f Transa

ctionTr

ans

act

ion

Valu

e (

$M

M)


Num

ber

of T

ra

0

100

Jan ‐09 Jul‐09 Jan ‐10 Jul‐10 Jan ‐11 Jul‐11 Jan ‐12 Jul‐12 Jan ‐13

NASDAQOMX NYSEEuronext (US)

$1,219

6

0

10

$0

$500

$1,000

$1,500

2010 2011 2012 2013

ns

Tota

l T

Total Transaction Value ($MM) # of Transactions

Rank Private Equity Firm Portfolio Company Close Date Value $MM Transaction Type1 Buyer: TPG Capital; Seller: GTCR Eze Software Group 4/9/2013 $950 Acquisition2 Technology Crossover Ventures FXall 8/17/2012 $680 Sale3 TPG Capital Advent Software, Inc. 5/10/2013 $190 Stake Acquisition4 Summit Partners, Technology Crossover Ventures Liquidnet, Inc. 7/3/2012 $100 Sale: Buyback5 Insight Venture Partners SR Labs 1/9/2013 $53 Venture Capital6 FTV Capital eBaoTech 1/29/2013 $36 Growth equity7 New Enterprise Associates Braintree Payment Solutions, LLC 10/17/2012 $35 Venture Capital7 Aquiline BI-SAM Technologies S.A. 7/10/2012 not reported Acquisition8 Madison Dearborn Partners EVO Payments International, LLC 1/7/2013 not reported Acquisition9 Sequoia Capital Merlin Securities, LLC 8/1/2012 not reported Sale

Source: World Federation of Exchanges, Freeman & Co.

LTM: 12 Months Ending June 30, 2013

Mid Year 2013 Issue

Sector Review: Specialty Finance

The Specialty Finance sub-sector had positive momentum through the first half of 2013 in terms of deal activity. Weexpect this trend to continue through year end, although we don’t expect 2011’s banner year to be eclipsed. Deal paceand total value are both trending roughly in line with 2012 These companies are taking advantage of a shiftingand total value are both trending roughly in line with 2012. These companies are taking advantage of a shiftingregulatory landscape and a more restrictive lending environment that has pushed some of the most active segments ofcommercial and consumer borrowers out of the traditional credit marketplace. Specialty Finance companies are fillingthe void, and are avenues for private equity firms to gain exposure to certain asset classes via these specializedoriginators, such as small ticket commercial credit or residential mortgages.

Private equity interest is spread across several of these sub-industries. Of the top five transactions within the last 12months, PE firms acquired an insurance premium finance company (Premium Credit Limited), a consumer debt acquirer(Cabot Credit Management) and an aircraft lessor (BBAM LLC). Other notable transactions included several consumer-focused finance companies, another consumer debt recovery provider and two consumer lenders – two of which arefocused on auto finance (First Investors Financial Services and White River Capital).

Mortgage origination and servicing has been relatively less active than some of the other sub-industries over the last 12months. Originations are forecasted to suffer over the next several months as refinance volumes trend downward whilewaiting for a pickup in purchase originations. Institutional buyers have been extremely active in the residential realestate market so the linkage between mortgage origination volume and overall volumes of single family purchases is

Securitization Proceeds Deal Activity

$ 09

$600 $11,321 70$12,000

estate market, so the linkage between mortgage origination volume and overall volumes of single family purchases isslightly weaker than it has been historically. Furthermore, higher capital requirements can drag on returns for any PEowner of a mortgage originator/servicer, which might scare off some of the firms who have generally positive views onthe overall market.

315

411 336

234 248 254 276

121

98

141

115

169 194 176

$437

$509$477

$349

$417$448 $452

$200

$400

Issu

anc

e (

$B

)

$3,647 29

32

20

30

40

50

60

$4,000

$6,000

$8,000

$10,000

Num

ber o

f Transa

ctions

al T

rans

act

ion

Valu

e (

$M

M)


$0

1H

20

10

2H

20

10

1H

20

11

2H

20

11

1H

20

12

2H

20

12

1H

20

13

MBS ABS

$2,270 $1,781

22

9

0

10

20

$0

$2,000

2010 2011 2012 2013

s

Tota

Total Transaction Value ($MM) Number of Transactions

Rank Private Equity Firm Portfolio Company Close Date Value $MM Transaction Type1 GTCR Premium Credit Limited 11/1/2012 $1,450 Acquisition2 JC Flowers Cabot Credit Management 5/15/2013 $1,208 Acquisition3 WL Ross American Home Mortgage Servicing, Inc. 12/27/2012 $750 Sale4 TPG Capital Shriram Transport Finance Co. Ltd. 2/21/2013 $305 Sale5 Onex Capital BBAM LLC 12/28/2012 $165 Acquisition6 Flexpoint Ford Jefferson Capital Systems, LLC 8/3/2012 $141 Acquisition7 Cerberus AerCap Aviation Solutions 3/26/2013 $120 Sale: Public Offering8 JAM Equity Partners RMS Reverse Mortgage Solutions 11/1/2012 $120 Sale9 Aquiline First Investors Financial Services Group 9/26/2012 $100 Acquisition10 Parthenon Capital White River Capital 2/14/2013 $78 Acquisition

Source: Thomson Reuters, Freeman & Co.LTM: 12 Months Ending June 30, 2013

$3,605

60

$8,000

$9,000

Entry vs. Exit Deals Deal Activity

Sector Review: Insurance


$4,377

$2,347

$4,030

$5,852

$427

2012

2011

2010

$6,456

$2,774

$6,525

15 2020

30

40

50

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Num

ber o

f Transa

ctions

Tota

l Tra

nsa

ctio

n Va

lue

($

MM

)

Rank Private Equity Firm Portfolio Company Close Date Value $MM Transaction Type1 Buyer: Onex Capital; Seller: Goldman Sachs USI Holdings Corp. 12/27/2012 $2,300 Acquisition2 Th C l l G Chi P ifi Lif I 1/8/2013 $796 S l P bli Off i

$140

$994

Exits/Sales

Entry Investments

2013

$1,135 10

11

0

10

$0

$1,000

$ ,

2010 2011 2012 2013



2 The Carlyle Group China Pacific Life Insurance 1/8/2013 $796 Sale: Public Offering3 Capital Z Partners Permanent General Companies, Inc. 12/31/2012 $239 Sale4 Aquiline Equity Insurance Group Limited 4/22/2013 $140 Acquisition5 Stone Point Axis Capital Holdings Ltd. 3/31/2013 $116 Sale: Buyback6 Buyer: Stone Point; Seller: JC Flowers EnStar Group 7/1/2012 $104 Stake Acquisition7 Warburg Pincus Primerica, Inc. 2/11/2013 $82 Sale: Buyback8 Buyer: Genstar; Seller: GCP Acrisure LLC 3/1/2013 not reported Acquisition9 Genstar Confie Seguros 11/9/2012 not reported Sale10 Lightyear Cooper Gay Swett & Crawford Ltd. 1/16/2013 not reported Sale

Sector Review: Business ServicesDeal Activity by Sub-Sector (LTM) Deal Activity

InformationServices

$371%

Insurance BPO $930

$11,618

$8,396 43

36

40

50

$8 000

$10,000

$12,000

Num($

MM

)

20%

Processing$3,75779%

$7,057

$1,662

36

14

7

0

10

20

30

$0

$2,000

$4,000

$6,000

$8,000

mbe

r of Tra

nsactio

ns

Tota

l Tra

nsa

ctio

n Va

lue

Rank Private Equity Firm Portfolio Company Close Date Value $MM Transaction Type1 Carlyle Group Open Solutions Inc. 1/14/2013 $1,015 Sale2 Buyer: Bain Capital; Sellers: Oak Hill, General Atlantic Genpact Ltd. 10/25/2012 $1,004 Acquisition3 Buyer: CVC Capital Partners; Seller: Stone Point Cunningham Lindsey Group Inc 12/10/2012 $930 Acquisition4 Summit Partners Ogone SA 3/26/2013 $484 Sale5 Great Hill Accelerated Payment Technologies Inc 10/2/2012 $413 Sale


0$02010 2011 2012 2013


5 Great Hill Accelerated Payment Technologies, Inc. 10/2/2012 $413 Sale6 FTV Capital, LLR Fleet One 10/4/2012 $369 Sale7 Apax Partners mFoundry, Inc. 3/14/2013 $120 Sale8 Susquehanna Growth Equity Credit Karma, Inc. 4/2/2013 $30 Venture Capital9 Bain Capital Partners Billtrust 11/14/2012 $25 Venture Capital10 Stone Point Infoglide Software Corporation 4/1/2013 $7 Sale

Source: Freeman & Co.LTM: 12 Months Ending June 30, 2013

PE firms have been hanging onto portfolio companies for better valuations, extending out fund lives that were started inthe fundraising boom of 2004-2008 and essentially kicking the can down the road with the goal of improving returns.There are still a significant number of boom-era portfolio companies on the books of funds but the exit market finally

Mid Year 2013 Issue

Exit Strategies

There are still a significant number of boom-era portfolio companies on the books of funds, but the exit market finallystarted to heat up in 2013.

In the financial services sector, that tide turned a year earlier where exit deal value surpassed total entry value in 2012.2012 was the biggest year for exits in terms of aggregate deal value since 2007. That trend has continued into 1H2013, with $7.8bn in exits compared to just $3.7bn of new investments (total entries plus exits do not equal total dealvalue due to investment returns and sponsor-to-sponsor transactions). But funds continue to hold a meaningful portionof their book at values below positive return levels (and especially below carry-eligible levels) due to the inflatedvaluations of boom-era buyouts. We have seen the sales of companies, bought immediately following the crisis atdepressed valuations, pick up recently. The motivations for selling and for deploying dry powder in funds are becomingstronger, as evidenced by the significant increase in sponsor-to-sponsor transactions.

Public trading multiples often provide the private equity markets with the most concrete benchmarks for deal-making.With strong recent equity markets performance over the past year, exits for PE firms are now more palatable.

Exits by Year (1) Entry vs. Exit

75

saction Value ($MM)

$17,851

$10,170

$16,226

$21,330

$23,801

22

01

12

01

0

37

63

57

25 30

45

60

# o

f Tra

nsa

ctio

ns

Top Exits Since 2009

Total Tran

$7,837

$20,853

$3,715

$16,226

1H

20

13

20

12

Entry Investments

Exits/Sales

0

15

2010 2011 2012 1H 2013

Capital Markets Financial Strategic

Rank Private Equity Firm Portfolio Company Buyer Close Date Value $MM Exit Type(1)

1 Cerberus TD Auto Finance LLC TD Bank US Holding Company 4/1/2011 $6,300 Strategic2 H&F (partial), General Atlantic Emdeon Blackstone 11/2/2011 $3,429 Financial3 Madison Dearborn TransUnion LLC Advent, Goldman Sachs 4/30/2012 $3,310 Financial4 Goldman Sachs Merchant Banking USI Holdings Corp. Onex Capital 12/27/2012 $2,300 Financial

5CDP Capital, GCP Capital, H&F, New Mountain, Stone Point, Vestar

Paris Re Holdings Ltd. PartnerRe 12/7/2009 $1,975 Strategic

6 General Atlantic, Spectrum Equity, TCV RiskMetrics Group, Inc MSCI, Inc. 6/1/2010 $1,845 Strategic7 JC Flowers & Co. BTG Pactual S.A. IPO 4/24/2012 $1,723 Capital Markets$ , p8 Cerberus Capital Management Aozora Bank Follow-On Offering 1/21/2013 $1,700 Capital Markets9 BAML, Stone Point, Diamond Castle Alterra Max Capital Group 5/12/2010 $1,494 Financial

10 H&F, JMI Equity Vertafore, Inc. TPG Capital 7/29/2010 $1,400 Financial

(1) Capital Markets: sale or partial sale of stake via equity capital markets (IPO or follow-on)

Financial: sale or partial sale to another private equity firm

Strategic: sale or partial sale to a strategic buyer

Source: Thomson Reuters, Freeman & Co.

The continued improvement in global debt markets is a big positive factor for PE deal activity going forward. As PE firmsexpect 20%+ returns, reasonable levels of leverage are required to meet expectations. That is especially true for newinvestments which are being driven to more expensive valuation levels by the appreciating public equity markets


Credit Environment

investments, which are being driven to more expensive valuation levels by the appreciating public equity markets.

Leverage multiples are back up to 2007 levels, as debt remains historically cheap. Since the Fed signaled in June thatthe end to these inexpensive times is at least potentially in sight, we expect further increases in PE-related financing orrefinancing in the near to medium-term.

Interestingly, bank lending is still relatively muted, a stark contrast to the boom-era years of 2003-2007, as bankscontinue to right size their lending books to comply with the more conservative parameters established by both theregulators and themselves.

Alternative debt providers, such as dedicatedmezzanine funds, high yield bonds, collateralizedloan obligations (CLOs) and bank loan funds areproviding significant capacity to the market. Thesecondary market for loans has been particularlystrong:

Credit Spreads: US Govt. 10-Yr vs. IG Corp (1)

5.5

6.0

strong:

• After falling close to zero in 2009, CLO issuancein particular has grown rapidly, with just $10bn inissuance globally in 2011, then $50bn in 2012and an estimate of $80bn in 2013, according toBain & Company

1 0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0S

pre

ad

%

• Loan mutual funds & ETFs have seen steadygrowth in assets under management, with fundinflows pushing total assets under managementover $100bn in early 2013, according toThomson Reuters

Global Debt Issuance Global Debt Issuance (Monthly Breakdown)

(1) US Generic 10 Year Index yield versus BLP Active Investment Grade US Corporate Bond Index YTM

0.0

0.5

1.0

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Global Debt Issuance Global Debt Issuance (Monthly Breakdown)

$424

$380$349

$377

$438 $426

$513

$431$403

$400

$500

$600

)

$4,057

$4,922

$5,745

$4,422

$3,962$4,000

$5,000

$6,000

$188

$324

$286

$333

$288$277

$349

$297$271

$319

$0

$100

$200

$300

2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3

Issu

anc

e (

$B

)

$2,327

$3,131$3,413

$2,304

$3,335

$2,363

$0

$1,000

$2,000

$3,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Issu

anc

e (

$B

)

Source: Thomson Reuters, Freeman & Co.Date: Closing date of transaction LTM: 12 Months Ending June 30, 2013

Jan-

1

Fe

b-1

Ma

r-1

Ap

r-1

Ma

y-1

Jun-

1

Jul-1

Au

g-1

Se

p-1

Oct

-1

No

v-1

De

c-1

Jan-

1

Fe

b-1

Ma

r-1

Ap

r-1

Ma

y-1

Jun-

1

Syndicated Loans HY Bonds CDOs

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20131H

Syndicated Loans HY Bonds CDOs

FundraisingInvestment Banking Fees Paid on PE Deals

1H 2013

Mid Year 2013 Issue

General Private Equity Statistics

$3 054

$2,960

$3,628$4,479

$7,660

$9,566 $9,451

$5,179$6,000

$8,000

$10,000

$12,000

ees

Pai

d (

$MM

)

$534

$460

$365

$264$300

$400

$500

$600

sed

($

B)

0 3Annualized

Portfolio Company Activity by Deal TypePE Buyouts by Deal Size (1)

$931 $971 $694 $324

$1,429 $1,913$1,701

$889

$2,340

$3,054

$2,576

$1,508

$2,458

$0

$2,000

$4,000

2010 2011 2012 1H 2013

Fe

Buyouts Financing Exits Portfolio Company Activity

$172 $181

$78

$0

$100

$200

2007 2008 2009 2010 2011 2012 1H 2013

Fu

nd

s R

ai

PE Early/Seed Mezz/Distressed FoF Secondary

p y y y ypy y

498

433 421

400

500

600

acti

on

s

530 540

378 400

500

600

700

acti

on

s

8441 29 15

414

392 392

128

143

0

100

200

300

2010 2011 2012 1H 2013

# o

f Tr

ansa

Di tit A i iti

195

283

239

45

0

100

200

300

2007 2008 2009 2010 2011 2012 1H 2013

# o

f Tr

ansa

$100 $100 $250 $250 $500 $500 $1b $1b

80%

90%

100%

g F

ee

s

20.9%

20.0%

22.5%

FIG Buyouts as % of Total Buyouts FIG Investment Banking Fees as % of Total

(1)Includes deals with disclosed deal value only

Spike due to bank rescues

Divestitures Acquisitions<$100mm $100mm-$250mm $250mm-$500mm $500mm-$1bn $1bn+

20%

30%

40%

50%

60%

70%

80%

of T

ota

l Glo

ba

l In

vest

me

nt B

an

kin

g

8.9%

14.2%

7.2%

4.7%

7.2%6.6%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

G %

of

Tota

l B

uyo

ut

Dea

l V

alu

e

0%

10%

2007 2008 2009 2010 2011 2012 1H 2013

%

FIG General Industrial Tech/Media/Telecom All other industries0.0%

2.5%

2007 2008 2009 2010 2011 2012 1H 2013

FIG

LTM: 12 Months Ending June 30, 2013 Source: Thomson Reuters, Freeman & Co.

$3.3 billion AUM


$3.0 billion AUM $9.3 billion AUM(1) (1)

Select Freeman & Co. Private Equity Activity

c

a wholly owned subsidiary of

Fi i l d i t th Alt i

has been acquired by

Financial advisor to PlanMember

entered a strategic alliance withhas acquired a minority interest in

Exclusive financial advisor to Eagle

a subsidiary of

Financial advisor to K2 Advisors

has sold a majority interest to

has raised $225 000 000 from

$400 million investment

Freeman & Co. Securities LLC

Financial advisor to the Altegris management team


February 2013


Exclusive financial advisor to Eagle

December 2012

Financial advisor to K2 Advisors

November 2012



The Institutional Sales & Trading Business of

(2) (2)

has raised $225,000,000 from


Financial advisor to CRT Capital Group, LLC

August 2010


Financial advisor to Security Benefit

July 2010

led investor group has acquiredq y


Financial advisor to Peachtree Settlement Funding

July 2011


Financial advisor to Braver Stern Securities LLC

June 2011


c

has been recapitalized and received a growth equity investment from

has received a $32,000,000 f

$32,000,000

NYSE Alternext: HNB

$50 Millioninvestment in

byhas sold a minority interest to

$5 5 billi AUM


Financial advisor to ESP Technologies, LLC

May 2007


investment from an

Co‐manager for Herald National Bank

March 2010

Investor Group


MatlinPatterson Global Opportunities Partners II, L.P.

Fairness Opinion for Broadpoint’sBoard of Directors

2008


Financial advisor to Leerink Swann & Company

July 2007

$1 7 billi AUM$5.5 billion AUM

has sold a minority interest to

cto form

have merged

$1.7 billion AUM

and

its holding company

have been acquired by

c

has acquired

(1)

Financial advisor to K2 Advisors LLC

April 2007

Freeman & Co. Securities LLC Freeman & Co. Securities LLC

Financial advisor to GTCR

October 2006


Financial advisor to Ursa Capital

September 2006


Financial advisor to Citigroup Inc.

August 2004

(1) Private Equity exit

(2) Private Equity-backed transaction

Private Equity Focus• Uncertainty Abounds (September 2012)• Another New Normal (September 2011)

Recent Publications by Freeman & Co.

Another New Normal (September 2011)• Show Me the Money (September 2010)• Waiting for the Turn (September 2009)• Where Have You Gone LBO? (September 2008)• The Stampede Rumbles On (September 2007)

Insurance• Mixed Messaging on Market Momentum (January 2013)• Harder Markets Ahead (June 2012)• Where Do We Go From Here (January 2012)• The Marriage of the Decade (July 2011)• Damned if You Don’t (January 2011)

Specialty Finance & AssetsSpecialty Finance & Assets• Rebirth of the Mortgage Industry (March 2013)• There are Still Riches in Niches (September 2012)• The Spotlight is on Shadow Banking (May 2012)• Low Interest Rates – Issues and Opportunities (February 2012)

Asset Management ReportsChanges Ahead (May 2013)• Changes Ahead (May 2013)

• The Roller Ride Coaster Continues (August 2012)• The Year that Wasn’t (December 2011)• Slowly but Surely Coming Back… (January 2011)• Slogging through the Mud (September 2010)• Putting the Pieces Back Together (April 2010)

Financial Technology Focus• Steady as she Goes (October 2012)• Who is Buying (or Not Buying) What… (December 2011)• Convergence: Servicing the Trader, PM and Back Office (April 2011)• Out of the Frying Pan and into Regulatory Reform (September 2010)

S iti I d t R tSecurities Industry Reports• Consolidation as a Recipe for Growth (June 2013)• Light Through the Trees (June 2012)• Post-Crisis: A Rapidly Changing Environment (October 2011)• Filling the Void in the Middle Market (January 2011)• Securities at Major Inflection Point (March 2009)

Freeman & Co.Freeman & Co. LLCLLC“Independent Financial Services Advice”“Independent Financial Services Advice”

Freeman & Co.Freeman & Co. LLCLLC“Independent Financial Services Advice”“Independent Financial Services Advice”

645 Fifth Avenue 9th Floor

New York, NY 10022

Tel: +1 212 830 6161

Fax: +1 212 265 4998

2013-09-17 Private Equity Focus 1H2013 · As in the past, this report is divided into three main...

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Transcript of 2013-09-17 Private Equity Focus 1H2013 · As in the past, this report is divided into three main...