International Investments in Private Equity: Asset Allocation, Markets, and Industry Structure

329 Pages·2011·4.58 MB·English

by  Peter Cornelius

International Investments in Private Equity
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International Investments
in Private Equity
Asset Allocation, Markets, and Industry
Structure
Peter Cornelius

AMSTERDAM(cid:129)BOSTON(cid:129)HEIDELBERG(cid:129)LONDON(cid:129)NEWYORK(cid:129)OXFORD
PARIS(cid:129)SANDIEGO(cid:129)SANFRANCISCO(cid:129)SINGAPORE(cid:129)SYDNEY(cid:129)TOKYO
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Cornelius,Peter,1960-
Internationalinvestmentsinprivateequity:assetallocation,markets,andindustrystructure/
PeterCornelius.–1sted.
p.cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-12-375082-2
1. Privateequity.2. Investments,Foreign. I.Title.
HG4751.C752011
332.67’3–dc22
2010038319
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Contents
Foreword xi
Acknowledgements xiii
About the author xvii
List of abbreviations xix
1 Introduction 1
1.1 From a closed toan openmarket view 2
1.2 Private equityfundamentals 4
1.3 Global marketsand investmentflows 7
1.4 What’snext? 11
1.5 Strategicconversations with general partners 12
Part One Private Equity as an Asset Class 13
2 Organization, value creation,and performance 15
2.1 Formsof private equity 16
2.2 Capital demand, capital supply, andmarket organization 19
2.3 Terms and conditions 21
2.4 Value creationand returns 23
2.4.1 Buyouts 23
2.4.2 Venturecapital 31
2.4.3 Performance differences,persistence, andselection skills 34
2.5 Getting exposuretoprivate equity 37

2.6 Summary andconclusions 42
Appendix2.1:Private equityfundstructures around theworld 44
3 Globalbenchmarks 49
3.1 Benchmark characteristics 50
3.1.1 Benchmarks for matureprivate equitymarkets 50
3.1.2 Benchmarks for nontraditional private equity markets 58
3.2 Benchmark performance 59
3.2.1 Benchmarking returns inmature markets 59
3.2.2 Benchmarkingreturnsinnontraditionalprivateequitymarkets 65
3.3 Summary andconclusions 66
vi Contents
4 Privateequity indiversified investment portfolios 69
4.1 Returns,risk, and correlations 70
4.2 The stale price problem 73
4.3 Managing dynamic risk 77
4.4 Why do allocations toprivate equity vary so much? 79
4.5 Summary andconclusions 82
Appendix 4.1. Measuring market riskin private equity 83
5 Designing privateequity programs inopen markets 87
5.1 Bottom-up versus top-down planning 87
5.2 Diversification strategies ina closed economy 90
5.2.1 Market segments 90
5.2.2 Vintageyearsand market timing 92
5.2.3 Industries 94
5.3 Diversification in anopen economy 99
5.4 Determining the assetmix 102
5.5 Summary andconclusions 105
Part Two Markets, Investment Flows, and Due Diligence 107
6 Globalmarkets,regionalpenetration, and country risk 109
6.1 Global private equityand the size ofregionalmarkets 109
6.2 Why do penetration rates vary so much? 115
6.3 The quality of the businessenvironment and permissible markets 121
6.4 Assessingcountryrisk 127
6.4.1 Economic risk 128
6.4.2 Political risk 129
6.4.3 Governance risk 130
6.4.4 The risk heat map 131
6.5 Summary andconclusions 133
Appendix 6.1:Abriefgui de topublicly available sourcesthat may
help investorsassess the qualityof the businessenvironment 134
7 Privateequity funds and cross-border acquisitions 139
7.1 The internationalizationofprivate equityfund investments 141
7.1.1 Exportingthe USventurecapitalmodel 141
7.1.2 The internationalizationofbuyoutfunds 144
7.2 Measuring cross-border investmentflows inbuyouts 149
7.3 Comparing cross-border private equity fundinvestments
with mutual funds 155
7.4 Summary andconclusions 157
8 Cross-border fund commitments, due diligence,
and theallocationmatrix 159
8.1 Cross-border fund-raising:empirical evidence 160
Contents vii
8.2 Thegrowing importance ofemerging economies assuppliers
ofprivate equitycapital 164
8.3 Due diligence incross-border commitments 170
8.3.1 Generaldue diligence principles 170
8.3.2 Due diligence innontraditional marketsand real options 173
8.4 The allocationmatrix 177
8.5 Summary andconclusions 180
9 Regional integration: thecase ofEurope 183
9.1 Europeanfinancial integration 184
9.2 Howintegrated isEurope’s private equity market? 186
9.2.1 Fund-raising 187
9.2.2 Investing 191
9.2.3 Integrating central andeastern Europe 194
9.3 Why hasEurope’sprivate equity market notbecome
more integrated? 196
9.4 Summary andconclusions 199
10 Fund investments and currency movements 203
10.1 Exchange rate movements:empirical evidence 204
10.2 The impact ofexchange rate movements on fund
investmentsand benchmarking 209
10.3 Skills or (bad) luck? 214
10.4 Are exchangerate movements predictable? 215
10.5 Currencycrashesand early warning systems 219
10.6 Should limited partnershedge their exchangeraterisk? 221
10.7 Summary andconclusions 225
Part Three What’s Next? 227
11 What’snext? Private equity inthe era of deleveraging 229

11.1 Global deleveragingandthe future of leveraged finance 230
11.2 Ten trends shaping the future of private equity 238
11.2.1 Increasedequitycontributionsinleveragedbuyouts 238
11.2.2 Smallerdeals andsmaller funds 240
11.2.3 Greater emphasis on companystrategyand operational
improvements 241
11.2.4 GrowingshareofPIPEs andminority deals 241
11.2.5 Redefining GP/LP relationships 242
11.2.6 Agreaterrolefor coinvestmentsand direct investments 243
11.2.7 Emergent economiesina globalized private equity
market 244
11.2.8 Corporate social responsibility (CSR)inprivate equity
investments 245
viii Contents
11.2.9 Private equityfirms asthe newmerchantbanks 245
11.2.10 Tightening regulation 246
11.3 Summary andconclusions 247
Part Four Strategic Conversations with General Partners 249
12 Chasing deals globally:expansion strategies and risk
management ofleading privateequityfirms 251
12.1 US private equityfirms 253
12.1.1 The Blackstone Group 253
12.1.2 Hellman &Friedman 256
12.1.3 Kohlberg KravisRoberts &Co 260
12.1.4 Vestar Capital Partners 263
12.2 European private equityfirms 267
12.2.1 Actis 267
12.2.2 Apax Partners 271
12.3 Private equityfirms innontraditional markets 273
12.3.1 Abraaj Capital 273
References 279
Index 289
ForHeike andPaul