Dow Jones Pea Outlook2013

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Dow Jones Private Equity Analyst

Dow Jones Private Equity News
The 2013 Global Outlook & Review
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Dow Jones Private Equity Analyst/Private Equity News
Contents
To the Reader:
Fundraising
Limited Partners to Shuffle the GP Relationship
Deck in 2013 as Competition Stays Fierce
From the Desk of Laura Kreutzer

4
Deals
U.S. Buyout Market: Liquidity Abounds,
but So Does Uncertainty
12
Europe Difficult but Stable for 2013 Deals
16
Regulation
U.S. Lawmakers Continue to Fine-Tune Rules
in 2013 as PE Firms Brace for Impact
20
European Buyout Firms Await

Tough 2013 as Regulation Bites
22
Restructuring/Distressed
For Distressed Investors,
Only Hard Work Will Pay
24
Secondaries Market
Secondary Buyers Hope to
Pump Up the Volume in 2013
27
Venture Capital
Back to Business? Enterprise May Displace
Consumers as Ventures Darlings in 2013
32
Sponsored Articles
2013: More Market Malaise
or a Change in Momentum?
36
By Brandon Farley of BMC Group
Venture Capital 2013 Outlook:

Three Factors That Make Us Optimistic
By David York and Lisa Edgar of
Top Tier Capital Partners
Private Equity Analyst

In some ways, the North American private equity industry in
2013 reminds me of the ancient Japanese sport of Sumo
wrestling (albeit in three-piece suits). In Sumo, wrestlers are
ranked by their skill and the wins they stack up in the ring, and,
with each tournament cycle, those rankings can shift. However,
despite the vast number of wrestlers, few if any reach the level of
Yokozuna, or grand champion, and a smaller, more nimble
wrestler can skillfully knock a much bigger one out of the ring.
In 2013, the private equity industry has already entered its own
tournament cycle as more firms, including some massive ones,
enter the fundraising ring. This time around, skill and
performance are more critical than ever, with firms battling for a
slice of a larger yet still limited investor pie. Some firms will
emerge victorious, but clearly others will fall in the rankings as
they raise smaller funds or, in some cases, no funds at all.
On the deal front, with credit beginning to flow again, U.S. private
equity professionals feel confident the industry will once again see
more multibillion-dollar buyout deals. However, at the close of
2012, the specter of a fiscal cliff, a stricter regulatory environment
and concern over the future of the economy hovered over the
industry. As the battle both for commitments and deals unfold, we
hope this supplement will provide the same in-depth coverage and
quality analysis that readers have relied on for the past 20 years.
From the Desk Of Paul Hodkinson

Private Equity News
37
The private equity industry should be getting used to this by now.

Economic uncertainty hurting deal flow, fundraising difficulties
and regulatory threats have been the themes of recent years and
there is little to suggest this will change in 2013.
Emerging Markets
Asian Private Equity to Creep
Cautiously Into 2013
38
Emerging Markets Investors

Picks Go Beyond BRICs
40
2012: The Year in Private Equity
43
Rising Stars
44
Some are referring to this period as the new normal, but in

reality, the industry is not old enough to have ever had a normal
period before its growth from the mid-90s to the peak of the
market in 2007 was rapid, rather than consistent. What firms are
experiencing now is probably the steadiest period in its history,
even if it is in the middle of uncertainty.
Dow Jones & Company is a News Corporation Company. Copying and

redistribution prohibited without permission of the publisher. This
publication is designed to provide factual information with respect to the
subject matter covered but its accuracy cannot be guaranteed. Dow Jones
is not a registered investment adviser, and under no circumstances shall
any of the information provided herein be construed as a buy or sell
recommendation or investment advice of any kind.
But there is little doubt that there is a more general acceptance

of this being the new reality now. A few years ago, it would have
been unthinkable to suggest that in the coming year there would
probably be a few firms that collapse, a threat of major
regulatory changes, various top firms struggling to raise capital
and very little visibility on whether deal flow will rise or fall over
the coming 12 months.
Copyright 2013 Dow Jones & Company, Inc. All rights reserved.
The Dow Jones Private Equity Analyst/Private Equity News
2013 Global Outlook & Review was published in January 2013.
Photo Credits
cover: iStockphoto.com/Rob Friedman; p4-5: iStockphoto.com/Kelly
Hall; p8: iStockphoto.com/Picsfive; p12: iStockphoto.com/Rebble;
p16: iStockphoto.com/Remus Eserblom ; p20: iStockphoto.com/
DrAbbate; p22: iStockphoto.com/John Carnemolla; p24: iStockphoto.
com/emyerson; p27: iStockphoto.com/Aliaksandr Niavolin; p32:
iStockphoto.com/Dennis Oblander; p38: iStockphoto.com/Sergey
Katsapin; p40: iStockphoto.com/carlos lozano; p43: iStockphoto.
com/John Cowie; p45: iStockphoto.com/Gavin Haywood
Many of these problems are most obvious in the euro zone, but
they are also present across much of the rest of the world,
making for what is essentially a more competitive landscape for
sponsors across the globe.
The analysis that follows aims to provide some clarity through

what is becoming fairly predictable uncertainty.
Sponsored by

Limited Partners to Shuffle the GP Relationship

Deck in 2013 as Competition Stays Fierce
By Laura Kreutzer and Paul Hodkinson
firms faced a crowded
fundraising year in
2012, but as 2013 unfolds, the marketing environment
promises to feel especially cramped with additional firms
entering the fundraising fray.
Its like watching an approach path to an airport, said
Andrea Auerbach, head of private investment research at
consulting firm Cambridge Associates. One plane after
another, theyre all coming in to land.
In North America, a modest but steady economic recovery
and favorable credit markets have allowed general
partners to return healthy amounts of capital back to their
investors over the past 18 months, driving a modest growth
in fundraising in 2012. Industry participants, including
limited partners and general partners, predict that
fundraising levels will hold steady or increase slightly in
2013, partly due to the return of large funds to the market.
But for some firms, it may not feel like happier times. The
sheer number of firms returning to market is leading to
lower targets, longer fundraising periods and, in some
cases, firms leaving empty-handed. At the same time,
investors are making tough choices, jettisoning some
relationships even as they look to add new ones to fill
desired niches in their portfolios.
In Europe, meanwhile, the fundraising picture looks a bit
bleaker as concerns linger over regulation and the continued
fallout from the regions sovereign debt crisis. European
private equity firms also face the same intense competition for
capital as their North American counterparts.
There are a handful of firms that will get their funds
raised, but there will be a bigger handful of people that will
fail to raise any money, said Brian Murphy, managing
director at Portfolio Advisors. Then you have an even
bigger group that will raise a smaller amount than last
time, and it will take them two years to get it raised.
LPs Get Back in the Game

As 2013 unfolds, the opportunities for GPs to form new
relationships, although still challenging, are slowly but
steadily improving.
Over the past two years, LPs shifted their attention from
managing their own liquidity constraints and portfolio
concentration issues to making new commitments. Those
Sponsored by
efforts promise to continue in 2013 and translate into new

capital for commitments, barring any macroeconomic
shock that sends the economy back into a recession.
In a recent survey of 131 LPs conducted by Coller Capital,
roughly one-third expected to increase their commitment
pace over the next 12 months, albeit modestly. More than
half of those same LPs planned to commit roughly the
same amount as last year.
We have gone from a closed market to at least a market
where most LP participants are back in the market, have
Quotes of the Year
Limited partners dont want to hear about

the promise. They want to see the cash.
Russell Steenberg, managing director,
BlackRock Private Equity Partners (July)

some capital and are making investments, said Alan

Pardee, managing partner at placement agent Mercury
Capital Advisors. LPs are still culling the number of
managers that they want to have in their portfolio, but new
relationships are still certainly possible and that comes from
having a bit more capital than they did a few years ago.
For example, in 2012, State Universities Retirement System
of Illinois began making its first private equity commitments
since the financial collapse of late 2008, budgeting $300
million for the year. The pension system has set aside
another $100 million for new commitments in 2013 and
$250 million for 2014, according to minutes from its March
2012 board meeting.
Even as they deploy more capital into the asset class,
however, LPs continue to cull some relationships from their
portfolios. According to the Coller Capital survey, 47% of LPs
planned to reduce the number of GP relationships in their
portfolios over the next two to three years, with roughly 18%
of European LPs in the survey planning to do so.
Quotes of the Year
Now that the credit bubble is gone,

you have to create value differently [and]
Antoine Dran, founder and chairman, Triago (July)
Some LPs had certain GP relationships for some time and

maybe older funds delivered above expectations, but more
recent funds have fallen short, Ms. Auerbach said.
Theyre saying youre Mr. Right Now but not Mr. Right,
and its time for us to part ways.
The shuffle of GP relationships has emerged, in part, out of
heightened due diligence by LPs, a trend that is only
expected to intensify in the coming years. Coller Capitals
survey found that nearly two-thirds of investors have
increased the length of time spent on due diligence since
the financial crisis, including 18% that have increased that
time significantly.
Geoffrey Rehnert, co-chief executive of Audax Group,
said the level of due diligence the firm received from
investors when marketing its fourth midmarket fund was
more intense than what it experienced with almost all of
its prior buyout funds. Audax wrapped up Audax Private
Equity Fund IV LP at the funds hard cap in December.
[Investors] have come to recognize that just looking at
track record is a bit like driving using only the rearview
mirror, Mr. Rehnert said. The fact that you made a lot of
money eight or 10 years ago is far less relevant than more
recent deal performance, as well as sourcing and operating
capabilities, he said.
However, as investors shed some older relationships from
their portfolios, its opened up limited opportunities for
newer groups, primarily spinouts of seasoned professionals
from well-established firms.
Some LPs are saying I want to go on the ride again. I
want to be able to back this new platform over multiple
funds, said Ms. Auerbach. Were doing a lot more work
on first-time funds.
In 2012, Siris Capital, a private equity firm that spun out of
hedge firm SAC Capital Advisors, raised $650 million for its
first institutional fund, although it took more than a year of
marketing. At press time, Alvarez & Marsal had secured a
commitment of up to $100 million toward a $500 million
target for its first private equity fund raised from outside
investors, after years of investing in operational
turnarounds off of the firms balance sheet.
Mr. Pardee of Mercury Capital added that, although
investors are more willing to consider a first-time fund than
they were two or three years ago, the bar for new firms
remains especially high.
Theres a willingness to look at a first-time fund, but it
better feel like a third-time fund in terms of what that team
has been doing, said Mr. Pardee. It is often general
partners that have been working together for a while,
[that] have a strong realized track record and have
demonstrated an ability to weather the downturn with
strong performing companies.
Sponsored by

Quotes of the Year
There is higher demand [for deals

from lenders] than supply. There are
too many mice but not enough cheese.
Robert Scelza, managing director,
KeyBanc Capital Markets (April)
In Their Own Words
North American LBO/

Corporate Finance
David Berchenbriter, partner, BerchWood Partners
Looking back, how would you characterize
2012? Despite a challenging environment in
2012, we continued to see quality managers
coming to the market with differentiated offerings
particularly [those] focused on emerging
markets such as Colombia, as well as sectors such
as health care, real assets and credit-type strategies. The industry
remains vibrant and attractive as ever!
What is the most important issue that the private equity
industry faces in 2013? The most important issue facing the
industry is the buildup in net asset value on the books of private
equity firms. To maintain a healthy cycling of liquidity between
GPs and LPs, it is critical that the speed for which NAV is
converted to cash distributions picks up.
What is your New Years wish for the industry in 2013? My
New Years wish for the industry is that it gains the respect of
politicians and regulators for the critical role it plays in injecting
dynamism into the economy creating more productive
businesses and generating healthy returns.
Jeff Eaton, partner, Eaton Partners
2012? In the same way the broader economy is
improving, but at a slower pace than we would
all like, the fundraising market in 2012 was better
than in recent years but still has a ways to go
before being characterized as healthy.
industry faces in 2013? Regulation and taxation are the biggest
issues facing the alternatives industry in 2013. Uncertainty behind
tax rates that GPs, LPs and portfolio companies will be subject to
will continue to complicate the dealmaking landscape. Any
certainty thats achieved, even if it is not the desired outcome,
may be seen as a positive in the coming year.
What is your New Years wish for the industry in 2013?
Further improvement in the fundraising landscape, with LPs
seeing enough certainty in the marketplace to have confidence
making additional fund commitments.
If you had to predict one headline involving the private
equity industry in 2013, what would it be? Unfortunately, the
headlines in the mainstream media concerning the private
equity industry in 2013 are likely to center around the tax rates
paid (or not paid) by the industrys successful fund managers.
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Clash of the Buyout Titans:

Mega Versus Midmarket
In the U.S. buyout market, small and midmarket firms will
have to fight even harder for investor attention amid the
crush of megafirms that will be in marketing mode in 2013.
Apollo Global Management, Bain Capital, Carlyle Group,
First Reserve Corp., Kohlberg Kravis Roberts & Co.,
Providence Equity Partners, Thomas H. Lee Capital
Partners, TPG Capital and Warburg Pincus all have either
been marketing large new funds or expect to begin
marketing them in the next 12 months.
Although Ms. Auerbach of Cambridge predicted that the
average amount of capital many megafirms will raise for their
next funds stands to be substantially lower than the amounts
they raised previously, their sheer numbers may crowd out
some of the smaller and midsize buyout firms.
The investor relations teams alone at some of these mega
firms are two or three times the size of the entire staff at
some lower middle-market firms, said Ms. Auerbach.
Funds with targets of more than $5 billion accounted for
nearly one-third of total 2012 fundraising for corporate
finance funds through Dec. 10, according to LP Source, a
database owned by Dow Jones & Co., also the publisher of
this newsletter.
That said, plenty of investors say they continue to favor the
midmarket. Probitas Partners investor survey found that
U.S. midmarket buyout funds, which the firm defines as
funds ranging from $500 million to $2.5 billion in size,
remain the most popular strategy among many investors,
with growth capital funds and small buyout funds tied for
second place.
Within the midmarket, investors continue to gravitate to
firms that can differentiate themselves, often through
specialized investment strategies. LPs are particularly
focused on midmarket firms that have a heavy emphasis
on operational expertise, with 58% of investors in the
Probitas survey indicating it as a favored strategy, followed
closely by funds focused on buy-and-build strategies (40%)
and industry-focused funds (30%).
People are looking for something thats original and
something thats unique, said Brian Gallagher, co-founder
of Twin Bridge Capital Partners. If youre a generalist, your
deals have to have a certain character. Youd better be
looking at buy and builds or special situations, something
different that makes you stand out.
Credit strategies, which enjoyed popularity in 2012, are also
likely to continue to attract investor attention in 2013,
particularly in the midmarket, as investors try to squeeze
greater yield out of their fixed-income portfolios. At year end,
a number of firms were touting credit funds focused on the

midmarket, including Audax Group, Chatham Capital,

Garrison Investment Management and Haymarket Financial.
However, a nascent resurgence in popularity of collateralized
loan funds provides alternative options for borrowers, making
the space less attractive. CLO issuance hit $51.4 billion
through early December 2012, according to the Royal Bank
of Scotland Group, which expects 2013 CLO issuance to hit
$60 billion to $65 billion. Carlyle Group alone raised some
$2.26 billion in 2012 across four new CLOs.
GPs Proceed With Caution in Europe

Although North American GPs may be cautiously
optimistic about fundraising prospects in 2013, their
European counterparts appear more anxious about what
will unfold over the coming year.
Mounir Guen, founder and chief executive of placement
agent MVision Private Equity Advisers, said fundamental
issues affecting the wider European market, which are driven
by a dearth of bank lending as well as political and economic
uncertainty, would take three to five years to work through.
The amount of firms unable to raise capital is going to build
in number and at some point they are going to have to find
ways to finance themselves, said Mr. Guen. Historically,
firms in Europe were supported by local investors, but those
investors are now looking to build global portfolios and have
reduced their local support, so a gap remains.
He added that the incoming regulation in the form of the
Alternative Investment Fund Managers Directive, which
will start being implemented in the summer, could also
complicate fundraising and that the theme for the year for
Sponsored by
fundraising would be to proceed with caution. In

addition, the AIFM Directive rules are expected to make it
more difficult for firms to market their funds in foreign
countries. As a result of all these factors, Mr. Guen and
others dont expect an improvement in 2013 from what
many felt was a poor 2012 fundraising market.
Fundraising in Europe reached $64 billion across 111 funds
in 2012 to the end of November, according to data
provider Preqin. By value, this was roughly on a par with
2011, when $67 billion was raised by 200 funds, and 2010,
when $60.3 billion was raised by 199 funds. But the 2012
figures are about 60% down on the value of funds raised in
the boom years of 2006 to 2008 and about 70% down in
the number of funds. They are also significantly down in
the number of fundraisings.
Overall, the European private equity industry appears to
be settling into a new fundraising reality that is far more
muted than it was several years ago. According to
separate data from Dow Jones, the value of funds raised
in Europe in the third quarter of 2012 suffered its steepest
fall for three and a half years. A total of $8.9 billion was
raised by buyout, venture, mezzanine, secondaries and
fund-of-funds vehicles in the three months, marking a
42% fall on the $15.4 billion raised in the second quarter.
James Moore, global co-head of the private funds group at
Swiss bank UBS AG, said he didnt expect an increase in
fundraising in 2013.
Overall, the fundraising market has now settled into what
I think will be its run rate for the next few years, he said.
The market has found its bottom and will bump along in

its current state until something fundamentally changes

with the economy.
Some firms raised funds successfully in 2012. These include
BC Partners, which raised 6.5 billion last February, and
Advent International, which raised Europes largest fund
since late 2008 by securing 8.5 billion from investors. In
addition, European buyout firm Triton Partners is set to
hold a first close of around 1.7 billion on its 2.5 billion
fundraising in the coming months, according to investors,
having returned to market last April.
However, most firms have had a harder time and many are in
the process of racing to hit their targets. Apax Partners, which
hit a 4.3 billion close last March, has generated another 2
billion of investor commitments, although it has yet to
formalize these with a close, according to one investor. It has
until March this year to reach its 9 billion target.
Large-cap peer Cinven also faces a race against time to hit
its 5 billion target, according to three investors. The firm
has currently collected about 4 billion and is due to hold
its final close in March. In November, European buyout
firm Permira stepped up its attempt to reach a first close for
its 6.5 billion fund, by giving investors until February to
commit, according to three investors. Permira started
raising the fund back in September 2011.
Meanwhile, Nordic Capital cut its fund size in October. The
Sweden-based firm had been hoping to raise between 4
billion and 4.5 billion but will now aim to raise 3 billion,
with an upper limit of 3.5 billion.
At the same time, various well-regarded firms are returning
to the fundraising market and look set to provide
competition to those already on the road.
CVC Capital Partners is expected to start raising a fund of
about 10.75 billion imminently, while Charterhouse Capital
Partners is also expected to return later in the year, although
it remains unclear what size fund the firm will seek.
Other firms that have spent most of their existing funds and
are due to return to the process of raising capital include PAI
Partners, which is expected to launch a formal 3 billion
fundraising shortly, and Carlyle Group in Europe, which has a
5.3 billion fund raised in 2007 that is around the 75%
invested stage at which firms typically start to raise new
vehicles.
The increased competition will only add to what is already
the most competitive fundraising market the industry has
ever known. There are currently 1,973 of all types of
private equity funds targeting $805 billion globally,
according to Preqin, with about a quarter of these being
buyout funds. By number of funds this is a record high, but
by value of funds it was higher in August 2008, just before
the collapse of Lehman Brothers Holdings Inc., when 1,597
funds sought $944 billion in capital.
In Their Own Words
European LBO/
Corporate Finance
George Anson, managing director,
HarbourVest Partners
2012? Unforgettable. The Queens Diamond
Jubilee, the London Olympics and Paralympics,
my 25th wedding anniversary and tickets to the
Rolling Stones concert in London.
industry faces in 2013? The management-fee revenue cliff in
the face of expiring investment periods and aging legacy funds
for GPs. Fundraising will never be more important.
What is your New Years wish for the private equity industry?
May your fundraising goals become a reality.
Juan Delgado-Moreira, head of Europe and Asia,
Hamilton Lane
2012? The year China slowed down, Myanmar
opened, Europe muddled through thanks to
Super Mario, and the U.S. lived their boring,
subpar new normal growth. Political uncertainty
was at a high point, given the U.S. election and the Chinese
change in administration.
What is the most important issue that the private equity industry
faces in 2013? Exits. We have calculated the volume needed to keep
in line with long-term DPIs and it is a very big number.
No more ex-PE people turning into high-profile politicians.
Francesco di Valmarana, partner, Pantheon
2012? The constant theme in 2012 has been a
flight to quality by GPs, by LPs, by banks,
everyone in the industry. Capital is being rationed,
and this means that the best opportunities are
attracting more than their share. We see strong
companies attracting premium pricing from GPs struggling to put
money to work. We see GPs with proven track records such as
Advent International hitting their hard caps. And we see it in
refinancings, where banks only want to lend to existing clients with
proven credit records, yet in the U.S. the high-yield market is
reintroducing GP-friendly terms such as PIKs.
What is the most important issue that the buyout industry faces
in 2013? The single most important issue is the threat that regulatory
pressures will restrict the very supply of risk capital that we need to
drive growth. With private sector pensions being advised to match
assets to liabilities with bonds, and insurance companies and banks
unable to support the capital charges on private equity due to Basel
III and Solvency II, the industry is increasingly reliant on a small
number of large public plans. This is not healthy.
What is your New Years wish for the industry in 2013? That
our lawmakers and regulators understand that the largest
beneficiaries of private equity are the pension funds that make
up 84% of our client base half of which are public plans!
Sponsored by
10

For some firms, the need to raise fresh capital could be

critical for the future of the firm. U.K. firms Duke Street,
Terra Firma Capital Partners, Motion Equity Partners and
Pangea Investors all pursued deal-by-deal financing in the
last year as they moved to adapt to the market without
fresh funds to invest. Arle Capital Partners is also hoping
to be able to raise its first fund under its new guise after its
partners left Candover Partners to form the new firm.
Doughty Hanson & Co. and 3i Group are also likely to be
closely watched to see if investors are keen to back them
in raising buyout vehicles.
We continue to see a polarized fundraising environment

with clear winners and losers. There continue to be a
small number of funds that are heavily oversubscribed
whilst others are finding it impossible to raise new money,
no matter what terms are offered to investors, said Jason
Glover, a partner at law firm Simpson Thacher & Bartlett
LLP. Consequently, it is becoming increasingly difficult to
describe market standard terms.
Europes economic woes have also led to some firms

building up in other divisions such as credit,
infrastructure and secondaries. But advisers said that
although they expect another busy year in secondaries
fundraising, they didnt expect a surge in credit and
infrastructure fundraising.
Fundraising needs to be hard, he said. The process that the

industry is going through, whilst painful, is the very thing that
will ensure it is going to survive and thrive going forward. If
the industry outperforms, investors will commit to funds. The
only way they are going to outperform is if there is less capital
in the system and there are fewer firms chasing deals.
Mr. Moore at UBS takes the view that these fundraising

travails are good for the industry.
In Their Own Words
North American LBO/Corporate Finance

Todd Bright, managing director, Denham Capital
Looking back, how would you characterize 2012?
For Denham, an important event early in 2012 was
the first quarter closing of our sixth fund at $3.0
billion. This gives us new dry powder with which to
pursue opportunities in our core sectors of oil and
gas, metals and minerals, and power and
renewables. In those sectors, 2012 was marked by continuing
scarcity of capital at the development and growth stages of
companies and projects, an environment which creates attractive
opportunities globally for Denham within its main focus of backing
proven management teams in the de-risking of assets and projects.
What is the most important issue that the energy-focused
private equity industry faces in 2013? While Denham is not a
buyout shop, we are seeing that operating assets and companies in
need of capital to fund growth and/or recapitalization of their
balance sheets are now turning to private equity more given the
current capital-constrained environment. This creates opportunities
for Denham to provide capital for distressed or semi-distressed
companies in our target markets, where we can make structured
investments with protection from current assets and Ebitda.
What is your New Years wish for the industry in 2013? The
energy business is very capital-intensive, so my wish for 2013 is for an
improvement in the international project finance markets. This will
likely only follow from an improvement in the political and economic
conditions in Europe and the U.S., something that, unfortunately, is
hard to be optimistic about at this point. Denham portfolio
companies generally do not rely heavily on debt financing at the
corporate level, but within the power and renewables sector, projectlevel debt is a must for the construction of projects. Fortunately, the
markets on which we are focused in this sector (outside of the U.S.
and Europe) have ample local project finance markets, which tend to
have been less affected by the financial crisis.
If you had to predict one headline involving the private equity
industry in 2013, what would it be? Generally speaking, my
headline prediction would be More of the Same. This is because I
do not expect material improvements in the economic environment,
particularly in the developed world. However, I might also predict a
Sponsored by
headline of Center of Gravity Shifts in Global Energy, based on the

fact that the developing world has now overtaken the developed
world in electricity production.
William R. Lemmons Jr., managing partner,
EnCap Flatrock Midstream
Well, 2012 has been a great year in the midstream
business, and weve had some very exciting events
within our own platform. Broadly speaking, the
industry continued the tremendous infrastructure
buildout required to serve our countrys growing unconventional
resource base. The deal market has been really active, with some of
the largest M&A transactions ever consummated in our space. And
several of our portfolio companies have had successful realization
events. We found the institutional investor market very enthusiastic
about the midstream sector as we completed the fundraise for EnCap
Flatrock Midstream Fund II at $1.75 billion in July.
What is the most important issue that the midstream energy
private equity industry faces in 2013? I think it will be ability to
compete and be the successful acquirer in the buyout market. The
private equity model is expanding in the midstream space and there
will be a number of highly attractive opportunity sets hitting the market
over the next several years. These will be assets and companies with
very high-quality portfolios of physical and contractual assets for the
larger players in the business to pursue. For the buyers, there is an
expanding universe of master limited partnerships that will increase the
number of aggressive acquirers of growth platforms.
What is your New Years wish for the industry in 2013? Some
clarity around the macroeconomic environment and regulatory
direction now that the 2012 election is behind us. A lot of driving
factors fall out of those two broad areas, including supply/demand,
which drives commodity prices, which in turn points us toward the
areas where supply will be developed and midstream investments
will be needed.
industry in 2013, what would it be? Private Equity Grabs a Growing
Slice of the Midstream Investment Pie would be one headline.
Leading the way

in alternative investing
12

U.S. Buyout Market: Liquidity Abounds,

but So Does Uncertainty
By Shasha Dai
at this time, buyout firms
predicted that 2012 would be
the year of midmarket deals, amid concerns about
Europes continued sovereign debt problems, an upcoming
presidential election and credit markets that, although
recovering, were hardly robust.
However, as the industry enters 2013, an abundant supply
of liquidity has once again put multibillion-dollar deals
within reach. Although midmarket deals are hardly
disappearing, a dwindling supply of quality inventory,
combined with rising prices, has added new layers of
complexity to getting those deals to the finish line.
Statistics appear to bear out this trend. According to data
provider Dealogic, the total volume for buyout deals of $1
billion or more rose to $66.3 billion for the year through
Dec. 7 from $56.8 billion in 2011, with the number of such
deals increasing to 30 from 21. By contrast, midmarket
deals those valued at between $250 million and $1 billion
declined to $16.83 billion from $22.5 billion in 2011.
Lower midmarket deals, which Dealogic defines as being
less than $250 million each, dipped more modestly to
$8.7 billion from $9.8 billion.
Overall in 2012, U.S. firms announced $91.8 billion worth of
deals through Dec. 7, surpassing $89.1 billion for all of 2011,
according to Dealogic. The number of deals went down to
653 from 709, suggesting a larger average deal size.
Dealogics data include minority investments.
To be sure, 2011 figures were relatively low to start with,
as deal volume slowed to a trickle in the second half of
2011 in the wake of the U.S. credit rating downgrade
and the European sovereign debt crisis. Even so, the
rebound in the megabuyout sector may largely have to
do with the abundance of available debt. Issuance of
both high-yield bonds and leveraged loans in 2012
through Dec. 10 was up from 2011 levels, approaching
the peak levels in 2007, according to Barclays PLC. Bond
volume rose to about $318.1 billion from $223.7 billion,
while loans issuance was up, to $456.9 billion from
$373.1 billion, according to Barclays.
Although a good portion of that issuance went to
refinancing, the amount of newly issued loans that went
Quotes of the Year

Michael Butler, chairman and chief executive, Cascadia Capital (May)
Sponsored by

toward financing buyouts increased by more than 20%

from 2011, while bonds that financed buyouts declined,
according to Barclays.
A Choppy Year?
An abundance of liquidity may support more large deals in
2013, but muted growth in the U.S. economy will force
megafirms to tread carefully.
You might see a few large buyouts because liquidity is
there, said Joe Baratta, global head of private equity at
Blackstone Group. But you are not going to see a
resumption of large-cap buyouts [as they were in 2005 to
early 2007] because it is hard to make returns work.
Mr. Baratta said that Blackstones overall view of the U.S.
economy continues to be cautious, and that as such the
firm has identified narrower themes in the general
economy for private equity transactions. They include energyrelated deals such as those in onshore exploration and
production, downstream projects and energy infrastructure
projects, as well as opportunities arising from resumption of
construction in the residential and commercial sectors.
For us, the bar for large buyouts is very high, Mr. Baratta
added. We need to find a way to materially change the
business to burn off big premiums we have to pay.
In the midmarket, the picture is mixed, according to
market participants. Despite the fact that debt and equity
capital is plentiful, the inventory of quality businesses is
dwindling, partly because a rush to sell businesses before
the end of 2012 in anticipation of capital gain tax increases
had somewhat reduced the supply of assets. Business
owners who ultimately decided to hold onto their
companies, in part because valuations have come in below
their expectations, may not have the urge to sell any time
soon, said the participants.
Howard Lanser, managing director of midmarket investment
bank Robert W. Baird & Co., said he predicts 2013 buyout
volume to be flat or slightly down from 2012 levels.
There is a lot of uncertainty throughout 2013, Mr. Lanser
said. Politically, the environment is less business-friendly,
with higher taxes and health-care costs. Its going to be a
choppy year.
Quotes of the Year
distributed before the return of capital.

Sean Greene, associate administrator for investment
and special adviser for innovation, U.S. Small Business
Administration, on problems associated with the SBAs
participating securities program (June)
In Their Own Words
European LBO/
Corporate Finance
Simon Borrows, chief executive, 3i Group
2012? 2012 has been a tough year. Close to
home, it has been characterized by uncertainty in
the euro zone, partly due to politicians inability
to make difficult decisions about shrinking the
public sector. But other regions have also seen
their own challenges, with a slowdown in China and an evident
lack of political will in India. A continued lack of confidence and
an uncertain outlook has led to less M&A activity during the
year, with forecasts that buyout volumes will be down 22%
compared with 2011, for example.
industry faces in 2013? I think the biggest danger facing the
industry going into 2013 remains the fact that fundamental
political, regulatory and financial questions remain unanswered in
Europe and beyond. We need to see some decisive action across
the euro zone and a workable solution to the looming fiscal cliff in
the U.S. As a result, I think M&A levels will remain relatively low
going into 2013. Also fundraising will continue to be challenging,
with only the best performers able to raise new funds.
Johannes Huth, head, Kohlberg Kravis Roberts
& Co. Europe
2012? For KKR Europe, it has been the year of
building global champions and providing
entrepreneurial capital. Partnerships between
Alliance Boots and Walgreens in the health and
wellbeing sector, and between Kion and Weichai Power in the
industrial space. Teaming up with the management teams of
Fotolia and Acteon.
But the current environment may favor one particular type

of midmarket firm: those targeting companies with
operating or financial challenges. Littlejohn & Co., a New
York-based turnaround firm, for instance, completed four
transactions in 2012, including two buyouts and two debtto-equity swaps, and Chief Executive Michael Klein said he
anticipates being even busier in 2013.

industry faces in 2013? Lets think in terms of opportunities of
putting capital to work. Europe is blessed with companies that
have the potential to further expand their emerging market
exposure. Europe has a strong foundation of entrepreneurs and
family-backed businesses that are looking for support in their next
phase of development. All situations where we can bring real
added value.
Some of the opportunity, said Mr. Klein, is coming from

industries that continue to see dislocation, such as energy
Lets be proud of what we stand for. And do all what is required to
be able to make that statement.
Sponsored by
13
14

Quotes of the Year
Although Id be very pleased for 70% of our managers to be women,

thats not the main objective of our investment program.
Solange Brooks, portfolio manager, California State Teachers Retirement System (August)
services and health care. The robustness of the credit
markets is also sowing seeds for the next wave of distressed
companies that Littlejohn targets, he said.
We are scratching our head and saying, Thats going to
create an inventory of opportunity for us, said Mr. Klein.
A Good Time to Sell?

Although 2012 was a strong year for exits, particularly to
other buyout firms, private equity firms have mixed
opinions about the exit environment in 2013.
Secondary buyouts posted by far the biggest gain in 2012,
clocking in $36.4 billion worth of deals, triple the 2011
level of $12.2 billion, according to Dealogic. The number
of such deals also rose to 128 from 111. Sale to strategic
buyers edged up, to $63.3 billion from $61.4 billion, with
the number of deals slightly down, to 193 from 197. The
initial public offering market contributed a relatively paltry
$12.1 billion worth of deals for sponsors in 2012, about half
of the value of private equity-backed IPOs in 2011.
Now is a good time to be a seller because big corporations
are sitting on cashand looking to buy, said Mr. Klein of
Littlejohn, which had two exits in 2012, both of which went
to strategic acquirers.
Other market participants, including Mr. Lanser, cautioned
that corporations may choose to sit on the sidelines in 2013
because of a lack of confidence in the U.S. and global
economy.
There is not enough tailwind going into 2013, said
Mr. Lanser.
But perhaps the biggest challenge both for deals and exits
is a lack of growth globally. A top executive at a New Yorkbased large alternative asset management firm said growth,
of lack thereof, is his primary concern. In order to make
money [in private equity], you have to have growth, the
executive said.
In Their Own Words
North American LBO/

Corporate Finance
Charles (Chip) Johnson Jr., senior associate,
Falfurrias Capital Partners
2012? From a business development perspective,
2012 was a choppy year, with a slow beginning
and end but an uncharacteristically busy summer.
Overall, new volume has not been as robust as
we had anticipated, and we have been disappointed in the
quality of the new opportunities that have come to market in
2012. From a performance perspective, we have seen consistent
growth in the select sectors in which weve chosen to focus, but
we are concerned that continued weakness in our economy
could disrupt this fragile recovery.
industry faces in 2013? The private equity industry mirrors the
economy. Accordingly, economic improvement is the most
important issue facing our industry.
What is your New Years wish for the industry in 2013? We
continue to believe that a lot of lower midmarket business owners
are waiting for a better time to sell their businesses. Our wish
would be for more of them to decide to go to market in 2013.
U.S. Financial Sponsor-Backed Transactions*

Deals (by transaction size)
Less Than $250M
Announced Deal Value (M) No. of Deals
2010
$12,185
593
2011
$9,812
647
2012 YTD
$8,683
590
$250M-$1B
Deal Value (M) No. of Deals
$28,986
54
$22,490
41
$16,831
33
$1B+
Deal Value (M)
No. of Deals
$58,490
26
$56,835
21
$66,311
30
Exits (excluding IPOs)

Secondary Buyouts
Announced Deal Value (M) No. of Deals
2010
$29,545
100
2011
$12,176
111
2012 YTD
$36,417
128
Trade Sale
$74,126
194
$61,441
197
$63,272
193
Total
Deal Value (M)
No. of Deals
$103,671
294
$73,617
308
$99,689
321
*Includes minority stakes. Data is as of Dec. 7, 2012. Source: Dealogic
Sponsored by
Total
$99,661
673
$89,137
709
$91,824
653
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bmcgroup
16

Europe Difficult but Stable for 2013 Deals

By Jennifer Bollen, Dan Dunkley and Kiel Porter
to a close, concerns
over the euro-zone
sovereign debt crisis caused a number of financial sponsors
and bankers in Europe to doubt the possibility of any deals
above 1 billion getting done in 2012.
However, over the next year, the markets proved them
wrong as a number of large deals closed, despite
uncertainty in Europe causing lenders to retrench for long
periods. Buyout executives and bankers said there is
greater clarity in the outlook for 2013 than there was at the
same time last year, giving some cause for cheer.
The important point is that it is not 2009, when the
economy was in free fall, said Laurent Haziza, a managing
director at financial adviser Rothschild Group. The
outlook is difficult, but stable.
Deal activity at the upper end of the European buyout market
remained steady in 2012, with the value of the top 10 deals
amounting to $20.1 billion, compared with $20.3 billion in
2011, according to data provider Dealogic. Investors that
participated in the largest deals in 2012 are confident that
conditions are still strong for the right assets going forward. In
the largest European deal of the year involving a financial
sponsor, Terra Firma Capital Partners in November 2012
acquired Annington Homes Ltd., a U.K. real estate business,
for $5 billion, according to Dealogic.
Sponsored by
Despite the fall in the overall M&A market, the right assets
with good earnings are available at the right price, said
Terra Firma Chairman Guy Hands.
Advisers on private equity deals, including Simon Tilley,
managing director at DC Advisory Partners, said auctions
remain difficult in the European market, but insist that
market dynamics including a huge backlog of private
equity assets under management will lead to a healthy
level of deal flow.
According to data provider Preqin, assets under management
for private equity are the highest they have ever been, at just
under $3 trillion. This is nearly double the $1.7 trillion it stood
at during the peak of the market in late 2006.
Transactions are taking longer to get done but there
remains a backlog of companies sitting in private equity
portfolios that need to find a new home, said Mr. Tilley.
Thats given some investors hope that activity will pick up
in the coming year. Although 2012 was characterized
largely by recapitalizations and refinancing, Harry
Hampson, head of the financial sponsors group for Europe,
the Middle East and Africa at investment bank J.P. Morgan
Chase & Co., said there is more visibility on larger new
buyout activity in 2013 and the industry could see some
multibillion-euro deals.
Bearing Fruit.
Hard work and patience have their rewards. Northstar Capital has always maintained
an unwavering approach: dedication to the deal, no matter what the environment.
After almost 20 years working with our partners, we think our approach has met the
test of time. With our latest fund launched, were looking forward to the next
two decades. Northstarcapital.com.
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19
We are more than five years into the crisis so a lot of the
highly levered companies had debt maturities of 20122013, so to a certain extent those problems have played
out, Mr. Hampson said. There will likely be further
challenging situations, but we are now in a position where
a lot of the remedial action for portfolio companies has
taken place and there is a sense of moving forward.
He added that deal flow is likely to continue to come
predominately from Northern Europe, particularly,
Germany, the U.K. and the Nordic region. In 2012, the
U.K. was the most active country in Europe for private
equity-related mergers and acquisitions, according to
Dealogic. There were 266 buyout-related M&A deals in
the U.K. in 2012, accounting for 23% of all European
buyout M&A. By contrast, 247 buyout-related M&A deals
took place in France and 128 in Germany, according to
the data provider.
Meanwhile, Mr. Haziza of Rothschild said no countries in
Europe would be out-of-bounds for buyout opportunities
in 2013, though he warned that the forthcoming German
federal election to be held between September and
October would lead to a slowdown in deals.
I dont think investors will avoid any country in Europe.
Italy/Spain are harder but there are some very good
companies in those markets, Mr. Haziza said.
DCs Mr. Tilley added that U.S. buyout firms remained
cautious on the outlook for Europe.
Our experience is that U.S.-based investment committees

are generally cautious about Europe from a macroperspective and it remains the case that teams with an
on-the-ground presence in Europe, local relationships and,
critically, local market knowledge are best placed to
identify and act on opportunities, he said.
Owen Clarke, a managing director at U.K. midmarket firm
Equistone Partners Europe, said buyout firms were facing up
to the reality that deals were now more difficult to organize.
It has generally been necessary even for [midmarket
deals] to arrange a club of banks to support a deal rather
than get one or two banks to underwrite, Mr. Clarke said.
The banks are more cautious than clearly they were in the
boom years, so we need to work very closely with them to
get them comfortable with due diligence and business.
However, he added those firms that do manage to line up
debt packages for their companies are at least securing
more favorable terms than they were 12 months ago.
Debt is available for good quality businesses and sensibly
structured transactions, said Mr. Tilley of DC Advisory
Partners. Whilst there is nothing like the liquidity that
existed in the debt markets just a few years ago, we are
seeing the emergence of new credit funds and institutional
money that is enabling well-advised borrowers to construct
their own club of lenders on mutually acceptable terms
and, in a rather smaller number of cases, some debt
underwriting to take place.
In Their Own Words
European LBO/Corporate Finance

Martin Halusa, chief executive, Apax Partners
2012 saw the three primary markets in which we
invest diverge quite dramatically. In the U.S., it was
business as usual to a certain extent. The portfolio
there is performing well and the climate for new
investments was favorable, buoyed by the ready
availability of financing, especially from a booming high-yield bond
market. In Europe, the predicted wave of deal flow from distressed
sellers did not materialize to the degree that was anticipated. The
lifeline provided to Europes banks by the ECB reduced the need
for widescale asset disposals, but I still think that corporate Europe
is in a long-term period of deleveraging and restructuring, which
will provide opportunities in years to come. The high-growth
markets in which we invest namely China, India and Brazil
continued to mature as markets for larger buyout investments of the
type that Apax focuses on across its platform.
industry faces in 2013? The congestion in the system that has built
over the last five years is now easing its way out. The debt markets
have reopened and made it possible to refinance many of the
investments that were made at the top of the market during 20062007. The industry now has to prove it can drive value from these
investments and return capital to investors.
That we should avoid falling back into recession and/or a seizing up
of the credit markets.
Conni Jonsson, managing partner, EQT Partners
2012? A challenging year for the whole industry,
with slower activity and uncertainties in the
financial markets affecting the availability of debt.
For EQT, however, it was a successful year with
several new investments by the EQT funds. EQT
also made some very successful exits like [those for] Dako,
Midland Cogeneration Venture and KMD.
industry faces in 2013? I doubt a quick recovery unless there is
some solution in sight to the fiscal crisis in both Europe and in
the U.S. The much-talked about wall of credit is also
approaching, which creates a lot of uncertainty. There are many
portfolios out there with companies that are up for refinancing
but that, of course, also creates opportunities for others.
That policy makers and others start realizing what an important role
private equity can play and already plays in growing and
developing companies, hence advancing the broader economy.
Sponsored by
20

U.S. Lawmakers Continue to Fine-Tune Rules

in 2013 as PE Firms Brace for Impact
By Michael Wursthorn
Waiting for Form PF

If 2012 marked the year that many private equity firms
cleared the initial hurdles of registering with the SEC, 2013
may well usher in a new era of enforcement that includes
implementation of what is known as Form PF.
The form, which must be filed by the end of April, will
require buyout firms managing more than $2 billion to
provide detailed information on portfolio companies in
which the fund holds at least a stake of 25% of the voting
interests.
Although they will not be publicly disclosed, such details
will give the SEC and the Financial Stability Oversight
Council a glimpse into the debt-to-equity ratios that firms
put on portfolio companies, as well as financing
arrangements and the overall health of private equitybacked companies.
The SEC wants to understand how the underlying
investors of those private equity funds are not only invested
in operating companies, but whether they are on the hook
for the leverage of those underlying companies, said
Brynn Peltz, a partner in Latham & Watkins LLPs financial
regulatory and investment funds practices.
equity firms continue to
confront a wall of regulation
implemented since the recession of late 2008, although, as
the industry enters 2013, some firms may adjust more
easily than others.
For the larger private equity firms, this has just become
another aspect of the business that has to be managed, said
Craig Marcus, a partner with Ropes & Gray LLPs private
equity transactions group. For smaller firms, its a real strain
on resources, time and expertise just to be in compliance.
In 2013, additional requirements tied to registration with
the U.S. Securities and Exchange Commission and further
modifications to the Foreign Account Tax Compliance Act
are only two of the many issues that stand to affect private
equity firms over the next 12 months. Meanwhile, the
industry is bracing for wider conversations over carried
interest and other tax issues that directly affect the
compensation of private equity professionals. This is
uncharted territory for everybody, said Norman Leben,
managing principal of Gen II Fund Services LLC, a
provider of accounting and administrative services to
private equity firms.
Sponsored by
Larger private equity firms appear to have an easier time

coping with these latest filing requirements than their
smaller peers, since many of them regularly collect detailed
information on their holdings, Ms. Peltz said.
Smaller ones seem a little more overwhelmed, Ms. Peltz
said, adding that many midmarket and lower midmarket
firms havent been routinely collecting the necessary
information to file the so-called Form PFs.
In addition to the new filing requirements, the industry is
bracing for a wave of SEC examinations, which the agency
plans to conduct for most, if not all, private equity firms
registered as investment advisers over the next two years.
In 2012, the agency sent letters to many buyout shops
telling them to expect an audit within the next two years.
The scrutiny is going to be much more acute, said Mr.
Leben.
Specifically, audits are likely to focus on how management
fees are computed, how the preferred return and waterfall
are handled, as well as on the assessment of valuations,
performance and marketing materials.

Firms that dont pass muster could have real problems,

according to Ms. Peltz. Penalties levied by the SEC for
non-compliance range from monetary fines being
imposed to being shut down if a private investment fund
manager showed a complete disregard for compliance,
she said.
regulations, said a person with knowledge of the banks

strategy. According to a Preqin study in mid-2012, the
number of banks committing to private equity has been
steadily declining since 2008, with 10% of those surveyed
saying they would cease investment in private equity due
to legislation and liquidity concerns.
FATCA on the Way
Embracing the New Normal
Although firms affected by the Foreign Account Tax

Compliance Act got a one-year reprieve from certain rules
that were slated to kick in on Jan. 1, many of them
continue to scramble to prepare for the laws
implementation.
Signed into law in 2010, FATCA is designed to deter
offshore tax evasion by U.S. investors and requires foreign
financial institutions, or FFIs, to disclose detailed
information about their U.S. investments to the Internal
Revenue Service. FFIs, which could include foreign funds
as well as domestic funds with international investors, must
sign an agreement with the IRS by 2014 to avoid a 30%
withholding tax on all U.S.-sourced income, such as
dividends and sales proceeds.
Even though we have this additional transition, its still
going to be fairly tight for financial institutions to meet
those deadlines, said Denise Hintzke, the global FATCA
leader for Deloitte LLP.
The Private Equity Growth Capital Council has called for a
more efficient process for private equity firms with foreign
funds or non-U.S. investors required to register as foreign
financial institutions. Specifically, the lobby group wants a
centralized compliance process for firms rather than
separate agreements for each fund classified as an FFI and
all holding companies that house investments.
Ms. Hintzke said the government has yet to make a
decision on the matter, and it was unknown whether
either the IRS or the Treasury Department would even
opt to make any changes at all. It continues to be an
issue, she said.
Volcker Rules Battle of Attrition

Despite the fact that U.S. financial institutions have until
2014 to fully comply with the Volcker Rule, which limits the
amount of capital that banks can invest in riskier assets
such as private equity, the legislation has not led to the
massive sell-off of assets that some initially anticipated.
Instead, the rule has led more to a reduction via attrition,
as banks cut off investments to new funds, a trend that
will only become clearer amid the crowded fundraising
market in 2013.
Financial institutions such as Texas bank Comerica Inc. had
curtailed such investments some time ago due to pending
Even though these and other regulations will add up to

increased costs for private equity firms in the coming year,
regulatory experts said regulation alone wont kill off firms
altogether.
Indeed, heightened regulation has evolved in part because
the industry has grown and matured. Those firms most
vulnerable to the effects of greater regulatory oversight
may well be those that are struggling to raise additional
funds and are experiencing subpar performance with
earlier vehicles, according to Mr. Marcus of Ropes & Gray.
If you have a successful business, youre going to find a
way to deal with the regulation, he said.
In Their Own Words
North American LBO/

Corporate Finance
Carl Thoma, managing partner, Thoma Bravo
2012? 2012 was a decent year for private equity.
The economy was alright, but growth was
dampened by uncertainty. The credit markets
were excellent, which helped financing for deal
flow. The prospect of tax increases encouraged
deal flow, but buyers were disciplined in their purchases because
of the uncertainty in the economy and in Washington.
industry faces in 2013? Washington will continue to be the
most significant issue for the private equity industry in 2013.
The fiscal cliff, large deficit and tax increases could all hurt
economic growth and tighten debt availability. Uncertainty is
hindering businesses from operating as they should be and
also makes it challenging to get deals done.
What is your New Years wish for the industry in 2013? I
would like to see issues in Washington get resolved in such a
way as to not spook the equity and debt markets and be a
foundation for economic growth. Resolving these issues in
Washington will bring back the certainty needed for
businesses to execute growth strategies with capital
expenditure and hiring.
equity industry in 2013, what would it be? Private Equity
Continues to Be a Superior Asset Class and Can Handle
Uncertainty Better Than Public Markets.
Sponsored by
21
22

European Buyout Firms Await

Tough 2013 as Regulation Bites
By Dan Dunkley
buyout fund managers
about their greatest
regulatory concern, and they will more than likely pick the
Alternative Investment Fund Managers Directive the
forthcoming alternative asset directive being enforced by
the European Union.
institution as a depositary, delegating all cash monitoring

and investment compliance procedures. At the same
time, buyout fund managers will be required to
implement remuneration policies that do not encourage
risk-taking, while managers are expected to ensure
remuneration is based on long-term incentives.
The directive is now in an implementation phase: E.U.

member states have until July 22 to write the regulation
into law, and private equity firms will have one year after
that to fully comply.
The directive also includes provisions on asset stripping

with distributions to investors and partners linked to a
portfolio companys profits, a detail that could potentially
dent a firms ability to gain liquidity through a dividend
recap. The directive will also potentially limit the investors
a firm can target when fundraising.
Although the AIFMD has been designed to provide a

comprehensive and effective regulatory framework for
alternative asset managers, private equity firms fear that
certain of the directives details will not only increase
operational costs but also potentially lower returns and
hinder fundraising.
Under the AIFMD, firms that manage funds with more
than 500 million in assets will need to appoint an
Sponsored by
The costs associated with implementing the directive could be

particularly difficult for smaller firms, according to James
Smethurst, partner at law firm Freshfields Bruckhaus Deringer.
Costs for compliance will be disproportionately larger for
midmarket firms, Mr. Smethurst said. Some of the bigger
firms will have larger legal, compliance and risk functions.
23
Quotes of the Year
Anybody that doesnt have a source of permanent capital is at

a strategic disadvantage in the marketplace.
David Fann, president and chief executive, TorreyCove Capital Partners (November)
A study from advisory firm Ernst & Young in March 2012
found that buyout firms saw requirements on remuneration,
risk management and the role of the so-called depositary as
the major challenges of the AIFMD.
As the July 22 deadline approaches, the industry continues
to work to voice its concerns with regulators, according to
Joanna James, managing partner at buyout firm Advent
International and a member of the European Venture
Capital Associations buyout firm forum. She described the
industrys ongoing dialogue as an ongoing intensive twoway communication effort. The important thing is to
make sure that future regulation is appropriate and
proportionate, and does not attempt to regulate private
equity firms as if they were banks or hedge funds, which
have very different business models, she said.
On Dec. 19, the European Commission (the executive body

of the E.U.) released the updated final wording of the
AIFMD, a move welcomed by EVCA Secretary-General
Drte Hppner, who said the buyout industry was
prepared for the challenges in terms of cost and timing of
the regulation.
Aside from the AIFMD, forthcoming regulation governing
capital reserve requirements for the insurance and pensions
industries also stands to affect European buyout firms, albeit
indirectly. For years, insurers have lobbied against what they
see as the strict requirements of Solvency II, which requires
insurers to hold extra capital against their investments in
higher-risk asset classes such as private equity.
Under Solvency II, introduced by the European Commission,
insurers could be required to hold 49% against their
investment in private equity, meaning for every 100
invested in the asset class, 49 must be put aside to mitigate
against the perceived risks posed by buyout firms. This is
known as the shock buffer.
Solvency II (although much delayed) is a concern as it
could make insurers less willing to invest in private
equity,said Mr. Smethurst.
But regulators arent just tightening the screws on capital
reserve requirements for insurance companies. The
European Insurance and Occupational Pensions Authority
is currently reviewing a directive aimed at improving
capital adequacy among pension funds. Although its
review of the institutions for occupational retirement
pensions directive known as IORP is still in the early
stages, buyout firms fear capital adequacy measures could
be similar to Solvency II.
The European Commission wants a draft directive on the

table by summer 2013. Its unclear whether IORP will be as
strict as Solvency II. A document viewed by Private Equity
News indicated that Thomas Mann, member of the
European parliament and of the European Peoples Party,
has written a report calling for the European Commission
not to extend Solvency II-style rules to pension funds.
One source close to the situation said the report was likely
to be influential when determining the outcome of the
revamped pensions regulation.
Both Solvency II and the IORP changes are less immediate

than the AIFMD. One regulatory expert said he believed
Solvency IIs planned implementation date, January 2014,
would likely be delayed, providing breathing space for the
[private equity] industry.
But breathing space is a luxury that will become even rarer
as the regulatory heat intensifies next year.
In Their Own Words
European LBO/
Corporate Finance
Drte Hppner, secretary general, European
Private Equity and Venture Capital Association
2012? 2012 was a year in which private equity
proved again that it plays a key role in the
economy by bringing together supply and
demand for long-term investment capital. That is
now more understood by policymakers and regulators.
industry faces in 2013? Fundraising will certainly be one of the
key challenges in 2013. Thankfully, research by investment
advisory platform CEPRES showed a sizable majority of investors
around the world are planning to make fresh commitments to
private equity over the next year. Forty percent of Europes limited
partners plan to increase their private equity allocation, while the
rest intend to maintain it. The EVCA continues to take measures to
support the fundraising efforts of our members.
Private equity is an industry that brings together the demand for and
the supply of long-term investment capital. I wish all of us, [both] the
demand and supply sides, will be able to continue to use private
equity as a market where they can join forces with appropriate
and proportional regulation that does not disturb the delicate
balance that every market needs in order to function properly.
Sponsored by
24

For Distressed Investors, Only Hard Work Will Pay

By Mara Lemos-Stein
Distressed investors have a list of usual suspects for some
action next year: highly leveraged companies from the
heyday of buyouts, such as Energy Future Holdings Corp.;
companies in sectors undergoing long-term structural
shifts, such as paper and publishing; those in industries
already showing some cracks from high commodity prices
and the recession, such as shipping and retail; and, of
course, European bank loans, even if opportunities there
are proving less bountiful than predicted.
The big wins, however, are likely to hail from unexpected
corners.
Clearly the things that tend to present the greatest
opportunities are generally the ones least telegraphed to
the market, said Daniel Crowley, a managing director and
head of distressed debt trading at Barclays PLC.
For all the touted friendliness of the credit markets, many
small and midsize companies are left out in the cold. That
is where seasoned distressed investors thrive: filling the gap
left by banks by providing loans and engaging in workouts.
The more interesting piece in the market is in the
idiosyncratic midmarket companies that are facing
financial distress, said Andrew Milgram, a managing
partner at Greenwich, Conn.-based Marblegate Asset
Management. These companies have a difficult capital
structure but a good business and just need their cash
flows to be liberated.
distressed securities have a
common refrain for success in
2013: be diligent. From those who seek low-priced high-yield
bonds, to those who trade in loans, to those who invest in
midmarket companies, digging deep for opportunities is key
to positive returns, they say.
The macroeconomic picture, with the U.S. looking at some
painful measures to confront its debt buildup and Europe
still scrambling to manage its own debt, may provide some
new impetus for weaker corporate performance. But a
scenario of economic austerity and slowing growth could
still be distorted by the prevailing monetary policy on both
sides of the Atlantic.
At a time of record-low interest rates, the hunger for yield
creates a benign credit market for companies to borrow more
and to refinance existing debt, extending maturity dates.
Default rates are expected to remain low, with Moodys
Investors Services predicting the U.S. speculative-grade
default rate to be 3% or lower for most of 2013, compared
with an average annual default rate of 4.6% since 1992.
Sponsored by
After interviews with debt-market participants, analysts and

data providers Markit Group Ltd. and Standard & Poors
Leveraged Commentary & Data, Dow Jones identified
some of the companies likely to be on distressed investors
watch lists next year. To qualify for our list, companies had
to meet three criteria: They have tight liquidity, according
to ratings agencies; hold at least one debt security trading
at or below 90 cents on the dollar; and have bank loans
and bonds maturing in 2013 and 2014.
Bonten Media Group Inc.
The New York-based television broadcasting company has
a revolving credit facility maturing in May 31, 2013, and
needs to make cash payments on a bond the next day, but
may not have liquidity to meet these obligations, ratings
firms say. The privately held company, which was formed
in 2006 in a joint venture between Randy Bongarten and
Diamond Castle Holdings, saw a 24% rise in revenue in the
second quarter of this year thanks to a surge in political ads
and gains in core advertising, according to Standard &
Poors Ratings Services. But in the absence of political
25
advertising and the Olympics, ad revenue will shrink and

Bontens earnings before interest, taxes, depreciation and
amortization are expected to fall by 35% in 2013, S&P
predicts. Bonten doesnt disclose its financial information
publicly, but according to S&P, it had drawn almost fully on
its $15 million revolver as of June 30, 2012. The company
has been able to maintain some cash balances because it
could make payments-in-kind on its $125 million of 9% PIK
bonds until 2011, and higher revenue helped during 2012.
That scenario changes in 2013, and the company could
have difficulty in addressing its maturities, says S&P.
GateHouse Media Inc.
The Fairport, N.Y., publisher of regional newspapers has
$1.18 billion in debt outstanding due August 2014, but like
many media companies it has seen its revenue decline as
consumers and businesses shift to digital formats. The
company, which publishes 79 daily newspapers in the U.S.,
has been implementing cost cuts and is investing in digital
products, but it continues to report losses. In the third
quarter of 2012, it posted a net loss of nearly $6 million on
revenue of $121 million, compared with net income of $1.6
million on $125 million of revenue in the same year-earlier
quarter. It said that total digital revenue rose 28% in the
quarter from 2011, but its cash flows arent likely to be
enough to handle its high debt burden, according to ratings
firms. GateHouses credit facilities contain few covenants so
Quotes of the Year
In large measure, these are distressed

sellers, not distressed assets, because
banks sometimes sell the best of their assets.
Dechert LLP, on potential investment opportunities
emerging from Europes troubled banks (February)
it may have some time to seek a balance sheet restructuring,
unless it gets a going concern warning from auditors in its
annual earnings report due in March, which would trigger a
default, said Moodys. The company has shares that trade in
the over-the-counter market, but Fortress Investment Group
owned about 40% of its equity and, according to filings, 10%
of its credit facility as of Sept. 30. Gatehouse had about $37
million in cash as of Sept. 30, 2012, compared with $19
million at the beginning of 2012, but it cannot access its $20
million revolving credit facility because of its high leverage.
Jacuzzi Brands Corp.
The hot-tub makers $185 million senior secured credit
facility due February 2014 was quoted at around 68 cents
on the dollar in early December, according to Markit,
reflecting concerns over the companys ability to refinance
The Scorecard From the 2012 Outlook Report

Last year, Private Equity Analyst published a shortlist of six private equity-backed midmarket companies
identified for possible balance sheet restructuring in 2012. Five of them did restructure their debt, with their
private equity sponsors losing control. Here are the key events:
Contech Construction Products Inc.
Hanley Wood LLC
Anchorage Capital Group, Littlejohn & Co., Tennenbaum

Capital Partners and Farallon Capital Management took
control of the company in February. As part of the deal, the
West Chester, Ohio, designer and maker of products such as
bridges, retaining walls and pipes eliminated its old debt,
which had been provided by its main shareholder, Goldman
Sachs Mezzanine Partners. It also changed its name to
Contech Engineered Solutions LLC.
In January, Oaktree Capital Management, Strategic Value

Partners and Tennenbaum Capital Partners became the new
owners of the Washington, D.C., business-to-business media
company and tradeshow organizer for the construction industry.
The group invested $35 million in new capital in the company,
which was previously owned by CCMP Capital Advisors.
Culligan International Co.

Centerbridge Partners took control of the water-treatment
company in June after a distressed debt transaction. The
Rosemont, Ill., company was owned by Clayton Dubilier & Rice
and had about $675 million in debt maturing in 2012.
DS Waters of America Inc.
Kelso & Co. had its stake in the Atlanta-based water distributor
cut to 33% after a group of investors led by Solar Capital, Golden
Tree Asset Management and Glenview Capital Management
converted their debt into equity in a February restructuring.
Wastequip Inc.
Centerbridge Partners took control of the Cleveland-based maker of
waste-handling equipment in a recapitalization transaction in June.
Wastequip was previously owned by Odyssey Investment Partners.
And one that didnt restructure:
Orchard Supply Hardware Corp.
The San Jose, Calif., home and garden retailer listed its shares
on the Nasdaq in January in a spin-off from Sears Holdings
Corp. ESL Investments Inc. now holds around one-third of its
public stock, compared with 80% prior to the listing. The
company secured a waiver from lenders in late October after
failing to comply with certain financial covenants.
Sponsored by
26

its debt in a timely manner. The Chino Hills, Calif.-based

company recently extended the maturity of its $45 million
asset-based loan facility to December 2013, but it also has
a $35.2 million term loan due November 2013. Jacuzzi,
which is owned by Apollo Global Management, has been
hurt by declining sales owing to the drop in new
construction and Europes market slump. It last refinanced
In Their Own Words
North American LBO/

Corporate Finance
Eric Zinterhofer, co-founder and partner,
Searchlight Capital Partners
2012? 2012 experienced M&A activity driven by
secondary buyouts, low interest rates and tax
uncertainty. In North America, easy access to
credit increased valuations, and so Searchlight
needed to be disciplined and proactive to find suitably attractive
investments. In Europe, we found fewer appropriately valued
opportunities than expected, given the flood of liquidity from the
European Central Bank and the disincentive for European banks
to aggressively repair their balance sheets.
What is the most important issue that the sector your firm
focuses on faces in 2013? We invest in services that face
consumers and small business, so the health of these
constituencies is critical. In 2012, we made an investment in
Hunter Boots in the consumer sector, as well as two
investments in the communications space, Integra Telecom and
the merger of OneLink Communications and Liberty
Cablevision of Puerto Rico. In that vein, we are closely
watching the ongoing fiscal cliff negotiations.
What is your New Years wish for the private equity industry
in 2013? I would wish for a more balanced public view of
private equity in 2013. Private equity was highly politicized in the
2012 presidential election, and many positive aspects of the
industry were overlooked. Private equity attracts long-term
investments from both domestic and foreign sources and has
created many more successes than failures. The industry is an
important way to improve the retirement savings for millions of
teachers, other government employees and corporate
pensioners. It has been critical to the health of endowments for
many important charitable and educational institutions, and is
generally run by disciplined professionals who provide
responsible oversight for their investors. There will always be
poor investments and mistakes. It is appropriate to highlight and
learn from those errors, but that should not result in a broad
indictment of private equity investing.
If you had to predict one headline involving the industry in
2013, what would it be? The private equity industry will change
its name. Private equity is not truly private as the industry is
SEC- and FSA-regulated. Our audited results are consistently
shared with our investors, and if you visit certain pension fund
websites, you can view the performance of many private equity
funds. Also, in the case of Searchlight and many other firms, we
do not just invest in equity but across the capital structure.
Perhaps we should be called Long Term Capital providers that
more accurately describes how Searchlight views itself.
Sponsored by
its balance sheet in January 2010, when it cut $175 million

in debt in exchange for new equity. Still, its debt is around
10-times Ebitda, according to ratings agencies. Jacuzzi
doesnt disclose financial information to the public, but
S&P said Jacuzzis earnings are about 1.5-times coverage
of interest expenses. With a name synonymous with
whirlpools and spas, Jacuzzi will have an advantage over
competitors as the economic environment improves, said
ratings agencies.
KIK Custom Products Inc.
The Concord, Ontario, contract manufacturer of consumer
products has a $235 million second-lien loan maturing in
November 2014 that is quoted at a midpoint of 79 cents on
the dollar, according to Markit. KIK Custom has good cash
flow but high leverage, and access to its revolving credit
facility is constrained by leverage covenants on a first-lien
loan, according to S&P. The company, which is owned by
CI Capital Partners, operates in a mature market where it
competes with established conglomerates in household
products and personal care. That means little pricing
power and slow growth prospects, ratings firms said. It is
also exposed to commodity price fluctuations. On the other
hand, it is hard to make inroads in these mature markets,
and KIK Custom has an established position as the largest
domestic producer of bleach for private labels, said
Moodys. The companys high debt level was boosted by
financing to acquire a pool products company in 2011, but
that line of products has helped improve earnings and
KIKs credit measures, said ratings agencies.
MediMedia USA Inc.
The Yardley, Pa., health-care information and marketing
company is trying to turn its financial performance
around in the face of tight liquidity and steep maturities.
After a temporary burst in liquidity following the sale of its
animal health business in 2011, the Vestar Capital
Partners-owned company had to tap into its revolver to
pay interest earlier this year, and its debt levels remain
too high, according to ratings agencies, at around
10-times Ebitda. MediMedias senior loans contain some
leverage measures that get more stringent in coming
quarters, which means the company is at risk of violating
covenants, said both S&P and Moodys. The main drag
on MediMedias earnings has been its pharmaceutical
marketing business, as big pharma companies review
their marketing budgets in light of the expiration of
patents. Ebitda is expected to grow next year, but the
companys capital expenditure is constrained, making a
turnaround difficult. It doesnt disclose its financial
information publicly but according to ratings firms,
MediMedia had around $7 million in cash on hand and
$17 million available under its revolving credit facility as
of June 30, the latest available information.
The companies listed above either declined to comment or
didnt respond to requests seeking comment.
27
Secondary Buyers Hope to Pump Up

the Volume in 2013
By Laura Kreutzer
first half of 2012 saw
secondary volume
approach record levels, as 2013 inched closer, the market
for secondary deals hit the pause button.
However, secondary buyers say that they dont expect the
lull to last for long, because many of the same forces that
helped drive record deal volume in 2011 and 2012 remain
in place as the industry enters a new year.
Through October 2012, secondary transaction volume
had hit around $21 billion, according to secondary firm
Lexington Partners, which predicts that total volume by
year-end may hover around last years record of $25
billion. However, Managing Partner Brent Nicklas added
that many large transactions currently in negotiations may
spill into the New Year, potentially creating another bump
in deal volume during the first quarter of 2013.
sales from large fiduciaries or financial institutions. At the

same time, there is plenty of capital available to bid on
assets, thanks to several robust years of fundraising, and
so competition for deals hitting the market promises to
remain fierce, potentially driving up prices.
Through the first half of 2012, secondary deal volume
seemed like it would handily exceed the record $25
billion invested in 2011 as a number of large fund
portfolios changed hands, including New York City
Employees Retirement Systems and State of Wisconsin
Investment Board.
Deals that slip into [2013] dont necessarily disappear,

said Mr. Nicklas. They just get pushed out.
However, by the third quarter of the year, the pace began to

slow, partly due to uncertainty over the U.S. presidential
election but also as a result of steadily improving stock
markets. This caused some sellers to hesitate, because they
expected that the underlying net asset values of their private
equity portfolios would increase in value for the quarter
ending Sept. 30, according to John Wolak, managing director
at Morgan Stanley Alternative Investment Partners.
Although secondary buyers expect the pace to pick up

next year, many said they expect to see the industry
continue to diversify beyond traditional fund portfolio
Sellers would like to price off of September and buyers

would like to price off of December, so there is a bit of a
standoff, said Mr. Wolak.
Sponsored by
28

A Mixed Bag of Sellers

But as 2013 unfolds, buyers predict the pipeline of deal
volume will fill up again as pension funds, financial
institutions and nontraditional sellers continue to reshuffle
their portfolios.
In North America, buyers said that they expect pension
systems will continue to be active sellers after driving much
of the volume in 2012. According to Lexington Partners,
fiduciaries, such as pension funds, sovereign wealth funds,
endowments and foundations, accounted for 42% of total
deal volume through October 2012, a big jump from the
prior year.
A lot of pension plans are less liquid than they would like
to be, said Jason Gull, partner at Chicago-based Adams
Street Partners. The stigma of being a seller has been
erased, so there is a lot of latent supply.
Buyers add that pension funds that have sold down
relationships in the past may well come back to the
bargaining table to sell again. California Public Employees
Retirement System, for one, is selling a fund portfolio to a
group of buyers, marking at least the second sale by the
pension fund in the past three years.
In Their Own Words
North American LBO/

Corporate Finance
Andrea Auerbach, head of private investment
research, Cambridge Associates
2012? I would characterize 2012 as the year the
private equity industry regained its footing. Only
three years ago, we saw a fundraising nadir, an
overhang peak, and so few transactions in some
markets that acquisition multiples could not be calculated. Now,
fundraising is up, the overhang is holding, the industry is
transacting at all size levels and distributions to LPs continue to
hover around record-high levels.
industry faces in 2013? As the adage goes, those who forget
history are doomed to repeat it. Having just come through the
great recession and all its learning opportunities, the question is
whether GPs will repeat or avoid mistakes made in the past. With
leverage increasingly available a manager observed that more
covenant-lite debt has been issued post-Lehman than preLehman the potential is high for upward pressure on prices,
corresponding downward pressure on returns and increased risks
for portfolio companies taking on that leverage.
What is your New Years wish for the industry in 2013? Besides
the obvious wish many great returns continued strong
alignment and communication between LPs and GPs is on my list.
equity industry in 2013, what would it be? Duck Your Head:
The Private Equity Overhang Is Back.
Sponsored by
Quotes of the Year
The interesting thing about it

is how late we are to the game.
An anonymous PE professional, on the industrys
political lobbying efforts and its participation in
election campaigns (September)
Once an institution executes on a secondary, the next one
becomes easier to do, said Mr. Wolak. Once the board
becomes educated and experienced, they cross a threshold.
Some buyers also expect to see more U.S. financial
institutions enter the selling fray, as the 2014 deadline for
compliance with the Volcker Rule inches closer.
In the first half of 2012, when you spoke to financial
institutions, many [took] a wait-and-see approach,
depending on the outcome of the election, said Luca
Salvato, a partner at Coller Capital. What I think you will
see with the current administration is that the Volcker Rule
will continue in a similar form in which it was drafted, so a
number of banks will start to sell some assets in order to be
compliant by July 2014.
Still, others arent so sure.
Financial institutions are not active portfolio managers,
said Mr. Gull of Adams Street. They function cyclically
based on what they think is in their own best interests. If
[the economy is] back into some sort of recovery, theyre
not likely to be sellers, but instead may begin buying again
to repeat the cycle.
Buyers did agree that continued pressure on European
financial institutions, including banks and insurance
companies, to reduce risk on their balance sheets ensures
continued supply of deal flow there.
In 2012, BNP Paribas and Lloyds Banking Group were
only a few of the European banks that brought portfolios
to market.
The European Unions Solvency II legislation, which
requires insurance companies to hold a higher level of
capital in reserve against riskier assets such as private
equity, takes effect in early 2014. At press time,
Lnsfrskringar Alliance, a group of Swedish insurers, had
sold a 1.5 billion portfolio of interests.
But buyers also say the community of secondary sellers
continues to diversify beyond traditional fiduciaries and
financial institutions to the funds of funds and general
partners themselves, a trend that is expected to intensify in
2013. In 2012, for example, publicly listed fund-of-funds
manager Conversus Capital sold its portfolio to
HarbourVest Partners in a $1.4 billion deal.
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providing customized solutions to banks, financial institutions,
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30

Quotes of the Year
Rolling back rules is not a vote winner right now.
We see an increasing number of nontraditional sellers

coming to market who own private equity assets where
theres either a mismatch between the vehicles and the
long-term nature of the underlying assets, or a desire to
seek liquidity for portfolios that have been dormant for
some period of time, Mr. Wolak said.
New Life for Old Funds

Buyers also expect to see more deal volume coming from
private equity firms, particularly buyout shops, which need
fresh capital to sustain investments in funds approaching
the ends of their lives.
In 2012, New York-based Behrman Capital and Chicagobased Willis Stein & Partners turned to the secondary
market to recapitalize funds raised in 2000 and 2001 both
to buy more time and to secure more capital for
companies still remaining in those funds.
Canada Pension Plan Investment Board, which financed
the lions share of the recapitalization of the Behrman
In Their Own Words
European LBO/
Corporate Finance
Susanne Forsingdal, partner, ATP-PEP
2012? Pension funds are trying to find
equilibrium in their asset allocation. On one
hand, a low interest rate environment creates a
need for adding risk to the balance sheet in order
to achieve promised returns, while on the other
hand, funds are struggling to meet capital requirements.
What is the most important issue that the buyout industry
faces in 2013? Fundraising will be on top of the agenda for a lot
of funds and funds of funds in 2013. However, the general theme
of narrowing down the number of relations/funds in a portfolio
will continue. This is why general partners need to prove
themselves for instance, through the sale of companies
acquired in pre-Lehman years.
Capital III LP, a $1.2 billion 2000-vintage year fund, is

currently analyzing a pipeline of more than $2 billion in
similar potential investment opportunities, Senior Principal
for Private Investments Yann Robard told Private Equity
Analyst back in November.
Over the summer of 2012, the investment boards secondary
team reviewed 75 funds raised between 1999 and 2001 and
found a handful that would lend themselves to similar
types of transactions, according to Mr. Robard.
However, the complex nature of these deals may limit the
number of transactions that make it across the finish line.
The more complex the deal, the lower the likelihood of
getting it done. said Rudy Scarpa, a partner on the
secondary investment team at Pantheon. These are
complex deals. Youre negotiating not only with the sellers
but also with the GP. We like these opportunities and are
actively seeking these types of deals.
Capital on Board
If and when the pace of secondary deal volume does pick up
in 2013, buyers have no shortage of money to purchase those
assets, generating some concern that pricing may get too rich.
Anything that hits the market gets tons of interest, said a
senior investment professional at one secondary buyer.
Secondary firms, including those in the U.S. and Europe,
attracted more than $20 billion for new funds through
early December 2012, according to Dow Jones LP Source,
on top of another $11 billion raised in 2011. Axa Private
Equity, Coller Capital and Partners Group are only a few
firms that wrapped up multibillion-dollar pools in 2012.
The secondary fundraising market may be less crowded in
2013, with fewer firms launching new offerings. Paul
Capital Partners and Pomona Capital remain on the
marketing trail as 2013 unfolds, while Lexington Partners
expects to launch marketing efforts for its next large
secondary fund sometime in the third or fourth quarter of
the year.

Formidable economic growth is on top of my list. If this,
surprisingly, does not come through, I wish for future pension
beneficiaries to push regulators into reconsidering the focus on
avoiding risk to the benefit of private equity funds, which have
showed consistently strong returns during the financial crisis.
That said, some buyers point out that the large amounts of
capital raised in recent years still pales in comparison with
the potential supply of deals they expect to hit the market
in the coming years and that overall buyers have stayed
fairly disciplined on pricing.

equity industry in 2013, what would it be? A Higher Capital
Gains Tax in the United States.
So far, I havent seen any crazy pricing out there, but its
always something to keep your eye on, said Mr. Wolak.
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32

Back to Business? Enterprise May Displace

Consumers as Ventures Darlings in 2013
By Russ Garland
Inc., Foursquare Labs Inc. and other social media
companies, indicated that companies were having a
harder time raising follow-on financing. For instance, just
under half of the consumer information services
companies that raised first rounds in 2010 had raised a
subsequent equity round as of September, versus 62% of
those that raised a first round in 2007.
This data prompted an exchange between two noted
venture investors, Fred Wilson of Union Square Ventures
and Dave McClure of 500 Startups. Mr. Wilson contended
on his blog that there have been fundamental changes in
the landscape in the last couple of years. He focused on
three things: the maturing of the consumer Web, a shift from
desktop Web applications to mobile apps and a move to
enterprise deals by later-stage and momentum investors.
In Their Own Words
Venture Capital
Promod Haque, managing partner, Norwest
Venture Partners
the venture industry was still

riding a consumer Internet
wave and eagerly awaiting Facebook Inc.s initial public
offering.
Now, as Facebook tries to regain its footing after its
bungled May IPO, the force of that wave is in question. A
string of exits involving venture-backed companies whose
business models target other businesses and organizations
known as enterprises in VC-speak has shifted the
spotlight away from the consumer-focused darlings of last
year. At the same time, VCs are casting a sober eye on the
crowd of Internet startups that raised seed funding during
the latest Internet boom or bubble and wondering
how many are really worthy of serious money.
All this has led to some entertaining exchanges in the
blogosphere, but whether venture investing has hit yet
another inflection point is an open question.
Overall, investment in consumer information services
companies was off 42% in the first nine months of 2012,
according to data from VentureSource, a research unit of
Private Equity Analyst publisher Dow Jones & Co. Further
analysis of activity in this sector, which includes Twitter
Sponsored by

2012? The resurgence of the enterprise sector,
particularly software as a service, cloud and IT
infrastructure technologies, was the key theme that
stood out in my mind. We saw a number of
enterprise technology companies being strongly valued by the
public markets and outperforming other newly public companies
that went out this year. We also witnessed some strong M&A
activity in 2012. It is clear that enterprise technology no longer
simply supports business. Enterprise technology is becoming
indistinguishable from business.
What is the most important issue that the venture capital
industry faces in 2013? Will public market investors continue to
be excited about companies growing at strong rates and value
this growth as we saw in 2012? Or will they get sidetracked with
the fiscal cliff or the slowing of the U.S. economy and pull back?
What do you see as the biggest investment opportunity for
venture capital in 2013? Were particularly bullish on the ongoing
innovation were seeing in a number of startups and growthoriented companies focused on big data/analytics, software-defined
networking, storage, health-care IT and the social enterprise. Thanks
to the rapid adoption of cloud technologies and the consumerization
of IT, companies continue to exploit massively disruptive forces that
are changing the face of enterprise technology as we know it today,
and their businesses are growing at a more rapid pace.
What is your New Years wish for the industry in 2013? A quick
and lasting resolution of fiscal cliff issues so that the IPO window
remains open and that growth continues to be valued highly by
public market investors.

Opportunity remains for those who adapt, Mr. Wilson wrote,

but the wind that has been at our back for seven to eight
years in consumer Internet is no longer there. Its tougher
sledding and will likely continue so for some time to come.
Mr. McClure challenged Mr. Wilson in a blog post asserting
that the Internet is blossoming in multiple ways, especially
globally, and that there are more investment opportunities
than ever, not fewer. He did, however, question whether the
typical venture fund was in a position to flourish when startups
serving consumers and small businesses could generate
revenue quickly and find exits earlier. There will be thousands of small wins, but larger funds cant handle the scale
required to do so many small investments, Mr. McClure wrote.
As Facebook, Groupon Inc. and Zynga Inc. have struggled
to live up to their pre-IPO hype, venture firms in 2012 saw a
string of enterprise-focused companies get a positive
reception on the public markets. For instance, Workday Inc.,
whose online software enables enterprises to manage their
employees, saw its stock shoot up 74% in its first day of
trading in October. Other successful IPOs by business-tobusiness companies were network security provider Palo
Alto Networks Inc. and data analytics company Splunk Inc.
Faster & Cheaper: U.S.-Based, VC-Backed

Consumer Information Services Deals
Median time (in years) from seed financing to first-round financing
1.2 years
1.08
1.08
1.04
1.0
0.8
0.75
0.75
0.6
0.38
0.4
0.2
2007
2008
2009
2010
2011
1Q-3Q12
Median sizes of first rounds (M)

All
Have not raised subsequent equity round
Have raised subsequent equity round
$5M
4.0
$4.0
$4.1
$4.0
$3.5
$3.0
3.0
$2.5
$2.1
$2.1
2.0
$2.2
$2.0 $2.0
$2.0 $2.0
1.0
0.0
NS*
2007
Chris Ehrlich, general partner, InterWest Partners

It was a tale of two different stories. It started with
optimism and a more-calm health-care market. The
enthusiasm was squashed by global uncertainty, and
we realized that the U.S. health-care industry is no
longer an island unto itself. The second part of the
year seems better, with biotech companies such as Tesaro Inc. going
public before they had an approved drug. That makes people feel
that theres a good market for exits in life sciences venture capital.
industry faces in 2013? The first is a return of stable and sustained
public market appetite for innovative [medical] assets. The second is
the willingness of the Food and Drug Administration to give clear
guidance for approval of drugs and medical devices. Those are the
two things that will make or break the industry every year, and 2013
is no exception.
venture capital in 2013? One is the good old-fashioned gamechanging solution for unmet medical needs real things that change
the standard of care. In addition, drugs and devices that optimize
wellness and appearances, such as obesity reduction and hair
growth. People want to lose weight and gain hair. Also, investing in
drugs that are close to market and can help pharmaceutical
companies deal with the patent cliff.
What is your New Years wish for the industry in 2013? One
is a revitalized and well-funded FDA that paves the way for a
record number of approvals. A second is a spate of high-profile
exits for biotech and medtech companies that will remind the
investment community why life sciences was and is a great
place to put their money.
2008
2009
2010
2011
1Q-3Q12
Median time (in years) from first-round financing to subsequent equity financing
1.5 years
1.33
1.33
1.3
1.08
1.1
1.00
0.9
0.83
0.7
NS*
2007
2008
2009
Median sizes of subsequent equity rounds (M)

$6M
5
2010
2011
1Q-3Q12
$5.4
$5.0
$4.0
$3.1
$3.0
3
2
1
0
NS*
2007
2008
2009
2010
*Not statistically significant. Source: Dow Jones VentureSource
Sponsored by
2011
1Q-3Q12
33
34

Clearly, the enterprise space is drawing greater attention of

late, but swings between the consumer and business
markets are par for the course in venture investing. Some
VCs say they dont pay much attention to the distinction
when deploying capital. Our themes cut across both and
in different ways, depending on each theme, Foundry
Group Managing Director Brad Feld said in an email.
Another indication of the blurry line between consumer
and enterprise plays is that consumer powerhouse Apple
Inc. is gaining traction in the enterprise market as workers
opt for iPhones and iPads.
What has happened is that the flood of angel-fueled seed
rounds has produced a feast of consumer Web companies
for venture investors to chew on and many of those
startups seem to be doing similar things.
I dont think were seeing fewer consumer Internet
startups, said Harry Weller, a general partner at New
Enterprise Associates. I think were seeing plenty of them.
I think were seeing much fewer of them getting funded.
Mr. Weller invests in both enterprise and consumer
companies his portfolio at NEA has included Groupon and
Eloqua Inc., a business software provider. In his view, the
much lower cost of starting a company, which has driven
the explosion of seed-stage investing, is a double-edged
In Their Own Words
European LBO/
Corporate Finance
Robert More, general partner, Frazier Healthcare
2012? It was a big shakeout year in biotech and
venture capital. We talk about it a lot, but this
year perhaps the reality outstripped the talk.
What is the most important issue that the
venture capital industry faces in 2013? The
progressive return to the cottage industry we once were. And
that is a good thing.
venture capital in 2013? I am a health-care person, and so I am
biased. But health cares biggest problem is getting the right
patient in front of the right provider at the right time. The
system is terribly broken. We spend more than any other country.
And our acute health care is second to none. But health is not
about acute events. It is lifestyle, prevention, education and
personal responsibility. We are terrible at that. Incentives are not
in the system. And the days of your general practitioner being
your advocate in the system are over.
What is your New Years wish for the industry in 2013? For
venture capital to lose its mystique. There are great VCs. But this
is not a scalable industry, per se. It is a cottage industry. It is a
mentorship business and a privilege. People need to be in this to
support entrepreneurship and facilitate those people changing
the world. It is not about us.
Sponsored by
sword. Although its never been cheaper to acquire users,

Mr. Weller said, its still very competitive to acquire a dollar
of revenueThe cost of copying is very low also.
Dont confuse the cost to start a company [with] the cost
of building a company, Douglas Leone, a Sequoia Capital
partner, recently told a crowd of young entrepreneurs in a
speech at the Massachusetts Institute of Technology. In a
globalized world, one application can spread like wildfire
and theres only one winning company, which means you
have to invest more than youve ever had. You have to
raise $100 million, $200 million dollars for the first time.
Eric Lefkofsky, a co-founder of Groupon and of Chicagobased early-stage investor Lightbank, said investment themes
such as local, social and mobile are just getting started and he
has seen absolutely no drop in entrepreneurs enthusiasm for
pursing them. There was a euphoria, I think, that existed
around a whole bunch of companies, he said, and that has
been damped by the performance of some of them on the
public markets. But there hasnt been a real change in the
market because these businesses are still performing at scale.
The euphoria over companies like Facebook and Groupon
enabled them to raise later rounds at huge valuations,
providing some early liquidity for investors such as NEA and
Lefkofsky. Since the Facebook IPO, there has been pushback
on valuations of high-flyers such as social media company
Foursquare, which in November was having trouble
persuading investors that it was still worth the $760 million
valuation it drew in financing before Facebook went public.
But hot companies can still command high prices for their
private shares as evidenced by mobile payments company
Square Inc., which in September raised $200 million to
expand internationally at a valuation of $3.25 billion. Other
companies generating a lot of excitement include room
rental service Airbnb Inc., cloud storage company Dropbox
Inc. and online scrapbooking service Pinterest Inc.
Investment banker Benjamin Howe, co-founder and chief
executive of AGC Partners, said there is a very strong
appetite among public investors and private equity firms
for consumer-oriented technology companies that show
they have sustainable and growing businesses. The
problem, he said, is stock market volatility. For most, the
question is whether fund partners feel it is a safe enough
market to debut their company, Mr. Howe said.
The story for the consumer Internet investing as 2012
ends is one of promising innovation on the technology
front tempered by an unstable exit picture that is largely
beyond the venture industrys control, coupled with a raft
of untested startups.
Its sort of like the lottery in a way, said NEAs Mr. Weller.
There always will be big winners. But predicting it is
getting harder than ever because of the number of
companies in the Petri dish.

Quotes of the Year
were distributed before the return of capital.

Sean Greene, associate administrator for investment and special adviser for innovation, U.S. Small Business
Administration, on problems associated with the SBAs participating securities program (June)
In Their Own Words
Venture Capital
Jon Callaghan, co-founder and managing partner,
True Ventures
It was a year of beautiful design and creativity in
mobile devices, messaging, video, entertainment,
the physical Web, personal health, education and
enterprise computing. We witnessed the scale of the
connected Web and the early potential of the post-PC world
(mobile phones and tablets). We also witnessed the democratization
of entrepreneurship. In 2012, it was easier to follow your dream and
start a company than ever before in history.
industry faces in 2013? Partisanship in Washington has created
business uncertainty which has stifled our economy. We need both
sides of the aisle to come together on pro-growth tax and
immigration reform designed to reward Americas risk-takers and
encourage long-term investment. Venture capital is good for
America, and it is uniquely American.
venture capital in 2013? We will see significant start-up innovation
and creative disruption in health-care IT and education. Our
brightest entrepreneurs are shifting time and talent to fixing these
enormous problems. Quantified self, consumer-driven outcomes
and mobile are big trends in health. Education is driven by
development in analytics, horizontal data platforms and mobile
content delivery. Also, connected devices (aka the Internet of
things) will change your world in 2013.
What is your New Years wish for the industry in 2013? I wish for
our industry to take bold risks and tackle the tough problems:
health, education, hunger, energy, happiness. Lets think big, work
hard, support our nations entrepreneurs and endeavor to create
companies of lasting impact and meaning.
Dennis Dougherty, co-founding general partner,
Intersouth Partners
2012? From a venture capital perspective, 2012
was a year of contraction. The venture funds have
gotten smaller. We also see more funds moving
toward late-stage investing, which may not be a
bad idea, but its starting to make it hard for entrepreneurs to get
startup financing.
industry faces in 2013? There is a liquidity crisis in the venture
capital industry. The limited partners need to validate the
investments they made in venture capital a decade ago theyre
waiting for money to come back so they can put it back out again.
Many venture capitalists with under 12 years of experience have
never seen an up-cycle. The limited partners need to regain the
belief that the venture industry can provide good returns across
industries, sectors and geographies.
venture capital in 2013? If we have a broadly rebounding
economy, the big corporations would begin to buy products and
programs that they want to have, not just the ones that they have to
have. Venture capitalists that have an inventory of acquisition-ready
companies will do well.
What is your New Years wish for the industry in 2013? My wish is
that Congress and the administration would see the importance of
long-term capital gains treatment for angel investors who invest in
startup companies. If not, Im afraid well lose them. Angel investors
are essential to seed rounds or first rounds for startup companies, and
theyre an important part of the ecology of entrepreneurship.
Neil Sequiera, managing director,
General Catalyst Partners
It was a strong year. Through the first three quarters
there were 40 venture-backed IPOs, including
companies like Palo Alto Networks Inc., Kayak
Software Inc., Facebook Inc., Workday Inc. and
others. These companies create important innovations and
thousands of jobs, which reinforces how critical venture capital is to
the overall economy.
industry faces in 2013? Given the influx of angel and seed funding
over the past few years, it is likely 2013 will be the year many of
these companies seek their first round of institutional capital.
However, venture capital done well is an artisan craft business, so
any given firm or partner can only take on so many new companies
if they truly want to make an impact. As a result, we will see a lot of
smart and thoughtful teams who have less-than-breakout ideas
looking for a home or finding creative ways to bootstrap their
companies as competition for capital grows fierce.
venture capital in 2013? Consumers appetite for consumption
of any media in any location on any device is insatiable, but the
infrastructure and platforms that deliver this content are
generally archaic. Next-generation digital delivery systems,
servers, routers, software switches, analytics and ratings, data
analysis, devices, interfaces and monetization tools are all ripe
for new disruptive startups that can replace legacy architectures
that were originally engineered to function in a completely
closed distribution environment.
What is your New Years wish for the industry in 2013? That the
enormous amount of cash sitting on balance sheets of the largest
acquirers is put to better use by acquiring innovative companies
and teams that will help reinvent entire organizations.
Sponsored by
35
36

Sponsored Article
2013: More Market Malaise or a Change in Momentum?

By Brandon Farley of BMC Group
The market malaise that deflated alternative investment returns
in 2008 and 2009 turned to the positive in 2010 and 2011.
However, 2012 can be defined as a year of instability, delivering
flat results largely impacted by geopolitical and macroeconomic
events, with global weather even playing a disruptive role.
execution and outsize returns. Market conditions aside, private

equity and venture capital firms have the ability to leverage
technology to limit risk and maximize value. Exit planning and due
diligence readiness have become a critical component in the life
cycle of most professional investors.
As we start 2013, the varying asset classes in alternative

investments are cautiously optimistic that, although slow global
growth is a foregone conclusion, strong multiples could surface if
volatility diminishes.
SmartRoom, along with its strategic partner DealCloud LLC, is

uniquely positioned to provide a solution that will enable private
equity and venture capital firms, as well as the service providers
and advisers they potentially engage, to optimize information and
process management while maximizing deal value. Deal teams
often cite their inability to identify and actively engage key buyers
and investors as well as to efficiently progress through the
marketing and diligence process as key factors in many deals
derailing. DealCloud and SmartRooms combined platform offers
value through its data and network, execution and marketing
tools, and diligence management solution.
Private equity and venture capital have seen a material change

in the buyer profile in the last four years. Prior to the credit
crisis, sponsor exits to other private equity firms were
commonplace. Now, in most industry verticals, over 70% of the
exit activity is through sales to strategic buyers (via corporate
acquisitions).
This swing to strategics is due to corporations ability to stockpile
cash in a low interest rate environment and, in the absence of
interesting investment options in the current low-growth
economy, continue to leverage acquisitions to create shareholder
value. This condition, combined with a potentially more attractive
initial public offering market in 2013, will likely improve multiples
and lead to better returns for private equity, venture capital and
mezzanine funds.
Real estate is still challenged by an overabundance of inventory,
making strong returns a challenge. However, funds with a vintage
of 2009 or newer can be and have been opportunistic in a
distressed space that, barring any unseen negative
macroeconomic event, should start to trend upward.
As a provider of virtual data room services, we are often a leading
indicator of transactional volumes and trends, given the announce
date of a liquidity event is usually six to nine months after our
project start date. Furthermore, more alternative investment firms
are leveraging technology to improve and expedite both the
fundraising process and partner reporting.
The first quarter of 2013 should see an increase in project
volumes as fiscal cliff uncertainty abates. Given the direct
correlation between improved volumes and improved returns, we
anticipate 2013 to be a stronger year for fund performance.
Technology is now woven into the fabric of every stage of an
alternative investment life cycle from fundraising, to portfolio
information management, to limited partner reporting, to exits. By
taking advantage of the tools at their disposal, firms will be at the
ready to execute on events that will maximize multiples, decrease
risks and deliver results well above the zero line.
More often than not, it is the human elements combined with a
lack of planning that introduces obstacles to successful
The proper technology solution necessitates multifold

requirements. First, there must be integration between document
collaboration and file-sharing software, value-added information
databases and the workflow process software leveraged to
manage active engagement. Second, owners and advisers must
maintain full control over their transactions from the
participants they include, to the personalization of information
exchanges, to complete security over access rights to diligence
documents, to interactive report generation on all deal-related
activity. Third, having the agility and flexibility to support
transactions of all shapes and sizes, including strategic and
proprietary processes, is paramount. Finally, a solution that
combines execution and process management with data must
refrain from disseminating a firms proprietary relationships to the
benefit of the network. In other words, a robust technology
platform that limits risk and maximizes value isnt another
additional siloed database or list.
The SmartRoom offering, in combination with DealCloud,
interactively melds the disconnect between readiness and
execution without disrupting traditional confidentiality, brand
equity and the highly unique processes typical in this industry.
Our experience with our private equity and venture capital
clients has taught us that this market overflows with
intelligently managed firms and we are excited to be delivering
a leading-edge technology thats evolving as fast as the needs
of the market.
Brandon Farley has led SmartRoom for BMC Group since
2005. He has spent his career in leadership roles with
companies that deliver technology to improve processes. Prior
to BMC Group, he served in a variety of management positions,
including regional datasite director for Merrill Corp., regional
sales manager at Macromedia Inc., and vice president of sales
for ezgov.com. He holds degrees in communications and English
from Stanford University.
37
Sponsored Article
Venture Capital 2013 Outlook:

Three Factors That Make Us Optimistic
By David York and Lisa Edgar of Top Tier Capital Partners
At Top Tier Capital Partners, we believe the fundamentals of the
venture capital industry are strong heading into 2013. Although
the industry experienced some setbacks in 2012 such as the
post-IPO performance of some large social media stocks we
believe overall that the three key elements of a successful venture
capital environment are in place.
Innovation. We see several significant technology trends driving
fundamental innovation and creating a new set of market-leading
companies. These include a move toward cloud computing; the
explosion of smartphones and accompanying mobile applications;
the rise of social networking technologies inside big businesses; the
need for more cost cutting in health care; and the development of
new energy-efficiency innovations in the clean-technology sector.
Underlying many of these trends is a shift from consumer toward
enterprise-IT innovation. Over the past several years, many notable,
VC-backed technologies catered to the consumer, including social
networking, gaming and new forms of e-commerce, such as daily
deals and monthly-subscription websites. But as we move into
2013, we see stepped-up interest and investment in the enterprise,
particularly cloud, big data, mobile and security.
All these sectors could see potentially explosive growth. The
mobile market is particularly attractive: Today, there are about
one billion smartphone users globally, but five billion mobile
phone users. This indicates the huge potential for growth in
mobile applications, mobile commerce and personal and business
productivity tools as users upgrade their devices.
In the health-care sector, spending is expected to grow more than 6%
annually through 2020. By then, the U.S. health-care industry will be a
$4.5 trillion market and make up 19% of gross domestic product,
creating more pressure to reduce health-care costs with innovative
new products and services1. Venture capitalists typically have focused
on biotechnology and new drug development, but they are also
funding new medical devices, equipment and services, especially
those that reduce costs and improve the quality of care. VCs also have
changed their strategies in clean-technology investing, now focusing
on companies with capital-efficient business models that have a
strong path to exit. The year 2013 may see several clean-tech
businesses seek liquidity in the public markets, which, if successful,
would reinvigorate this area of investing.
Capital. Currently, industry capital flows are back to more-normal
levels compared with those in the dot-com boom. And less capital
means better returns. Through the end of the third quarter of
2012, U.S. venture capital firms raised $16.2 billion for 142
separate funds. The amount raised is up about 31% compared
with 2011, but the number of funds is down by 13%2. We expect a
similar fundraising environment in 2013 as capital gets
concentrated with fewer and fewer managers.
Importantly, the venture industry has right-sized, with the number

of firms actively making investments decreasing to less than 500
today from about 2,000 a decade ago. At the same time, there has
been a rise in angel and seed activity, and we expect that to
continue. Recently, there has been discussion in the press about a
Series A crunch, and whether many of the new crop of seedfunded companies will graduate to receive Series A preferred
stock rounds of institutional financing. Our expectation is that
many of these small companies will not cross the chasm to Series
A, which is not surprising as this historically has been the case for
many seed-stage projects. The difference today is that there are
many more seed-only funds in the market, making the problem
seem more significant.
Liquidity. A robust exit environment delivers returns for
investors and fuels the continuing cycle of innovation,
investment and liquidity. We saw 2012 as a good year for initial
public offerings. Through the third quarter, 40 U.S. venturebacked companies went public, raising a total of $20 billion.
The blockbuster Facebook Inc. IPO made up most of this
volume. The National Venture Capital Association reported 28
venture-backed companies in registration as of the end of the
third quarter3. Notably, this number does not include
confidential IPO filings under the JOBS Act, so the number of
filings may be much larger.
Returns for companies already public have generally improved
since 2010. Despite some disappointment in the after-market
performance of Facebook, Zynga Inc. and Groupon Inc., investors
who got into those companies early still realized significant
returns. At the same time, the IPOs of many enterprise-focused IT
companies have produced better-than-expected gains. Enterprise
companies such as Palo Alto Networks Inc., Splunk Inc., Workday
Inc. and ServiceNow Inc., for example, have all performed well.
Moreover, the large cash balances held by major enterprise-tech
acquirers such as Microsoft Corp., Google Inc., International
Business Machines Inc., Cisco Systems Inc. and VMware Inc. are
helping drive a fairly robust enterprise-M&A market as well.
Venture remains a complicated, risky business. But its always
been a sector of high risks and potentially outsized returns. We
remain confident that savvy venture capital investors, partnering
with the most innovative and accomplished entrepreneurs, can
continue to turn profits in 2013 and beyond.
David York and Lisa Edgar are managing directors at Top Tier
Capital Partners, a San Francisco fund-of-funds manager focusing
on venture capital. Mr. York is chief executive of the firm.
Centers for Medicare & Medicaid Services National Health Expenditure Projections 2011-2021
National Venture Capital Association, Q3 2012 Venture Capital Fundraising Report
National Venture Capital Association, Q3 2012 Venture-Backed Exits Report
38

Asian Private Equity to Creep Cautiously Into 2013

By Sonja Cheung
is still good compared with other countries. Mr. Tsao
added that Gobis LPs wont be cutting their allocations to
Asia, but will either maintain or increase them. Gobi
manages both yuan- and dollar-denominated funds.
CVCs Mr. Kuan said Asian allocations from sovereign
wealth funds key investors in private equity are either
going to stay steady or increase. China Investment Corp.,
one of the worlds largest sovereign wealth funds, said at
Chinas 18th Party Congress in November that it would like
to allocate more of its $482 billion wealth to Asia, partly
based on the regions economic growth. CIC is an investor
in Chinese firm Citic Capital Holdings Ltd.
private equity
investors, tight
lending conditions, higher company valuations and a
challenging exit market mired the year of the dragon, 2012,
prompting general partners to become increasingly
cautious both about their investment strategies and
about raising new funds over the last 12 months.
That cautious sentiment will likely continue into 2013.
Fundraising will remain challenging for private equity firms
worldwide as a flood of firms jockey for favor among
choosy limited partners. Asian GPs could do relatively well,
however, as Western-based institutional investors still need
to deploy capital into Asia to balance out global portfolios,
and sovereign wealth funds favor the regions high-growth
economies, industry participants said.
The amount of capital going into Asian PE funds could be
flat, to slightly increasing, said Roy Kuan, managing
partner at CVC Capital Partners, manager of three funds in
the region totaling about $6.85 billion. The firm, which has
offices in Hong Kong, Bangkok and Beijing, has no
immediate plans to raise a new fourth Asia-focused fund,
he said.
However, this doesnt mean that fundraising will be clear

sailing, as some LPs see more attractively priced
investment opportunities in Europe and the U.S., albeit
withdistressed elements, said Barry Lau, managing
partner and chief investment officer at Gen2 Partners,
which is raising a second credit fund that will partly target
Chinese private equity deals.
In 2012, fundraising in Asia was lackluster, with only 67
buyout and corporate finance funds able to complete at
least a first closing as of November, far less than 137 in
2011 and 124 in 2010, according to data provider LP
Source, which is owned by Dow Jones & Co., publisher of
this newsletter. Its a similar story in venture capital, with 52
venture funds having completed at least one close as of
November, compared with 97 in 2011 and 80 in 2010.
The years slowdown was partly due to political
uncertainty in the U.S. and China. Hu Jintao handed over
the Chinese Communist Party leadership to Xi Jinping in
November, which not only made investors pause in
raising new funds but also slowed deal flow. On the
venture side, Chinese deal flow took a hiatus, with the
number of deals in the three months ending in September
dropping 61% on a year-over-year comparison to 41,
while the value dipped 58% to $612 million, according to
Dow Jones VentureSource.
Now those changes have taken place, theres less risk
aversion about fundraising, said Mr. Tsao.
Investors are banking on growth in Asian economies,

especially in China, while Europes sovereign debt crisis
and growing concerns about the U.S. sinking back into
recession force limited partners to reconsider country or
regional allocations.
U.S. buyout giant TPG Capital and Morgan Stanleys Asian

private equity arm are two of the firms still raising new funds.
TPG is yet to close its intended $4 billion sixth pan-Asian fund,
while Morgan Stanley Private Equity Asia is raising a lesser
amount of $1.5 billion for its fourth Asia-focused vehicle.
Tom Tsao, founder of venture capital firm Gobi Partners,

pointed out that even though Chinas growth has slowed, it
In terms of China deal flow in 2013, Headland Capital

Partners Chief Executive Marcus Thompson expects it to
Sponsored by

pick up as private company valuations become more

attractive, at which point entrepreneurs will start to price
their businesses in line with falling public equity valuations.
He added that a reduced flow of capital from yuan funds
will also dampen pricing expectations, after a flood of local
currency earlier this year pushed up company valuations.
Several firms have expanded their activity in Southeast
Asia, seeing it as a good long-term bet (see adjacent article
on emerging markets).
In the near term, Mr. Thompson is conservative, noting
that deals in those markets tend to be smaller, so we do
see an increase in deals, but deal flow is unlikely to double
and triple. CVCs Mr. Kuan is more cautious about the
Quotes of the Year
There are many disgruntled people in China

who will not hesitate to blow the whistle.
Marcia Ellis, partner, Ropes & Gray LLP (March)
outlook for deal flow in Southeast Asia, citing high public
market multiples and liquidity.
The PE markets there are starting to remind us of where
China and India both were in 2009 to 2011 in terms of
valuations and competition, said Mr. Kuan, whose firm
has invested more than $1.3 billion in Southeast Asia over
the past few years.
In Their Own Words
Emerging Markets
Gary Rieschel, founder and managing partner,
Qiming Venture Partners
It has been a difficult year, because exits are not
materializing as fast as we would like. The U.S.
market continues to be difficult for Chinese listings,
and the domestic Chinese market is stuffed with
mediocre companies taking up space in the queue.
industry faces in 2013? The venture capital industry is going to have
to be disciplined in terms of investment focus and pricing in 2013.
We are bullish on China, but how you price deals and add value post
investment will continue to separate great from merely average firms.
Meritocratic listing criteria in China, cutting off low-cost capital to
SOEs and stronger protection of intellectual property.
Thomas Tsao, founder, Gobi Partners
It was a challenging year as the IPO window was
essentially closed in the U.S. As a result, two of our
portfolio companies went for listings in other
overseas venues Vange, an enterprise software
company focusing on Chinas housing market, in
Germany, and DeClout, a cloud computing company, in Singapore.
Overall M&A activity remained relatively robust.
What is the most important issue that the venture capital industry
faces in 2013? In a sense, the era of taking shortcuts, what I call the
doping era, is over for Chinese companies trying to go public in the
U.S. These shortcuts involved poor disclosure, disregard of minority
shareholders, lack of corporate governance, accounting shenanigans
and even outright fraud. Of course, were all partly to blame from the
PE firms that paid excessive valuations, thereby setting unrealistic
growth expectations, to the accounting firms that relied on assumptions
instead of vetting them, to the investment banks that were more
concerned about earning fees than earning public trust. In some way,
we all helped enable those bad companies. Whats needed now is a
reset, a back-to-basics approach. Weve got to move to a clean ball
era and eliminate the corporate steroids. That starts with early-stage
investors demanding and instilling greater accountability and discipline

in the startup process in China.
What is your New Years wish for the industry in 2013? My wish
is that the early-stage VCs in China, such as Gobi, can repopulate
the investment landscape with enough high-quality companies that
go on and raise future rounds of growth and pre-IPO funding.
Otherwise, all that money that has been raised for late-stage
investments will not be able to find a home.
industry in 2013, what would it be? China Enters Golden Age for
Early-Stage Investing
What impact, if any, do you see currency volatility having on the
private equity industry in 2013? In the long term, continued
appreciation of the renminbi versus the U.S. dollar will only hasten
Chinas climb up the value chain. As Chinas traditional cost
advantage erodes, business models that relied solely on cheap labor
and imitation are giving way to new companies that are trying to
generate sustainable margins in a more competitive market. Thats
the new generation of startups emerging from China driven by the
reality of renminbi appreciation and global competition.
Jonathon Bond, head of fundraising and
environmental, social and governance, Actis
An encouraging year for emerging markets private
equity, with most investment themes continuing to
show resilience and some political risks abating
(Egypt, Chinas change of leadership).
What is the most important issue that the emerging market
buyout industry faces in 2013? The risk of too much capital
driving down returns.
What is your New Years wish for the industry in 2013? For a
marked improvement in sentiment toward India, following a
renewal of government reforms.
industry in 2013, what would it be? The emergence of large
financial buyers as key exit routes for EMPE midmarket
investments.
Sponsored by
39
40

Emerging Markets Investors Picks Go Beyond BRICs

By Jonathan Shieber
where 60% expect more deals in 2013, was about on a
par with North America. The survey of 143 general
partners was conducted between July and September.
Africa Ascendant
A number of firms are actively looking at the African
market as the quest for growth continues. Africa is
expanding faster than almost any other region, and the
continent has 12 countries whose growth rates have
averaged above 6% for six or more years.
London-based Satya Capital is raising $500 million to focus on
private equity and growth capital investments in East Africa.
Meanwhile, global heavyweights like New York-based
Kohlberg Kravis Roberts & Co. and Washington-based Carlyle
Group are both beefing up their ability to commit capital in
Africa. In November, KKR poached Kayode Akinola, a
founding investment partner at pan-African fund Helios
Investment Partners, to join its firm, while earlier in 2012,
Carlyle launched a $500 million Sub-Saharan Africa fund.
interest in direct
investments into
India and China may be waning, but allocations to
emerging markets continued expanding into new locales in
2012 and investors are looking ahead to a bullish 2013 in
certain economies.
Many private equity firms have stumbled in China as
growth there slowed, but it remains a large part of
investors strategies (see adjacent story). Now, growthhungry limited partners are looking beyond the big four
countries of Brazil, Russia, India and China and are seeking
to diversify and invest more broadly in certain regions.
A recent Grant Thornton LLP survey showed a sharp
drop in sentiment regarding fundraising in the BRIC
countries and in the Asia-Pacific region, though
sentiment declined less in the Middle East and North
Africa. Similar patterns were shown for deal-making
while a majority of respondents expect less activity in the
BRIC countries in 2013 than in 2012, they have a very
positive view of Latin America. The MENA region,
Quotes of the Year
People say private equity performance

isnt correlated to public markets, but the
sentiment sure is.
Paul Delaney, senior managing director,
Sponsored by
Genevieve Sangudi, managing director of the Carlyle fund,

told The Wall Street Journal in November that the firm had
been drawn to the continent by improving economic and
political stability. Were here for the long haul, she said.
Investors from other emerging markets are looking to
Africa for investment opportunities as well. In May,
Brazilian bank BTG Pactual said that it planned to raise a
$1 billion investment fund for Africa focused on
agriculture, energy and infrastructure.
Brazilian Bounce
Brazil, and Latin America more broadly, represent potential
hotspots where limited partners are hoping that emerging
market growth can power returns.
The case for Brazil has already convinced many investors,
and theyre warming to the broader promise of the region,
according to a September review of 2012 investments by
Ernst & Young LLP.
The Latin American Private Equity & Venture Capital
Association reported that in the first half of 2012, the
number of deals in the region rose 38% from the same
period in 2011, although the value of deals, at $2.7 billion,
was up only 2%. The vast majority of deals were in Brazil,
though Mexico showed a surge.
At the same time, Latin America-focused funds face the same
stampede for capital as firms in the rest of the world. Ernst &

Young said firms were seeking $19.7 billion in new capital.

The $1.9 billion raised in the first half of 2012 was down
sharply from the record $4.9 billion raised in the first half of
2011 for funds focused on the region, according to Lavca.
Southeast Asian Tigers Roar Again

The idea that one economy can become a hub around which
private equity firms can continue to invest extends beyond
Brazil and Latin America, to Southeast Asia and the growing
economies that orbit the worlds second largest, China.
Private equity transactions in Southeast Asia during 2012
stood at $3.6 billion as of November, up from $1.3 billion the
year prior, according to data from the Centre for Asia Private
Equity Research Ltd. Those deals include the $1.7 billion
buyout of snack-food franchises KFC Holdings (Malaysia) Bhd
and QSR Brands Bhd by European firm CVC Capital Partners.
At the same time, more global firms are planting flags in
the South Asian market. In November, KKR opened a
Singapore office, with co-founder Henry Kravis
announcing plans to invest more than $1 billion in
Southeast Asia over the next five years.
Blackstone Group also opened a Singapore office last year,
while Carlyle Group recently closed its first Southeast Asia
deal, an investment in Indonesian telecommunications
tower operator PT Solusi Tunas Pratama Tbk. for between
$100 million and $150 million.
In Their Own Words
Emerging Markets
Benjamin Fanger, partner, Shoreline Capital Partners
2012? Regarding Chinese PE, in 2012 the investing
world woke up. GPs realized that China cant defy
economics. LPs realized capital should be allocated
toward niche managers with real ability to generate
value. And we all realized the next decade will look
very different than the last that successful investing will focus on
inefficiencies and value generation rather than just growth.
focuses on faces in 2013? China overlends to state-owned
enterprises, leaving private companies starved for credit. As a result,
we have seen a significant flow of special situations (or asset-backed
financings with PE-level returns) in recent years. But recently were
beginning to see NPLs and other distressed opportunities coming
back as well. Because these types of opportunities result largely from
Chinas misallocation of credit, a significant question for 2013 will be
whether China will learn to more efficiently allocate loans. If not,
special situations and NPL opportunities will continue to grow.
What is your New Years wish for the private equity industry in
2013? I hope that investors obtain a more nuanced picture of
China. So many LPs fall prey to the thinking that China can be
summarized in simple headlines that its either all bad or all good.
I would love to see the investing world dig deeper and understand
the more complicated picture, which is that China has both growth
and distress, both excess liquidity and cash crunches, both bubbles
and underpriced assets (depending on where you look in China).
A recent report from Boston Consulting Group cited

Southeast Asia as a strong source of private equity growth
and deal flow. From 2001 through 2011, the amount of
documented private equity capital under management in
Southeast Asia rose from to $30.1 billion from $11.7 billion,
according to the BCG report.

2013, what would it be? Journalists Finally Realize Chinese PE
Cant Be Summarized in One Headline.
The consulting firm said that investors should consider

alternative investment theses. Carve-outs from large
corporations, conglomerates and family groups represent
a significant opportunity for those wishing to leverage
Southeast Asias lower labor costs, the report said. Many
business sectors in Southeast Asia are highly fragmented,
offering private equity investors a host of potentially
suitable candidates for rollups, buy-and-build plays or
consolidation, it said.

2012? In 2012, I relocated to Nairobi to set up
ECPs Kenya office, so I would characterize the
year by what I witnessed here. That is, a growing
awareness of the potential of the continent not only by
institutional investors but also by the general business
community. A clear indicator of this is the sheer number and
variety of companies from tech, to finance, to retail moving
into the region and the constant sound of new office buildings
being constructed.
Emerging Markets PE
Fundraising & Deals
Number of Funds
Amount Raised (B)
Number of Deals
Amount Invested (B)
2012*
110
$27.2
619
$17.1
2011
117
$31.3
690
$22.3
*Through the third quarter of 2012. Source: Emerging Markets Private Equity Association
Namita Shah, vice president and head of

environmental, social and governance,
Emerging Capital Partners
What is the most important issue that the African private

equity industry faces in 2013? I would highlight talent sourcing
as an issue that has typically faced the African private equity
industry, similar to other fast-growing emerging markets. However,
with an increasing number of diasporans educated in the West
seeking opportunities back home, I would predict that 2013 will
see the hunt for top talent become increasingly less of a challenge.
What is your New Years wish for the industry in 2013? I believe
that positive development impact is complementary to profitability.
This ethos is increasingly sought out by our investors. My New
Years wish for the African PE industry is therefore for local African
authorities to increase their role in enforcing ESG standards.
Sponsored by
41
Raising the bar on real estate.

On newsstands Fridays.
WSJ.com/mansion
43
June
19th: Walgreen Co. pays $6.7 billion for a
45% stake in U.K. health products retailer
Alliance Boots GmbH, the largest private
equity exit of the year.
29th: 3i Group announces it will cut 160
jobs and close six of its 19 offices.
July
11th: The Wall Street Journal reports that
Apollos Leon Black was the purchaser of
Edvard Munchs The Scream, bought at
auction in May for $120 million.
25th: New Enterprise Associates closes its
14th fund with $2.6 billion, the largest
venture fund of the year.
August
10th: Carlyle announces the acquisition of
asset manager TCW Group Inc. from
French bank Societe Generale SA.
2012: The Year in Private Equity

January
11th: Hostess Brands Inc. files for
bankruptcy, leading to a plan to liquidate
its assets that would wipe out an
investment by Ripplewood Holdings.
17th: U.S. presidential candidate and
former Bain Capital head Mitt Romney
reveals he paid an effective income tax
rate of 15% in recent years.
February
1st: Duke Street shelves plans to raise a
850 million seventh fund.
4th: Nigel Doughty, founding partner of
Doughty Hanson & Co., dies.
the SEC has launched an informal inquiry
into how private equity firms value their
investments.
16th: VentureWire reports coal-conversion
company GreatPoint Energy Inc. raised a
$420 million round of capital, the largest
venture round of the year.
21st: Dubai-based Abraaj Capital, the
biggest buyout firm in the Middle East,
announces the acquisition of emerging
markets specialist Aureos Capital.
March
13th: Bain Capital writes to investors to
defend itself from criticism directed at the
firm in connection with the U.S.
presidential campaign of the firms
co-founder Mitt Romney.
September
April
9th: Facebook Inc. swoops in to buy
photo-sharing service Instagram Inc. for $1
billion, a week after the company raised
$50 million of venture capital at a $500
million valuation.
24th: The SEC accuses former California
Public Employees Retirement System
Chief Executive Federico Buenrostro of
scheming to defraud Apollo Global
Management. Through his lawyer,
Buenrostro denies the charges.
May
2nd: Carlyle Group prices its initial public
offering at $22 a share, raising $671 million.
8th: Chinas National Development and
Reform Commission rules that all the
capital in yuan-denominated funds must
come from local Chinese investors,
shutting out foreign firms.
9th: Calpers commits $500 million to a
separate account with Blackstone Group.
14th: The Obama campaign releases a TV
ad that criticizes Bain Capital for closing a
steel mill. It includes an interview with a
worker describing the firm as a vulture.
18th: Facebook lists its shares on Nasdaq.
A subsequent slide in its price leads to
criticism and sours the outlook for venturebacked offerings.
24th: Apollo, Riverstone Holdings and
others complete a $7.15 billion deal for El
Paso Corp. assets, the largest private
equity deal of the year.

New Yorks attorney general is investigating
the tax practices of private equity firms.
25th: Providence Equity Partners reveals it
has sold a stake in its management
company. The Florida State Board of
Administration later confirms it was one of
the two buyers.
October
debt issued to pay private equity
dividends has reached $54 billion, higher
than the post-crisis rebound year of 2010.
November
12th: Advent International announces it
raised 8.5 billion for its new fund, the
largest raised during the year.
19th: Terra Firma Capital Partners strikes a
3.2 billion deal for U.K. property
management company Annington Homes
Ltd., the biggest European deal of the year.
December
19th: Focus Media is to be acquired by
FountainVest Partners, Carlyle Group,
Citic Capital Partners, China Everbright
and management for $3.7 billion, in the
biggest Asian deal of the year.
19th: The European Commission unveils a
revised version of the Alternative Fund
Managers Directive that assuages some of
the industrys concerns about the new rules.
Quotes Of The Year
People have been wary of the world over the past few years. Credit is the place to be.
Tripp Smith, senior managing director, GSO Capital Partners (October)
Sponsored by
44

Rising Stars
During the past year, we profiled successful private equity investors who
could be part of the next generation of industry leaders. Here are excerpts
from some of those profiles.
Bruce Booth, Atlas Venture
Dr. Booth, 38, was hired by Atlas Venture in 2005

after stints with Caxton Health Holdings, where
he focused on venture and private equity deals,
and McKinsey & Co. In 2011, Dr. Booth
co-authored a study of venture returns that found health care,
not technology, had been the better performer from 2000 to
2010. There are a lot of myths about what successful
investing needs to look like, he said. As a former scientist
and data geek, I like to put out thought-provoking pieces that
are grounded in data that challenge some of those things.
Reputation: Hes got a very good grasp of science and
business at the same time, and hes voracious in his
analysis of the literature and [in] keeping up on the latest
developments, said Miragen Therapeutics Inc. co-founder
and Chief Executive William Marshall.
Key Deals: Avila Therapeutics Inc., which Atlas backed in its
Series A round and was acquired in 2012 by Celgene Corp.
for $925 million. Dr. Booth teamed up with scientists and
entrepreneurs in 2007 to launch mirage Therapeutics Inc.,
which is testing a new brand of medicine called microRNAbased therapy.
Alex Krueger, First Reserve Corp.
One of three co-heads of the energy-focused

firms private equity business, Mr. Kruegers
tenure with First Reserve dates back to 1999,
when he joined the firm from the energy
group of Donaldson Lufkin & Jenrette. In late 2008,
Krueger moved to London to help build First Reserves
European business.
Tim Levene, Augmentum Capital
Mr. Levene is setting his sights on creating a

successful venture capital firm amid an
increasingly tough operating environment for the
asset class in Europe. Mr. Levene started several
successful businesses before becoming a managing partner at
Augmentum, which is investing from its first, 50 million, latestage venture capital fund, focused on European businesses
with technology and e-commerce at their core.
Reputation: The World Economic Forum lauded Mr.
Levene and his fellow young global leaders as passionate,
open-minded and hands-on future captains of industry.
Key Deals: He created Crussh juice bars, growing the firm
from one outlet in Canary Wharf to a chain of 20 stores.
Mr. Levene was instrumental in the creation of Flutter.com
in 1999, raising 24 million from venture capital firms.
Flutter in 2001 merged with Betfair, which has since gone
public. Augmentum has invested in Borro, an online
pawnbroker, and gold trading platform BullionVault.
Jules Maltz, Institutional Venture Partners
Mr. Maltz joined IVP in 2008 and became a

general partner at the ripe old age of 30. At
any given time, Mr. Maltz has a hit list of
about 10 companies that he has not yet
invested in but considers to be on the fast track, and he
lends support whenever possible. Its a multiyear
process to getting to know entrepreneurs and building a
trust relationship, he said.
Reputation: Colleagues described him as hard working

and well-prepared, doing deep research on energy trends
before considering deals. A limited partner said that when
you speak to him, you dont get a sense that success has
gone to his head.
Reputation: Hes known as a high-energy investor who

connects easily with entrepreneurs and quickly rolls up his
sleeves to delve into details surrounding products,
customers and other metrics. Hes someone who can
always squeeze in that second breakfast or a cup of coffee
with an entrepreneur before a flight, said IVP General
Partner Sandy Miller.
Key Deals: Mr. Krueger cut his teeth putting together

coal platform Alpha Natural Resources Inc. starting in
2002, in what would later become one of the most
successful deals for First Reserve. He also led a deal for
Australian rail construction and management company
Calibre Global Pty Ltd.
Key Deals: He sourced IVPs investment in Twitter Inc.,

assisted with LivingSocial Inc., Sugar Inc. and Marketo
Inc., and led investments in Dropbox Inc., Buddy Media
Inc. and WhaleShark Media Inc. Just six months after
joining the firm, he convinced IVP to back Twitter, before
the companys most explosive growth phase.
Sponsored by
45
Victor Parker, Spectrum Equity
Mr. Parker joined Spectrum Equity in 1998,

and has been a managing director since 2000.
He focuses on digital media, software and
online information services investments.
Before Spectrum, Parker was with Summit Partners, where
he made expansion-stage investments in software,
telecommunications services and communications
technology companies. Mr. Parker and fellow partner
Christopher Mitchell manage the firm alongside
co-founders Brion Applegate and William Collatos.
Reputation: He is an exceptionally hard worker, said a
former Spectrum LP. He is still very hungry, very
motivated and is on the road continuously.
Key Deals: One high-profile deal spearheaded by Parker
was for genealogy company Ancestry.com Inc., which
Spectrum took public in 2009. Realized and unrealized
returns amount to 6.4 times Spectrums original $113
million equity. He also led the firms investment in online
survey company SurveyMonkey Inc.
Brian Ramsay, Littlejohn & Co.

When Brian Ramsay was seeking a job with
then start-up firm Littlejohn in 1997, he offered
to work for free. The firm took him on as a
junior professional to work on its maiden deal,
for French truck-trailer manufacturer General
Trailers. Mr. Ramsay embarked on a 15-year career that
saw him climb the ladder to become president of the
midmarket turnaround firm in January 2012.
Reputation: Chris Williams, a partner at advisory firm
Harris Williams & Co., which often works with Littlejohn,
said Ramsay represents the Littlejohn way, with a
willingness to really dig on certain issues and not afraid
of rolling up his sleeves to resolve those issues.
Key Deals: The General Trailers investment required
consolidating plants, streamlining purchasing processes
and revamping product offerings. General Trailers was sold
in 2000 to Apax Partners, returning Littlejohn more than
three times its money. He was instrumental in a
reorganization of Diamond Innovations Inc., a supplier of
industrial diamonds carved out of General Electric Co.
Littlejohn sold Diamond to Swedish tool and equipment
maker Sandvik Tooling in 2007 for an undisclosed sum,
earning four times its original equity.
William Spiegel, Pine Brook

Mr. Spiegel helped launch U.S. midmarket
firm Pine Brook in 2006 after President and
Chief Executive Howard Newman tried
unsuccessfully to recruit him to head the
financial services group at Warburg Pincus a few years

earlier. Before that, Mr. Spiegel was with Cypress Group,
where he managed the firms investments in financial
services and health care from 1994 until 2006. Now 50
years old, Mr. Spiegel is a managing director at Pine Brook.
Reputation: An affable and persuasive Energizer Bunny.
Key Deals: He led an acquisition of Syndicate Holding
Corp., comprising Lloyds of London insurance syndicates
no longer underwriting new policies, which over the past
four years has averaged a more than 30% annual return on
equity. He also helped establish mortgage insurer Essent
Guaranty Ltd.
Scott Stevens, Pamlico Capital
Now a partner at the Wachovia Corp. spinout,

the 40-year-old Mr. Stevens joined Pamlicos
predecessor entity in 1999 and returned in
2003 after attending business school. Before
joining Pamlico, he was an analyst in the communications
and media finance group at investment banking firm First
Union Securities.
Reputation: Acquaintances said Mr. Stevens strategic
direction and financial expertise are instrumental to the
firms approach in nurturing lower midmarket companies.
Key Deals: He spearheaded a deal in 2005 for TMW Systems
Inc., a provider of software used in managing truck fleets,
Sponsored by
46

which was eventually sold for 11 times the firms original

investment. Mr. Stevens also helped drive the growth of fiberoptic network operator Lightower Fiber Networks, which is
jointly owned by Pamlico and M/C Partners.
Alex Stirling, Carlyle Group
Alex Stirling learned the hard way, joining

Apax Partners when the dot-com bubble burst,
then being hired by Carlyle Group as the
financial crisis hit five years ago. Since then,
Mr. Stirling, a director within Carlyles European buyout
team, has been involved in a number of the firms highprofile European deals. Mr. Stirling said his early
experiences in consumer retail have made him more astute
and cautious, especially when considering valuations, and
they have also provided some valuable lessons about
working with portfolio company management.
In Their Own Words
North American LBO/

Corporate Finance
Gordon Pan, managing partner,
Baird Capital Partners
2012? 2012 was a tale of two halves, with
modest growth and confidence in the first half
followed by decreasing growth and confidence in
the second half. Despite the economic and
political uncertainty, we had a very productive year. The
proactive investment strategies wed developed coming into the
year worked regardless of the election outcome and growth
trends. We invested in several quality companies, and made a
number of add-on acquisitions across our portfolio. Overall, 2012
was a great year in terms of how were positioning our funds for
the future, both in the U.S. and internationally.
focuses on faces in 2013? Visibility into future earnings and
economic growth is critical across our global footprint because
what happens in Europe and Asia impacts our companies in the
U.S., and vice versa. We rely on our ability to assess the
trajectory of future economic growth to make decisions about
future capital or human capital investments, and uncertainty in
this area impacts all of our businesses.
What is your New Years wish for the private equity industry
in 2013? A year of global political, economic and social stability.
Uncertainty creates doubt, which reduces the consumer and
corporate spending that is needed for growth. The U.S. needs to
show the rest of the world that we can solve our differences and
put ourselves on a path towards sustainable growth. Only then
can we work to help other countries follow our lead.
2013, what would it be? Continued contraction in the PE
industry. While the amount of capital flowing into the industry is
improving, marginal players will have difficulty attracting and
raising new funds.
Sponsored by
Reputation: One financial sponsors lawyer described Mr.

Stirling as an astute operator in the market, and a great
deal-sourcer.
Key Deals: These include the 450 million acquisition of
U.K. dentist chain Integrated Dental Holdings Ltd., and of
roadside assistance group the RAC Ltd., acquired from
insurance company Aviva PLC for 1 billion in June 2011.
Mr. Stirling has also been involved in the re-emergence of
the dividend recap in Europe.
Elaine Wong, Hao Capital
Ms. Wong is only 36 years old, but her Beijingbased firm is already gearing up for a third
fund that could total around $500 million,
while she sits on the boards of Chinese
companies including Ju Tai Long, a furnishings business.
After seven years with Carlyle, Ms. Wong decided to set up
Hao Capital in 2006.
Reputation: Described as a quick study, her degree in
chemical engineering from Massachusetts Institute of
Technology has provided her with a strong understanding
of technology.
Key Deals: In July, Ms. Wong teamed up with
Guangdong, China-based consumer electronics
company TCL Corp. to form a joint venture that will
invest in Chinese diagnostic imaging companies. At
Carlyle, she was involved in backing Blackboard, maker
of an e-learning software for universities.
James Zelter, Apollo Global Management
Unlike the co-founders of Apollo, the 50-yearold leader of the firms credit business is an
outsider, having joined after a lengthy career
in credit at Citigroup Inc. and its predecessors.
Shortly after he moved to Apollo, Mr. Zelter began laying
the groundwork for raising Apollos first dedicated fund for
European nonperforming loans. That vehicle, the
2007-vintage Apollo European Principal Finance Fund I
LP, had raised about $1.64 billion and, as of June 30, 2012,
had generated a net internal rate of return of 9.5%,
according to Apollos most recent quarterly report.
Reputation: Michael Levitt, who founded credit
investment firm Stone Tower Capital and has known Mr.
Zelter since the early 1990s, described him as a low-ego
person who loves to invest and leads by investing.
Key Deals: One of the most important deals for Apollo on
the credit side was for its own organization, the acquisition
of New York credit investment firm Stone Tower. The deal,
which closed last April, added a whopping $18 billion to
Apollos credit assets and turned capital markets into its
largest business segment, surpassing private equity.
Global Presence. Local Knowledge.
As a market pioneer and a global leader in secondary market investment banking,

Cogent Partners has successfully advised on more than $65 billion of private equity
secondaries since 2001.
Our experience and worldwide presence give us a superior insight and perspective
into the unique elements of every transaction. We leverage this knowledge to
provide independent and unbiased advice to our clients wherever they are.
www.cogent-partners.com
Dallas New York San Francisco London Shanghai
Securities transactions in the US are effected through CP Cogent Securities, LP, a broker-dealer and member of FINRA and SIPC. Securities transactions in the
European Union, European Economic Area and Switzerland are effected through Cogent Partners Europe, LLP an entity authorized and regulated by the Financial
Services Authority in the United Kingdom.
TOPTI ER
Top Tier Capital Partners is an asset management firm managing
venture capital-focused funds of funds and co-investment opportunities.
Formerly known as Paul Capital Investments, Top Tier manages
more than $2 billion in cumulative investor commitments.
Lisa Edgar Philip Paul Dan Townsend David York

Jessica Archibald Garth Timoll
Top Tier Capital Partners

600 Montgomery Street, Suite 480
San Francisco, CA 94111
Phone: +415 835 7500
www.ttcp.com

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The 2013 Global Outlook & Review

From the Desk of Laura Kreutzer

Europe Difficult but Stable for 2013 Deals

European Buyout Firms Await

By Brandon Farley of BMC Group

Venture Capital 2013 Outlook:

Private Equity Analyst

From the Desk Of Paul Hodkinson

The private equity industry should be getting used to this by now.

Emerging Markets Investors

2012: The Year in Private Equity

Some are referring to this period as the new normal, but in

Dow Jones & Company is a News Corporation Company. Copying and

But there is little doubt that there is a more general acceptance

The analysis that follows aims to provide some clarity through

The 2013 Global Outlook & Review

Limited Partners to Shuffle the GP Relationship

LPs Get Back in the Game

efforts promise to continue in 2013 and translate into new

Quotes of the Year

Limited partners dont want to hear about

The 2013 Global Outlook & Review

some capital and are making investments, said Alan

Quotes of the Year

Now that the credit bubble is gone,

Some LPs had certain GP relationships for some time and

The 2013 Global Outlook & Review

Quotes of the Year

There is higher demand [for deals

In Their Own Words

North American LBO/

Clash of the Buyout Titans:

The 2013 Global Outlook & Review

midmarket, including Audax Group, Chatham Capital,

GPs Proceed With Caution in Europe

fundraising would be to proceed with caution. In

The 2013 Global Outlook & Review

its current state until something fundamentally changes

In Their Own Words

The 2013 Global Outlook & Review

For some firms, the need to raise fresh capital could be

We continue to see a polarized fundraising environment

Europes economic woes have also led to some firms

Fundraising needs to be hard, he said. The process that the

Mr. Moore at UBS takes the view that these fundraising

In Their Own Words

North American LBO/Corporate Finance

headline of Center of Gravity Shifts in Global Energy, based on the

Leading the way

The 2013 Global Outlook & Review

U.S. Buyout Market: Liquidity Abounds,

Quotes of the Year

The 2013 Global Outlook & Review

toward financing buyouts increased by more than 20%

Quotes of the Year

distributed before the return of capital.

In Their Own Words

But the current environment may favor one particular type