Private Equity Fundraising Update - PSIK · Private Equity Fundraising Update John Crocker Citi...
Transcript of Private Equity Fundraising Update - PSIK · Private Equity Fundraising Update John Crocker Citi...
Private Equity Fundraising Update
John Crocker
Citi Alternatives Distribution
PPEA / Paul Capital Conference
February, 2009
Table of Contents
1. State of the Market
2. Fundraising
Citi Alternatives Distribution Group
� Advisor to Alternative Investment Sponsors
� One of the largest players with over 50 professionals
� Global footprint – offices in ten geographies
� Focus on the spectrum of alternative investments – better positioned to understand investor sentiments
� Only group to have dedicated professionals to cover gatekeepers
� Only group with dedicated resources to respond to RFP’s
Who we are…
� Only group with dedicated resources to respond to RFP’s
� Only group to hold an invitation only Private Equity Conference – its ninth consecutive year
1
Citi Alternatives Distribution Group – Fully Integrated ModelCiti Alternatives Distribution Group is the only fully integrated group in the industry, allowing us to deliver a full platform and range of services.
Institutional Clients Group
Citi Alternative Investments� US$45 billion of capital under management
� Leading investment centers in:– Private Equity, Hedge Funds, Global Fixed
Income, Infrastructure
Securities and Banking� Preeminent global investment banking
firm
� Foremost global underwriter in combined equity and debt issuance
Global Wealth Management� One of the world's top private banks
� Offices in 100 countries covering 9 million accounts with over $1 trillion in assets under managementIncome, Infrastructure
Citi Alternatives Distribution Group� One of the largest placement advisory teams
� Largest global footprint with offices in nine geographies
� Only team with dedicated Consultant Relations team
equity and debt issuance under management
Over the last four years, Citi Alternatives Distrib ution Group has been the most stable platform in the industry.
2
Distribution Capabilities – Global Coverage
Citi Alternatives Distribution Group Institutional Sales Professionals and Locations
As one of the largest placement teams with “on-the-ground presence” in nine geographies, the depth and breadth of our investor coverage is second to none.
Palo AltoBrian LeftwichAmy Richards
New YorkAri BarkanJohn CrockerMaureen CurranJames HaddonBrian HickeyMichael LashendockMerope Pentogenis
Tokyo Hiroko OgisoKazumoto Takeuchi
Consultants Relations TeamJonathan FreedmanElizabeth HammondKathryn HotzeAundreia ImAmy Lesch
Amy Richards
MinneapolisMark Marxer
LondonNermina HadziabdicJoseph NagaeLaurent de RosièreAndrew WilburDaniel Zinic
AmmanJamal Al-Naif
DubaiJames Eldridge
Singapore Serene Ang Rachel Farrell
Sydney Filo Sedillo
Note: Red denotes Citi Alternatives Distribution Group office.3
Citi Private Equity and Alternatives ConferenceCiti’s industry-leading, invitation-only private equity and alternatives conference brings together over 400 alternative investment professionals from around the globe.
Citi Private Equity and Alternatives Conference
The Ritz-Carlton, Key BiscayneKey Biscayne, Florida
General Partner Speakers from Past ConferencesRobert AndreenNordic Capital
David BondermanTPG Capital
Gordon BonnymanCharterhouse
John CanningMadison Dearborn
Dick CashinOne Equity Partners
J. Taylor CrandallOak Hill
Nigel DoughtyDoughty Hanson
Wesley R. EdensFortress
Don GogelClayton, Dubilier & Rice
Guy HandsTerra Firma
Henry KravisKKR
Lyndon LeaLion Capital
Thomas H. LeeT.H. Lee Co.
Chris O’BrienInvestcorp
Daniel OchOch-Ziff
Richard PerryPerry Capital
David RouxSilver Lake Partners
David RubensteinThe Carlyle Group
Selected Speakers at the 2008 One Equity Partners
Jon CosletTPG Capital
Terra Firma
Josh HarrisApollo
Och-Ziff
Steve PagliucaBain Capital
Limited Partner/Advisor Speakers from Past ConferencesMichael ArpeyCredit Suisse
Andrea AuerbachCambridge Associates
Adam ClemensNew York Life
Paul CrottyPortfolio Advisors
Chuck FlynnBregal
Thaddeus GrayAbbott Capital
Clint HarrisGrove Street
Tim KellyAdams Street
Carol KennedyPantheon Ventures
James KesterAllianz Private Equity
Jim LeechOntario Teachers
Mark WisemanCPP
Selected Speakers at the 2008 ConferenceLeon BlackApollo
John EharaUnison
Erik HirschHamilton Lane
Glenn HutchinsSilver Lake Partners
Michael KimMBK
Hugh LangmuirCinven
Marc Lasry Avenue Capital
John MorrisHarbour Vest
Jonathan Russell3i
Steve SchwarzmanBlackstone
Wray ThornMarathon
Erol UzumeriOntario Teachers
Citi Private Equity and Alternatives Conference rep resents the Firm’s commitment to alternative investors and the industry.
4
1. State of the Market
Global Equity Markets Have Declined PrecipitouslyMarkets in large and small economies have been declining as a result of the credit crisis, economic concerns and panicked sellers.
MSCI World Index (2006-2009YTD)
1,200
1,400
Source: Factset, 2/3/2009.
400
600
800
1,000
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Feb-09
5
Matched by Credit Markets Being ImpactedFollowing a five year period of unprecedented strength in the leveraged finance markets, the entire market entered a period of dislocation in the Summer of 2007.
Rate Environment – Rising Ted Spread
$91$153 $183
$321$387
$40
$143
$158 $112
$181
$171
$57$89
$125$183$29
$32
$71
New Issue Volume and Refinancing Overhang ($ in billions)
1
2
3
4
5
$91$40
$89
2003 2004 2005 2006 2007 2008 2009 2010 2011
High Y ield Leveraged Loan Upcoming HY Maturities Upcoming Loan Maturities
Annual Default Rates
Source: Altman High Yield Report, S&P LCD.Note: Defaults calculated based on par value and principal amounts defaulted divided by all par and principal amounts outstanding. 2008 High Yield default rate represents projection.
6.6%
9.5%
4.6%
0.5%
5.1%
9.8%
1.6%0.8%
3.4%
12.8%
1.3%
4.7%4.2%
8.0%
3.8%
0.2%0.5%
3.0%
1.0%
2.3%
6.0%6.3%
4.2%
1.5%
98 99 00 01 02 03 04 05 06 07 08 09E
High Yield Leveraged Loans
Source: Citi Syndicate, Citi Yield Book. Note: Does not reflect 2009 YTD high yield new issuance of $4.3B.
2009 Estimates:High Yield = 9.0-10.0%Lev. Loans = 7.0-9.0%
Source: Factset as of 2/3/2009.
0
1
Jan-08 Feb-08 Mar-08 May-08 Jun-08 Aug-08 Sep-08 Nov-08 Dec-08 Feb-09
6
582 585
666
615 613
655620
550582
448
410
400
500
600
700
Number of Private Equity Deals
422
294
519
300
400
500
600
Average Deal Size($ in Millions)
Impacting Private Equity Transactions…
Private equity deals are now much smaller in size and significantly fewer in number.
0
100
200
300
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308
Source: Dealogic, November 2008
251
171143
97
155134
0
100
200
300
Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308
Source: Standard & Poor’s, November 2008
7
… and the Availability of Leverage
350
370
390
410
430
Average Spread of Leveraged Buyout Loans(vs. LIBOR)
Average Equity Contribution(% of Purchase Price)
Private equity deals involve far less favorable debt terms and require significantly more equity.
34
36
38
40
bps %
250
270
290
310
330
350
2004 2005 2006 2007 1H08 2H08
Source: Standard & Poor’s, November 2008 Source: Standard & Poor’s, November 2008
26
28
30
32
2004 2005 2006 2007 1H08 2H08
8
Market Environment – What are the Key Questions
� Will the credit crisis lead to a fundamental shift in the alternatives fundraising market?
– Yes – while commitments to alternatives will continue, the market will slow and become highly selective
� Is the fundraising market headed for a significant downturn?
– Yes – but probably nowhere near the downturn seen earlier in the decade as smart investors and new entrants continue their long term investment allocation to the asset classclass
� What is the likely complexion of the market players in the future?
– GPs: global brand platforms and specialty leaders will dominate
– LPs: the largest LPs will wield increasing power in the market
9
2. Fundraising
$385
$468$444
$350
$400
$450
$500
1,500
1,750
2,000
Market Dynamics – Reviewing Past Cycles …
The fundraising market has experienced periods of volatility over the past 20 years, but a look at historical trends indicates some differences in the current environment.
Global Fundraising1 from 1988 – 2008 ($ in Billions)
CAGRs
1988–2007 17.4%
2003–2007 48.7%
$22 $21 $19 $20 $20 $26$43
$52$65
$100
$151
$182
$299
$182
$91 $96
$139
$283
$0
$50
$100
$150
$200
$250
$300
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
0
250
500
750
1,000
1,250 S&
P 500 Index
U.S. LBO U.S. VC Other U.S. PE EU LBO EU VC Asian LBO Asian VC S&P500
Source: Venture Economics, January 2009 (as of December 31, 2008).Note: (1) Includes Asia, Europe and the US10
$328
$300
$350
$400
$450
$500
$407 $385
LBO Fundraising (Excluding Venture Capital Funds) …The LBO fundraising market, while impacted by the stock market downturn in 2000, was much less volatile excluding venture capital funds.
Global Fundraising1 — (Excluding VC Fundraising) from 1988 – 2008 ($ in Billions)
CAGRs
1988–2007 18.5%
2003–2007 51.0%
$16 $15 $14 $16 $21$31
$238
$111
$78$80
$124$144
$106$110
$74
$48$38
$15
$0
$50
$100
$150
$200
$250
$300
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
U.S. LBO Other U.S. PE EU LBO Asian LBO
Source: Venture Economics, January 2009 (as of December 31, 2008).Note: (1) Includes Asia, Europe and the US
11
Market Situation – Today
� Many investors, frozen during the last quarter of 2008, may continue that way into early 2009
� The “denominator effect” has left many investors with significant over-allocation to alternative asset classes (over 50%, as surveyed by Preqin)
� FASB 157 has created uncertainty regarding the “true” value of private investments and raised the potential for increased volatility in the value of that portfolio going forward
� Rising default rates cause concern as many of the mega buyout firms are expected have significant wipeouts – potentially resulting in negative returns for many 2005/2006 fund vintages
� Despite the negative news, some investors and gatekeepers view the dislocation as an opportunity. They continue to make commitments, albeit, much more selectively and more deliberatelycontinue to make commitments, albeit, much more selectively and more deliberately
� Some investors have decided to take a focused approach – investing in strategies that can take advantage of the dislocation now and in the foreseeable future
� Investors committing capital are overwhelmed by the hundreds of sponsors in the market
12
Investor Status – By Geographic Region
� In the U.S.:
– CalPERS has gone from $260 billion to $193 billion in plan assets
– State of Oregon – “We are out of capital – will only look at re-ups”
– Ohio Teachers – “We are markedly over-allocated”
� In Europe:
– Currency volatility has become a major issue for Euro-denominated investors
– Welcome Trust has increased their cash allocation
The Denominator Effect
CalPERS example:
Total Assets
�October 2007: $260 billion
�October 2008: $193 billion
– Decrease from peak: ($67) billion
Private Equity Allocation– Welcome Trust has increased their cash allocation
from 1% to 20%
� In the Middle East:
– SWFs are still cash rich but extremely cautious
– Precipitous drop in price of oil will require them to focus on domestic investment, in the short term
� In Asia/Australia:
– Korean investors have largely suspended their overseas investments
– Others are frozen due to over allocation and/or caution
�Year End 2007: 9.2%
�October 2008: 12.4%
To maintain year end allocation CalPERS would need to shed $6 billion of private equity interests.
13
$446 $413
$100
$200
$300
$400
$500
$600
$700
Market Conditions – Looking Forward to 20102008 appears to have marked the beginning of a slowdown in capital raising. Most industry experts anticipate 2009 to be one of the most challenging fundraising years in some time.
What is the outlook for 2009?
• “Established players will have the best chance of raising funds.”
• “The ability to raise capital will also depend on the composition and diversity of a GP’s investor
Global Private Equity Capital Raised(US$ billions)
(7.4%)*
2007FY
$615
$0
$100
Q1-3 07 Q1-3 08
the composition and diversity of a GP’s investor base.”
• “There will be a higher percentage of new non-US investors committing to funds compared to US investors that are in difficult positions.”
• “Outlook for 2009 looks grim… Most predict a decline of 50% from 2008 (fundraising) figures.”
*Source: Private Equity Analyst, January 2009
Source: Private Equity Intelligence Q3 2008 Private Equity Fundraising Update, October 2008
*Decline from Q1-3 07 to Q1-3 08
14
$164
$98
$119$131 $136 $137
$150$155
$161$168
$176$185
$147
$84$95$92$89$87
$109
$141 $145
$100
$120
$140
$160
$180
$200
($155)
($300)
($200)
($100)
$0
US UK
Continued Demand for Alternatives to Fund Pension GapAging populations across the world and pension plan asset/liability mismatch are expected to fuel demand for alternative assets. Pension deficits in the US alone total almost $500 billion.
Pension Deficits($ in Billions)
Private Defined Benefits, Contributions vs. Distributions (1)
($ in Billions)
United States United Kingdom
$30$40 $37
$84 $89$87
$0
$20
$40
$60
$80
$100
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
E
2009
E
2010
E
Contributions Distributions
($489)
($600)
($500)
($400)
($300)
Source: Department of Labor—Private Pension Plan. No.12, Federal Reserve, company reports, Morgan Stanley Research.Note: (1) 2000–2010 estimated by Morgan Stanley Research.
15
Private Equity Returns Have Been Consistently Superior …
Top Quartile U.S. Buyout Returns
Top Quartile private equity returns have shown consistent excess returns versus other indices.
Top Quartile European Buyout Returns
12.8%
30.3%
1.2%
22.1%
Top Quartile U.S.Buyout
0.9%
31.9%
-0.4%
31.2%
Top QuartileEuropean Buyout
Note: Returns are calculated from 06/30 to 06/30 of each considered period. The last period considered ends at 06/30/2008.Source: Venturexpert as of January 2009.
-15.4%
-14.9%
4.8%
5.6%
0.3%
1.2%
-20% -10% 0% 10% 20% 30% 40%
DJIA
S&P 500
1- year 5- year 10- year
-26.8%
-14.9%
7.5%
6.9%
0.5%
-0.4%
-30% -20% -10% 0% 10% 20% 30% 40%
CAC - 40
FTSE
1- year 5- year 10- year
16
7.17.7
7.5
8.9
15.0%
20.0%
25.0%
Alternative Allocations Will Increase Going ForwardAllocations to alternatives in North America and Europe amongst top institutional investors are expected to reach 23.2% and 23.6%, respectively.
Alternative Allocation Among Select Leading Investors
North America
21.7% 21.4%20.7%
23.2%
Europe
15.9%
19.6%20.9%
23.6%
5.3 7.4
8.4
15.0%
20.0%
25.0%
7.1 6.7 6.7 7.37.5
7.57.0 6.5
7.0
2.5
0.0%
5.0%
10.0%
2001 2003 2005 2007 2009E
Real Estate Private Equity Hedge Funds
Source: 2007–2008 Russell Survey on Alternative Investing.Note: Respondents were selected from a broad-based, global list of institutions that manage tax-exempt assets, and those interviewed were qualified to represent the investmentactivities, decisions and views of their organization.
10.0%
5.3%
8.39.8 8.9 9.7
3.6
4.0
4.54.6
5.5
1.7
3.6
0.0%
5.0%
10.0%
15.0%
2001 2003 2005 2007 2009E
Real Estate Private Equity Hedge Funds
17
Situation Analysis: Private Equity Investor Market
The global private equity investor market continues to evolve.
Hi
Future Growth
Aus / N. Z.
Asia (ex. Japan)Middle East Canada
Commitments to Private Equity
Low
Low Hi
Future Growth
Current Share
Source: Citi estimates 7/07.Note: Bubbles reflect estimate of total commitments to private equity.
Japan
Europe
US
18
Evolving Global Sources of Capital
U.S.
Europe
Middle East
� Large share of private equity market but growing slowly� Many well established programs reducing number of relationships� Strategy – become a “core” portfolio holding
� Large market with new entrants� Expand relationship with larger players across countries
� Oil revenues drive increase in commitments for foreseeable future� Number of new entrants by investor type and geography� Important to establish “proper” base from which to expand relationships
� Growth in defined benefit programs spur increase in commitmentsCanada
Asia (ex. Japan)
Japan
Aus / N.Z.
� Growth in defined benefit programs spur increase in commitments� Large established programs with newer programs coming on line
� Growing interest in alternatives with wide spectrum of sophistication and appetite� Need a targeted marketing strategy in general; mostly too early for India and China� Inroads today may prove beneficial in the long run
� Superannuation growth drive markets and will expand� Investors transition from Fund-of-Funds to direct fund investing
� Established players returning to market but focus on well known names� Privatization of pension system could create significant potential� Leverage marquee name to expand base
19
Market Outlook – 2008/2009 and beyond
� The next few years will be challenging for all… but there is light at the end of the tunnel
– 2008 capital raising totals are likely to be 15-20% below 2007 totals
– Capital raising is expected to fall even further in 2009, as much as 50% below depressed 2008 levels
– Depending on the pace of economic recovery, 2010 capital raising could show an upswing
� Limited Partners will have the upper hand
– Investors will be more focused on negotiating on economics and terms
– They may be more reluctant to add new fund manager relationships
– A subset will “cull” their portfolios to better focus on their core manager relationships
� Smart investors will continue to commit capital� Smart investors will continue to commit capital
– Recession vintage years tend to perform best as proven time and time again
– Drive to find alpha continues due to massive amount of pension liabilities around the globe
– Limited alternatives for “value added” capital deployment
� Emerging sources of capital will fuel growth in the asset class
– Sovereign wealth funds will continue to grow and deploy capital in alternatives
– Pension fund growth will continue as many countries focus on their future liabilities
– New entrants to the asset class will be found globally
20
Fundraising Strategies – 2009/2010
� General Partners need to reach out to their LPs and potential investors stressing the importance of long term partnership
� Investors need to be informed of fundraising plans well in advance to allocate appropriately
� Existings must, now more than ever, be the base off of which to build fundraising momentum with a “quiet” first close prior to hitting the broader market
� Marketing cycles are likely to take far longer. Investors will require a significant amount of capital returned prior to considering the next fund
� General Partners may need to strategically cover a far broader base of investors by both geography and type in order to reach their desired goalstype in order to reach their desired goals
21
IRS Circular 230 Disclosure: Citigroup Inc. and it s affiliates do not provide tax or legal advice. A ny discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoi ding any tax penalties and (ii) may have been writt en in connection with the "promotion or marketing" of any transaction contemp lated hereby ("Transaction"). Accordingly, you should seek advi ce based on your particular circumstances from an i ndependent tax advisor.
Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the information contained herein and the existence of and proposed terms for any Transaction.
Prior to entering into any Transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accounting characterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any Transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. By acceptance of these materials, you and we hereby agree that from the commencement of discussions with respect to any Transaction, and notwithstanding any other provision in this presentation, we hereby confirm that no participant in any Transaction shall be limited from disclosing the U.S. tax treatment or U.S. tax structure of such Transaction.
We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may also request corporate formation documents, or other forms of identification, to verify information provided.
Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time.
efficiency, renewable energy & mitigation
In January 2007, Citi released a Climate Change Position Statement, the first US financial institution to do so. As a sustainability leader in the financial sector, Citi has taken concrete steps to address this importantissue of climate change by: (a) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of alternative energy, clean technology, and other carbon-emission reduction activities; (b) committing to reduce GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (c) purchasing more than 52,000 MWh of green (carbon neutral) powerfor our operations in 2006; (d) creating Sustainable Development Investments (SDI) that makes private equity investments in renewable energy and clean technologies; (e) providing lending and investing services toclients for renewable energy development and projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging witha broad range of stakeholders on the issue of climate change to help advance understanding and solutions.
Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.
© 2009 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughoutthe world.
in any such instrument at any time.
Although this material may contain publicly available information about Citi corporate bond research, fixed income strategy or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to limit communications between its investment banking and research personnel to specifically prescribed circumstances.