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Q1 2016 Summary - Private Equity Review & Outlook



  • US and European private equity and venture capital fundraising continued at a robust level in Q1 2016. Venture fundraising was particularly strong. Fundraising slowed in Asia-Pacific and in Emerging Markets.
  • Buyout investment volume fell sharply in the US and Europe. Continued high valuations of targets, increased market volatility at the start of the year, and Europe’s uncertainty around Brexit weighed on investment volume, particularly in the large cap segment. Invested capital in venture capital-backed companies declined as valuation-rich late-stage venture capital-backed companies had difficulties in raising money from investors.
  • Exit activity was mixed. While volatile and declining stock markets halted IPOs from private equity-backed companies around the globe and dividend recapitalizations completely dried up in adverse leveraged finance markets, cash-rich corporations remained a resilient source of liquidity for private equity and venture capital funds.
  • Despite a slow start in 2016, we expect private equity and venture deal activities to regain pace throughout the remainder of the year.


In brief

  • US private equity had a challenging start to the year with deal activity falling sharply amid continued difficulties in lending and declining public equity markets. Buyout acquisition prices climbed further to a historical high due to the stiff competition from both cash-rich corporations and cash-rich buyout firms. As a result, investment activity declined dramatically, as deals were priced to perfection and many did not get done by buyout firms. On the other hand, resilient trade buyers supported private equity exits, as IPOs and dividend recapitalizations dried up completely. However, there are early signs that deal activity will improve throughout the remainder of the year.


USD billion  2014 2015 Q115 Q415 Q116 Dy/y Dq/q
Fundraising  219.9 209.4 53.0 50.1 53.6 1% 7%
Investments  167.9 247.7 66.5 98.0 30.7 (54%) (69%)
Exits  302.9 257.7 57.0 45.7 30.8 (46%) (33%)

Notes: Dy/y is the comparison of Q1 2016 vs. Q1 2015. Dq/q is the comparison of Q1 2016 vs. Q4 2015.
Source: Thomson ONE, Preqin, S&P Capital IQ, Bloomberg as of May 15, 2016.


  • Fundraising remained steady

US private equity fundraising continued at a steady pace. Commitments to private equity funds totaled USD 54 billion during the first quarter, roughly the same amount as a year ago. Buyout funds attracted nearly 60% of the aggregate quarterly volume, led by USD 13 billion from Advent International Global Private Equity Fund VIII, the largest fund ever raised by this manager. Fundraising remains competitive with a record number of funds in the market. According to Preqin, about 842 North American funds target to raise USD 232 billion suggesting that 2016 volume could exceed the 2015 benchmark if all funds meet their targets.


  • Deal activity started slowly

Buyout deal volume declined sharply in the first quarter reflecting a difficult buyout financing environment and a heightened level of broad M&A market uncertainty. Continued high pricing amid fierce competition from corporations did not help either with S&P Capital IQ reporting an increase in buyout purchase multiples to 10.1x EBITDA during the first quarter, up from 9.9x during 2015. Buyout firms concluded deals worth USD 31 billion, representing a 54% decline from the first quarter of last year. However, corrections in public markets provided investment opportunities seized by some PE firms. The subdued headline figures included the announcement of one of the largest buyouts post-financial crisis. Apollo Management took private a home security maker, ADT, and merged it with its portfolio company in a deal valued at USD 15 billion, including a USD 4.5 billion equity contribution from funds managed by Apollo and co-investors.


  • Market conditions weighed on exit volume, although exits to trade buyers remained robust

Mirroring activity on the investment side, exit pace slowed down in the first quarter. Aggregate quarterly exit volume fell 46% year-on-year to USD 31 billion. The first quarter did not register any PE-backed IPOs as PE firms postponed offerings due to unfavorable market conditions. Similarly, the lack of demand for riskier leveraged loans put dividend recapitalizations on hold. Exits to private equity buyers faded as well. In contrast, trade buyers continued to be a resilient source of liquidity, with the number of exit deals remaining at a steady pace and volume declining only 6% year-on-year to USD 23 billion. In the largest quarterly exit deal, Silver Lake disposed of Dell’s consulting services unit to Japan’s NTT Corporation, generating USD 3.2 billion in proceeds for corporate purposes.


  • Improving market conditions should support deal making

We expect deal activity to improve during the rest of the year as leveraged loan markets show early signs of recovery. Leveraged lending volume has increased since March, while pricing of leveraged loans on the secondary market has trended slowly upwards since a low in February. Similarly, PE-backed IPOs resumed in April. The US economy is growing slowly but resiliently, and is expected to grow stronger during the rest of the year driven by robust domestic consumer demand. However, headwinds stemming from global market volatility remain in place and may impact private equity activities.



In brief

  • The US venture market saw a downturn in invested capital as valuation-rich VC-backed companies found it difficult to raise large funding rounds. As a result, birth of unicorns came to a halt during the first quarter. However, corporations remained busy on both the investment and exit fronts, driving a surge in exit deal volume. Improved liquidity helped propel fundraising by US venture funds to the strongest quarter over the past ten years.


USD billion  2014 2015 Q115 Q415 Q116 Dy/y Dq/q
Fundraising  31.0 28.7 7.5 5.5 13.8 84% 151%
Investments  58.2 74.5 17.3 18.6 13.9 (20%) (25%)
Exits  96.6 64.7 13.7 18.5 21.8 59% 18%

Notes: Dy/y is the comparison of Q1 2016 vs. Q1 2015. Dq/q is the comparison of Q1 2016 vs. Q4 2015.
Source: Dow Jones VentureSource, as May 15, 2016.


  • Venture fundraising came back roaring

US venture got off to a flying start in 2016. In the first quarter, US venture had the most successful fundraising quarter in ten years. Commitment volume increased 84% year-on-year to USD 14 billion across 57 funds. Acceleration in investment pace combined with improved returns and elevated liquidity continue to be tailwinds for a surge in US venture fundraising. During the first quarter, activity was driven by the return of sought after managers. The top ten largest funds attracted nearly 60% of the quarterly fundraising total, led by Founders Fund VI, which raised USD 1.3 billion in the largest fundraising commitment of the first quarter. Accel Growth Fund IV and Norwest Venture Partners XIII joined the group of billion-dollar funds closed during the quarter - each securing USD 1.2 billion during the first quarter of 2016.


  • Valuation concerns strained late stage deals

Following the busiest year since the dotcom era, venture investment activity slowed. Invested capital in the US-based VC-backed companies declined 20% year-on-year to USD 14 billion. The downturn was more pronounced across late stage investments, while first round investments fared relatively well. Investors’ scrutiny of valuations and business fundamentals of late stage deals put the brakes on deal making. In venture rounds, median pre-money valuations continued to slide since the fourth quarter of last year. In the first quarter of 2016, it declined to USD 19.7 million, down from USD 26.5 million in the fourth quarter of 2015 and from USD 59.9 million in the first quarter of 2015. The first quarter saw only one company achieving a unicorn status compared with 17 at the peak in the third quarter of 2015. However, corporate investors continued to write large cheques, with Takeda Pharmaceutical Company funding VC-backed Mersana Therapeutics with USD 800 million, while Alibaba Group invested EUR 794 million in Magic Leap.


  • Robust M&A exits spurred growth in volume

IPOs of US venture-backed companies continued to diminish. Challenging public markets did not support the reversal of that trend, with US venture registering only six IPOs from VC-backed companies during the first three months of 2016, compared with 12 a year ago and 39 two years ago, according to Dow Jones VentureSource. All of the companies that went public were in the healthcare sector, while a dearth of tech IPOs continued into 2016. However, venture funds continued to find opportunities to generate liquidity through international corporations investing heavily overseas and buoyant corporate acquirers preferring acquisitions of innovative companies to spending resources internally on R&D. As a result, exit volume increased 59% to USD 22 billion, as M&A exit volume had the best quarter since the fourth quarter of 2015. The Chinese Dalian Wanda Group acquired a movie production company Legendary Entertainment for USD 3.5 billion in the largest VC exit of the first quarter.


  • VC fund investing may remain resilient

The correction in public markets and the subdued post-IPO performance by VC-backed companies is expected to weigh on investment activity from non-VC fund investors. However, the increased dry powder among VC funds should support venture fund investment pace. Cash-rich and innovation-hungry corporations can become more selective, but will continue to acquire VC-backed companies that provide technological edge and expand at fast pace. VC funds that invest in such market disruptive companies at fair valuations can withstand market volatility.



In brief

  • The European buyout market had a mixed start to the year. While deal flow remained steady in the mid-market, less friendly capital markets crimped activity at the larger end of the market, resulting in a decline in investment volume. Furthermore, deal volume tumbled in the UK, perhaps reflecting uncertainty around Brexit. Exit deal flow slowed down and volume dropped significantly, primarily due to a lack of large private equity-backed IPOs and trade exits. Investor sentiment appears to remain positive, as indicated by robust fundraising.


EUR billion  2014 2015 Q115 Q415 Q116 Dy/y Dq/q
Fundraising  57.5 60.0 13.6 7.1 14.3 5% 101%
Investments  80.2 86.5 15.8 14.4 10.1 (36%) (30%)
Exits  131.7 146.1 44.0 26.3 19.4 (56% (26%)

Notes: Dy/y is the comparison of Q1 2016 vs. Q1 2015. Dq/q is the comparison of Q1 2016 vs. Q4 2015.
Source: Thomson ONE, Preqin, Bloomberg, as of May 15, 2016.


  • Large fund closings lifted fundraising volume

European private equity funds closed on EUR 14 billion during the first quarter, slightly more than a year ago. Fundraising was lifted by three funds that accounted for 56% of the total volume. Investindustrial closed the largest buyout fund of the first quarter at EUR 2.0 billion. However, all other buyout funds were of smaller size. Other notable fund closings included the Blackstone’s Real Estate Partners Europe V garnering EUR 3.4 billion. Fundraising is expected to remain at the current pace for the rest of the year due to activity of large-cap buyout funds.


  • Deal volume declined as large cap deals waned

Buyout investment activity had a mixed start to 2016. Despite global market volatility, deal flow improved in comparison to the first quarter of last year as indicated by a 9% growth in the number of deals to 275. However, invested capital declined sharply by 36% to EUR 10.1 billion. The decline was attributable to fewer platform buyout deals in the larger end of the market with only two deals moving the needle. Supported by the strong momentum in economic growth, the French buyout market continued to provide vibrant deal flow with the number of deals increasing 32% from a year ago. The EUR 1.1 billion carve-out of the Airbus Group’s defense electronics business by KKR’s European Fund contributed to a 36% increase in deal volume in the French market to EUR 3 billion. In contrast, the UK market did not record any billion-Euro buyout platform deals as uncertainty around Brexit perhaps weighed on buyers’ and sellers’ minds of large-cap companies that might have exposure to continental Europe. As a result, UK investment volume halved from the comparable period of last year to EUR 3 billion with a EUR 1.7 billion add-on acquisition of The Priory Group by a portfolio company of the US lower mid-market firm Waud Capital Partners, which contributed the most to UK deal volume. Of note, the Brexit uncertainty seems to be affecting less of the UK deal flow in small and mid-cap segments, as they remained steady.


  • Muted exit activity due to market volatility

Following the strongest exit year on record, Europe saw a marked decline in exit volume during the first quarter. Aggregate exit volume plunged by 56% from a year ago to EUR 19 billion due to a lack of large exits, fewer IPOs and post-IPO disposals. Weak stock markets resulted in only six IPOs from private equity-backed companies during the first quarter of 2016, compared to 20 offerings during the same period a year ago, according to Bloomberg. Raised proceeds of EUR 980 million were dwarfed in comparison to the same period of the previous year, too. Trade exits declined to less of an extent but fewer large exits to trade buyers weighed on exit volume. In the largest exit of the first quarter, Bain Capital sold the UK catering supplier Brakes Group to Sysco Corporation for EUR 2.8 billion.


  • Despite a slow start, deal making is to steady

We expect European private equity to continue its steady development, despite a blip in the first quarter. Recovery in European economies showed signs of either stabilization or acceleration supported by improving employment, income and consumption as well as increased business investments. However, European private equity is not immune to global market volatility and Brexit uncertainty and clouded growth prospects in export markets are making recovery fragile.



In brief

  • The European VC investment volume declined due to the lack of large financing rounds, while deal flow remained steady. In the muted IPO environment, VC-backed companies continued to find exits from active corporate acquirers. Improved liquidity and performance from the asset class supported strong fundraising by first-time managers.


EUR billion  2014 2015 Q115 Q415 Q116 Dy/y Dq/q
Fundraising  3.17 7.12 1.30 1.63 1.88 44% 15%
Investments  8.43 13.50 2.91 3.40 2.42 (17%) (29%)
Exits  13.08 24.60 5.33 7.97 4.26 (20%) (47%)

Notes: Dy/y is the comparison of Q1 2016 vs. Q1 2015. Dq/q is the comparison of Q1 2016 vs. Q4 2015.
Source: Dow Jones VentureSource, as of May 15, 2016.


  • Experienced managers boost fundraising

Following the strongest fundraising year since 2001, European venture maintained momentum in 2016. Commitments to European venture funds increased 44% year-on-year to EUR 1.9 billion. In the largest fund closing of the first quarter, Kreos Capital Managers raised EUR 400 million for its fifth venture fund. Investors are warming up to European venture, as the asset class started to demonstrate it can deliver returns. Most recently, European venture capital funds pooled returns over the past five years exceeded those of European buyout funds, according to the Cambridge Associates data. Another sign of the benign fundraising environment is the success of first-time managers during the first quarter, with the ratio of follow-on vs. first-time funds declining to the lowest level observed in many years. Six newly created funds out of 19 fund closings contributed to nearly a third of the quarterly fundraising volume. Medicxi Ventures (UK) LLP raised the largest first-time fund attracting EUR 209 million for its first early stage focused venture fund.


  • Large deals were absent, but deal flow remained stable

In line with global venture market trends, non-venture capital fund investors refrained from making large investments in VC-backed companies during the first quarter. As a result, venture investment volume declined 17% to EUR 2.4 billion. However, deal activity measured by the number of deals remained steady. The absence of EUR 100 million+ deals in quarterly volume underlines the robustness of the investment activity. The largest deal was the EUR 80 million financing of Mission Therapeutics by a consortium of venture investors. Furthermore, the quarterly volume doesn’t include the EUR 930 million convertible debt investment by TPG Capital and other investors into Spotify, as Dow Jones VentureSource investment statistics do not include bridge financing. The deal, however, is illustrative of the current investment environment in which valuation-rich VC-backed companies may still attract sizable capital but at stricter terms with financing conditions tied to the timing of liquidity.


  • Corporations remained eager to acquire VC-backed companies

European exit volume declined 20% to EUR 4.3 billion following the strongest exit activity since 2001. Despite a drop in volume, the number of M&A exits remained stable indicating that VC-backed companies continued to find ample liquidity opportunities. In the largest exit of the first quarter, Ubon Partners completed the sale of Acano, a provider of collaboration infrastructure and conferencing software, to Cisco for EUR 651 million. In contrast, IPOs from VC-backed companies slowed down, with the first quarter registering six offerings, half as many as a year ago, according to Dow Jones VentureSource. Offering amounts and market capitalization achieved were of small size, with Shield Therapeutics, backed by Invetages, raising EUR 45 million at the market capitalization of EUR 228 million.


  • European VC market can continue growing

The European venture market is expected to continue growing driven by globalization of VC investments, benign valuations of European targets and an emergence of venture hubs across Europe. We expect experienced managers to seize opportunities to invest as well as gain liquidity when opportunities arise in such a volatile market environment.


In brief

  • Asia-Pacific private equity investments maintained the strong momentum during the first quarter. Buyout investments increased in South Korea and Japan, while technology companies in China continued to receive large funding rounds from investors. In line with global trends, PE-backed IPOs dipped. Fewer but larger M&A exit deals spurred growth in M&A exit deal values, with South Korea taking the top spot in the regional exit landscape.


USD billion  2014 2015 Q115 Q415 Q116 Dy/y Dq/q
Buyout fundraising  19.9 16.9 3.6 9.0 1.2 (65%) (86%)
Growth fundraising 52.2 48.8 14.3 6.9 6.1 (58%) (11%)
Buyout investments  30.7 65.7 11.3 13.6 11.1 (2%) (19%)
Growth investments  63.2 74.1 11.0 20.8 13.6 24% (34%)
M&A exit values 57.0 53.8 7.5 13.4 9.7 29% (28%)
IPO exit values 70.3 40.6 6.3 10.2 1.2 (81%) (88%)

Notes: Notes: Dy/y is the comparison of Q1 2016 vs. Q1 2015. Dq/q is the comparison of Q1 2016 vs. Q4 2015.
Source: Asian Venture Capital Journal database, as of May 15, 2016.


  • Subdued fundraising continued in 2016

Asia-Pacific fundraising activity declined sharply during the first quarter as investors were reluctant to make decisions on long-term investments in illiquid funds in light of high market volatility. A lack of experienced buyout fund managers in fundraising also weighed on commitment volume. As a result, aggregate fundraising volume dropped 59% to USD 7.3 billion. The largest buyout closing in the first quarter was the USD 350 million first close by ChrysCapital for its seventh fund, as private equity managers in India try to capitalize on renewed interest in the country due to the improving macroeconomic outlook.


  • Investment activity remained robust

During the first quarter, private equity investment volume maintained the pace of the 2015 record-breaking year. While the buyout investment volume of USD 11 billion matched the capital invested during the same quarter as last year, growth and venture capital investments increased 24% year-on-year to USD 14 billion. With respect to buyouts, deal flow was robust in Japan and South Korea. Japan recorded the highest number (20) of buyout deals in the region. South Korea came second eclipsing Australia for the first time on record, according to the AVCJ database. Notable buyout transactions included the USD 913 million acquisition by MBK Partners of Doosan Infracore’s machine tool business and the USD 527 million takeover of South Korean cement producer Lafarge Hall Cement by Baring Private Equity. Tech fever continued in China, with a logistics arm of Alibaba Group receiving a USD 1.5 billion in financing from a consortium of private equity investors, while Harvest Funds Management and Sequoia funded a start-up, JD Finance, with USD 1 billion.


  • Large M&A exits lifted exit volume

Exit activity continued to slow down in the first quarter. According to the AVCJ data, the number of exit deals dropped 35% to 100 exits year-on-year, while IPOs of PE-backed companies stalled in light of market volatility and growth concerns in the region, with the first quarter generating only USD 1 billion in proceeds - the lowest since the first quarter of 2013. Despite a slowdown in deal making, a few large exits pushed exit values to USD 10 billion, a higher level than a year ago. The maturing South Korean buyout market provided increasing exit opportunities, accounting for 30% of total exit proceeds - the largest share across all markets in the region. In the largest exit of the quarter, Affinity Equity Partners agreed to sell the Korean music streaming provider Loen Entertainment to Kakao Corporation for USD 1.3 billion.


  • Investment environment is supportive of PE

Despite the continued economic slowdown and structural reforms, the region provides consolidation opportunities for private equity investors. In some markets, an increasing number of small and medium sized enterprises are expected to seek capital from private equity investors in light of local banking problems. However, market uncertainty is prevalent so investors are more likely to pursue fund and deal opportunities cautiously.



In brief

  • Fundraising activity in Emerging Markets continued to trend downwards in the first quarter of 2016. MENA was the only region showing a rebound from the prior quarter, but the amount was still lower compared to the prior year. In contrast, total investments in the region increased, mostly driven by improved investment activities in Latin America and the CEE & CIS regions. Consumer and healthcare related sectors continue to attract private equity investors across the regions. The unsaturated consumer demand combined with a rising middle class population make companies in these sectors attractive for private equity investments. Additionally, these sectors are relatively less vulnerable to macroeconomic headwinds.


USD million  2014 2015 Q115 Q415 Q116 Dy/y Dq/q
MENA Fundraising  1,043 1,052 351 59 176 (50%) 200%
  Investments  752 928 254 151 24 (91%) (84%)
  Number of deals  67 62 20 19 12 (40%) (37%)
SSA Fundraising  4,323 3,894 1,895 597 572
  Investments  2,103 1,248 323 469 247


  Number of deals  125 101 22 27 22 0% (19%)
CEE & CIS Fundraising  2,016 643 123 264 45 (64%) (83%)
  Investments  1,902 1,426 158 87 425 169% 391%
  Number of deals  152 98 27 19 23 (15%) 21%
Latin America & Caribbean Fundraising  10,319 7,375 1,349 3,512 676 (50%) (81%)
  Investments  5,795 2,668 459 576 766 67% 33%
  Number of deals  142 31 31 42 26 (16%) (38%)
Emerging Markets (Ex. Em. Asia) Fundraising  17,700 12,964 3,718 4,431 1,469 (60%) (67%)
  Investments  10,552 6,299 1,194 1,283 1,462 22% 14%
  Number of deals  486 410 100 107 83 (17%) (22%)

Notes: Notes: Dy/y is the comparison of Q1 2016 vs. Q1 2015. Dq/q is the comparison of Q1 2016 vs. Q4 2015.
Source: Emerging Markets Private Equity Association, as of May 30, 2016.

Latin America

  • Fundraising slowed down due to continued macroeconomic challenges, but investment activity increased

Fundraising activity in Latin America started off slowly in 2016. During the first quarter, commitment volume halved to USD 676 million from a year ago. Brazil continued to experience economic difficulties and political instability. As a result, only one fund, Inseed Investimentos’s venture capital fund, Criatec III, achieved a close in the country in Q1 2016. In Latin America, Union para la Infraestructura posted the largest fundraising amount of USD 394 million for its Colombia-based direct lending fund, FCP 4G Credicorp Capital/Sura Asset Management (FCP 4G), during the period.

Conversely, more capital was invested in the region during the quarter, reporting a total of USD 766 million, or a 33% increase compared to the prior quarter. This implies that there was still enough dry powder remaining in the market, as fund managers were cautious in deploying capital despite successful fundraising during the prior quarter. The Carlyle Group was the most active manager in deploying capital in the region, investing USD 275 million in Brazilian education company Uniasselvi and another USD 87 million in Tempo Participacoes, a healthcare equipment and services provider in Brazil.

One of the most positive signs in the region during Q1 2016 was Southern Cross Group’s Mexico-based homebuilding company Javer’s IPO, the first private equity-backed IPO in the region since 2014. This is encouraging as it may indicate the possibility to recover from the decrease in LP sentiment within the region, but only if fund managers are able to leverage public markets for further exit activities.

Middle East and North Africa (MENA)

  • Both fundraising and investments slowed down in MENA in Q1 2016, after a rapid growth in both activities in the prior periods

In Q1 2016, fundraising volume rebounded to a total of USD 176 million from its rock bottom of USD 59 million in the prior quarter. However, this is merely half of the amount raised during the same quarter in 2015. Indeed, fundraising remained relatively muted with only one fund, Gulf Capital’s latest mezzanine fund, GC Credit Opportunities Fund II, reaching a close in Q1 2016.

Investment activity dropped sharply during the quarter, reporting a 84% decrease compared to the prior quarter and a 91% decrease year-on-year. The largest investment in the region was made by Capital Invest, in Morocco-based healthcare equipment and services provider Best Health in January 2016. While fund managers continued to leverage the region’s underlying demographics and growing middle class by investing more than 75% in consumer and healthcare related sectors, fund managers were still cautious and reluctant to deploy capital in the region. Ultimately, macroeconomic challenges are unavoidable even in these most promising sectors – lower oil prices are likely to continue, which could potentially stress local consumers of oil-exporting nations in the region.

One positive sign was the diversified exit activity shown in the region. In Q1 2016, seven exits were recorded in MENA, of which two were in infrastructure and the other two were in the financial space, illustrating that GPs are able to divest across various sectors and strategies.

Sub-Saharan Africa (SSA)

  • Both fundraising and investments slowed down in the SSA region. However, LP interests remain strong while GPs have significant dry powder that was accumulated during the past two years

Fundraising in the SSA region remained almost flat at USD 572 million in Q1 2016 compared to USD 597 million in the prior quarter. However, considering the past two years in which fund managers in the region raised a total of USD 8.2 billion, the figure is somewhat disappointing. The recent decline is partly explained by the subdued economic outlooks, as estimated by the IMF, for many countries in the region, with commodity exporters experiencing large downward revisions in growth for this year. This also affected the region’s investment activities, which recorded a sharp drop from the prior quarter as well as on a year-on-year basis. In Q1 2016, the largest fund achieved a close in LeapFrog-Prudential Financial I, a SSA growth capital fund managed by LeapFrog Investments, which achieved a total of USD 350 million during the quarter. Investec Asset Management’s second African PE fund added USD 45 million in Q1 2016, bringing the fund’s total capital raised to USD 295 million to date.

Although investment activity also slowed down, private equity fund managers continued to find opportunities in the region – most notably Nigeria and South Africa, which attracted the majority of the deal flow. Ethos Private Equity invested close to USD 100 million in Eazi Group, a South Africa-based support services provider. Asma Capital Partners, together with Capital Group Private Markets and IFC, invested USD 52 million in Nigerian oil and gas producer Seven Energy.

According to EMPEA’s recently released 2016 Global Limited Partners Survey, SSA was the third most attractive emerging market destination for GP investments and the most attractive market for GP investments when ranked by managers who have commitments in the region. The continued LP interest in the region along with the surge in dry powder accumulated over the last two years are expected to boost further fundraising and deal making activities.

Turkey and Russia/CEE/CIS

  • Fundraising continued to decline amid the region’s political risks and macroeconomic vulnerability, whereas investments picked up

The challenging environment for fundraising in Turkey and Russia/CEE/CIS continued in the first quarter of 2016. During this period, only one fund achieved a close in the region. Karma Ventures, an Estonia-based series A fund, first closed with a capital commitment of EUR 40 million (approximately USD 45 million).

Conversely, investment activities picked up during the quarter, with fund managers deploying a total of USD 425 million in the region. The two largest deals, Bridgepoint Private Equity’s USD 269 million investment in a Poland-based retailer Smyk along with Elbrus Capital’s USD 131 million acquisition of a Russian recruitment platform Headhunter, accounted for more than 94% of the total amount invested during Q1 2016. Poland was the most active region in terms of investments, leading eight deals, or 35% of all deals in the region during the quarter. These figures not only represent Poland’s relative economic strength within the region, but also the lack of private investment activity in other countries of the CEE/CIS. Nine deals were completed across the Baltics, whereas deal activity in Russia remained subdued, with only four deals completed during the period.


In brief

  • The secondary market deal flow remained robust and 2015 was another strong year. We expect to see increased deal flow in 2016 and continue to see attractive opportunities in the smaller segment of the market.

Greenhill Cogent estimates that the volume of secondary deals was USD 40 billion during 2015. The number of sellers and transactions remained steady but there were fewer deals in the USD 1 billion plus category. Sub USD 50 million transactions were largely driven by tail-end portfolio sales. The average age of buyout funds traded on the secondary market continued to increase, with funds in their harvesting phase (6 to 9 years old) comprising the bulk of buyout volume in 2015.

Dry powder remains strong, with an estimated USD 80 billion of equity capital available from a broad range of institutions. Furthermore, an increasing portion of secondary buyers are using leverage and deferrals, leading to aggressive pricing.The vast majority of capital raised in 2015 comprised of far larger secondary funds, with several USD 10 billion secondary funds successfully closing their fundraising processes. This aggregation of capital at the larger end continues to favor the competitive dynamics at the lower end of the secondary market.

As the secondary market matures, and buyers and sellers become more experienced, transactions are being completed faster than ever. More and more one step binding auction processes are being requested by sellers. In this market environment, strong execution capabilities as well as access to a strong primary private equity platform are sources of considerable competitive advantage.

One of the most significant trends of 2015 was the upturn in the number of GPs initiating the secondary sale of fund interests in their funds. The main driver behind this is the large inventory of unrealized assets in mature funds coming to the end of their fund lives. GPs of such funds are incentivized to restructure their own funds through a secondary sale in order to secure income stream and potential carry from a continued management of the portfolio companies. As of February 2016, Greenhill Cogent estimates the volume of GP-led deals over the prior 24 months to be at approximately USD 15 billion.

Another trend is the rise of real estate deals, exemplified by the CalPERS USD 3 billion sale of its real estate portfolio. Diversification of sellers’ profiles away from U.S. financial institutions is another theme of 2015. While deal flow from US banks has been reduced this year, following the extension of the Volcker rule, large pension funds, non-US banks, insurance firms and multi-asset management firms continue to drive supply. Greenhill Cogent estimates that the volume of real estate secondaries was at USD 7.5 billion in 2015, compared to just USD 3.0 billion in 2013.

The recent market turmoil in China and high volatility in crude oil have had a broader market impact. Volatility has been higher across most asset classes so far in 2016. The recent public market volatility had no dramatic effect on overall secondary market volume or pricing but has induced a flight to quality. Demand and prices remain strong for high quality assets, while average and lower quality assets are increasingly more difficult to sell.As GPs typically value private equity portfolios “mark-to-market”, NAVs of PE funds were affected but remained relatively resilient compared to public markets. Discounts for secondary private equity stakes widened in this environment, but only slightly. According to market observations from Greenhill Cogent, the average pricing on buyout secondaries declined from 96% of NAV during 2014 to 94% of NAV during 2015.

Looking forward, given the high valuations and uncertain macroeconomic conditions, we expect a growing price gap between top-tier and lower quality GPs and between funds and lower interest in funds with significant public exposure and high single-company concentrations. Furthermore, we expect the supply of tail-end funds to remain strong, with many sellers focusing on selling tail-end portfolios for administrative reasons. We also expect to work on an increasing number of GP-led deals as GPs use the secondary market to create LP liquidity and to restructure funds. Finally, we continue to expect attractive investment opportunities in the small and medium segments of the secondary market.


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