Private equity and hedge funds in capital markets today
BSCC Luncheon
24 May 2007 Alfred Gantner Executive Chairman Partners Group
Speaker 2
Alfred Gantner, Partner Executive Chairman Alfred Gantner is a founding partner of Partners Group and serves as the firm's executive chairman, leading the business strategy and corporate development of the firm. As a member of both the private equity and hedge fund investment committee, he has been instrumental in building the firm's private equity and hedge funds investment management business and participated in a large number of private equity (primary, secondary and direct investments) and hedge fund investments in Europe and the US. Prior to founding Partners Group, Mr. Gantner worked for Goldman Sachs & Co. where, after stays in New York and London, he built up an institutional client base in Switzerland. He started his career in the securities trading department of the UBS Private Banking Group (Cantrade) in Zurich and Geneva. He holds a MBA degree from the Marriott School of Management at Brigham Young University, USA.
Partners Group
Table of contents 3
I.
Introduction Partners Group
II.
Private equity
III.
Hedge funds
Introduction Partners Group
Partners Group - overview 4
Independent Ca. 70% owned by Partners, Principals & employees
Sophisticated Innovative structuring solutions and state of the art risk management
Proven Founded in 1996; over CHF 17bn AuM in private equity, private debt, private real estate, infrastructure, and hedge funds
Global
Track record significant outperformance of relevant benchmarks
Offices in Zug, London, Guernsey, New York, San Francisco and Singapore
Access & Network
Strong Resources
Invested with over 150 leading managers
Over 200 employees; listed at SWX (PGHN) with market cap of over CHF 4bn
Partners Group
Table of contents 5
I.
Introduction Partners Group
II.
Private equity
III.
Hedge funds
Private equity
Private equity firms have again moved into the public spotlight…
6
“Vulture Culture”
“Megadeal manoeuvres” “HCA Buyout Highlights Era of Going Private “
“Some financial investors don’t bother to think of the people whose jobs they destroy. They remain anonymous, don’t have a face, fall over companies like locust swarms, graze them and then move on.“ Franz Müntefering, former head of German Social Democrats
Private equity
… they raise bigger and bigger funds… 7
Year
Size/target size of latest/current fund (in USD bn) The Blackstone Group
20
2006
Goldman Sachs
20
2007
Kohlberg Kravis Roberts
16
2006
Texas Pacific Group
15
2006
Permira
15
2006
The Carlyle Group
15
2007
CVC Capital Partners
2005/2006
14
Providence
12
2007
Bain Capital
12
2007
Apax Partners
12
2007
Silver Lake
10
2007
Apollo Management
10
2006
Thomas H. Lee
9
2006
Cinven
9
2006
Hellman & Friedman
8
2007
Warburg Pincus
8
2005
Madison Dearborn
Source: Partners Group analysis based on various sources
7
2006
European-based funds
US-based funds
Private equity
… and are expected to raise even more capital in the years to come …
“Halusa, chief executive of Apax Partners, said that if the USD 100bn fund became a reality, it would put many of the world’s biggest companies within the grasp of private equity groups, opening a vast new marketplace for their investment activity. The USD 100bn fund would be ten times the size of the biggest private equity funds at present.” The Times / January 26, 2006
8
Private equity
… have lately done their ever-largest deals after the buyout of RJR Nabisco in 1989…
9
Company TXU Equity Office
Deal size USD 45.0bn USD 40.0bn
Industry Electricity manufacturer Office building owner & manager
Sponsor TPG, KKR Blackstone
Year
HCA
USD 33.0bn
Hospital operator
incl. KKR, Bain Capital
2006
RJR Nabisco
USD 31.4bn
Consumer products
KKR
1989
First Data
USD 29.0bn
Credit card billing
KKR
2007
Clear Channel
USD 26.7bn
Media
TH Lee, Bain Capital
2006
Sallie Mae
USD 25.0bn
Student loan provider
incl. JC Flowers, JP Morgan
2007
BAA
USD 23.9bn
Airport operator
incl. Ferrovial, CDP
2006
Kinder Morgan
USD 21.6bn
Energy & natural gas pipelines
incl. Carlyle, AIG
2006
Freescale
USD 17.6bn
Semiconductors
incl. Carlyle, Permira, TPG
2006
Harrah's Entertainment
USD 17.1bn
Entertainment
TPG, Apollo
2006
TDC
USD 15.8bn
Communication
incl. Apax, Providence
2006
Thames Water
USD 15.2bn
Water & wastewater services
Macquarie
2006
Hertz
USD 15.0bn
Car rental
incl. CD&R, Carlyle
2005
Univision
USD 13.6bn
Media
incl. Providence, TPG
2006
SunGard
USD 11.3bn
Software
incl. Silver Lake, KKR
2005
VNU
USD 11.0bn
Media
incl. Carlyle, TH Lee
2006
2007 2007
Private equity
… and play a big part in our economy and life
10
Estimated revenues
Estimated No. of employees
Kohlberg Kravis & Roberts
> USD 60bn
> 300’000
Blackstone Group
> USD 50bn
> 300’000
Texas Pacific Group
> USD 40bn
> 250’000
The Carlyle Group
> USD 30bn
> 200’000
Apollo
> USD 30bn
> 200’000
Permira
> USD 20bn
> 150’000
CVC
> USD 20bn
> 150’000
Cinven
> USD 20bn
> 150’000
Apax Partners
> USD 20bn
> 100’000
Private equity Group
Selected portfolio companies
Source: Partners Group estimates, The Economist, KKR, The Carlyle Group
Private equity
The geographic investment spectrum is broadening, and…
100% 90%
11
Asia 0% Europe 14%
Asia 12% Asia 33%
80% 70%
Europe 40%
60% 50% 40%
Europe 33%
US 86%
30%
US 48%
20% 10%
US 33%
0% 1994
2006
Source: NVCA, EVCA, Asian Venture Capital Journal, Partners Group estimates
2014 +
Private equity
…and investing in ever more industries
12
100% 90%
Others 17%
80%
Building products / construction 8%
70%
Media 11%
60%
Consumer / retail 12%
Others 60%
50% 40% Media & telecom 11%
30% Industrials 52%
Consumer / retail 17%
20% 10%
Industrials 10% 0% 1994
H1 2006
Source: Buyouts Newsletter / TPG for 1994 figures (include only transactions over USD 200m); mergermarket „European Private Equity in Review“ and „North American Private Equity in Review“ (August 2006) for H1 2006 figures (value-weighted average of European and North American figures)
Private equity
…and investing in larger deals (public to privates)
13
S&P 500 ex-Financials
80%
11%
75%
10% Net debt to equity
9%
net debt to equity
65% 8%
60% 55%
7%
50%
6%
Cash % of assets
45%
cash in % of assets
70%
5% 40% 4%
35% 30% 2Q86
3% 4Q87
2Q89
4Q90
2Q92
4Q93
2Q95
4Q96
2Q98
4Q99
2Q01
4Q02
2Q04
4Q05
Public companies have low leverage and excess cash on the balance sheets Higher quality assets with more diversified revenue base Significant cost improvement potential
0.0
Source: EVCA, Thomson Financial, PriceWaterhouseCoopers
Greece
Slovakia
Czech Republic
Ireland
Austria
Poland
6X
Switzerland
Belgium
Italy
New Zealand
China
Portugal
Canada
Hungary
India
Finland
Norway
Japan
Germany
2X
Denmark
Spain
France
Netherlands
South Korea
United States
Australia
Sweden
Israel
United Kingdom
Private equity investments in % of GDP
Private equity
The private equity industry still has room to accommodate strong future growth 14
12X
1.2
1.0
0.8
0.6
0.4
0.2
Private equity
European Buyout Valuations Entry EV / EBITDA Multiples
15
Pricing across all size ranges has risen again in 2006, but there appears to be a leveling out
Very similar to 2005, liquidity in the debt markets and the positive economic development in general drove valuations upward during 2006 9.5x 9.0x 8.5x 8.0x 7.5x 7.0x 6.5x 6.0x 5.5x 1999
2000
> EUR 250m
2001
2002
EUR 250 - 500m
2003
2004
> EUR 500m
2005
2006
> EUR 1000m
Source: Standard & Poor’s, as at December 31, 2006
High quality deals, availability of debt at low rates largely justify increased valuations
Private equity
Equity contribution remained stable at reasonable levels of 30% to 40%
16
Rolling 3-month average equity contribution 1997-2007 50%
40%
30%
20%
10%
0% 1997
1998
Source: Standard & Poor’s
1999
2000
2001
2002
2003
2004
2005
2006
2007
Private equity
Leverage is still much lower than historic highs reached in the 1980s
Source: Standard & Poor’s (global)
17
Private equity
Larger funds do not mean lower returns 18
In 1999-2001, funds have been raised with never before seen record sizes: Apax Europe V:
EUR 4.4bn
Apollo V:
USD 3.7bn
Cinven III:
EUR 4.4bn
TPG III:
USD 3.4bn
Back then, many people were afraid that these funds would have lower returns
Today, the IRRs of these funds stand at around 30%
Private equity
Buyout value creation chain: reality 19
Value creation through
Key return drivers of active ownership
Company outperformance / “active ownership”
1.
In 83% of the best deals, investors secured privileged knowledge on the company before actually investing
2.
Successful deal partners institute substantial and focused performance incentives: usually a system of rewards equalling 15 – 20% of the equity
3.
Successful investors craft better value creation plans at the beginning and execute them more effectively:
64%
Arbitrage
5%
McKinsey Quarterly, 2005 Number 1, pages 24 – 26
Sceptical review of current business; development of new business plan
92% of successful investors implemented performance management tools
4.
The most effective investors devote more hours to the initial stages of a deal: in the best performing companies, deal partners spent around half their time on the company during the first 100 days
5.
In over 80% of the best deals, firms strengthened the management team before the closing of the transaction
Market / sector appreciation 32%
Private equity
Private equity firms create jobs and revenue growth Employment growth Employment by UK private equity-backed companies grew by an average 14% annually and thus nearly five times the rate of FTSE 100 & FTSE Mid-250 companies in the five years until 2004/05 (1) In Europe, employment by private equity-backed companies grew by an average of 5.4% annually – or eight times the average of the EU 25 (0.7%) in the period 2000-2004 (2)
20
UK employment growth 15% 12%
14%
9% 6% 3% 0% Private equity-backed
Growth of revenues and investments
Revenues of private equity-backed companies in the UK grew by 20% annually on average (for the five years until 2004/05) (1) R&D expenditure by private equity-backed companies in the UK increased at an average rate of 19% annually (1)
(1)
3%
3%
FTSE 100
FTSE Mid-250
UK revenue growth
(1)
25% 20% 15%
20%
10% 5%
8%
7%
FTSE 100
FTSE Mid-250
0% (1) (2)
BVCA study “The Economic Impact of Private Equity in the UK 2005” EVCA study “Employment contribution of Private Equity and Venture Capital in Europe”, November 2005
Private equity-backed
Private equity
Relative attractiveness of various private equity segments
Source: PG Alternative Assets Navigator H1 2007
21
Partners Group
Table of contents 22
I.
Introduction Partners Group
II.
Private equity
III.
Hedge funds
Hedge funds
Hedge fund market has been growing significantly
23
Hedge fund assets tracked by Tremont (in USD bn)
919 813 674
Source: Q4 2006 TASS Asset Flows Report, Data until 1992 from Hennessee Hedge Fund Manager Survey
2006
2005
2004
2003
310
2002
264
2001
2000
197 209
1999
1998
1986
145 154
1997
1974
99
1996
1971
1995
1960
1994
2
1993
3
1992
1
1991
0
72 50 50 57 35 20
1950
490
Hedge funds
Hedge fund returns have been decreasing
24
Rolling three-year performance 50%
40%
30%
20%
10%
0%
-10% 1992
1994
1996
Convertible arbitrage Event Driven Fixed Income Arbitrage
1998
2000
Long/Short Equity Global Macro
Source: Bloomberg, Hedge Fund Research data, monthly data as of 31.3.2007
2002
2004
2006
Equity Market Neutral Distressed Securities
Hedge funds
Hedge fund “Alpha” has been decreasing
25
The development of Alpha for various strategies based on a rolling regression over a 60 month time window. 1.0%
Monthly Alpha in percent
Equity Hedge Event Driven Merger Arbitrage Convertible Arbitrage
0.8%
0.6%
0.4%
0.2%
-0.2% Data Source: HFR, Bloomberg. Calculation: Partners Group
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Hedge funds
High fee load lowers net returns further 26
Hedge Fund Return Gross of Fees
12.0%
Management Fee HF (2%)
2.0%
Performance Fee HF (20%)
2.4%
Hedge Fund Return Net of Fees
7.6%
Management Fee FoF (1%)
1.0%
Performance Fee FoF (10% above US LIBOR)
0.3%
FoF Return Net of Fees
6.3%
Hedge funds
Only small portion of HF returns is “alpha”
27
Traditional mutual fund
Hedge fund True Alpha (security selection, timing, execution)
Market Risk Premium
Hedge
Proclaimed Alpha Leverage
Leveraged proclaimed Alpha
“Alpha”
Currency Risk Premium Event Risk Premium Convergence Risk Premium Commodity Risk Premium Complexity Risk Premium Short Vega Risk Premium Liquidity Risk Premium Small Cap Risk Premium Value Stocks Risk Premium Term Curve Risk Premium Credit Risk Premium EmMa Risk Premium Equity Risk Premium
One of many investors’ most frequent mistakes is not looking deeper into a hedge fund’s proclaimed Alpha.
Hedge funds
“Traditional beta” vs. “Hedge fund beta” (“Alternative beta”) Traditional beta
Hedge fund beta (Alternative beta)
Exposure to:
Exposure to:
Broad equity market
Interest rates (duration) Credit risk Emerging markets
Style factors, such as small cap vs. large cap, value vs. growth (Long/Short Equity, Equity Market Neutral) Event risk (Merger Arbitrage) Volatility (Convertible Arbitrage, Volatility Arbitrage) Risks of commercial hedgers in futures markets (Managed Futures) Liquidity risk (Distressed Securities, Fixed Income Arbitrage, Reg D) Spread risk, e.g. carry trades (Global Macro)
Exposure to Hedge Fund Beta requires special investment techniques including short selling, leverage, and the use of derivatives. Thus, hedge funds have exclusive access to these Alternative Betas.
28
Hedge funds
ABS is very cost efficient for investors 29 Hedge Funds 2%/20% Hedge Fund Return Gross of Fees Management Fee HF Performance Fee HF
Fee savings on three levels:
Return net of Hedge Fund Fees
ABS 1.25%/15%
9% - 18% 2.00% 1.4% to 3.2%
9% - 18% 1.25% 1.2% to 2.5%
5.6% - 12.8%
6.6% - 14.2%
ABS Fee Saving on Hedge Fund level
Eliminate one fee layer (fund of fund level)
Management Fee FoF (1%) Perf. Fee FoF (10% above US LIBOR)
Æ save 220-360 bps p.a.
1.0% - 2.0% Fund of Fund 1%/10%
Return net of FoF Fees
1.00% 0.2% - 0.9%
0.00% 0
4.4% - 10.6%
6.6% - 14.2%
ABS Fee Saving on FoF level
1.2% - 1.9%
Total ABS Fee Saving Potential
2.2% - 3.6%
G ross G ro ss P e rfo rm a n c e P e r fo r m a n c e H edge Fund 1 H edge Fund 2
No asymmetric performance fee (performance netting benefit)
N e t P e r fo r m a n c e c o m b in e d : A fte r 2 0 % p e r fo r m a n c e fe e s
+12 %
+ 9 .6 %
Æ save 40-80 bps p.a. - 6%
Hedge Fund B pays Libor +45 bps for leverage
No financing costs for leverage
ABS Hedge Fund A receives Libor -35 bps for excess cash
(strategy cross-financing) Æ save 40-80 bps p.a.
=
+ 5 .1 %
HF B
Leverage without external borrowing External borrowing
Traditional fund of funds: No access to excess cash
…
HF A
+ 3 .6 %
ABS: A fte r 1 5 % p e rfo rm a n c e fe e s
- 6%
Exposure
ABS zero
HF n
ABS has a total fee savings potential of 300-500 bps p.a.
excess cash required collateral
Average Exposure of fund of funds
126
124
122
116
114
0 1 .1 0 .2 0 0 4 0 1 .1 1 .2 0 0 4 0 1 .1 2 .2 0 0 4 0 1 .0 1 .2 0 0 5 0 1 .0 2 .2 0 0 5 0 1 .0 3 .2 0 0 5 0 1 .0 4 .2 0 0 5 0 1 .0 5 .2 0 0 5 0 1 .0 6 .2 0 0 5 0 1 .0 7 .2 0 0 5 0 1 .0 8 .2 0 0 5 0 1 .0 9 .2 0 0 5 0 1 .1 0 .2 0 0 5 0 1 .1 1 .2 0 0 5 0 1 .1 2 .2 0 0 5 0 1 .0 1 .2 0 0 6 0 1 .0 2 .2 0 0 6 0 1 .0 3 .2 0 0 6 0 1 .0 4 .2 0 0 6 0 1 .0 5 .2 0 0 6 0 1 .0 6 .2 0 0 6 0 1 .0 7 .2 0 0 6 0 1 .0 8 .2 0 0 6 0 1 .0 9 .2 0 0 6 0 1 .1 0 .2 0 0 6 0 1 .1 1 .2 0 0 6 0 1 .1 2 .2 0 0 6 0 1 .0 1 .2 0 0 7 0 1 .0 2 .2 0 0 7 0 1 .0 3 .2 0 0 7 0 1 .0 4 .2 0 0 7 0 1 .0 5 .2 0 0 7
Hedge funds
PG ABS performance since inception 30
120
Outperformance annualized:
118
2.9%
PG ABS Hedge Fund Strategy Index PG ABS monthly
+22.8%** Correlation: 84.8%
+14.6%*
112
PG ABS Program net performance**
110
108
106
104
102
100
98
96
94
*)
Return: p.a. 8.2%
Volatility: p.a. 7.1%
Sharpe Ratio: 0.8
Maximum Drawdown: -7.2%
HF sub-indices with same strategies and weights like ABS over time (graph below), gross of any index fees (50-60 bps) **) Net of Management Fee: 1.25% & Performance Fee: 15%
Portfolio Solution
An optimal core satellite portfolio 31
Allocation by Managers Bridgewater Pantera3%
IIU 3%
AM Vol Arb 3%
Deephaven 3%
Group G 3%
Troob 3%
3% Argonaut 3% Ocean PE Investments 3% 2% Kevian 2% Campbell 2%
Wegelin 3% OMAM Global 3%
ABS 50%
Aphelion 3%
ABS Market Neutral 50%
Quattro 4% Argent 4%
1 “core” manager (Partners Group) with 21 replication programs 17 different “satellite” hedge fund managers/strategies = 38 different equity-neutral and diversified return sources
Partners Group
Contacts 32
Partners Group
Zugerstrasse 57 6341 Baar-Zug Switzerland T: +41 41 768 85 85 F: +41 41 768 85 58
Partners Group (UK) Limited
Partners Group (Guernsey) Limited
Partners Group (USA) Inc.
Partners Group (USA) Inc.
33 Cavendish Square 16th Floor London W1G 0PW United Kingdom T: +44 20 7182 1870 F: +44 20 7182 1871
Tudor House, 3rd Floor Le Bordage St Peter Port GY1 1BT Guernsey T: +44 1481 711 690 F: +44 1481 730 947
450 Lexington Avenue 39th Floor New York, NY 10017 USA T: +1 212 763 47 00 F: +1 212 763 47 01
150 Spear Street 3 Church Street 18th Floor San Francisco, CA 94105 Samsung Hub #28-06 USA Singapore 049483 T: +1 415 537 85 85 T: +65 65 44 65 65 F: +1 415 537 85 58 F: +65 65 44 65 66
www.partnersgroup.net
[email protected]
Partners Group (Alternative Investments Asia Pacific) Pte Limited
Partners Group
Disclaimer 33
This material has been prepared solely for purposes of illustration and discussion. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. Any security offering is subject to certain investor eligibility criteria as detailed in the applicable offering documents. The information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summary form for convenience of presentation, it is not complete and it should not be relied upon as such. All information, including performance information, has been prepared in good faith; however Partners Group makes no representation or warranty express or implied, as to the accuracy or completeness of the information, and nothing herein shall be relied upon as a promise or representation as to past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models and/or other analysis of Partners Group (which may not necessarily be described herein), no representation or warranty is made as to the reasonableness of any such assumptions, models or analysis. The information set forth herein was gathered from various sources which Partners Group believes, but does not guarantee, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to change at any time.
