Private Equity

Private Equity Trend Report 2010 Navigating the rocky road to recovery

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Private Equity Trend Report 2010 Navigating the rocky road to recovery Edited by PricewaterhouseCoopers By Martin Scholich and Richard Burton This publication includes information obtained or derived from a variety of publicly available sources. PricewaterhouseCoopers has not sought to establish the reliability of these sources or verified such information. PricewaterhouseCoopers does not give any representation or warranty of any kind (whether express or implied) as to the accuracy or completeness of this publication. The publication is for general guidance only and does not constitute investment or any other advice. Accordingly, it is not intended to form the basis of any investment decisions and does not absolve any third party from conducting its own due diligence in order to verify its contents. Before making any decision or taking any action, you should consult a professional advisor. Typesetting Nina Irmer, Digitale Gestaltung & Medienproduktion, Frankfurt am Main Printing Kohlhammer und Wallishauser GmbH, Hechingen Printed in Germany

© February 2010 PricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Preface

Preface Our annual survey of private equity funds was undertaken in the final months of a turbulent year for the industry. Our sincere thanks go to all who contributed to this year’s survey. As predicted in last year’s survey, 2009 proved to be a ‘time of challenge and change’ for private equity. Indeed, the year can be characterised as a major year of restructuring activity within the portfolios. Most of our respondents are now cautiously optimistic about the future – the consensus is that the European M&A market will start its recovery during 2010. Nevertheless, it is widely acknowledged that portfolio restructuring activity and negotiations with financing providers will need to continue in the next 12 months. As well as dealing with ongoing difficult trading conditions at portfolio companies and a likely dearth of willing sellers and finance providers for new transactions, private equity also needs to manage a variety of other challenges:

•

Changes in the traditional business model of private equity – these are expected by an overwhelming 90% of participants.

•

Investor actions to address fund performance – though only 12% of funds surveyed claimed to be dissatisfied with the performance of their portfolio companies, their limited partners may beg to differ.

•

Increasing focus on risk management and sustainability issues – however, less than half the funds we surveyed have so far undertaken an assessment of sustainability issues in their portfolios.

•

The demands brought by increased regulation and transparency (e.g. AIFM).

In summary, we expect that the private equity market – and the majority of market participants – will embark on the ‘rocky road to recovery’ during 2010. This road looks set to provide a smoother ride than 2009, but many investors will still need to navigate a challenging passage past the bumps, around the curves and out of the odd chicane. We look forward to supporting your successful drive through 2010.

Martin Scholich Advisory Leader

Richard Burton Private Equity Leader

3

Contents

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Contents Preface ......................................................................................................... 3 Figures ......................................................................................................... 5 A Executive summary ................................................................................ 8 B Turbulent times: 2009 in retrospect ...................................................... 11 C The future for private equity: outlook and opportunities........................ 17 D Emerging issues: risk management and sustainability ......................... 25 E German and international investment trends ........................................ 29 F

Background information and methodology ........................................... 33

About us ..................................................................................................... 34 Contacts ..................................................................................................... 35

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Private Equity Trend Report 2010 Navigating the rocky road to recovery

Figures

Figures Fig. 1

Percentage of portfolio companies that have breached one or more bank covenants......................................................11

Fig. 2

Outcomes of negotiations with banks following covenant breaches ....................................................................................12

Fig. 3

Measures taken to preserve profitability in portfolio companies in 2009 .....................................................................13

Fig. 4

Measures taken to preserve liquidity in portfolio companies in 2009 .....................................................................14

Fig. 5

Level of satisfaction with the overall development of portfolio companies ....................................................................15

Fig. 6

Expected European deal market recovery .................................17

Fig. 7

Future sources of new deal opportunities ..................................18

Fig. 8

Future industry focus of international private equity funds .........19

Fig. 9

Development of credit availability over the next 12 months .......20

Fig. 10

Development of credit terms over the next 12 months ...............21

Fig. 11

Percentage of portfolio companies expected to breach one or more bank covenants in 2010 .........................................21

Fig. 12

Future changes to the private equity industry ............................23

Fig. 13

The changing importance of risk management as a result of the global financial crisis ........................................................25

Fig. 14

Processes established to manage risk in portfolio companies..................................................................................26

Fig. 15

Importance placed on sustainability by funds.............................26

Fig. 16

Sustainability issues considered in assessing new investments ................................................................................27

Fig. 17

Attractiveness for private equity funds in Germany – development since 2007 ............................................................30

Fig. 18

Development of Germany’s position in a ranking for private equity investments..........................................................30

Fig. 19

Countries/regions which will become more attractive for private equity over the next 5 years ...........................................31

5

Figures

6

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Fig. 20

Respondents by headquarters .................................................. 33

Fig. 21

Respondents by total global fund volume (capital under management) ............................................................................ 33

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Figures

7

Executive summary

Private Equity Trend Report 2010 Navigating the rocky road to recovery

A Executive summary A total of 187 private equity funds took part in PwC’s fourth annual survey of investment trends. Of these funds, 20% were based in Germany and 80% were headquartered outside Germany. 65% of participants manage funds of up to €500 million, 15% between €500 million and €1 billion and 20% over €1 billion. The key findings of the survey were as follows: 2009 in retrospect

Outlook and opportunities

Risk management and sustainability

•

The vast majority of respondents (over 75%) had to deal with covenant breaches within their portfolio companies or were otherwise required to enter negotiations with financing banks during 2009.

•

Staff reductions were the most common measure cited by international funds1 to preserve the profitability of portfolio companies (78%), whereas German-based funds preferred to make use of procurement savings (84%), cutting temporary or contract staff (84%), short-term cost cutting (79%) and short time work (Kurzarbeit) (76%) before resorting to employee lay-offs (66%).

•

Despite the challenging conditions, two thirds of all funds surveyed expressed satisfaction with the development of their portfolio companies in 2009. Only 12% admitted they were dissatisfied.

•

A mood of cautious optimism now prevails: 68% of funds expect the European deal market to recover in the course of 2010, most likely in the second half of the year (44%).

•

Almost 80% of the German funds expect the German market for private equity deals to improve in 2010. None expect the market to be worse than in 2009.

•

Over 90% of funds surveyed believe that the business model of private equity will change in future and that less leverage or financial engineering will be used.

•

Co-operations are expected to be high on the agenda: 60% of funds anticipate more co-operations with strategic investors and 52% expect more club deals with other private equity funds. However, while 26% of international funds expect more co-operations with sovereign wealth funds or hedge funds, only 5% of German funds believe this will occur.

•

For 64% of all respondents the importance attached to risk management has increased since the beginning of the global financial crisis.

•

Over two thirds of all funds have improved monthly performance reporting, use an early warning system and have set up supervisory or advisory boards to conduct regular risk reviews of portfolio companies.

•

58% of the international funds attach a relatively high importance to sustainability issues in making investments, compared with less than half of the German funds surveyed (46%). 12% of all funds still considered this issue to be “not at all important”.

1

8

In this survey, “international funds” refers to all funds whose headquarters are based outside Germany.

Private Equity Trend Report 2010 Navigating the rocky road to recovery

•

42% of the international funds stated that they had undertaken an assessment of sustainability issues within their existing portfolio, compared to fewer than 30% of the German funds.

•

International funds plan to significantly increase investments in Germany in future:

Executive summary

German and international investment trends

– Over 45% of the funds currently investing in Germany expect to increase the assets that they allocate to the country by 2014. – Over 40% of the international funds that currently do not invest in Germany plan to start making investments there in the next five years.

•

The funds surveyed continue to view Western Europe (48%) as most attractive for future investment, followed by CEE (37%) and Asia (27%).

•

Poland (18%) was ranked as the most attractive individual country for future investment, particularly among the German-based funds, followed by China, France, Germany and India (16% each).

9

Executive summary

10

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Turbulent times: 2009 in retrospect

B Turbulent times: 2009 in retrospect As forecast in last year’s survey, 2009 proved to be an exceptionally challenging year for the European private equity industry, with investment activity almost coming to a standstill. While the lack of available bank financing was undoubtedly a key factor, the capacity of many investment teams was fully utilised by the need to deal with emerging issues in their existing portfolios. In addition, businesses exposed to the severe economic cycle became almost impossible to value reliably in the first half of 2009 as their order books and trading results deteriorated on almost a weekly basis. Under these circumstances the basis for a negotiated transaction was simply not present in many cases. As the results of our survey will show, the German and international funds alike were faced with taking action to preserve the profitability and liquidity of their portfolio companies.

Three quarters of all funds had to deal with bank covenant issues within their portfolio companies

Negotiations with banks

Only 20% of all funds surveyed stated that their portfolio companies had not breached one or more bank covenants or had otherwise needed to enter negotiations with their financing providers since the collapse of Lehman Brothers and the beginning of the global financial crisis.

6%

Over 40%

10% 5%

31 to 40%

8% 9%

21 to 30%

16% 20% 21%

10 to 20%

35%

Less than 10%

18% 18%

None at all

Not specified 0%

24% 7% 3% 10% German funds

Fig. 1

20%

30%

40%

International funds

Percentage of portfolio companies that have breached one or more bank covenants

When asked about the outcomes of the negotiations with their banks, over 60% of the German funds and almost half of the international funds named waiver or standstill agreements.

11

Turbulent times: 2009 in retrospect

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Other outcomes most frequently named by the interviewees were:

• • •

Covenant resets with no new equity injection, Use of an equity cure, New equity injection without dilution of shareholding.

However, a significant minority of funds admitted that they had experienced either a full loss of their equity shareholding (16% of international funds, 11% of German funds) or a loss of majority control in favour of the finance parties (13% of international funds, 11% of German funds) at one or more of their portfolio companies. 33% of international and 29% of German funds had been required to dilute their equity stake while managing to retain majority control. The survey results also indicate that the wave of restructurings is by no means completed – 54% of the international funds and 46% of the German funds found themselves in the midst of negotiations at the time of the survey.

49%

Waiver or standstill agreement only

64% 46% 50%

Covenant reset with no new equity injection 40%

Equity cure

25% 36% 36%

New equity injection without dilution of shareholding

33% 29%

Capital restructuring without loss of majority control 13% 11%

Capital restructuring with loss of majority control

16% 11%

Full exit in favour of finance parties

54%

Negotiations are still ongoing/in progress

46% 0%

10%

20%

30%

German funds

Fig. 2

40%

50%

60%

70%

International funds

Outcomes of negotiations with banks following covenant breaches

“The level of financial restructuring activity in 2009 was unprecedented – we expect this to continue for at least two more years.” Dr. Derik Evertz, Business Recovery Services Leader, PwC

12

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Turbulent times: 2009 in retrospect

Short-time work (Kurzarbeit) was a popular measure to protect portfolio company profits in Germany

Protecting profitability

76% of the German funds said that their investee companies took advantage of the short-time work scheme introduced as a crisis measure by the government, compared with only 37% of the international funds surveyed. This indicates that German labour law provided companies with an effective instrument to avoid dismissals in difficult economic situations and to achieve temporary savings in personnel expenses. Under this scheme, the employees’ working hours, and hence the company’s own costs, are reduced and the staff receive money from the Bundesagentur für Arbeit (German Federal Employment Agency) in compensation for the lower income received from the employer. Almost 85% of the German funds also cut costs by reducing temporary or contract staff which they had built up during the boom years. This use of short-time work and the reduction of temporary or contract staff has led to fewer layoffs of permanent staff by the German private equity funds surveyed. 66% of them stated that they have made permanent staff redundant, compared with 78% of the international funds. Other popular measures employed by the majority of respondents were procurement cost savings and use of temporary cost cutting measures such as cut-backs of travel and marketing expenses. Transfers of operations to low cost countries, outsourcing and insourcing were less prevalent, but still formed a substantial component of cost saving measures. Further unprompted responses covered reductions in salaries, reductions in overhead, sales increases and changes in research and development programmes.

37%

Use of short-time work

76% 73%

Reduction of temporary or contract staff

84% 78%

Layoffs/redundancies of permanent staff

66% 69%

Short term cost cutting measures (e.g. travel ban)

79% 68%

Procurement savings

84% 28%

Transfers of operations to low cost countries

18% 45%

Outsourcing

32% 22%

Insourcing

32% 0%

20%

40%

German funds

Fig. 3

60%

80%

100%

International funds

Measures taken to preserve profitability in portfolio companies in 2009

13

Turbulent times: 2009 in retrospect

Preserving liquidity

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Cash is king: This principle counts in times of an economic crisis more than ever and never more so than in 2009. Companies that managed their liquidity position effectively were much better equipped to survive the difficult economic situation, which meant that they were also better positioned in negotiations with finance providers. When asked about their activities to preserve liquidity in portfolio companies, the majority of both international and German funds focused on:

• • • •

Reductions in inventory holdings, More active receivables management, Cuts in capital expenditure budget, Renegotiations of credit terms with suppliers.

Despite these actions, 50% of international funds and 37% of German funds admitted that their investee companies had resorted to deferring supplier payments beyond the agreed credit terms. More surprisingly, only a small minority of funds (28% international, 18% German) had agreed a reduction of tax prepayments with the tax authorities.

More active receivables management

79% 79%

Cuts in capital expenditure budget

74% 79% 66%

Reductions in inventory holdings

84% 66% 68%

Renegotiating credit terms with suppliers 50%

Deferring supplier payments compared to agreed terms

37% 46%

Disposal of non-core assets

37% 28%

Reducing advance payments of tax

18% 0%

20%

40%

German funds

Fig. 4

60%

80%

International funds

Measures taken to preserve liquidity in portfolio companies in 2009

“Cash management will continue to be key in 2010 – businesses will want to start investing in capex and working capital again but many lack the means to do so.” Steve Roberts, Cash Accelerator Leader, PwC

14

100%

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Turbulent times: 2009 in retrospect

Two thirds of all funds surveyed were satisfied with the development of their portfolio companies in 2009

Development of portfolio companies

Against the background of the restructurings that the private equity funds had undertaken to keep their portfolio companies profitable and solvent, PwC asked the respondents about their overall satisfaction with the development of their investments in 2009. In spite of the undoubtedly difficult situation, this positive feedback is striking. Only 12% of them expressed their dissatisfaction and there was no difference in the answers given by the German and the international funds.

Very dissatisfied 0% Dissatisfied

12%

Neither/nor

21%

Satisfied

53%

Very satisfied Not specified 0%

Fig. 5

13% 1% 10%

20%

30%

40%

50%

60%

Level of satisfaction with the overall development of portfolio companies

“Most GPs seem satisfied with the performance of their investments. Whether this view is shared by their LPs is open to question – we may well find out in 2010.” Richard Burton, Private Equity Leader, PwC

15

Turbulent times: 2009 in retrospect

16

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Private Equity Trend Report 2010 Navigating the rocky road to recovery

The future for private equity: outlook and opportunities

C The future for private equity: outlook and opportunities While recognising that it is notoriously difficult to make predictions in the current environment, we asked the respondents about their expectations for the future.

A mood of cautious optimism prevails: The vast majority of funds expect the European deal market to recover in 2010

European M&A market

A total of 76% of the German funds and 66% of the international funds look ahead into 2010 optimistically and expect the deal market in Europe to gain momentum during the course of this year. The consensus view (40% of international funds, 63% of German funds) was that a recovery was most likely to occur in the second half of the year. Only one in five German funds do not believe in a recovery until 2011. However, the international funds were less confident – 32% do not expect a recovery until 2011 or even later.

2012 or later

6% 0% 8%

Second half of 2011

3% 18% 18%

First half of 2011

40%

Second half of 2010

63% 26%

First half of 2010

13%

Not specified 0%

2% 3% 10%

20%

30%

German funds

Fig. 6

40%

50%

60%

70%

International funds

Expected European deal market recovery

Almost 80% of German funds expect the buy-out market to improve in 2010

German buy-out activity

The German funds surveyed also demonstrate optimism with regard to the development of the German market for private equity transactions compared to the levels of activity during 2009: Almost 80% of them expect the market to improve in 2010. None of them believe that the situation will worsen, and only one in five funds believes that the situation will stay the same as in 2009.

17

The future for private equity: outlook and opportunities

New deal opportunities

Private Equity Trend Report 2010 Navigating the rocky road to recovery

When asked about the likely sources of new deal opportunities for private equity, the traditional sources of transactions continued to score highly, in particular:

• • •

Equity injections into private companies, Corporate spin-offs/carve-outs, Acquisitions of majority shareholdings from private owners.

Nevertheless it is clear that new deal sources will be considered by most investors. As many as 71% of German funds and over half the international funds expect opportunities to arise from acquiring assets out of insolvency or distress. Previously the focus of relatively few specialist funds, this type of transaction appears set to become mainstream. In addition, half of the international funds and 45% of German funds anticipate opportunities to arise from disposals of equity stakes by banks. However, it appears that relatively few funds would contemplate making private investments in public equity (PIPE) – less than a quarter of international funds cited this as an opportunity and even fewer German funds (only 13%).

90%

Equity injections into private companies

79% 78% 84%

Corporate spin-offs/ carve-outs 62%

Acquisitions of majority shareholdings from private owners

82%

Acquisitions of assets out of insolvency/distress

51%

Banks selling equity stakes in companies

50% 45%

71%

24%

Equity injections into publicly listed companies

13% 0%

20%

40%

German funds

Fig. 7

60%

80%

100%

International funds

Future sources of new deal opportunities

“We were bumping along the bottom in 2009 – the only way from here can be up. We expect new structures for doing deals to develop during 2010.” Dr. Frank Schmidt, M&A Tax Leader, PwC

Industry trends

The international funds cited a very diversified range of target industries. The most popular industries were technology and business services, but even these were only mentioned by a third of participants. Energy was ranked third at 30%. German funds, on the other hand, have a clear preference for industrial products and services (71%) – the companies which have historically driven

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Private Equity Trend Report 2010 Navigating the rocky road to recovery

The future for private equity: outlook and opportunities

the country’s economic strength. Automotive, with 37%, may also enjoy a return to favour with German funds – in particularly those companies, which are set to emerge as winners from the recent turmoil in the industry. The business services industry is also becoming increasingly popular as a target for investment. Other notable differences were that international funds showed significantly more appetite for pharmaceutical and biotechnology (24%), media (18%) and telecommunications (18%) compared to the German funds – whereas the chemicals sector was mentioned by 26% of German funds, but very few international funds.

3%

Automotive

37% 33% 34%

Business services 7%

Chemicals

26% 20%

Consumer

32% 30%

Energy

13% 17%

Financial services

3% 24%

Industrial products/services

71% 18%

Media

5% 24%

Pharmaceuticals, biotechnology and life sciences Public sector and healthcare

5% 9% 0% 9% 8%

Retail

33%

Technology Telecommunications

21% 18% 0%

Transport and infrastructure 0%

6% 3% 20%

40%

German funds

Fig. 8

60%

80%

International funds

Future industry focus of international private equity funds

“Germany’s industrial heartlands will remain a rich source of buyout opportunities in the future.” Werner Suhl, Corporate Finance/M&A Leader, PwC

19

The future for private equity: outlook and opportunities

Financing trends

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Securing bank financing for new deals proved to be a major challenge during 2009, even for the more defensive businesses. While this has not yet fundamentally changed as we enter 2010, most of survey participants are now spotting light at the end of the tunnel:

Over half of all funds surveyed expect the availability of credit to improve in 2010 52% of the international funds and 61% of the German funds expect the availability of credit for leveraged buyouts to “get slightly better” in the next 12 months, with 32% and 18%, respectively, foreseeing no substantial change. Nonetheless, a small minority of respondents (7% of international funds and 11% of German funds) still expect a further deterioration. “I expect the availability of credit to…” Get substantially better

1% 0% 51%

Get slightly better

61% 32%

Stay broadly the same

18% 6% 8%

Get slightly worse Get substantially worse

1% 3% 9% 10%

Not specified 0%

10%

20%

30%

German funds

Fig. 9

40%

50%

60%

70%

International funds

Development of credit availability over the next 12 months

“There are still some tough times ahead in getting deals financed. We are by no means out of the woods yet.” Volker Strack, Transaction Services Leader, PwC

As for credit terms, almost 60% of the German funds and 46% of the international funds expect the situation to stay broadly the same during the course of 2010, while 37% of international and 21% of German funds are hopeful of seeing an improvement in terms. At the other end of the scale, 18% of the German funds and 10% of the international funds are pessimistic and expect terms to get even worse.

20

Private Equity Trend Report 2010 Navigating the rocky road to recovery

The future for private equity: outlook and opportunities

“I expect credit terms to…” Get substantially better

1% 0% 36%

Get slightly better

21% 46%

Stay generally the same

58% 9%

Get slightly worse Get substantially worse

18% 1% 0% 7%

Not specified

3%

0%

10%

20%

30%

German funds

Fig. 10

40%

50%

60%

International funds

Development of credit terms over the next 12 months

The majority of funds again expect to face bank covenant issues in 2010 Over 40%

1% 0%

31 to 40%

1% 0% 4% 5%

21 to 30%

13% 13%

10 to 20%

42%

Less than 10%

34% 32%

None at all Not specified 0%

42% 7% 6% 10%

20% German funds

Fig. 11

Bank covenants

30%

40%

50%

International funds

Percentage of portfolio companies expected to breach one or more bank covenants in 2010

While there is a mood of cautious optimism in respect of the prospects for new transactions, and to a more limited extent, for the return of leverage to the buyout market, our survey shows that a majority of funds still expect to be heavily occupied with their portfolios in 2010.

21

The future for private equity: outlook and opportunities

Private Equity Trend Report 2010 Navigating the rocky road to recovery

52% of the German funds surveyed and 61% of the international funds expect further bank covenant breaches within their existing portfolio. Only a third of the international funds are more optimistic and do not expect any further covenant breaches or negotiations with their financing providers in future – this compares to 18%, which did not face such issues in 2009. In this respect, the German funds are slightly more optimistic: 42% anticipate no further covenant breaches in their portfolios, compared to 24%, which did not experience any problems in 2009. Clearly, there is significant restructuring activity still to occur in 2010. “An accurate covenant forecasting system has now become a must for the CFOs of private equity owned companies.” Dr. Ulrich Störk, Private Equity Audit Leader, PwC

The future of private equity

Over 90% expect the business model of private equity to change in future This represents a sizeable further increase from the 80% of last year’s survey participants who believed that changes to the business model would be required in future.

Co-operations are high on the agenda As a result of the ongoing difficult environment for bank financing, around 90% of the funds surveyed plan to make less use of leverage or financial engineering while focusing more on active portfolio management. Co-operations ─ either teaming with strategic investors or “clubbing” with other private equity funds ─ are likely to increase according to the survey participants. 60% of all funds expect more co-operations with strategic investors and 52% of them expect more club deals with other private equity funds. However, less than one in five funds now believes in more cooperations with sovereign wealth funds or hedge funds – significantly fewer compared to last year’s survey. A majority of investors also plan to expand into other investment areas such as infrastructure or distressed debt, and half of the international funds surveyed would now contemplate taking minority positions in companies.

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Private Equity Trend Report 2010 Navigating the rocky road to recovery

The future for private equity: outlook and opportunities

93% 92%

Less use of leverage or financial engineering More focus on active portfolio management

89% 89% 63%

More co-operations with strategic investors

49%

Expansion to other investment areas, e.g. infrastructure or distressed debt

55% 62% 53% 49%

More club deals with other private equity funds

50%

More minority shareholdings

41% 26%

More co-operations with sovereign wealth funds or hedge funds

5% 0%

20% German funds

Fig. 12

40%

60%

80%

100%

International funds

Future changes to the private equity industry

“Our survey implies that the private equity industry has fully embraced the need for change.” Martin Scholich, Advisory Leader Germany, PwC

23

The future for private equity: outlook and opportunities

24

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Emerging issues: risk management and sustainability

D Emerging issues: risk management and sustainability Since the beginning of the global financial crisis, the role of risk management at banks and other large corporations has come under scrutiny. Likewise, the importance attached to sustainability issues has increased exponentially in society as a whole in the last years. In this year’s survey, PwC has analysed the role that risk management and sustainability issues currently play in the eyes of private equity funds.

For 64% of all respondents the importance of risk management has increased since the beginning of the global financial crisis Increased significantly

Managing risk

19%

Increased slightly

45%

Stayed the same

34%

Decreased slightly

2%

Decreased significantly 0% 0%

Fig. 13

10%

20%

30%

40%

50%

The changing importance of risk management as a result of the global financial crisis

There was no material difference in the answers given by the German and the international funds. In order to monitor risk in portfolio companies, the majority of all funds have improved their monthly performance reporting and have established an early warning system. In addition, their supervisory or advisory boards conduct more regular risk reviews. However, other techniques which are widely used in the corporate world, such as the use of risk assessment questionnaires and balanced scorecards, are used by only a minority of private equity funds.

25

Emerging issues: risk management and sustainability

Private Equity Trend Report 2010 Navigating the rocky road to recovery

77% 76%

Improved monthly performance reporting 68%

Regular risk reviews by supervisory or advisory board

76% 64%

An early warning system

82% 27%

Risk assessment questionnaires

37% 27% 24%

Balanced scorecards 0%

20%

40%

German funds

Fig. 14

Sustainability

60%

80%

100%

International funds

Processes established to manage risk in portfolio companies

58% of the international funds and 46% of the German funds surveyed attach importance to sustainability issues We asked the survey participants to grade the importance their organisations place on sustainability issues on a scale from 1 to 10, where 1 denotes “not at all important” and 10 “very important”. 58% of international funds graded the importance of sustainability higher than 6, compared to a lower percentage of German funds (46%). Yet slightly more than 10% of both groups considered the issue to be “not at all important” to their organisation. 30%

26%

25% 20% 15%

13% 11%12%

11%

10%

7%

5%

5%

3%

5%

11% 3% 4%

3%

0%

0% 1 not at all important

2

3

4

5

German funds

Fig. 15

17%

16%15% 13% 11% 11%

6

7

8

9

10 very important

International funds

Importance placed on sustainability by funds

A closer definition of the types of sustainability issues considered reveals that the majority of the funds surveyed are most concerned about the reputational impact of their investments: Over 80% consider the consequences of reputation or image in the decision-making process about new investments. Other criteria such as energy use and environmental or community impact were also mentioned by a majority of funds, but the German funds consistently lagged behind their international counterparts in 26

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Emerging issues: risk management and sustainability

the importance they attach to sustainability issues when assessing new investments.

82% 85%

Reputation impact

80%

Environmental impact

68% 70%

Energy usage

62% 66%

Community impact

47% 59%

Climate change regulation

38% 48%

Water availability

35% 0%

20%

40%

German funds

Fig. 16

60%

80%

100%

International funds

Sustainability issues considered in assessing new investments

International funds lead the way in performing sustainability assessments within their portfolio Consistent with the apparent higher importance placed on sustainability, a higher proportion of international funds (42%) have undertaken an assessment of sustainability issues within their existing portfolio companies – compared to just under 30% of the German funds. However, the results imply that a majority of private equity funds surveyed have not yet undertaken such an assessment of their portfolio. “Taking the lead on sustainability could be a key source of competitive advantage for the future.” Dr. Peter Bartels, Valuation and Strategy Leader, PwC

27

Emerging issues: risk management and sustainability

28

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Private Equity Trend Report 2010 Navigating the rocky road to recovery

German and international investment trends

E German and international investment trends As part of the annual barometer for private equity trends in Germany, PwC asked the international funds participating in the survey to assess the attractiveness of Germany as an investment destination for private equity and name their top countries for private equity investments in future.

International funds plan to significantly increase investments in Germany by 2014

Germany as an investment destination

The key trends identified included:

•

At the time of the survey, 52% of the international funds already held investments in Germany.

•

99% of these funds confirmed that they intended to continue investing in Germany over the next five years.

•

Over 45% of the funds currently investing in Germany expect to increase the assets that they allocate to the country by 2014.

•

Over 40% of the international funds that currently do not invest in Germany plan to start making investments there in the next five years.

•

Altogether, a total of 71% of all international funds surveyed plan to invest in Germany in the next five years, indicating a significant net inflow of capital in future.

•

41% of the international funds surveyed consider the attractiveness of Germany for private equity to be very good or quite good, which represents a further improvement compared with 2009, when only 30% thought this was applicable, and 2008 (only 22%).

•

Conversely, only 18% now consider the attractiveness of Germany for private equity to be quite poor or very poor, compared to 36% two years ago. “Our survey results indicate that Germany will emerge from the financial and economic crisis as a clear winner for private equity investment.” Andreas Mackenstedt, Global Valuations Leader, PwC

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German and international investment trends

Private Equity Trend Report 2010 Navigating the rocky road to recovery

45%

41% 36%

40% 35%

32%

30%

30% 25% 20%

23%

15%

22%

20%

18%

10% 5% 0% 2007

2008

2009

Very poor/quite poor Fig. 17

2010

Very good/quite good

Attractiveness for private equity funds in Germany – development since 2007

In our previous survey, 28% of respondents expected Germany’s position in an international ranking for private equity investments to improve. At that time, the country ranked third behind the UK and France. According to the latest EVCA statistics2, Germany has moved up in the ranking for private equity investments and now ranks second behind the UK. According to over half of the international funds surveyed, this position is likely to remain the same. However, 26% believe that Germany’s position will improve further. 60%

56%

50% 40%

52% 47%

32%

46%

45% 28%

30%

26%

20% 10%

14%

12%

0% 2007

7%

7%

2008

2009

Deteriorate Fig. 18

International flows of capital

Remain the same

2010

Improve

Development of Germany’s position in a ranking for private equity investments

Poland, China, France, Germany and India will become more attractive to private equity in the next five years The funds surveyed continue to rate Western Europe (48%) as most attractive for future investment, followed by CEE (37%) and Asia (27%). 2

30

EVCA Yearbook 2009

Private Equity Trend Report 2010 Navigating the rocky road to recovery

German and international investment trends

Participants rated Poland as the destination, which will gain most in attractiveness for private equity investment in the next five years, followed by China, France, Germany and India. Almost one in five funds plans to open new offices over the next five years. Germany, USA, Switzerland, China and India were cited the most times by survey participants. Country

Percentage

Poland

18%

China

16%

France

16%

Germany

16%

India

16%

Czech Republic

12%

Sweden

12%

UK

12%

Norway

10%

Denmark

8%

Hungary

8%

Russia and CIS

8%

Spain

8%

Switzerland

6%

Finland

5%

Slovakia

5%

Fig. 19

Countries/regions which will become more attractive for private equity over the next 5 years

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German and international investment trends

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Private Equity Trend Report 2010 Navigating the rocky road to recovery

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Background information and methodology

F Background information and methodology Between 12 November and 4 December 2009, PwC’s International Survey Unit interviewed 187 top management representatives of international private equity funds. A total of 56% of them were headquartered in Continental Europe (excluding Germany), 20% of them were based in Germany, 17% had their headquarters in the UK and 5% were based in the United States. In this survey, “international funds” refers to all funds whose headquarters are based outside Germany. USA Others 5% 2% United Kingdom 17%

Continental Europe (incl. CEE, excl. Germany) 56% Germany 20%

Fig. 20

Respondents by headquarters

At the time of the survey, the majority of the survey participants had up to €500 million of capital under management. 15% of them manage funds of between €500 million and €1 billion, and a further 20% of them have over €1 billion of capital under management. Above €1 billion 20%

Between €500 million and €1 billion 15%

Fig. 21

Less than €500 million 65%

Respondents by total global fund volume (capital under management)

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About us

Private Equity Trend Report 2010 Navigating the rocky road to recovery

About us With some 9,000 employees and a turnover of around €1.37 billion, PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft is one of the leading auditing and consultancy companies in Germany. Experts at 29 locations work on behalf of national and international clients of every size. The focus is on assurance and business advisory services, tax services as well as deals and consulting. The company’s activities are marked by an emphasis on high quality, forward thinking and timely action. Decision-oriented analysis and comprehensive transaction advice – this is the passion of over 600 transaction experts in Germany. You too can profit from our track record of over 1,000 successful transactions in the last 10 years. It is the people at PricewaterhouseCoopers, our team of advisers, who make our firm unique. They possess invaluable experience and in-depth technical know-how. They know the requirements of our clients first hand. They possess an instinct for new trends and know how to rapidly convert these into success. The focus areas of our advice at a glance:

• • • • • • •

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Transaction planning, M&A lead advice Business due diligence Tax structuring Financing Valuation Restructuring Post merger integration

Private Equity Trend Report 2010 Navigating the rocky road to recovery

Contacts

Contacts Martin Scholich Advisory Leader Phone: +49 69 9585-5600 [email protected]

Richard Burton Private Equity Leader Phone: +49 69 9585-1251 [email protected]

Dr. Peter Bartels Valuation and Strategy Leader Phone: +49 40 6378-2170 [email protected]

Dr. Derik Evertz Business Recovery Services Leader Phone: +49 9585-5548 [email protected]

Andreas Mackenstedt Global Valuations Leader Phone: +49 69 9585-5704 [email protected]

Steve Roberts Cash Accelerator Leader Phone: +49 69 9585-1950 [email protected]

Dr. Frank Schmidt M&A Tax Leader Phone: +49 69 9585-6711 [email protected]

Dr. Ulrich Störk Private Equity Audit Leader Phone: +49 69 9585-1271 [email protected]

Volker Strack Transaction Services Leader Phone: +49 69 9585-1297 [email protected]

Werner Suhl Corporate Finance/M&A Leader Phone: +49 69 9585-5650 [email protected]

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www.pwc.de/de/a-great-deal-better