While noting that James' suggestion may be self serving, the author points out that retirees face similar problems to pension funds insofar as they are being hurt by low interest rates. As a result, it might make sense for 401K plans to take greater risks.
Preqin, a company that provides information, products and services to fund managers, investors, consultants and service providers, recently released its Special Report: The Private Equity Top 100 (February 2017).
According to the report, the top five GPs are (1) Carlyle Group ($66.7 billion aggregate capital raised in the last 10 years and $15.8 billion in dry powder), (2) Blackstone Group ($62.2 billion aggregate capital raised in the last 10 years and $31.9 billion in dry powder), (3) KKR ($59.7 billion aggregate capital raised in the last 10 years and $17.6 billion in dry powder), (4) Goldman Sachs ($55.6 billion aggregate capital raised in the last 10 years and $16 billion in dry powder) and (5) Ardian ($53.4 billion aggregate capital raised in the last 10 years and $22.3 billion in dry powder).
The top five LPs are (1) CPP Investment Board ($281 billion assets under management, with $44.4 billion allocated to private equity), (2) Abu Dubai Investment Authority ($792 billion assets under management, with $39.6 billion allocated to private equity), (3) GIC ($350 billion assets under management, with $31.5 billion allocated to private equity), (4) California Public Employees’ Retirement System ($305 billion assets under management, with $25.4 billion allocated to private equity) and (5) APG – All Pensions Group ($432 billion assets under management, with $21.6 billion allocated to private equity).
The report states that private equity’s total assets under management grew 4.2% from December 2015 to a new record of $2.49 trillion as of June 2016, which more than doubles the size of the industry at the end of 2006.
For more information, please visit www.preqin.com.
A family office is typically defined as the private office that manages the assets, including investments and estate planning, for families of significant wealth. A family office can vary from being a small operation to one more similar to a true private equity fund with more than 100 employees, depending on the type of service it provides and its investment appetite.
Direct Investments and Co-Investments
As family offices are increasingly characterized as private investment offices, recent trends show they’re ramping up direct investment, co-investment and acquisition activities rather than the traditional limited partnership investment in private equity firms. Results from a survey conducted by the Family Office Exchange show that almost 70% of family offices engage in direct investing and 56% of family offices plan to increase direct investments over the next two years. And, according to a recent Bloomberg News article by Margaret Collins and Devin Banerjee, more and more family offices are acting like private equity firms and directly buying out large stakes in companies and acquiring companies outright rather than the traditional black box investments into private equity firms.
With direct investments, not only are family offices avoiding the dreaded “two-and-twenty” fees typically paid to private equity firms to participate as a limited partner, but family office direct investments in 2015 even outperformed buyout firms by more than a 2 to 1 margin. The prevailing logic from a family office perspective is that families without an overriding need for liquidity and a desire for more control over investments can achieve superior long-term performance and transparency with direct investments, patience and, in some cases, willingness to absorb unrealized short-term losses as the investment matures.
Building a team is a crucial step when executing a direct investment strategy. Some family offices will attempt to hire managers or directors from private equity firms to run their investment team, but this is not always a seamless transition. In certain situations, family offices do not have the resources available to hire such an individual or to assemble an in-house team that can sufficiently analyze each industry in which an investment opportunity arises. For these reasons and more, co-investment strategies have also increased greatly among family offices.
In a co-investment, a minority investor would link up with a larger investor, whether it’s with another family office that is an industry expert or with a private equity firm looking for a partner in a certain transaction, to make a direct investment in a company or transaction rather than investing through the private equity firm. About 80% of family offices are involved in some form of co-investment and according to the most recent UBS and Campden Research survey of family offices, nearly 51% of family offices are hoping to increase their co-investments. With a co-investment, a family office can benefit from a partner’s industry and investment expertise while avoiding fees that accompany a traditional private equity investment.
Shift from Hedge Fund Investments to Private Equity
While direct investments are increasing, family offices aren’t pulling out of private equity investments altogether. The most recent UBS and Campden Research survey of family offices around the country reveals a continuing trend of family offices pulling out of hedge fund investments and allocating them to private equity, with approximately 22% of family office investments now allocated to private equity. This shift is due to the recent poor performance of the hedge fund industry as a whole, increasingly high fees charged by the hedge funds and, according to the UBS and Campden Research survey, “some doubts about the ability of hedge funds to generate alpha going forward.” The survey results also show a particular increase in indirect investments by family offices into multi-year private equity fund participants, with private equity funds proving particularly popular among the smaller family offices. This may again highlight the challenges that certain smaller family offices may face when attempting to devote resources or develop expertise with respect to direct investment opportunities.
Increase in Impact Investing
Results from the UBS and Campden Research survey show that millenials are a key catalyst in social responsibility and impact investing, a type of investment that provides for both financial growth and social good. This mindset has influenced more family offices to look for sustainable, responsible and impact investing (SRI) opportunities that give them more control of the management of the investment. Roughly 32% of family offices are active in impact investing and another 30% are likely to become active in the near future.
Outlook for Family Offices
Family offices have long been considered a reliable investor as limited partners in private equity investments but family offices have recently become more sophisticated and a shift has been occurring in the investment appetite of family offices around the world. While many family offices continue to hold private equity investments as a part of their portfolio, many have added direct investments and co-investments to their investment portfolio as well and, in some cases, have been competing with private equity firms for direct investment and co-investment opportunities. Additionally, many family offices have begun engaging in impact investment opportunities and as millenials start to get older and older, a growing issue for family offices continues to be succession planning.
Yesterday, the U.S. Supreme Court issued the long-awaited decision in United States v. Salman (No. 15-628, December 6, 2016), partially rejecting a limited aspect of the Second Circuit’s landmark ruling in United States v. Newman regarding the "personal benefit" necessary to sustain an insider trading claim. Addressing the narrow question presented in Salman, the unanimous Supreme Court affirmed an insider trading conviction based on a family relationship between the tipper and tippee of inside information, overturning the Second Circuit Court of Appeals to the extent that Newman required that a tipper receive a tangible monetary benefit in exchange for a tip to a family member.
However, the Court emphasized that the question of the sufficiency of personal benefit to a tipper is entirely dependent on the particular facts involved; a tip between two very close brothers was not a difficult question, but the decision leaves open the broader issue of defining the personal benefit required where there is no family relationship. In addition, Salman also does not specifically take on the requirement established by the Second Circuit in Newman that the downstream tippee must know that the original tipper received a personal benefit.
So, while Salman makes clear that a close family relationship is sufficient to infer the necessary "personal benefit" to the tipper, what constitutes a personal benefit in more attenuated or professional relationships remains an open question likely to be sorted out by the lower courts.
As the PE industry well knows, SEC regulators are aggressively prosecuting all violations as potential enforcement cases, no matter whether they come to the agency’s attention through its own investigations or self-reporting by PE managers. Given that self-reporting will almost certainly result in an investigation and enforcement action, PE managers are thinking twice before voluntarily disclosing misconduct or violations to the SEC.
Of course, in the event a PE firm discovers misconduct or violations, they must take every step to stop the conduct, remediate the damage, and take all necessary actions to resolve the issues. Whether to self-report the issues, however, is a different question that involves measuring inchoate benefits against real and significant risks.
In the past, it was an easier decision for PE firms to self-report because a firm would simply inform the SEC of the matter, and that would be the end of it. There was very little risk associated with self-reporting.
In comparison, now, the risk-reward analysis in deciding whether to self-report is skewed in the direction of not self-reporting. Given the highly sophisticated and aggressive SEC staff, particularly in the Asset Management Unit, self-reporting has a very high risk of investigation and an enforcement action.
From a PE manager’s perspective, there is little benefit to counteract this risk. The SEC urges firms to self-report by offering the potential for reduced penalties or, less tangibly, a more benign recitation of the misconduct in an order, or an acknowledgment of the firm’s cooperation, or an “administrative summary” instead of a press release. But, to PE Managers, the reduced penalty is not meaningful when compared to the value of avoiding an enforcement action and the more benign public reporting is not helpful when the firm’s reputation will be damaged nonetheless by the press inevitably reporting on the action.
Furthermore, PE managers have no obligation to self-report, as self-reporting is generally not required. Rather, managers act in good faith by internally handling the matter and moving on.
The result is that more PE managers are deciding to forego self-reporting, preferring instead to handle the matter quietly and hoping that it does not come to the SEC’s attention.
It is the industry’s best interest to reassess this dynamic. In the current circumstances, the SEC is deprived of critical information that could concern a widespread issue. Closing this information gap would enable the SEC to better protect investors.
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With the potential for a global slowdown in the near future, PE funds will need to adjust their strategies to sustain their solid returns on investments in healthcare-related assets.
In 2015, PE funds saw a 6% rise in deal volume. Despite a 20% decrease in overall deal value, the number of supersized deals over $1 billion nearly doubled. Funds added onto previously acquired assets, and the number of exits rose 8%. Provider and related services represented more than half of both the year’s deal value and the top ten deals. Healthcare-related information technology, retail health, European laboratories and biopharma were the year’s popular segments. Most of the activity in these sectors occurred in the Asia-Pacific, European and North American regions.
For 2016, the volatility of the markets and threat of global recession has slowed public offering activity. PE participants are finding it difficult to secure financing. As such, experienced PE investors are taking recession scenarios into consideration when making their investment decisions.
In healthcare investing, we can expect the focus to shift to segments that offer cost savings and away from segments that have high cash-pay components or are dependent on consumer demand, such as elective medical procedures. The market leaders who have cut costs by reducing the number of suppliers to manage will be attractive to investors. This appeal and approach may bolster their leadership and improve their financial strength to make investments through a downturn.
In order to prepare for slower economic moments, investors should stay focused on strategy for downturn, the margin for improvement in potential investments as a core driver of value, and the various options for exiting an investment. As always during times of turmoil, healthcare investors should meticulously attend to their current assets and be ready to act quickly on good opportunities emerging in the future.
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According to a recent survey published by Deloitte, acquisition activity in the insurance broker and agency industry substantially increased in 2015. It is anticipated that transaction activity will continue to grow.
Private equity funds and large strategic buyers are actively seeking smaller regional brokers for acquisition
Acquisitions by large brokers and private equity funds suggest that the market for acquisitions will continue to remain active as brokers seek to increase revenue and value by acquiring smaller players. High price points, lower risk profiles and potential for higher profits make smaller targets appealing to acquirers.
Types of buyers
There is no “on size fits all” when it comes to transactions, and not all buyers are created equal. Some transactions can be structured so that the seller retains equity. This type of arrangement can be an effective avenue for growth. Even if you will not retain equity, finding the best-fit buyer takes some time. Most buyers require the seller to remain at the company for three years after the transaction.
Activity in the market
In 2015, mergers and acquisitions in the insurance agency industry in the US and Canada reached record high numbers with 451 transactions up from the previous record of 357 in 2014 (26% increase).
• Private equity buyers were involved in 242 acquisitions.
- Increase by over 50% from 2014
- 54% of all 2015 deals up from 44% in 2014 and 21% in 2008
• 255 sellers were property/casualty agents and brokers accounting for 56% of all deals in 2015
• 148 separate buyers in 2015, more than any year since 2008
• Dramatic expansion of activity by the private equity funds with an average of more than 12 deals per fund compared with less than four per firm in 2008
• Publicly traded and privately held brokers reported fewer deals in 2015. Financial institutions increased the deals that they made.
• It should be noted that brokers focused on employee benefits and those offering both property and casualty and benefits increased last year.
Reasons for market activity
The five largest publicly traded insurance brokers posted a collective single-digit increase in 2015 revenue based on modest organic growth and expense reductions based on economics of scale from acquisitions and mergers. Organic growth will continue to challenge the brokerage industry. Numerous factors will drive growth through strategic acquisitions.
• Commercial pricing of insurance products is softening
• Organic growth is flat
• Cost of technology for small firms
• Breadth and depth required by small firms to service clients
• Enhance existing platform by product offerings, technology and branding
• Diversification of revenue streams
• Strong valuations
• Aging principals in the industry without succession plan
• Large brokers need to diversify geographically
• Analysis of regulatory changes and understand the uncertainties in the market
Reasons purchasers pursue small acquisitions
• Accretive earnings causes increased valuations of buyers
• Reasonable price point compared to organic growth
• Potential for seller to have higher profile
• Low risk
• Ongoing management
• Geographic and regional expansion
• Cultural fit
• Economies of scale
- Product lines, pricing of products
• Diversification and expansion of sellers’ businesses
Projected activity in 2016
Expectations for near-term future are for a continuation of the current mergers and acquisitions environment barring significant financial, political or economic events.
Factors to be considered are:
• Multiples are slightly softening
• Offset of price declines by growth of profit by combination
• Interest rates continue to be at historic lows but starting to increase
• Small to middle market is still very fragmented and PE buyers are accelerating consolidation
It is doubtful that the brokerage M&A bubble will burst or slow in the near term. However, the current valuation levels may not be sustainable. Whether private equity investors fail to achieve their expected returns or buyers simply cannot afford sellers’ prices, at some point the valuations will come back to some degree of normalcy.
It is appropriate for buyers to be cautious. Many potential near-term sellers are considering getting on the bandwagon sooner rather than later.
While I don’t think 2016 will be the year of the “Blue Light Special” (except, perhaps, in the energy sector), this year could be the year of falling prices creating opportunities for many shoppers, especially private equity firms. By all accounts, 2015 was as a sellers’ market that was characterized by high valuations (in fact, some might say, frothy valuations) with corporate strategics and private equity firms competing for a limited supply of great assets. It was also a time when private equity funds were able to sell more of their portfolio companies relative to the number of companies they acquired (again, due in large part to the competitive, high valuation market). Yet, the tides appear to be changing in the current environment – an environment marked with volatility in the debt and equity markets, increased concern about the growth (or lack thereof) in the global economy, and, of course, one can’t forget the rather “interesting” Presidential election taking shape this fall. As a result, the valuation compression seen towards the end of 2015 seems likely to accelerate into 2016. And, according to several private equity executives at the SuperReturn conference in Berlin earlier this week, this lower-valuation environment will likely provide an opportunity for private equity firms to shift their focus from selling companies to acquiring them.
Nixon Peabody hosted a roundtable discussion on January 13 in which panelists recapped the highlights of the private equity and M&A markets in 2015 and discussed what to expect in the year ahead. This discussion was a part of Nixon Peabody’s ongoing Hot Topics in the Middle Market series. Panelists for this discussion included:
· Gregory Bondick, Managing Director at Windjammer Capital Investors
· Jason Fennessy, Director at RSM US LLP
· Jay Hernandez, Director at Harris Williams & Co.
· Kevin Jolley, Managing Director at MHT MidSpan
· Matthew Keis, Managing Director at Gemini Investors
· William Nolan, Managing Director at H.I.G. Capital
· Andrew Shiftan, Managing Director at BHC Interim Funding, LP
The following are some takeaways from the many topics touched on by the panel:
Recap of 2015 – The past year had a healthy volume of M&A deals, with valuations in many instances at levels not seen since 2007. For many PE funds, fundraising was strong, giving these funds ample capital to deploy in 2016. The credit markets were also friendly to buyers with healthy balance sheets, giving many buyers sufficient cash to deploy on M&A activity. The health care and health care IT sectors were big winners in the past year, as companies and investors became increasingly familiar with the Affordable Care Act and corresponding investment opportunities. Brewery and SaaS-based businesses also drove high multiples.
The Year Ahead – The panelists agreed that while growth may have moderated, it is still a seller’s market. That said, sellers’ expectations may have started to exceed the market reality and valuations are likely plateauing. Despite this realization, the metrics driving deals will hold true. The middle market and lower middle market are a good place for buyers seeking reasonable valuations. Buyers who are flexible in terms of the capital structure of an acquisition and can provide certainty related to the closing of a transaction will continue to be more successful in competitive bid processes.
M&A activity will continue to follow growth sectors. The panel agreed that the natural and organics, outdoors, pet product and business services industries would remain hot. The pet products industry, for example, is growing faster than GDP and appears not to be affected by market cycles. The industrial sector will likely not fare as well, and finding growth here may be challenging. The revenue of companies in this sector is often tied to the oil and gas industry, which is hurting, and the U.S. dollar, the strength of which hurts companies who have operations offshore.
From a lender’s perspective, 2016 will continue to present challenges as banks, business development companies (BDCs), SBICs and insurance companies compete to deploy capital. Uneasiness will remain in the high yield market related to macroeconomic conditions such as the price of oil and China’s economy. At the upper end of the credit market, there is a lack of liquidity. Larger institutions are holding debt in industries like oil and gas that are not faring particularly well. Lenders are also facing regulatory pressure related to balance sheet requirements. The panelists agreed that only time would tell whether this uncertainty would trickle down to the middle market.
On September 30, as part of its Hot Topics in the Middle Market series, Nixon Peabody hosted a roundtable discussion entitled “What is Now and Next for Investing in Technology and Delivery Solutions in Health Care”. Nixon Peabody Partners David Martland and Michele Masucci moderated the hour-long discussion, which also included the following speakers:
· Daniel Head, Senior Vice President at Brown Brothers Harriman & Co.
· Chris LeLonde, Partner at Century Capital Partners
· Rhea Heath, Manager, Healthcare Advisory Services at Grant Thornton LLP
· Charles Larkin, General Partner at Webster Capital
The following are some takeaways from the many topics touched on by the panel:
1. Mobile medicine. The proliferation of technology is transforming this industry. Mobile applications, wearable health monitoring devices, and at-home testing kits are becoming more mainstream, allowing providers to review and use data from patients’ phones in their diagnoses. Telemedicine is also increasingly commonplace, used to serve rural patients and non-urgent care issues. If used properly, these advances may contribute to better patient care and increased access at lower costs.
2. How much data is too much? While allowing a doctor to remotely monitor patients’ heart rates 24/7 may sound great to patients, doctors may disagree. The abundance of patient data may actually complicate doctors’ diagnoses, forcing them to sort through mounds of irrelevant data in order to determine what may be relevant to patients’ care. Also, with the expanded use of electronic medical records and integration between providers, doctors are expected to be more familiar with patients’ long-term health history. This “analysis paralysis” may strain providers, who are generally constricted in terms of how much time they can allow per patient visit.
3. Data risks. The US government, retailers, credit card companies, insurers – everyone is susceptible to a data breach. The consequences are harsher when the leak involves patients’ private health information. Patients want to share their data with providers; payors want to review their insureds’ data in order to spot trends; researchers want to store data that has no current purpose but may be useful in the future. At the same time, everyone expects their data to be secure. Providers and payors must navigate the inherent regulatory and economic risks involved sharing and storing patient data.