Prequin’s Private Equity Spotlight for December 2013 takes a look at the top private equity topics during 2013.
We present a recap of two issues below.
Zombie funds
These are firms that have little chance of cashing their investments at a profit, and neither can they raise fresh funds. Their main objective is to continue to manage the assets they have and generate fee income thereby. According to an article in the Financial Times, zombie buyout firms hold an estimated $116B worth of assets across the globe.
Also see: Private Equity Funds See Highest Fundraising In 5 Years
Prequin highlighted the issues related to zombie firms and sees opportunity ahead, particularly in the US. However, the volume of recapitalization deals “depends on LPs acting together to drive change with incumbent GPs, as well as on thoughtful and tenacious execution from new GPs and their LP backers. Collective hard work will be required, and reason must prevail over emotion,” says Prequin.
Prequin cited the example of Vision Capital, which has a track record of executing and delivering an innovative transaction in this area involving a year 2000 vintage fund, Willis Stein & Partners III, L.P.
Also see: Whistleblower Points To Private Equity Transaction Fees
Willis Stein had three companies in its portfolio: The American Education Corporation (OTCMKTS:AECC). (a private provider of post-secondary education), Strategic Materials Inc. (the largest glass processing and recycling business in North America), and Velocitel, L.L.C. (a provider of outsourced engineering and design services for the wireless telecom and renewable energy industries). Vision Capital and Landmark Partners gave the existing investors the option to take cash proceeds or to roll the value of their interests into the new partnership. A majority of investors elected to receive cash; however, a significant number chose to participate in the new structure.
Sovereign wealth funds
At the opposite end of the spectrum from zombie funds are the sovereign wealth funds, which apparently have a problem of plenty. As of October 2013 these funds had assets of about $5.4T and added assets of about $750B after 2012 alone, as per the chart below:
Sovereign wealth funds around the world provide a significant source of capital to the private equity asset class, says Prequin, who recently launched their 2014 Prequin Sovereign Wealth Fund Review.
“If more resource-rich economies continue to plan new sovereign wealth funds, and existing sovereign wealth funds continue to expand and accumulate assets, we can reasonably expect further growth in the sovereign wealth fund space in the future. In turn, these entities will continue to become an ever more important source of funding in the asset management space,” says Prequin.
Importance of funds to private equity
The importance of these funds to private equity can be gauged by the fact that Korea and Russia recently partnered to deploy more funds into private equity. The Korea Investment Corporation and the Russian Direct Investment Funds, both sovereign funds, will jointly build a new “platform for cross-border private equity investment.” The funds will invest $250M each and the combined pool could rise to as much as $1B.
