By Urs Haeusler
Investors in private equity are looking beyond their home markets in search of returns that outperform fixed income investments and the public markets. Foreign investing makes the due diligence process even more critical to success.
Tasks like sourcing and screening deals, valuation, finding local partners and advisers, negotiating and contracting become more challenging and complex. One of the ways to address these challenges is to use online tools and services, either accessing them individually, or through highly integrated and global platforms like DealMarket.
By using online platforms users can save money and increase productivity in the pre-investment and post-investment processing steps, lowering the barriers to success.
In their quest for out-performance, private equity investors in the US and Europe are targeting emerging markets and BRIC countries where economic growth is expected to be more robust.
Large institutional investors are doing direct investments and co-investing with their general partners, both at home and abroad. New entrants from so-called emerging markets, such as Russia, are looking for more foreign investments in the West and beyond.
One aspect of the globalisation trend is visible in Alibaba, a Chinese consumer Internet company. Its investors hail from as far away as California-based Silver Lake Partners, and Russia, with DST Global, as well as China’s Yunfeng Fund and Temasek, the sovereign wealth fund of Singapore.
These investors enabled it to de-list, gain independence from Yahoo in the US, and raise the capital to complete billions of dollars in corporate finance transactions in the past year.
The trend is not limited to individual companies, it is also apparent at the institutional level. Preqin, an industry research organisation, notes a steadily increasing allocation to private equity (PE) funds from limited partners based in Asia and other regions of the world (non-US and non-European).
Pension funds in Latin America are now investing in markets beyond their borders, while Southeast Asian countries and beyond are targets for investors based in the Asia Pacific region. At the same time limited partners (LPs) in Europe and the US are continuing to invest in regions slated for higher than average growth.
Challenges For Investors
The trend has several drivers; an important one is declining returns in the asset class due to stricter debt markets, slowing economic growth, not to mention the stock market volatility. Studies by EVCA show reduced internal rates of returns (IRRs) for the pool of European funds it tracks after the highs of the late nineties.
Even some of the earliest and most experienced institutional investors in the US are affected a slowdown in returns, such as Princeton, Harvard, and some of the large California pension funds whose performance is partially publicly available.
What is not obvious about these trends is the challenges they present to the current way of doing business in private equity. Due diligence is even more important than ever, and yet more complex for foreign investing.
It needs to be done more efficiently, more quickly, while keeping transactions costs down and the strain on resources to a minimum. This holds true for screening investment opportunities, deal flow, negotiating, contracting, and accessing the best market information, advisors and partners.
Many investors do not have the in-house resources to vet a private equity universe that spans the globe. Even the UK’s massive pension sector, which has an average of USD2.4 billion in assets over 100 separate funds, is challenged by the trend, according to David Denison, CEO of Canada’s USD 166 billion pension fund who was quoted in an article in Triago’s quarterly newsletter in September.
At a recent London luncheon, Denison told the gathered crowd that British pension funds “lacked the scale necessary for an increasingly complex long-term private investment universe”.
Online Resources Provide a Solution
If funds of that size are struggling, how can small and mid-sized market participants with fewer resources generate competitive returns?
One way to address constraints and adapt to the changes is to use online tools and services, in just the same way as practically every other industry has moved some their business process online. Clearly, deal making is not like procuring auto parts or cargo space, but a lot of the due diligence, pre-investment, and post-investment processing can be expedited with online services.
One of the tools gaining ground is the virtual data room (VDR). Last year, VDRs were reportedly used in almost 80 percent of all North America-based M&A deals. They are becoming more widely used in Europe and Asia.
Private equity platforms, such as DealMarket take it one step further, integrating resources such as VDRs, due diligence data resources, as well as providing a low-cost way to announce direct and indirect investment opportunities, manage portfolios, find advisory partners and industry experts from around the world.
Private equity buyers, sellers and advisors can access PE services, which enable better decision-making, and certainly boost the productivity of individual investors and fund managers. There is money to be saved and new networks to be forged that online services expedite, if not revolutionise.
Urs Haeusler (author of this Thought Leadership article) has been appointed as new CEO of the Swiss-based global Private Equity Platform DealMarket on 1st of February 2012. Urs studied Business at the University of St. Gallen and has many years of experience in building and leading online companies. He was previously employed as Chief Sales & Customer Officer at amiando GmbH, Europe’s leading online event registration and ticketing platform based in Munich. Prior to his time at amiando, he was the CEO of Ticket Online AG Schweiz in St. Gallen and Country Manager Switzerland for Jamba!. one of the world’s leading mobile entertainment brands.
He also is the owner of Haeusler Management & Ventures, an internet business consulting firm, since 2008. Urs has a son and lives with his family in St. Gallen, Switzerland.