Going public

Given the lack of deal activity, it is tempting to think that private equity’s big boys have spent the past year kicking their heels, making paper aeroplanes out of PPMs, carrying out due diligence on the contents of the fridge and visiting leverage departments to beg “Please sir, can I have some more?”. In fact, they’ve been busy. Writing annual reports.

According to recent reports, Walker has since gone back on his claim that he was satisfied with the findings of his report in late 2007, saying that he would have lowered the threshold for reporting, thus increasing the number of private equity firms and their portfolio companies that would be required to provide records regarding finances, employment and environmental standards.

Apax would argue that it had already gone beyond Walker’s criteria. The firm said that it was currently working with seven of its investments regarding enhanced reporting guidelines – General Healthcare Group, HIT Entertainment, Incisive Media, New Look, Somerfield, Trader Media Group and Travelex – and prominently notes that it has 83,541 employees in UK-based Walker-compliant portfolio companies.

Apax also stressed that, while “the completion of new deals and the sale of stakes in companies has slowed down because of the dislocation in global credit markets”, current investments “continue to perform well despite a deterioration in the overall trading environment”.

Surprisingly, the Apax report also showed institutional investors raising their heads above the parapet. Considering how much investors have to gain from defending managers of alternative asset funds in which they have made commitments, their silence over the past year during attacks from unions, politicians and the press has been deafening. On the other hand, many fund managers have privately admitted that it was their fight, not their investors’.

Still, it is interesting to see that Wellcome Trust (a co-investor with Apax on several deals), Universities Superannuation Scheme, the UK’s second largest pension fund, and GE Asset Management were happy to be named as limited partners in Apax’s funds.

According to the report, 26% of Wellcome Trust’s £15bn portfolio is committed to private equity, delivering an annual internal rate of return of 21.5%. This, as Apax (and Terra Firma, Permira, Carlyle et al) is at pains to point out, means “superior returns for the millions of individuals whose pension funds and investment plans commit to our funds”.

Public pension funds make up 31.9% of the latest fund’s investor base and private pension funds 11.7%. In 2007, about €3.2bn was invested but €3.5bn was returned to investors.

In the same period, Carlyle, according to its report, deployed US$17.6bn and returned US$8.9bn, its second largest ever return following the record US$10.2bn in 2006.

While not revealing much about its own accounts or details of turnover and profits at portfolio companies, Carlyle said that its 67 exits in 2007 generated an average internal rate of return (IRR) of 3.2 times invested equity – since 1987 its return has been 1.8 times – with the €1.4bn sale of forged metal manufacturer Forth Rixson to Oak Hill Capital Management and Carlyle and Advent International’s €775m divestment of plastic products business HT Troplast to Bahrain-based investor Arcapita realising the largest returns at 9.7 times and 9.1 times respectively.

Referring to the credit crunch as marking the “end of the period of extraordinary liquidity that began in 2003”, the report noted that Carlyle would be unlikely to participate in further mega deals until the credit markets recovered and that the slowdown in economic growth “will likely create a more challenging operating environment for some of our portfolio companies”. Exits could also suffer due to depressed asset prices.

The collapse of publicly-listed mortgage-backed securities fund Carlyle Capital Corporation was also addressed as a “regret”, but one that Carlyle doesn’t expect measurably to impact its other funds, which it said are well positioned and well equipped to “weather the current storm and profit from the extraordinary investment opportunities it is likely to create”.

Private equity may not have this PR business licked just yet. It clearly has time on its hands to learn, though.