Withdrawal symptoms

A new survey looking at reasons why European private equity firms pull out of deals has identified management as a key factor. More than eight in ten respondents (82 percent) said lack of confidence in the quality of management at a target company had made them retract their bids.

Chris Morgan Jones, regional managing director of Kroll EMEA, said: ?Private equity firms should conduct an assessment of a company's management even before they look at the finances. As well as helping to identify potential risks, a review will help them to understand and anticipate a management team's priorities and negotiating style.? Kroll, the risk consulting firm, commissioned the survey along with Mercer Human Resource Consulting and Marsh, the insurance services provider.

Facing unquantifiable or unknown liabilities was also cited as a major reason for terminating bids by 52 percent of respondents, an outcome the authors of the report attribute to the increase in auction processes, with their tighter control over the release of information. A related finding was that inability to get access to management and competitive time pressures were given as reasons for aborting transactions by 47 percent of respondents.

An emerging area of deal risk is the under-funded pension scheme, with 19 percent of respondents saying they had pulled out of a deal for this reason. If a pension deficit exists in the UK, clearance must be sought from the Pensions Regulator – adding time and expense to the process. The survey found that 40 percent of respondents mitigate against the risk of under-funded pensions schemes through price adjustment, while 21 percent use warrants and indemnities. ?Like sleeping giants, pension liabilities have started to stir and make their mark on private equity deals,? said Eric Warner, a worldwide partner at Mercer.

The survey was conducted on behalf of the three sponsors by research firm Mergermarket and quizzed 100 European private equity firms: 25 in the UK and 15 each in the Netherlands, Germany, France, Sweden and Southern Europe.

China: ?Long way to go?
The vice chairman of the China Securities Regulatory Commission, Tu Guangshao, said last month that ?there is still a long way to go? in terms of capital markets reforms. Tu made his comments in front of the World Economic Forum in Beijing. ?Accelerating capital market reforms would not be sustainable without first building the structure and regulatory foundation of the market,? he said. At the same event, Max Burger-Calderon, Asia Chairman of Apax Partners, said: ?If you want to solve the problem of poverty, you must balance many interests. There can be very bad backlashes if you don't balance all interests.? Private equity managers have been disheartened by recent pronouncements from Beijing regulators that foreign investors will be more closely monitored in China. This outlook was spelled out in the recently released ?Measures on Acquisitions of Domestic Enterprises by Foreign Investors.?

Panel formed to study US capital markets
A ?blue ribbon? panel has been formed to seek ways to make the US public capital markets more competitive. The Committee on Capital Markets Regulation, unveiled last month, is in response to a worry among some US finance professionals that overregulation will send capital elsewhere. The new group has the support of US treasury secretary and former Goldman Sachs chairman Henry Paulson. It is directed by Hal Scott, a professor at Harvard Law School and co-chaired by Brookings Institute chairman John Thornton and Columbia Business School dean Glenn Hubbard. Other committee members include Ken Griffin, the president and CEO of Citadel Investment Group, Ira Millstein, a partner at law firm Weil Gotschal & Manges, and Wilbur Ross, founder of private equity firm WL Ross & Co. The committee will ?assess the degree to which US public markets are losing ground to foreign and private markets, the cause of this decline, and its impact on the financial industry and the economy,? according to a statement. An interim report from the committee will be released in November.

Private equity ETF nears launch
An ?exchange traded fund? (ETF) that will track listed private equity funds will soon launch in the US. ETFs trade as single stocks but track the performance of indices, such as the S&P 500. The company PowerShares, which provides a suite of ETFs, has announced it will soon launch the PowerShares Listed Private Equity Portfolio ETF, based on an index created by Denver firm Red Rocks Capital Partners. The two companies claim to have identified 30 publicly traded companies that ?invest in private equity,? according to a report on SmartMoney.com. The two firms will not reveal which stocks are part of the index for fear that traders will ?front load? the shares and benefit from an expected uptick in value once the ETF is launched.

Report: concern over ?side pocket?
Some investors in Ritchie Capital, a Geneva, Illinois hedge fund and asset manager, have expressed concern at the firm's approach to ?side pocket? accounts, according to a report in the Wall Street Journal. In the past year, investors have withdrawn roughly $1 billion from funds managed by Ritchie Capital, according to the report, which noted that the firm's main fund was down slightly for the year. Side pocket accounting is used by many hedge funds to segregate private equity and less-liquid investments from liquid assets. The accounts create complexity when new investors come in and existing investors redeem holdings because of the need to place a value on the sidepocket assets (see ?Hot pocket? p. 29). The report stated that Ritchie Capital is offering investors the chance to convert their interests in the side pocket accounts into fixed-income instruments, an offer that has been taken by some investors.