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Apollo nears Arconic mega-deal

In June 2017, a malfunctioning refrigerator sparked a fire at the Grenfell Tower apartment building in London. The blaze quickly engulfed the 24-story structure, ultimately resulting in 72 deaths and one of the largest residential disasters in recent British history.

Later government investigation attributed the rapid spread of the flames to the building’s poorly made cladding, a type of siding, which later tests showed was so combustible that it essentially turned the apartment into one giant, deadly tinderbox. The company that made that cladding was Arconic.

It perhaps wasn’t a surprise when, less than a year later, Arconic announced a strategic review, with reports indicating that it could sell the building products unit that made the aluminum panels involved in the Grenfell Tower disaster. Within months, prompted in part by continuing activist pressure from Elliott Management, talk turned to a wholesale takeover of the company.

It perhaps also wasn’t a surprise that several private equity firms showed interest—despite a number of looming lawsuits, criminal investigations and potential liabilities that could hamstring the business in the future.

Blackstone, The Carlyle Group and KKR were among the heavyweights to sniff around the building products unit, with Arconic describing the potential mega-deal as an effort to refocus its operations on building aluminum components for aerospace and auto companies rather than the construction market. But when the subject changed to a full buyout, Apollo Global Management emerged as the front-runner, with a potential price tag reported to be some $11 billion (or up to $20 billion including debt).

While Arconic’s direct involvement in a tragic, avoidable disaster that cost dozens of innocent lives is almost surely one factor behind the sale, another very obvious one is the presence of Elliott. The hedge fund won representation on Arconic’s board in early 2017 after a pitched battle and the ouster of former CEO Klaus Kleinfeld. The aluminum company’s stock price has continued to slide throughout 2018, which in Elliott’s mind seems to only cement the need for a complete leadership overhaul.

Apollo’s management thought a deal with Arconic could have been signed as soon as December, according to a New York Post report from the final day of 2018. But the buyout’s final hurdle is proving to be the continued tightening of global debt markets, raising doubt as to whether banks would be able to finance a deal as large as what Apollo and Arconic have in mind. Apollo is also believed to be considering a $40 billion move on the GE’s aviation leasing business, an even larger deal that will surely encounter similar concerns. A lack of available funding could very well endanger prospective Apollo deals worth $60 billion in total.

The role Arconic’s shoddy products played in the horrific events at Grenfell Tower make it painfully clear that major changes of some sort are needed at the company. Whether a private equity firm is the correct group to make those changes could be a matter for debate. But if the debt markets cooperate, then Leon Black and Apollo seem poised to be the ones navigating the transformations, lawsuits and reckonings that are almost surely ahead.

 

Read More – www.pitchbook.com

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Next big thing: Oiltech

Proptech, insurtech, femtech, lawtech and even MADtech (the confluence of marketing, advertising and technology)—whether you call them buzzwords or not, they are all an indication of how technology and data are disrupting traditional verticals. This is evident in the current crop of startup founders. Several stem from traditional sectors and, with the proliferation of technology, have a vision to do things differently—and more efficiently—than before.

In the first edition of our “Next big thing” series, we take a look at oiltech and, to a wider extent, commoditech.

The rise of Big Data, changing regulations and evolving real-time trading trends are leading global commodity giants, trading houses and other market participants to think about recalibrating their traditional models and how business will be conducted moving forward. This is understandable given the sums that are at stake, with research from consulting firm BCG estimating that the commodity trading industry’s potential value pool is worth around $70 billion per year.

Change is coming

Margins within commodity trading are eroding, and indeed, it appears as if the industry as a whole needs to come to terms with a less profitable reality. According to research from Oliver Wyman, gross margins dropped some 4.5% in 2016.

However, new players are emerging, either starting up businesses or backing those aiming to re-engineer some traditional methods.

“It is fascinating to see just how fast things are evolving,” Florian Thaler told PitchBook. Thaler is a former oil strategist at hedge fund Och-Ziff, Shell and Citigroup, and a co-founder and the current CEO of OilX, a tech startup that has set out to revolutionize oil trading analytics. “Commodity trading and oil trading as the largest commodity will be significantly shaped by two mega-trends, namely new data sets from remote sensing via satellites, as well as superior data science models that can process, curate and combine data in near real time on a massive scale.”

Shifting powers

These themes are also altering the power balance between the new entrants and established industry players such as oil majors, banks, brokers and service providers.

“The general complacency toward smaller players who are doing things differently is diminishing, but we still have some way to go,” Thaler said. “It is encouraging to see that money is being invested and that traditional VCs and some large family offices have realized that the market is going to look fundamentally different than it does now in only three to five years.”

Blue Bear Capital is one of the few thus far that have begun backing companies in the space. The firm invests in companies that apply data-driven technologies to the energy supply chain and counts some of the industry’s most prominent names as advisors, including former BP board member and CEO John Browne. All of its portfolio hails from the space and includes companies such as Expedi, a supply chain procurement platform for the energy industry.

Another backer is CommodiTech Ventures, a specialized early-stage venture fund investing solely in commodities technology and founded by former traders Etienne Amic and Jose Tumkaya. The industry veterans both believe that trading by gut instinct is simply outdated and the equivalent of being stuck in the analog era.

Enter technology

On the face of it, commodity trading actually sounds pretty straightforward: Make a profit by monetizing market imperfections such as those related to quality, time and location.

The reality is, of course, more nuanced.

During his time at Shell, Thaler discovered that access to data was only one of the ingredients required to gain an advantage over competitors.

“The fact is that the oil majors have access to an incredible amount of data, but the way that information gets utilized is very siloed and limited,” he explained. “In contrast to this, my experience at a hedge fund showed quite the opposite: limited access to information, but amazing tools and systems. It demonstrated to me that superior data systems can be very powerful.”

OilX’s vision is to combine the data science tools of a modern hedge fund with the knowledge base of an oil major. Its setup mirrors the technological innovation of Signal Ocean, a venture looking at a similar disparity in the shipping industry, with the aim of improving commercial performance of its clients.

Signal Ocean is a co-founder of OilX and its technology partner. Thaler and his partner have effectively created a digital twin of the oil supply chain without owning any assets in the chain, by applying AI and satellite technology to enable oil traders to make better decisions much faster than traditionally. The newcomers alter the already ultracompetitive space and could potentially reshape the industry’s dynamic from asset-driven to data-driven.

Said Thaler: “While some of the market participants have begun to invest and embrace the changing environment, there is still a number that are only slowly coming to terms with the fact that having loads of people on the ground and owning assets around the globe is no longer good enough. What is currently happening is a seismic shift away from ‘boots on the ground’ to ‘eyes in the sky.'”

The commodity trading industry has a long history of agility and constant adaptation. However, the speed of change and the diversity in background and skill set of new entrants in the space will require the big players to embark on new ways to create proprietary information flows and utilize algorithm-based analytics.

The incorporation of data science technologies into the decision-making process may also see a number of traditional players entering partnerships with some of the startups that are setting out to disrupt the industry.

 

Read More – www.pitchbook.com

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The key trends that will shape European PE and VC in 2019

Growth trajectory

While Europe has traditionally been very good at creating new companies, it hasn’t been as apt at growing them, according to Draper Esprit CEO Simon Cook. He thinks this will change. “One trend we have been tracking closely is the proportion of companies which raise early-stage money and which then go on to raise growth money,” he said. “We think this is key to building a sustainable entrepreneurship in Europe. In the US, almost 85% of all businesses that raise seed go on to raise growth capital ($5 million to $75 million). In Europe, it has previously been much less. We expect the gap between the US and Europe to close this year, and to see far more growth deals in Europe.”

Green is a go

Among Europe’s new companies, there’s one sector in particular that Matt Bradley, investment partner at Forward Partners, believes will take off in 2019.

“You’ve probably noticed—in stores, restaurants and conversations—an embrace of all things not meat,” he said. “Vegetarianism, veganism and the curiously defined flexitarianism are on the rise. Whether it’s due to animal welfare concerns, the environment or health and diet-related interest, there’s been a huge shift in public appetites and taste. The trend shows little sign of abating. That means the market size that entrepreneurs can go after is large and increasing rapidly; a great foundation from which to start a business.”

These types of companies have already seen success in 2018 with investments including vegan meal delivery business AllPlants’ £7.5 million funding round from Octopus Ventures. But, Bradley said there’s still plenty of room for innovation:

“In the offline world, I’d expect more and more vertical-focused restaurant concepts to pop up. There’s clearly appetite for more plant-based products for those entrepreneurs willing to take on food formulation and creation. In the online world, all those businesses and business models that we’ve seen prosper relating to food—marketplaces in all parts of the supply chain, on-demand, subscriptions, et cetera—are increasingly attractive. As the market grows more and more, investors are likely to want a piece of the action too.”

Impact’s breakthrough year

It’s not just the food industry that’s going green, according to Sir Ronald Cohen, chairman for the Global Steering Group for Impact Investment. He expects that 2019 will be a “breakthrough year” for impact investing, which he believes will develop into a multitrillion-dollar market.

According to Cohen, impact investing not only more than matches returns generated by more traditional investment strategies, but is also the answer to some of society’s biggest challenges.

“On a global level, I am concerned by the tensions that are building in societies around the world,” he said. “Migration, inequality, the widening gap between the ‘haves’ and the ‘have-nots’ and the resulting erosion of some of our most trusted institutions are all causes for great concern. If we want to maintain a market-based system, we have to face these challenges head-on.

“I believe impact investing can contribute to a solution in a meaningful way, not by fixing issues at the edges, but by putting us on the path to systemic change. Impact investment moves us away from the doctrine of maximizing profit alone to a new paradigm. It brings impact to the center of our consciousness, measures it, and shifts us to optimize risk-return-impact when making business and investment decisions.”

Business as usual

While societal challenges and political events such as Brexit have created a fair amount of uncertainty, Andres Saenz (pictured), EY global private equity leader, expects European activity to remain robust.

“2018’s fundraising market was notable for closings by a number of large European funds and one of the best years on record,” he said. “We expect continued strength in 2019, while recognizing that there are fewer such vehicles currently in the pipeline.”

Saenz anticipates the coming 12 months will keep up the pace after a busy 2018: “We expect continued momentum heading into 2019, given record levels of dry powder and an overall accommodative financing environment. Tech, healthcare and consumer products remain powerful trends and platforms for growth, and we expect continued appetite for deals in these spaces.”

The end of an era

However, not everyone shares an optimistic view for the year ahead. Richard Clarke-Jervoise, partner and head of the Stonehage Fleming Private Capital, claims that private equity has reached the end of its “Golden Age.”

“I think we, like many people, have been preparing for a downturn for a number of years,” he said. “We’ve been very conscious that it has been a good sellers’ market and a tougher buyers’ market. The period from 2012 to 2018 will be remembered as private equity’s ‘Golden Age’ due to exceptionally benign economic conditions, very strong interest from investors and a strong bull market for equities. Private equity managers have taken advantage of various innovations: GP-led restructuring, GP-stake transactions and a growing willingness for LPs to support multiple strategies. However, cracks have started to show in 2018 as it closed on an uncertain note.”

He continued: “The technology space has suffered from falls in public market valuations, IPOs trading below their listing price and the first signs of the impact of trade wars. This has led to a palpable sense of caution from most GPs and we’re getting closer to the top of the market, if we’re not there already. This means that it’s time to be cautious rather than piling on a lot of risk. We’ve tried to be very disciplined in the way we commit money and really focus on managers with a huge amount of experience; they’ve seen a lot of cycles and we think that has a lot of premium in a volatile period.”

 

Read More – www.pitchbook.com

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The Pac-12 wants a $500M investment from private equity

Private equity has long made its living turning around distressed companies.

Could the industry revive a struggling college sports league?

The Pac-12 Conference is seeking a $500 million investment from a private equity partner for a 10% stake in the league’s TV network and other commercial assets, according to The Oregonian. A possible deal could reportedly value the new business at between $5 billion and $8.5 billion, per the conference’s plans. It would also include broadcast and sponsorship rights, merchandising, and distribution agreements.

It’s unclear if any formal discussions between the Pac-12 and potential investors have begun.

Embattled Pac-12 commissioner Larry Scott presented the plan to Pac-12 leadership last November, per the report, and if a deal is struck, it could provide the conference’s 12 schools with nearly $42 million apiece. The money is much-needed. The Pac-12 Network has struggled to generate revenue comparable to other Power Five conferences such as the SEC and the Big Ten, the latter of which is set to distribute $15 million-plus more annually to its schools than the Pac-12 currently does to its member institutions.

Why would a PE firm be interested in such a deal?

In 2011, the Pac-12 signed a 12-year television contract with ESPN and Fox worth some $3 billion. The deal expires in 2024 and the upcoming contract could provide a nice cash infusion within a typical five-to-seven-year investment timeline. And an investor wouldn’t have to do much in the meantime other than front the money, since a proposed deal from the Pac-12 would see the conference retain operational control.

But any firm would be attaching itself to a league that’s been criticized for spending too much on its conference headquarters in downtown San Francisco, overseen a raft of high-profile officiating errors in football, and failed to produce a team that reached the College Football Playoff in three of the past four years, plus other controversies. The Pac-12 has responded by hiring FleishmanHillard, a PR agency that specializes in crisis management, again per The Oregonian.

When the conference created its own network following the deal with ESPN and Fox, it touted that the Pac-12 Network was independently owned and thus would get 100% of the proceeds. But that arrangement so far hasn’t been very lucrative. The conference has failed to strike a deal with DirecTV because of a disagreement over media rights, costing the Pac-12 millions and hurting its national exposure. Meanwhile, Scott himself has drawn criticism for his $4.8 million salary, per a USA Today report, which was more than double his Big Ten and SEC peers in 2016.

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Swiggy nabs $1B as Indian food tech industry matures

From tangy, chutney-dipped samosas to spicy chicken curries, Indians are enthusiastic when it comes to their food. And so are venture capitalists.

Indian food delivery startup Swiggy has announced a $1 billion round led by Naspers, with participation from DST Global, Coatue Management and Meituan Dianping. Tencent, Hillhouse Capital and Wellington Management also participated in the funding.

Founded in 2014, Swiggy has partnered with more than 50,000 restaurants across 50 cities in India. Naspers first backed the Bengaluru-based business in 2017, before leading a $100 million round for Swiggy this February at an estimated valuation of $725 million, followed by another $210 million round in June at an estimated valuation of $1.3 billion.

In a country with more than 1.3 billion people who seem to love their food, it’s not difficult to see the scope of investment opportunities in food tech and restaurant tech. Swiggy’s latest fundraise comes at the end of a big year for Indian food startups securing VC funding. Even excluding Swiggy’s massive round, the current year has seen more VC funding in the space than each of the last three years, with $762 million invested across 23 deals.

Read More – www.pitchbook.com

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Takeda and Shire shareholders back £46bn drugs takeover

Japanese drugs giant Takeda’s £46bn ($59bn) takeover of Irish pharmaceuticals firm Shire has been approved by both sets of shareholders.

The acquisition, the largest by a Japanese company, propels Takeda into the world’s top 10 list of biggest pharmaceutical companies.

Shire shareholders met in Dublin to approve the deal. Takeda investors gave the green light earlier in the day.

Some Takeda investors objected over fears it will increase the firm’s debt.

The votes to approve the takeover follow a long-running battle in which Takeda made multiple offers for Shire.

On Tuesday, Kazuhisa Takeda, a member of the firm’s founding family, spoke out against the deal over concerns with the level of debt it would add to Takeda.

Takeda plans to finance the takeover via the issue of new shares in exchange for Shire stock, bank loans and bonds.

The takeover is part of Takeda’s strategy to become a global pharmaceutical company. The firm wanted to buy Shire to strengthen its cancer, stomach and brain drug portfolios.

But one of its potentially lucrative treatments will have to be sold off at the direction of European regulators over competition concerns.

“We are delighted that our shareholders have given their strong support to our acquisition of Shire,” said Takeda chief executive Christophe Weber after the investor vote in Osaka.

Shire was founded in the UK, but moved its corporate headquarters to Dublin a decade ago. It has 24,000 employees in 65 countries.

 

Read more – www.bbc.co.uk

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Bestival music events firm bought for £1.1m

The Bestival and Camp Bestival music festivals have been snapped up by a multi-millionaire Dorset entrepreneur just days after a collapse into administration.

Richmond Group, controlled by the loan broker James Benamor, is buying the festival business after offering £1.1m for Bestival’s assets and brand. Richmond had lent Bestival Group £1.6m in February last year.

Benamor founded Amigo Loans, a Bournemouth-based company that offers quick guarantor-backed loans, which was floated on the stock exchange in July. The business is valued at more than £1bn and Benamor’s Richmond Group has a stake of 61%.

Julie Palmer, of the advisory firm Begbies Traynor, who was appointed administrator on 20 September, said she had received more than one offer for the business but Richmond’s was the best bid.

Bestival was launched in 2004 by DJ Rob Da Bank and this year was headlined by the performers Chaka Khan, Grace Jones and Thundercat. It began on the Isle of Wight but relocated to Lulworth Castle in Dorset in 2017.

Its sister festival, Camp Bestival, which launched in Dorset in 2006, is aimed at a family audience and this year featured Simple Minds and Rick Astley alongside Peppa Pig and Paddington.

In a statement Benamor said: “We have been fans and supporters of Bestival since the beginning. Our children have grown up with wonderful memories of these festivals. Bestival is an example of Dorset being world class and we are keen to ensure that this fantastic institution goes on to delight families and local businesses for many years to come.”

On the Camp Bestival website it said that tickets for the 2019 festival remained valid and there was “no reason to believe Camp Bestival won’t go ahead as planned”.

Hundreds of 2018 Camp Bestival attendees are still hoping for a refund after the festival was forced to close a day early in July because of poor weather. The company said the cancellation of the festival’s Sunday line-up this year was not the reason for its financial difficulties but said it had not been “a positive factor for the business”.

Richmond Group said that under the terms of its offer all Camp Bestival 2019 tickets sold so far would be honoured.

Read More – www.theguardian.com

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KKR stock surges after first earnings as a corporation

KKR’s conversion to a corporation is paying off for stockholders.

The New York-based buyout shop announced its 3Q earnings on Thursday, including after-tax distributable earnings of $496.7 million, or 60 cents per share, a YoY increase of 21.3% and about in line with analyst predictions. The firm also reported $640.2 million in profit attributable to shareholders, up more than 300% YoY. KKR’s stock responded positively, closing Thursday up more than 6% on a day the market rebounded from a recent sell-off, thanks in part to several strong earnings reports across the corporate spectrum.

KKR changed its tax structure from a partnership to a corporation on July 1 in hopes of making its shares more accessible on indices. As a result, the firm has stopped reporting its economic net income, an opaque metric that publicly traded peers such as Blackstone, The Carlyle Group and Apollo Global Management use to grade performance.

So far, KKR management likes the results.

“We’re encouraged by the earnings we are having,” said Craig Larson, the firm’s head of investor relations. “We feel like we’re seeing an increase in the breadth of our shareholders.”

Co-COO and co-president Scott Nuttall took away positives both from KKR’s results and the wider market downturn, saying the firm will be able to grow at a faster pace if valuations drop.

“We saw this coming out of the financial crisis a decade ago,” Nuttall said. “We can also buy back our stock at lower prices. From our seat, our stock is worth even more today and our firm has even more opportunities and better prospects than a month ago.”

 

Read More  – www.pitchbooks.com

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‘Fortnite’ creator valued at $15B with mega-round from headline investors

Epic Games is the developer of “Fortnite,” which might very well be the most popular video game in the history of the world. The company had ascended to the pinnacle of the entertainment industry without much in the way of help from Silicon Valley—until now.

On Friday, Epic announced a whopping $1.25 billion in funding from a group of VC and PE luminaries that includes KKR, Kleiner Perkins, ICONIQ Capital and Lightspeed Venture Partners, with The Wall Street Journal reporting a valuation of $15 billion—a figure that’s in line with Juul Labs, another VC-backed creator of a product that’s wildly popular among millennials and Generation Z. Other investors in Epic’s round include aXiomatic—an e-sports company that raised a reported $26 million of its own earlier in the week with backing from Michael Jordan and the family office of The Carlyle Group founder David Rubenstein—and Vulcan Capital, the firm founded by Paul Allen.

Previously, Epic’s most prominent public financing was the reported sale of a 48.4% stake to Tencent in 2013 for $330 million. Disney and Endeavor are the company’s other existing investors.

While “Fortnite” may be the company’s current cash cow, it’s far from the only aspect of Epic’s portfolio that would appeal to investors. Based in Cary, NC, Epic is also the creator of the highly regarded “Gears of War” and “Infinity Blade” series. And the company is significant in the video game space beyond the titles that it’s developed itself. Epic is also the business behind the Unreal Engine, a pioneering piece of software that’s used by dozens of other developers to create games of their own, including hits like “Bioshock” and “Mass Effect.”

Somewhat surprisingly, perhaps, the amount of VC investment in the US entertainment software space has been trending down for several years now, ever since reaching an annual high of 147 transactions in 2012, per data. But this year is holding steady. Firms executed 81 investments in the sector through the first three quarters of 2018, on pace to equal last year’s total of 108.

Read More – www.pitchbooks.com

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Uber Unveils New Division

Elon Musk introduced us to the hyperloop. Now, thanks to Uber, we have a Powerloop, too.

That’s the name of the new service the ridehailing company unveiled Wednesday, which will involve renting pre-loaded trailers to shipping carriers in an effort to help smaller carriers connect to businesses with plenty of goods to move—including Anheuser-Busch, which is one of Powerloop’s first clients. Powerloop will be affiliated with the existing Uber Freight unit, which uses an app to direct truckers with empty trailers to cargo waiting to be hauled.

The announcement came a day after reports emerged indicating that Uber has been in discussions with investment banks regarding a public debut that could be worth up to $120 billion. The San Francisco-based company and its primary rival, Lyft, are both making progress toward enormous IPOs that are expected in 2019.

Uber isn’t the only VC-backed company with its eye on reshaping the world of shipping. Last month, Convoy confirmed it had raised $185 million at a $1.1 billion valuation, essentially tripling its valuation from barely a year prior, while Cargomatic brought in $35 million in August. Both companies have similar aims to Uber Freight, using a platform to connect available trucks to clients with goods to ship.

Powerloop’s trailer-pool services are already available in Texas, with plans to expand throughout the US. The division represents Uber’s latest effort to diversify away from its flagship ridehailing business. That unit, the company’s Freight division and its UberEats subsidiary are all currently unprofitable, per The Wall Street Journal, with UberEats expected to be the first of the units to get into the black.

Read More – www.pitchbooks.com