Intralinks Deal Flow Predictor - China First Capital€¦ · Our key predictions for the next six months 1. The global number of announced M&A deals for the full year 2015 will be

Intralinks® Deal Flow PredictorOur quarterly prediction of future trends in the global M&A market

Forecast of global M&A activity through Q1 2016Includes guest commentary from Peter Fuhrman, Chairman, Founder & CEO at China First Capital

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Welcome to the latest edition of the Intralinks Deal Flow Predictor (DFP) report. The Intralinks DFP forecasts the volume of future mergers and acquisitions (M&A) announcements by tracking early-stage M&A activity – sell-side M&A transactions across the world that are in the preparation stage or have reached the due diligence stage. These early-stage deals are, on average, six months away from their public announcement.Along with our forecast of announced M&A activity for the full year 2015 and Q1 2016, this edition of the Intralinks DFP includes:• a spotlight feature on why we believe private

equity backed exits are due to increase;• the Intralinks Mid-Market Monitor, a snapshot

of more than 1,200 new actionable deal opportunities added in Q3 2015 to Intralinks Dealnexus®, the largest global online deal sourcing and M&A social network, exclusively for dealmaking professionals; and

• an interview with Peter Fuhrman, Chairman, Founder and CEO at China First Capital, who provides us with timely and valuable insights into the dealmaking environment in the world’s second largest economy based on his deep knowledge and experience of China’s M&A and capital markets.

Welcome

WATCH NOW: QUICK REVIEWSee highlights from this report in one minute

Intralinks is the leading global provider of software and services, including Virtual Data Rooms (VDRs), for managing M&A transactions, private equity fund raisings and corporate development, and has been in business for more than 19 years. Our involvement in the early stages ofasignificantpercentageoftheworld’sM&Atransactionsgives us unique insight into the expected volume of future announced M&A deals.

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Predicting deals: Intralinks’ forecast of Thomson Reuters’ future reported volume of announced deals for the next two quarters

The Intralinks DFP has been independently verified as an accurate predictor of future changes in the global volume (number) of announced M&A transactions, as reported by Thomson Reuters. Quarter-over-quarter (QoQ) percentage changesintheIntralinksDFParetypicallyreflected(onaverage)sixmonthslaterinannounceddealvolumes.The Thomson Reuters data on announced deal volumes for the past four quarters has been adjusted by Intralinks for expected subsequent changes in reported announced deal volumes.

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Global early-stage deal activity in Q3 2015 grew by 5.6 percent1, a slower rate of increase compared to the previous quarter’s 9.0 percent increase. The slowdown can be attributed to North America (NA),whichdeclinedby3.0percent,andAsiaPacific(APAC),whichsaw growth fall to only 3.2 percent compared to 34.1 percent in the previous quarter. In contrast, both Europe, the Middle East and Africa (EMEA) and Latin America (LATAM) showed increases in their growth rates, with EMEA growing by 11.0 percent (up from 6.8 percent in Q2 2015) and LATAM growing by 48.6 percent (up from 3.4 percent in Q2 2015).We believe that early-stage M&A activity in NA is down for two main reasons. First, there appears to be a growing sense of uncertainty over the pace and timing of expected U.S. interest rate increases and frustration among dealmakers over the apparent lack of a clear policy strategy for normalizing monetary conditions. Second, dealmakersarefacingconflictingsignals:someeconomicindicatorsare suggesting robust U.S. economic growth so far this year, while at the same time the U.S. Federal Reserve (Fed) has recently voiced its concerns over the impact on the U.S. economy of the economic slowdown in China and the decline in U.S. and global equity markets that began in July.

Introduction

Matt PorzioVP of Strategy & Product MarketingIntralinks

1 Unless stated otherwise, all references to percentage growth in early-stage M&A activity as shown by the Intralinks DFP refer to the percentage difference in the volume of early-stage M&A deals compared to the same period one year prior.

In APAC, mounting evidence of slowing Chinese economic growth, the botched devaluation of the Chinese currency (and resulting fears of a regional currency war), and the meltdown of Chinese equity marketsthatbeganinJunehaveallcontributedtoasignificantslowdown in growth in early-stage deal activity. Within APAC, weakness in North Asia, Australia and South Asia is being offset by strong growth in South East Asia and Japan.In EMEA, robust economic growth in the UK and a sharp improvement in large Eurozone economies such as France and Spain, together with signals from the European Central Bank that it will likely further increase its quantitative easing policies, are supporting increases in early-stage deal activity.LATAM, the region that showed the strongest growth rate for early-stage M&A activity in Q3 2015, appears to be staging a recovery following several quarters of weakness – something we highlighted in the previous edition of the Intralinks DFP. On a global level, we are seeing increased early-stage deal activity in the following sectors: Consumer, Healthcare, High Tech, Financials, Materials, Real Estate and Retail. Meanwhile, we are seeing decreased early-stage deal activity in the following sectors: Energy & Power, Industrials, Media & Entertainment and Telecoms.

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Our key predictions for the next six months

1. The global number of announced M&A deals for the full year 2015 will be within a range of 6 to 9 percent higher than in 2014, with the mid-point of our prediction being approximately 8 percent higher. At the top of the range, 2015 will match 2007 as a record year for the number of announced M&A deals.

4. M&A activity in EMEA will remain robust, supported by improving economic conditions, loosening monetary policy and increased interest from foreign buyers in the region’s high quality companies and assets.

2. The global number of announced M&A deals in Q1 2016 will be approximately 7 percent higher than in Q1 2015, driven by corporates aggressively seeking growth in a low inflationenvironment,anincreasein private equity exits and continued availability of cheap acquisition financing.

5. However, there are also a worrying number of potential downside risks: further turmoil in China and emerging markets leading to a global economic slowdown, another correction in global equity markets, overheated M&A valuations, a mishandled U.S. interest rateincrease,oraregionalconflictthat spirals out of control – for example between the U.S. or NATO and Russia in Syria.

3. Continued lack of direction from the Fed on interest rate normalization policy and further evidence of a Chinese slowdown could affect dealmakingconfidenceinNAandAPAC.

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Overview: global early-stage deal activity continued to rise in Q3 2015, but regional differences starkly illustrate the challenges facing the global economy and markets

A combination of corporates hunting for inorganic growth in a low inflationenvironmentandrecordlowinterestratesinmostmajoreconomies has provided continued support for increased levels of both early-stage deal activity and announced transactions. In fact, 2015 looks likely to match or even exceed 2007 as a record year for deal announcements and Q1 2016 seems set for a strong start in the number of announced deals. According to the Intralinks DFP, global early-stage M&A activity in Q3 2015 rose by 5.6 percent, with Thomson Reuters reporting a similar increase in the numberofannounceddealsglobally.Basedonthesefigures,weare predicting that the total number of announced deals in 2015 as a whole will be within a range of 6 to 9 percent higher than in 2014, with the mid-point of our prediction being approximately 8 percent higher. For Q1 2016, we are predicting that that the total number of announced deals will be within a range of 6 to 8 percent higher than in Q1 2015, with the mid-point of our prediction being approximately 7 percent higher.

According to Thomson Reuters, the value of announced M&A deals inthefirstninemonthsof2015increasedby32percentto$3.2trillionascomparedtothesameperiodin2014,thestrongestfirstnine months for worldwide dealmaking since 2007. The record value of M&A was driven by a substantial increase in the number

ofmegadeals–dealsover$10billion–whichalmostdoubledover the same prior year period

Asimpressiveasthefiguresonvalue are, we believe that paying close attention to the number of announced deals gives a better picture of the overall health of the M&A market. There aretworeasonsforthis:first,inanygivenyear,almost60percent of announced deals, on average, have no disclosed deal value; and second, the total value of announced deals tends to be heavily skewed by a small number of mega deals.

Reasons to be cautiousDespite the strength of the M&A market in 2015, there are plenty of reasons for caution in forecasting that 2016 will be equally robust.

First, and most importantly, there is now growing evidence that the global economy is slowing down, with emerging markets, in particular, performing less well than the advanced economies. Theroutinfinancialmarketsthatwesawoverthesummer,which was largely attributed to the “shock” of a slowing Chinese economy as China seeks to rebalance its economy from commodity-consuming investment to consumption, could lead to lower growth in emerging markets, which could infect advanced economies in the months ahead.

According to the latest Brookings Institution-Financial Times TIGER Index (Tracking Indices for the Global Economic Recovery), released in early October, measures of real economicactivity,financialmarkets,andinvestorconfidence

Philip WhitcheloVP of Strategy & Product Marketing, Intralinks

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intheemergingmarketshavefallenandaresignificantlyweakerthan both their historical averages and weaker than those measures in the advanced economies. The Brookings Institution reports that “Emerging market economies, which had become themaindriversofglobalgrowthintheaftermathofthefinancialcrisis, are now leading the world economy into a slump. Growth hasfallen,businessandconsumerconfidenceareeroding,andfinancialmarketshavetakenabeatingintheseeconomies.”

At the International Monetary Fund (IMF) annual meeting in Lima, Peru in early October, the IMF downgraded its economic forecasts for 2015 and 2016, citing concerns over a further slowdown in emerging markets and a weaker recovery in advanced economies. According to the IMF’s World Economic Outlook (WEO)pressbriefing:“Globalgrowthdeclinedinthefirsthalfof2015,reflectingafurtherslowdowninemergingmarketsandaweaker recovery in advanced economies. It is now projected at 3.1 percent for 2015 as a whole, slightly lower than in 2014, and 0.2 percentage point below the forecasts in the July 2015 WEO Update. Prospects across the main countries and regions remain uneven. Relative to last year, growth in advanced economies is expected to pick up slightly, while it is projected to decline in emerging market and developing economies. With declining commodity prices, depreciating emerging market currencies, and increasingfinancialmarketvolatility,downsideriskstotheoutlookhave risen, particularly for emerging market and developing economies. Global activity is projected to gather some pace in 2016. In advanced economies, the modest recovery that started in 2014 is projected to strengthen further. In emerging market

and developing economies, the outlook is projected to improve: in particular, growth in countries in economic distress in 2015 (including Brazil, Russia, and some countries in Latin America and in the Middle East), while remaining weak or negative, is projected to be higher next year, more than offsetting the expected gradual slowdown in China.”

Second,despiterobustsecondquartereconomicgrowthfiguresin the U.S., which were revised higher to an annualized 3.9 percent, several reports have since indicated that the U.S. economy is losing momentum: these include a U.S. Bureau of Labor report showing much weaker than expected jobs growth in September and weaknesses in surveys of U.S. manufacturing and durable goods orders. Add to that the fact that the U.S. equity markets are also down due to the “China effect” correction in global equity markets, which saw the S&P 500 Index fall over 12 percent from its peak in mid-July to the end of August, although it has since recovered somewhat to stand at just over 5 percent down as of October 9th. Globally, equity markets have posted the biggest losses in Q3 since the 2011 Eurozone crisis.

Third,financialmarketshavelostconfidenceintheabilityofcentral banks, in particular the Fed, to restore global demand and are irked by the apparent lack of a clear policy strategy for normalizing interest rates. Based on the Fed’s recent narrative, the story that investors were expecting to be hearing by this point was that solid U.S. economic growth, underpinned by years of ultra-low interest rates and unconventional monetary policy, had allowed the Fed to begin raising interest rates, thus reassuring

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investorsthatcentralbankerswereconfidentthatasustainedrecovery was underway. Instead, the Fed’s September decision to keep rates at current levels, together with accompanying comments pointing to concerns about a potential slowdown in the global economy and the need to keep an eye on volatile global financialmarkets,havespookedinvestors.

Fourth, we cannot ignore the potential dangers of an accidental clash between the U.S., its allies and Russian forces – who are currently conducting air strikes in dangerous proximity to one another in Syria with little apparent coordination – spiraling into something more serious. Russia’s startlingly bold intervention in thealmostfiveyearoldSyrianconflictappearstobemotivatedby its desire to prop up the Syrian government, led by President Bashar al-Assad, a policy diametrically opposed to that of the U.S. and its allies. A regional shooting match between the U.S. and its allies and Russia could lead to global market turmoil.

EMEA still showing strong growthEMEA continues to be the powerhouse behind the global increase in early-stage M&A activity we have seen in Q3 2015 – with the Intralinks DFP showing an 11.0 percent increase in early-stage deal activity within the region. However, a number of issues could negatively impact dealmaking in the months to come.

Asconfidenceandtrustarekeycomponentstocreatingabusiness environment conducive to M&A activity, much has been made of the emissions scandal that has erupted around German automaker Volkswagen. As some commentators

raise the question of trust in Germany in general, any negative developmentscouldfurtheraffectconfidencelevelsinEurope’sthird largest M&A market. The coming weeks will show whether the scandal is unique to this one automaker or symptomatic of a wider problem.

Interestingly, German drug maker Bayer announced that it is slashing the price range for the initial public offering (IPO) of shares in its plastics division Covestro, citing the Volkswagen emissions scandal and equity market volatility. Bayer now aims to raise gross proceeds of €1.5bn by listing Covestro on the FrankfurtStockExchange–significantlylessthanthe€2.5bnitwas previously targeting. Announcing the new IPO price range for Covestro on October 1st, Bayer said: “Since the start of the bookbuilding phase on September 21, 2015, the capital market situationhasdeterioratedsignificantly.Externalfactorssuchas uncertainty surrounding future economic growth in China or the Federal Reserve’s interest rate policy have contributed to increased market volatility. In addition, the stock market has been impacted by the negative headlines from the automotive sector.”

While EMEA as a whole is performing strongly, German early-stage M&A activity declined by 6.9 percent in Q3 2015, the second consecutive quarter that Germany has shown a decrease, following a 7.1 percent decline in Q2. In contrast, France, which is staging an economic recovery of sorts, saw early-stage deal activity jump by over 60 percent in Q3 2015.

Meanwhile in the UK, hard left socialist anti-austerity politician Jeremy Corbyn has been elected leader of the opposition Labour

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party after a surprisingly popular campaign. While the next UK general election is not until 2020, the new leader’s unorthodox economic policies and apparent lack of support among the majority of his party’s representatives in Parliament point to continued electoral dominance for the ruling Conservatives. After the 3.1 percent decline in early-stage M&A activity in the UK in Q2 2015, which we believe was caused partly by uncertainty in the run up to the May general election, dealmakers appear to have applauded the Conservative victory as early-stage M&A activity in the UK jumped by 18 percent in Q3 2015.

Finally…Greece. After dominating headlines for much of the year, the bailout deal that was agreed in August has moved collective attention on to other matters. In order to tap approximately $100billionofbailoutfunds,Greecewillneedtoimplementapackage of tax increases, spending cuts, labor market reforms, and privatizations. While the bailout deal means that Greece is once again temporarily able to pay public sector wages and its creditors, a recurrence of Greece’s problems seems a racing certainty at some point in the future. According to former Greek financeministerYanisVaroufakis,thebailoutdealis“notgoingto work” because it is based on an unsustainable debt burden and an economy that is unable to produce enough to support its repayment obligations. The next act in this Greek tragedy: coming to an amphitheater near you in 2016.

Fed’s lack of a clear policy strategy is unsettling dealmakers in North AmericaAre storm clouds building on the horizon for dealmakers in NA? The Intralinks DFP shows a 3 percent decline in early-stage deal activity in Q3 2015. Coming after a roaring bull market for M&A overthepast18months,dealmakerswilljustifiablybewonderingif this is the beginning of a downturn.

The continued uncertainty about when the Fed will raise interest rateshasdefinitelyaffectedconfidencelevels.However,giventhatthe normalization path for interest rates is expected to be gradual andwilllikelyfinishatalevelfarbelowhistoricalaverages,dealmakersandfirmsshould be able to deal with an increase in rates. However, the concern appears to come from dealmakers not knowing when and how fast interest rate increases will happen, therefore, making it hard for them to plan. Dealmakers can only hope that the Fed will make its intentions clear before the end of the year and thus provide a degree of certainty on which they can act and formulate their strategies.

Amidst evidence of a slowing U.S. economy, the turmoil in Chinese and emerging economies’ equity markets over the summer has scared dealmakers looking towards APAC for M&A opportunities. Added to that, an overall equity markets correction, which saw the S&P 500 Index fall over 12 percent from its mid-July peak (although it has since recovered somewhat to stand at just over 5 percent down as of October 9th), has likely further

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impacted some M&A plans. Last but not least, there is the prospect for a replay of the 16-day U.S government shutdown of October 2013 that can only be avoided if Congress agrees toraisethe$18trillionfederaldebtceilingoverthenextfiveweeks, and continued uncertainty about who will win the parties’ nominations for the U.S. presidential election.

So, the decline can be explained but, nevertheless, it raises concerns about the future plans of NA corporates and other dealmakers and the direction of M&A trends in this region.

Is Latin America finally turning the corner?The region that stands out most in the Intralinks DFP data for its recovery is LATAM. Figures for early stage deal activity in the region show a 48.6 percent increase in Q3 2015. During the past quarter, we saw increased activity levels in Brazil, Mexico and Chile, with the Consumer, Media & Entertainment, Retail, Real Estate, and Energy & Power sectors all seeing increased early-stagedealflow.

This is all happening despite the IMF’s prediction that economic growth in LATAM and the Caribbean will fall by 0.3 percent in 2015 and grow by less than 1 percent in 2016. Under the IMF’s analysis, Brazil is the deadweight dragging the region down, with expected declines in Brazilian GDP of 3 percent and 1 percent in 2015 and 2016, respectively, compared to projected GDP increases of 2.3 percent and 2.8 percent in 2015 and 2016, respectively, for Mexico. The IMF explains that the downturn in Brazil is deeper than expected, and, with declining commodity

prices, momentum continues to weaken in other countries in the region.GrowthisalsolowerthanexpectedinMexico,reflectingslower U.S. growth and a drop in oil production.

M&A activity in the region has historically been heavily weighted to the Metals and Mining sector, which has been hard hit over the past 18 months by the collapse in commodity prices. With the increase in early-stage M&A activity that we have seen in Q3 2015, particularly in the Consumer sector, it appears that global playersmayrecognizehowchangingdemographicscouldbenefitfirmsintheregioninfuture.AswithChinatwentyyearsago,globalplayers may be taking the approach that they need to get their feet in the door before markets take off and they are left behind.

China meltdown in July and August impacts overall M&A activity in Asia PacificAPAC meanwhile is a mixed bag – some markets show signs of strong growth in early-stage M&A activity, while others are struggling. Overall, the region saw a 3.2 percent rise in early-stage deal activity in Q3 2015.

The spectacular meltdown in the Chinese stock market that began in June has resulted in nervousness across the globe, but particularly in APAC.

North Asia, which includes China, Hong Kong, South Korea, and Taiwan, saw a decline in early-stage M&A activity of 11.9 percent in Q3 2015.

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Early-stage M&A activity in Australia declined by 2.6 percent in Q3 2015.Australia,whichhasbenefitedoverthepast15yearsfromincreasing Chinese demand for its iron ore and coal, has also historicallyseensignificantinboundM&AflowsfromChina.Withthe precipitous decline in global commodity prices and a slowing Chineseeconomy,AustraliaisadjustingtoasignificantM&Aslowdown in the previously dominant Metals & Mining sector. While the number of announced cross-border inbound M&A deals into Australia in Q3 2015 declined by 7 percent compared to the previous year, announced outbound M&A jumped by 14 percent according to Thomson Reuters. With increasing signs of a more fundamental slowdown in the Chinese economy, M&A practitioners “down under” have been busy refocusing their M&A strategies on new deal destinations so Australian corporates can keep up with their global counterparts pursuing M&A-driven expansion strategies.

India, meanwhile, is also facing a slowdown in M&A activity, with early-stage deal activity down almost 38 percent in Q3 2015, followingarobustfirsthalfoftheyear.Thesteepdepreciationof the Indian rupee against the U.S. dollar is putting a strain on dealmaking,withprivateequityinvestorsfindingitparticularlychallenging to exit their Indian investments.

South-East Asia and Japan are the bright spots in APAC, with early-stage M&A activity up 27 percent and 19 percent, respectively. Fresh from his unopposed re-election as head of the ruling Liberal Democratic party, Japanese Prime Minister Shinzo Abe, in his attempt to kick start higher growth in the

world’s third largest economy, unveiled Abenomics 2.0. The cornerstones of this new plan will be to stabilize the decline in Japan’s population, provide more support for families, increase spending and monetary stimulus, and lower corporate taxes.

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NALSMYoY3: +2.0% QuarterlyYoY4: -3.0%

Regional snapshot: early-stage M&A activity across the world2

2Thedirectionofthearrowsindicatesthechangefromthepreviousquarter’sfigures.3 Percentage difference between the Intralinks DFP data for the six months ending September 30, 2015 compared to the six months ending September 30, 2014.4 Percentage difference between the Intralinks DFP data for Q3 2015 compared to Q3 2014.

EMEALSMYoY:+8.8% QuarterlyYoY:+11.0%

APACLSMYoY:+17.1% QuarterlyYoY:+3.2%

LATAMLSMYoY:+24.9% QuarterlyYoY:+48.6%

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The Intralinks Mid-Market Monitor: deal opportunities on Intralinks Dealnexus

The Intralinks Mid-Market Monitor provides a quarterly snapshot of M&A opportunities on Intralinks Dealnexus, the largest global online deal sourcing and M&A social network, exclusively for M&A professionals. With over 500 new, actionable M&A opportunities created and securely marketed on Intralinks Dealnexus every month, the Intralinks Mid-Market Monitor represents around 15% of global announced deal volume.

The chart below shows the cumulative number of deal opportunities and their total revenue value added to Intralinks Dealnexus since Q12013,highlightingthegrowingnumberofcorporates,PEfirmsandadvisorsusingIntralinksDealnexustodiscretelymarkettheirdealopportunities to a global network of vetted buyers and investors. The charts on the next page show the percentage of deal opportunities by sector added to Intralinks Dealnexus in Q3 2015. This demonstrates which sectors are seeing the most activity on Intralinks Dealnexus in each region on a quarter-by-quarter basis. The table on the following page shows the top 5 opportunities by region and revenue on the Intralinks Dealnexus public deal marketplace as at the end of Q3 2015.

Cumulative number of opportunities and their total revenue value (bn) added to Intralinks Dealnexus

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The Intralinks Mid-Market Monitor: percentage of deal opportunities by sector marketed on Intralinks Dealnexus in Q3 2015

NA EMEA

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The Intralinks Mid-Market Monitor: top 5 opportunities by region and revenue* on the Intralinks Dealnexus public deal marketplace as at end of Q3 2015

NA

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INDUSTRIES REVENUE EBITDA

Oil and Gas Storage and TransportationEnvironmental and Facilities ServicesOil and Gas Equipment and Services

Food Distributors

Residential Construction, General Contractors and Operative Builders

Food, Beverage and Tobacco | Food DistributorsFood Retail | Distributors

Prefabricated Buildings and Components | Single-Family Houses

$172,700,000 $16,200,000

$160,000,000 $ 9,000,000

$140,000,000 $25,000,000

$116,531,479 $2,818,081

$106,800,000 $3,000,000


Oil and Gas Distribution | Oil and Gas Storage and Transportation

Pharmaceuticals

Outsourced Business Services | Diversified Financial ServicesHealthcare Services | Systems Software | Application Software

Independent Power Producers and Energy Traders

Textiles | Specialty Stores | Home Furnishing Retail | Wall Coverings Internet and Catalogue Retail | Upholstery | Non-Durable Goods Distribution | Home Decor | Accessories | Window Coverings

$36,000,000

$26,000,000

$16,000,000

$30,000,000

$6,989,000

$222,000,000

$220,000,000

$140,000,000

$115,000,000

$101,481,000


Oil and Gas Storage and TransportationEnvironmental and Facilities ServicesOil and Gas Equipment and Services

Food Distributors

Residential Construction, General Contractors and Operative Builders

Food, Beverage and Tobacco | Food DistributorsFood Retail | Distributors

Prefabricated Buildings and Components | Single-Family Houses

$172,700,000 $16,200,000

$160,000,000 $ 9,000,000

$140,000,000 $25,000,000

$116,531,479 $2,818,081

$106,800,000 $3,000,000


Oil and Gas Distribution | Oil and Gas Storage and Transportation

Pharmaceuticals

Outsourced Business Services | Diversified Financial ServicesHealthcare Services | Systems Software | Application Software

Independent Power Producers and Energy Traders

Textiles | Specialty Stores | Home Furnishing Retail | Wall Coverings Internet and Catalogue Retail | Upholstery | Non-Durable Goods Distribution | Home Decor | Accessories | Window Coverings

$36,000,000

$26,000,000

$16,000,000

$30,000,000

$6,989,000

$222,000,000

$220,000,000

$140,000,000

$115,000,000

$101,481,000


Online Services | Software and Services | Travel and Tourism Services

Industrial Heating, Ventilation, Air Conditioning, and Refrigeration Equipment and Supplies

Household Paper Products

Diversified Financial Services | National and State Commercial BanksCommercial Banks

Insurance

$180,000,000 $25,000,000

$150,000,000 $15,000,000

$110,000,000 $21,000,000

$100,000,000 $16,000,000

$100,000,000 $20,000,000


Construction and Engineering $350,000,000 $75,000,000

Auto Components $150,000,000 $2,500,000

Human Resource and Employment Services $75,000,000 $3,750,000

Food Products $51,000,000 $3,200,000

Commercial and Professional Services | Diversified FinancialsCredit Agencies

$48,542,293 $11,288,588

*revenue between $25,000,000 and $500,000,000

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Tony Hill, Director, Intralinks Dealnexus

Spotlight: private equity industry set for a record-breaking run of exits

Afewyearsago,intheimmediateaftermathofthefinancialcrisis,a partner with a large internationally operating private equity (PE) fund said in a panel discussion: “Private equity is dead.” Looking at recent data, we can now say that the report of the death of PE looks somewhat exaggerated. Just as M&A in general has made a spectacular comeback over the past 18 months, the data shows that PE funds are also back in action.

PE funds are known for planning their exits even before making theiracquisitions.However,intheyearsfollowingthefinancialcrisis, many PE funds found all their exit routes closed: depressed equity markets made an exit via the stock market unviable or impossible, while the lack of corporates with an appetite for acquisitions made a trade sale similarly unlikely. Secondary buyouts seemed the only option, but, with debt markets near frozen, that route also appeared to be closed. The result for manyPEfirmswasastandstill,leavingPEfundsholdingportfoliocompanies well past their original investment horizons.

Now, a few years on, the pendulum has swung in the other direction. Corporates are taking advantage of record low interest

rates to grow via acquisitions and there is high liquidity and rising valuations – perfect conditions for PE funds to begin divesting their portfolios of companies, many of whom have been on the funds’ books for a long while.

TheaverageholdingperiodforPEinvestmentssoldinthefirstfourmonths of 2015 had fallen to 5.5 years, down from 5.9 years for those sold during the whole of 2014, according to data released by Preqin in May. This is still longer than the most recent low point, in 2008, of a 4.1 year average holding period for investments, but the trend is clear – PE funds are exiting investments faster now than they have in recent years. Add to that the fact that, according to data published by Thomson Reuters, the value of PE exit transactionshasincreasedby25percentinthefirstninemonthsof 2015 compared to the same period in 2014.

The surge in activity has seen the return of one feature of PE life that has been missing from the M&A landscape in recent years: auctions. Increasingly, we are seeing PE funds engaging in tightly managed auction processes instead of relying on bilateral talks. BC Partners’ sale of German laboratory services provider Synlab is an interesting example. News of a possible sale initially became public in March 2015 and, soon after, media reports named PE funds KKR, Advent, EQT, Bain and CVC as potential bidders in a tightly contested auction process. News reports cited Synlab’s Chief Executive Bartl Wimmer’s comments that highlighted the company’s potential as a platform for an industry rollup, but also reported that trade buyers large enough to make the deal might encountercompetitionissues.Intheend,PEfirmCinvenwas

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able to secure the deal in June, after a relatively short but intense auction process.

The bullish M&A market over the past 18 months and equity markets that, even after the recent bout of volatility, are open for new listings mean that PE funds are facing an abundance of options when it comes to evaluating exit scenarios for their portfolio businesses. And, according to a number of PE practitioners, exits are the forefront of everybody’s mind right now.

Trade salesWith record low interest rates and a strong appetite for M&A-supported growth among international corporates, PE funds havebeenabletooffloadportfoliocompaniestotradeplayers.“A trade sale is usually the ultimate goal,” one PE practitioner explained,addingthattheexpectedfinancialandoperationalsynergies mean trade players are usually able to offer a higher valuation than PE acquirers, even when debt is readily available. An interesting example is Amgen’s acquisition of Dutch Dezima Pharma, previously owned by PE funds Forbion Capital Partners, New Science Ventures, and BioGeneration Ventures. The acquisition has allowed Amgen to expand its portfolio of treatments for cardiovascular disease.

IPOsDespite recent stock market volatility, market commentators are suggesting we could see a record level of new equity listings as PE funds also ramp up the use of IPOs to exit their portfolio companies.

However, equity market valuation levels are not the only factor making IPOs seem an attractive exit route. In India, for example, PEplayersarefindingthatthedepreciatingrupeeismakingtradesales and secondary buyouts more complicated and the listing route more attractive as a result.

Taking a closer look at the U.S. pipeline for IPOs, PE powerhouse KKR is reportedly preparing its payment processing provider, First Data, for an IPO. High-end department store Neiman Marcus is being prepared for a listing, only two years after its previous owners, TPG Capital and Warburg Pincus, had begun listing preparations in a dual track process that ended up in the secondary buyout by Ares Management and Canada Pension Plan Investment Board. Univision, the U.S. Spanish-language TV broadcaster owned by a PE consortium including TPG Capital and Thomas H. Lee Partners, is another corporate being prepared for a listing.

In the UK, global payment processing company Worldpay successfully listed its shares on the London Stock Exchange in mid-October, raising £1.4bn for its PE owners, Advent International and Bain Capital, as well as selling new shares for £950m to pay down its debt. The landmark listing is the biggest ever IPO of a PE backed company in the UK.

With stock markets increasingly jittery following the China-inspired equity market correction that began in June, some might argue that PE funds are being canny by getting these portfolio businesses listed while the going is still good.

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Dual track processes2015 has also seen a number of PE portfolios businesses being taken down the dual track process route. UK bakery business Brakes is currently being prepared for a £2.5bn IPO on the London Stock Exchange; however, media reports suggest that the company is also soliciting offers from trade players. Oberthur Technologies, the French digital security company owned by Advent International, was also on a dual track process, but a listing is now in the cards after Advent rejected a joint offer from bidders Eurazeo and Carlyle. Finally, Philips, the Dutch industrials group, is currently reviewing options for its lighting business and considering an outright sale, with Asian players reportedly showing interest, as well as a listing on one of the European equity markets. The ultimate choice of exit route will depend on many factors, not the least of which is the overall stability of stock markets globally.

Secondary buyoutsOne exit scenario that we have seen comparatively little of recently is the secondary buyout, where a PE owned business issoldtoanotherPEfirm.Whilesecondarybuyoutsfoundfavorduring 2010 – 2013 when M&A markets were down and buyers scarce, they have fallen out of fashion as the M&A market boomed in 2014 and 2015: the volume and value of secondary deals so far this year have dropped by 33 percent and 67 percent, respectively.

So, far from being dead in the water, PE is making hay while the sun is shining. However, given the potential for a slowdown in M&A activity in 2016, it is unlikely that the current exit frenzy willgoonindefinitely.So,thatleavesthequestion:howfarwillPE go? Will PE funds temper their enthusiasm for exits and focus solely on those assets that have reached maturity, while continuing to work on those portfolio companies that still require attention, or will they – as one market commentator nicely put it – “sell everything that isn’t nailed down”? The answer to that will become clear over the next few quarters.

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Guest comment: an insider’s view of Chinese M&A

For this edition of the Intralinks DFP, Intralinks (IL) interviewed Peter Fuhrman (PF), Chairman and CEO at China First Capital (www.chinafirstcapital.com), a China-focused and China-based international investment bank and advisory firm. Founded in 2008, China First Capital serves a distinguished group of clients, including industry leaders in China, both private sector companies and state owned enterprises (SOEs), financial sponsors, as well as global corporations actively expanding within China. Peter first came to China in 1981, part of the first intake of American graduate students, studying at Nanjing University. He later completed his Master’s Degree at Cambridge University and worked in Europe for many years as a senior European executive for Forbes Inc. He then returned to the U.S. as CEO of a California-based venture capital company, and then became the founder and CEO of a California-based enterprise security software company that exited through a successful trade sale.

IL: The meltdown of China’s equity markets that began in the summer, despite measures by officials in Beijing aimed at calming investors’ nerves, has left many global investors jittery. Is this just a correction of an overheated market or the start of something more serious, and how would you describe the mood in China at the moment?

PF: Never once have I heard of a stock market correction that was greeted with glee by the mass of investors, brokers, regulators orgovernmentofficials.SotoomostrecentlyinChina.Thedivein Chinese domestic share prices, while both overdue and in line with the sour fundamentals of most domestically quoted companies, has caused much unhappiness at home and anxiety abroad. The dour outlook persists, as more evidence surfaces thatChina’srealeconomyisindeedinsometrouble.Ifirstcameto China 34 years ago, and have lived full-time here for the last sixyears.Thisisunquestionablytheworsteconomicandfinancialenvironment I’ve encountered in China. Unlike in 2008, the Chinesegovernmentcan’tandwon’tlightafiscalbonfiretokeepthe economy percolating. The enormous state-owned sector is overallonlifesupport,barelyekingoutenoughcashflowtopayinterest on its massive debts. Salvation this time around, if it’s to be found, will come from the country’s effervescent private sector. It’s already the source of most job creation and non-pump-primed growth in China. The energy, resourcefulness, pluck and risk-tolerance of China’s entrepreneurs knows no equal anywhere in the world. The private sector has been fully legal in China for less than two decades. It is only beginning to work its economic magic.

Peter FuhrmanChairman and CEO China First Capital

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IL: Much has been made of slowing economic growth in China. What are you seeing on the ground and how reliable do you view the Chinese official growth statistics?

PF: If there’s a less productive pastime than quibbling with China’s officialstatistics,Idon’tknowofit.Look,it’sbeyondperadventure,beyond guesstimation that China’s economic transformation is without parallel in human history. The transformation of this countryoverthe34yearssinceIfirstsetfoothereasagraduatestudent is so rapid, so total, so overwhelmingly positive that it defiesnumericalcapture.Thatsaid,we’reatauniquejuncturein China. There are more signs of economic worry down at the grassroots consumer level than I can recall ever seeing. China is in an unfamiliar state where nothing whatsoever is booming. Real estate prices? Flat or dropping. Manufacturing? Skidding. Exports? Crawling along. Stock market prices? Hammered down and staying down. The Renminbi? No longer a one-way bet.

IL: What impact do you see a slowing Chinese economy having on other economies in the APAC region and elsewhere?

PF: Of course there will be an impact, both regionally and globally. There’s only one certain cure for any country feeling ill effects from slowing exports to China: allow the Chinese to travel visa-freetoyourcountry.Theonetradeflowthatisnowrobustand without doubt will become even more so is the Chinese flockingabroadtotravelandspend.OnlypartlyinjestdoIsuggestthattheU.S.tradedeficitwithChina,nowrunningatarecordhighofabout$1.5billionaday,couldbeeliminatedsimply

by letting the Chinese travel to the U.S. with the same ease as Taiwanese and Hong Kong residents. Manhattan store shelves would be swept clean.

IL: With prolonged record low interest rates and low inflation in most of the advanced economies, many multinational companies have looked to China as a source of growth, including through M&A. Which sectors in China have tended to attract the majority of foreign interest? Do you see that continuing or will the focus and opportunities shift elsewhere? Is China a friendly environment for inbound M&A?

PF: The challenges, risks and headaches remain, of course, but M&A fruit has never been riper in China. This is especially so for U.S. and European companies looking to seize a larger slice of China’s domestic consumer market. The M&A strategy that does work in China is to acquire a thriving Chinese private sectorbusinesswithrevenuesinChinaofatleast$25mayear,with its own-brand products, distribution, and a degree of market acceptance. The goal for a foreign acquirer is to use M&A to build outmostefficientlyasales,brandandproductstrategythatisoptimized for China, in both today’s market conditions, as well as those likely to pertain in the medium- to long-term.

The botched deals tend to get all the headlines, but almost surreptitiously, some larger Fortune 500 companies have made some stellar acquisitions in China. Among them are Nestlé, General Mills, ITW, FedEx and Valspar. They bought solid, successful, entrepreneur-founded and run companies. Those

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acquired companies are now larger, often by orders of magnitude. The acquirer has also dramatically expanded sales of its own global products in China by utilizing the localized distribution channels it acquired. In Nestlé’s case, China is now its second-largest market in revenue-terms after the U.S. Four years ago, it ranked number seven.

Chinese government policy towards M&A is broadly positive to neutral. More consequential but perhaps less well-understood are the negative IPO environment for domestic private sector companies, as well as the enormous overhang of un-exited PE invested deals in China. These have transferred pricing leverage from sellers to buyers in China. Increasingly, the most sought-after exit route for domestic Chinese entrepreneurs is through a trade sale to a large global corporation.

IL: After years of being seen mainly as “an interested party”, rather than an actual dealmaker, Chinese players are increasingly frequently the successful bidder in international M&A transactions. What has changed in their approach to dealmaking to ensure such success?

PF:Yes,Chinesebuyersareincreasinglymorewillingandableto close international M&A deals. But, the commonly-heard refrain that Chinese buyers will devour everything laid in front of them stands miles apart from reality. It seems like every asset for sale in every locale is seeking a Chinese buyer. The limiting factor isn’t money. Chinese acquirers’ cost of capital is lower than anywhere else, often fractionally above zero. The issue instead is too few Chinese companies have the managerial depth and experience to close global M&A deals. There are some world-class exceptions and world-class Chinese buyers. In the last year, for example,

a Chinese PE fund called Hua Capital has led two milestone transactions, the proposed acquisition for a total consideration northof$2.5bn,oftwoU.S.-quotedsemiconductorcompanies,Omnivision and ISSI. Hua Capital has powerful backers in China’s government, as well as outstanding senior executives. These guys are the real deal.

IL: When it comes to doing deals, what are the differences between private/public companies and SOEs?

PF: With rare exceptions, the SOE sector is now paralyzed. No M&A deals can be closed. Every week brings new reports of the arrest of senior SOE management for corruption. In some cases, the charges relate directly to M&A malfeasance, bribes, kickbacks and the like. SOE M&A teams will still go on international tire-kicking junkets, but getting any kind of transaction approved by the higher tiers within the SOE itself and by the government control apparatus is all but impossible for now. That leaves China’s private sector companies, especially quoted ones, as the most likely club of buyers. We work with the chairmen of quite a few of these private companies. The appetite is there, the dexterity often less so.

IL: China has long been a fertile dealmaking environment for PE funds – both home-grown and international. In what ways does the Chinese PE model differ from what we see in other markets?

PF: Perhaps too fertile. For all the thousands of deals done, Chinese PE’s great Achilles heel is an anemic rate of return to their limited partner investors, especially when measured by actualcashdistributions.Overthelastthree,five,sevenyears,Chinese PE as a whole has underperformed U.S. PE by a gaping margin. It’s a fundamental truth too often overlooked. High GDP growth rates do not correlate, and never have, with high

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investment returns, especially from alternative investment classes like PE. If there is one striking disparity between PE as practiced in China as compared to the U.S. and Europe, it’s the fact that that Chinese general partners, whether they’re from the world’s largestglobalPEfirmsorpan-AsianorChina-focusedfunds,toooften think and act more like asset managers than investors. The 2 takes precedence over the 20.

IL: What opportunities and challenges are private equity investors facing?

PF: The levels of PE and venture capital (VC) investing activity in China have dropped sharply. What money is being invested is mainly chasing after a bunch of loss-making online shopping and mobile services apps. The hope here is one will emerge as China’s next Alibaba or Tencent, the two giants astride China’s private sector. PE investment in China’s “real economy,” that is manufacturing businesses that create most of the jobs and wealth in China, has all but dried up. Though out of favor, this is where the best deals are likely to be found now. Contrarianism is an investing worldview not oftenencounteredatChina-focusedPEandVCfirms.

IL: As in many other markets, PE investors are having to deal with a backlog of portfolio companies ready to be exited. Do you feel that PE’s focus on minority investments in China could prove a challenge when it comes to exiting those investments? What do you see as the primary exit route?

PF: Exits remain both few in number and overwhelmingly concentrated on a single pathway, that of IPO. M&A exits, the main sourceofprofitforU.S.andEuropeanPEfirms,remainexceedinglyrareinChina.Inpart,it’sbecausePEfirmsusuallyholdaminoritystake in their Chinese investments. In part, though, the desire for an

IPO exit is baked into the PE investment process in China. Price/Earnings (P/E) multiple arbitrage, trying to capture alpha through the observed delta in valuation multiples between private and public markets, remains a much-beloved tactic.

IL: Finally, what is your overall outlook on China and advice for foreign companies and investors seeking opportunities to engage in M&A or invest there?

PF:Yes,China’seconomyisslowing.Butthesalientdiscussionpoint within boardrooms should be that even at 5% growth, China’s economy this year is getting richer faster in dollar terms than it did in 2007 when GDP growth was 14%. That’s because the economy is now so much larger. This added increment of wealth and purchasing power in China in 2015 is larger than the entire economies of Taiwan, Malaysia, Thailand, and Hong Kong. Much of the annual gain in China, likely to remain impressively large for many long yearstocome,filtersdownintoincreasedmiddleclassspendingpower. This is why China must matter to global businesses with a product or service to sell. M&A in China has a cadence and quirks all its own. But, the business case can often be compelling. The terrain can be mastered.

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of respondents are optimistic about the current deal environment, compared to 51 percent being optimistic in the previous quarter’s survey.

Highlights of the Q3 2015 survey results include:

The quarterly Intralinks Global M&A Sentiment Survey polled dealmakers during late September/early October and in-volved responses from a total of 575 dealmakers.

Sentiment survey

of respondents in EMEA are optimistic regarding expected deal participation and general deal volumes over the next six months.

57%43%

of APAC and LATAM respondents, respectively, are concerned about a slowdown in Chinese economic growth having an impact on M&A activity in their region over the next six months.

67% and 77%

Respondents in all regions except LATAM expect a global economic slowdown to have the most impact on M&A activity over the next 12 months. Dealmakers in LATAM, however, expect monetary policy (i.e., quantitative easing and rising interest rates) to have the most impact on M&A activity in their region over the next 12 months.

LATAM

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The Intralinks DFP provides Intralinks’ perspective on the level of early-stage M&A activity taking place during any given period of time.Thestatisticscontainedinthisreportreflectthe volume of VDRs opened, or proposed to be opened, through Intralinks or other providers for the purpose of conducting due diligence on proposed transactions, including asset sales, divestitures, private placements,financings,capitalraises,jointventures, and partnerships.These statistics are not adjusted for changes in Intralinks’ share of the VDR market or changes in market demand for VDR services. These statistics may not correlate to the volume of completed transactions reported by market data providers and should not be construed to represent the volume of transactions ultimately consummated during any period of time. Indications of future completed deal activity derived from the Intralinks DFP are based on assumed rates of deals going

from diligence stage to completion. In addition, the statistics provided by market data providers regarding announced M&A transactions may be compiled with a different set of transaction types.To verify the predictive nature of the Intralinks DFP, we compared the data underlying the Intralinks DFP with subsequent announced deal volume data reported by Thomson Reuters to build an econometric model (using standard statistical techniques appropriate for estimating a linear regression model) to predict the future reported volume of announced M&A transactions two quarters ahead, as recorded by Thomson Reuters. We engaged Analysis & Inference Inc. (A&I), an independent statistical consulting firm,toassess,replicateandevaluatethismodel. A&I’s analysis showed that our prediction model has a very high level of statisticalsignificance,withamorethan99.9 percent probability that the Intralinks DFPisastatisticallysignificantsix-monthpredictive indicator of announced deal

The Intralinks DFP provides Intralinks’ perspective on the level of early-stage M&A activity taking place during any given period of time.

About: the Intralinks Deal Flow Predictor

data, as subsequently reported by Thomson Reuters. We plan to periodically update the independentstatisticalanalysistoconfirmthe Intralinks DFP’s continuing validity as a predictor of future M&A activity.The Intralinks DFP report is provided “as is” for informational purposes only. Intralinks makes no guarantee, regarding the timeliness, accuracy or completeness of the content of the report. This report is based on Intralinks’ observations and subjective interpretations of due diligence activity taking place, or proposed to take place, on Intralinks’ or other providers’ VDR platforms for a limited set of transaction types. This report is not intended to be an indicator of Intralinks’ business performance or operating results for any prior or future period. This report is not intended to convey investment advice or solicit investments of any kind whatsoever.

About IntralinksIntralinksHoldings,Inc.(NYSE:IL)isaleading, global technology provider of secure enterprise content collaboration solutions. For more information, visit www.intralinks.com.

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“Intralinks” and the stylized Intralinks logo are the registered trademarks of Intralinks, Inc. This report may also refer to trade names and trademarks of other organizations without reference to their status as registered trademarks. The Intralinks Deal Flow Predictor may be used solely for personal, non-commercial use. The contents of this report may not be reproduced, distributed, or published without the permission of Intralinks. For permission to republish Intralinks Deal Flow Predictor content, please contact [email protected].

Thanks to Thomson Reuters for permission to use their M&A deal reports and data on announced deals in the Intralinks Deal Flow Predictor report.

The Intralinks Dealmakers Sentiment Survey polls a global sample of M&A professionals taken from the Intralinks database. The survey was conducted during September and October 2015 and received responses from 575 dealmakers.

© 2015 Intralinks, Inc. All rights reserved.

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Intralinks Deal Flow Predictor - China First Capital€¦ · Our key predictions for the next six months 1. The global number of announced M&A deals for the full year 2015 will be

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