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The (Gross Profitability) Trend Is Your Friend

EMEA Struggles To Attract PE Investment As Year's End Approaches

Public Companies Going Private

Banking, Corporations, Insurance, Professional Services

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Capital Markets
The (Gross Profitability) Trend Is Your Friend

Highlights

In this report, we examine the performance of a trend strategy derived from gross profitability (“GP”).

Gross profitability trend was effective across multiple investment style categories.

Jun. 05 2018 — Trend strategies based on changes in stock price or earnings are widely used by investors. In this report, we examine the performance of a trend strategy derived from gross profitability (“GP”). Gross profitability trend (“GPtrend”), was proposed by Akbas et al. who argued that the trajectory of a firm’s profitability is just as important as the level (GP). We define GPtrend as the year-on-year difference in either quarterly or trailing twelve month GP, where GP is calculated as revenue minus cost of goods sold, divided by total assets. Our back-tests confirm that GPtrend has historically been an effective stock selection signal globally, with the added benefit of low to moderate correlation with commonly used investment strategies. Our findings include:

GPtrend generated statistically significant average annualized long-only and long-short excess returns in five of the six regions we tested the signal. Performance was strongest (long-short basis) in Asia ex-Japan (6.68%), Europe ex-U.K. (6.66%) and the U.S. (6.50%), and weakest in Japan (1.15%).
Gross profitability trend was effective across multiple investment style categories, indicating that the factor can be beneficial to a value, growth or core and large/small cap investment process.
GPtrend’s performance is not subsumed by gross profitability, earnings revision or price momentum: GPtrend retains its ability to separate winner stocks from loser stocks, after controlling for GP. The average annualized return of the most attractive GP/GPtrend interaction portfolio minus the least attractive interaction portfolio is 12.19%. The factor’s excess return is also still significant after controlling for both earnings and price momentum.
Performance was robust to several methodologies of determining trend: We computed gross profitability trend using six different methods and all six trend metrics generated statistically significant average annualized long-short excess returns in the Russell 3000 universe.

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Capital Markets
EMEA Struggles To Attract PE Investment As Year's End Approaches

Highlights

Our latest report has all the details you need to dive deeper and understand PE investment winners and losers by region.

Oct. 23 2018 — Europe, Middle East and Africa (EMEA) region as a destination for new global private equity (PE) investments saw a shift in positive trend which was highlighted previously in Issue 18 of Private Equity Market Snapshot.

During the study period of July 1, 2018 to August 31, 2018, total capital deployed into the region fell by 26% compared to the same period last year, falling from €23.4bn to €17.4bn. At the same time, global PE firms engaged in just 9% less deals in 2018 period, meaning that 2018 investments were of smaller size than those done in 2017. In fact, the average entry deal size declined quite significantly, from €63.1m in 2017 to €44.1m in 2018.

Despite the slowdown in overall PE activity within EMEA, the UK continues to shine1. The UK represented 67% of the total capital invested (€17.4bn), with 158 new deals – the highest number of deals completed during the 2018 study timeframe. Global GPs invested €11.7bn of new money into the UK during the study period, an astonishing twofold increase compared to 2017. It is worth noting that 82% of invested €11.7bn is attributed to two largest deals of the period, which saw Information Technology (IT) and Consumer Staples targets being acquired for €2.9bn and €6.8bn, respectively2.

Within the UK, London led the way with €3.8bn of new money from global GPs across 72 deals. The majority of these investments were aimed at London-based IT companies, a trend we have been observing since the beginning of the year. London IT targets took €3.1bn of capital across 34 new deals during the 2018 study period.

On a sector basis, after removing the outlier deal within Consumer Staples of €6.8bn, Information Technology yet again emerges as the leader. The IT sector attracted €4.3bn of new money across 251 deals, resulting in an 89% growth in capital and 9% in deal count. Interestingly, the majority of the investments were private placements as opposed to pure buyouts, representing 91% of the total 251 deals. This points to a strong preference for start-up investments by global GPs within the IT sector. After a closer look at the private placements, data shows that the majority of funding was in Venture funding type and Series A, with €314m across 73 deals and €255m across 45 deals, respectively.

Global PE divestment activity also showcased negative trends during the 2018 period. Global PE firms realised 55% less capital from EMEA-based target’ exits across 186 deals, going from €51.5bn in 2017 to €23.2bn in 2018. In-line with PE entry activity, the UK also leads the pack when it comes to PE exits. Over the 2018 study period, global PE firms exited €8.2bn from UK-based targets, followed by Southern Europe with €5.2bn.

EMEA Private Equity Market Snapshot Issue 17 (2018, April). S&P Global Market Intelligence. Retrieved from https://www.spglobal.com/marketintelligence/en/news-insights/research/emea-private-equity-market-snapshot-issue-17 and Issue 18 (2018, July). S&P Global Market Intelligence. Retrieved from https://www.spglobal.com/marketintelligence/en/news-insights/research/emea-private-equity-market-snapshot-issue-18
2 Silver Lake acquired ZPG Plc for €2.9bn (As of 2018, August 31). S&P Capital Platform. Retrieved from https://www.capitaliq.com/CIQDotNet/Transactions/TransactionDetail.aspx?transactionId=564134278&companyId=10255072 and KKR & Co. LP (NYSE:KKR) acquired Upfield Foods for €6.8bn (As of 2018, August 31). S&P Capital IQ Platform. Retrieved from https://www.capitaliq.com/CIQDotNet/Transactions/TransactionDetail.aspx?transactionId=546954145&companyId=546954102

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EMEA Private Equity Market Snapshot Issue 19

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Public Companies Going Private

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Capital Markets
Public Companies Going Private

Sep. 14 2018 — The recent tweet from Elon Musk has understandably made big news, but it is worth pointing out that the appetite for taking public companies private has been a key area of activity this year. S&P Global Market Intelligence’s data shows that 2018YTD is already at 39% of 2017 numbers, standing at €17.8bn of deal value across 32 completed deals, globally. Going-private closed deal count is at a healthy 49% compared to full 2017 numbers.

In terms of most popular sectors for going-private deals, since 2013 - Information Technology has been leading the pack with €108.9bn of aggregate deal value recorded across 104 deals, while Consumer Discretionary* is trending as a distant second with €49.7bn of total deal value.

The top target location for going private deals is the US, and interestingly – China comes in at second place, with UK following. The three regions have seen total deal size of €218.8 during the period of 2013 through 2018YTD. The popularity of these locations is further supported by the fact that after going private, average target’s EBITDA values have increased compared to when those companies were public. The US-based going private targets grew their EBITDA by average of 56% since leaving the public market, while Chinese and the UK-located companies grew EBITDA by 10% and 38%, respectively. Overall, the going private moves proved to be successful for ex-public companies globally within the 2013 – 2018YTD deals’ time frame, where their average Net Income values grew by 58% while EBITDA values grew by a smaller but yet attractive 29%.

In terms of the deal pipeline, 18 going-private deals were announced globally since 1st January 2018 and would add €25.8bn of aggregate deal value to already closed €17.8bn.

The following was originally published on Angel News on August 16, 2018: Public companies going private, S&P Global comment

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