pe income trust
TRANSCRIPT
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ListedListed PE interestPE interest firmfirm
January 2012January 2012
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PreamblePreamble
This short paper aims to raise theThis short paper aims to raise thediscussion of listingdiscussion of listing aa PE firm, or listingPE firm, or listing
thethe economic interesteconomic interest hereinherein
The idea discussed hereThe idea discussed here should workshould work
structurally, however, certain issues needstructurally, however, certain issues need
to beto be sorted outsorted out Here goesHere goes
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What isWhat is llistedisted PEPE iinterestnterest firm?firm?
Listed PE firm or not?Listed PE firm or not? It is not, it isIt is not, it is about listingabout listing thethe GPs interestGPs interest
rather than listing the firm, therather than listing the firm, the
management company of the GPsmanagement company of the GPs
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Why?Why?
What goes wrong with the listed PE firms?What goes wrong with the listed PE firms? There are tangible benefits indeedThere are tangible benefits indeed
Evergreen capitalEvergreen capital
Realization of firmRealization of firms values value
Exit for founders / partnersExit for founders / partners
Incentives for talentsIncentives for talentsAcquisition currency andAcquisition currency and
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But the problem isBut the problem is
The interest can never be alignedThe interest can never be aligned betweenbetween
Strike a balance? No way unfortunatelyStrike a balance? No way unfortunately
Existing LPsNew public
shareholders
Long-term IRR driven
Short-term Share price focused
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Listed PE firmsListed PE firms historyhistory
1960s 1970s 1980s 1990s 2000s
1976 London 1985 Frankfurt
1987 Swiss
1987 Toronto
1987 JASDAQ
1995 Paris
1994 SGX
1997 NASDAQ
1996 London
1997 Stockholm
1994 LSE
2004 NASDAQ
2001 Paris
2005 Brussels
2006 AIM
2000 GEM
2006 AmsterdamNote: Eurazeo was formed by the merger ofEurafrance and Azeo (formerly Gaz et Eaux) in 2001
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Listed PE firmsListed PE firms recent pastrecent past
Billionaires madeBillionaires made
Wesley Edens, Peter Briger et al., following theWesley Edens, Peter Briger et al., following the
listing of Fortress in March 2007listing of Fortress in March 2007
Bonanza preBonanza pre--Lehman demiseLehman demise Lavish party of SchwarzmanLavish party of Schwarzmans 60s 60thth birthdaybirthday
before the IPO of The Blackstone Groupbefore the IPO of The Blackstone Group
... and then listings of... and then listings of
Apollo Global ManagementApollo Global Management11 and KKR & Co.and KKR & Co.Note 1: Apollo Investment Corporation, a business development company, was listed on NASDAQ back in April 2004, raising US$930 million
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andand current observationscurrent observations
Diversification and AUM growthDiversification and AUM growth To earn more fees and have more stableTo earn more fees and have more stable
income favored by public shareholdersincome favored by public shareholders
Share price volatilityShare price volatility
Subject to NAV writeSubject to NAV write--ups and downs, IPOups and downs, IPO
exits window and broader market sentimentexits window and broader market sentiment
Note: AUM stands for assets under management
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OK, what is the suggestion?OK, what is the suggestion?
Listing the economic interests of GPs inListing the economic interests of GPs intheir firm, in the form of income trusttheir firm, in the form of income trust
The economic interests are theThe economic interests are the
management fee and carry, to which GPsmanagement fee and carry, to which GPs
are entitledare entitled
The whole idea is to avoid losing controlThe whole idea is to avoid losing controlof the firm (i.e. the management company)of the firm (i.e. the management company)
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The structureThe structure
Partner A Partner B Partner C Partner D
PE Income Trust(Listco)
Trustee-Manager
Pools of management fee and carry
Unit holders
Distribution of economic interests to the Trust
Distributions to unit holdersHolding of units
Fees
Trustee and mgmtservices
Explanation: An income trust is an investment vehicle that may hold equities, debt instruments, royalty interests or real properties. The mainattraction of an income trust, a flow-through entity, is its stated goal of paying out consistent cash flows to investors (or unit holders).
The PE Income Trust (the Trust) will be constituted by a trust deed, under which the Trustee-Manager will hold all economic interests of GPs andacquire new economic interests on trust for unit holders. The Trustee-Manager will have the dual responsibility of safeguarding the interests of theunit holders and managing the Trusts economic interests.
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HowHow ddoes the Trustoes the Trust wwork?ork?
The economic interests of partners are pooledThe economic interests of partners are pooledtogethertogether
Such interests will be listed in the form ofSuch interests will be listed in the form of
income trustincome trust Investors will be subscribing for units at theInvestors will be subscribing for units at the
time of IPOtime of IPO
IPO proceeds will go to the partnersIPO proceeds will go to the partners
Distributions will be made regularly to investorsDistributions will be made regularly to investors
(or unit holders)(or unit holders)
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Viable structure?Viable structure?
The answer isThe answer is yesyes There is flexibility as toThere is flexibility as to whatwhat interestinterestss
will flowwill flow throughthrough the Trust and getthe Trust and get
distributeddistributed to the unit holders, e.g.to the unit holders, e.g.
Management fee and / or carryManagement fee and / or carry
All or a portion of GPs interestsAll or a portion of GPs interests Which period of GPs interestsWhich period of GPs interests
GPs interests in a particular fund, say Fund IVGPs interests in a particular fund, say Fund IV
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ValuationValuation
Primarily based on cash flow streams of (i)Primarily based on cash flow streams of (i)management fee and (ii) carry,management fee and (ii) carry, to be receivedto be received
by partnersby partners
ComplexityComplexity depends on whetherdepends on whether the Trustthe Trustincludes carry or notincludes carry or not
Listco - Management Fee2
Cash flows stable & predictable
Distributions to unit holdersgoverned by trust deed
Defensive play
Utilities-type trading PE multiple
Low discount rate for valuation
Listco - Management Fee & Carry
Cash flows unpredictable on carry
Payout ratio typically fixed
Growth play during buyout boom
Trading PE multiple similar to thatof other listed PE firms
Relatively high discount rate
Note 2: Assuming fund size of US$1 billion, 2/20 structure, 7-year life anddiscount rate of 10%, the Trust can raise US$97.4 million using DCFcalculation (without taking into account the carry contribution)
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Pros of this ideaPros of this idea
Having the same advantages as otherHaving the same advantages as other listedlisted
PE firms, namelyPE firms, namely
Monetization for GPsMonetization for GPs
Rewarding talentsRewarding talents Realization of firmRealization of firms value, to some extents value, to some extent
The keyThe key benefit is avoidance of conflict ofbenefit is avoidance of conflict of
interest, between existing LPs and publicinterest, between existing LPs and publicshareholdersshareholders
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Some issues to considerSome issues to consider
GPs perspective
Most PE firms dont allow transfer ofshares if partners leave or retire
A PE firm can borrow money to buyout departing partners
What if only some partners cash out?
Do GPs really want disclosures and
potential litigation from shareholders?
LPs perspective
Will LPs interests be aligned after theIPO?
Would GPs be focused and motivatedafter the monetization?
How may the LP/GP relationshipdevelop over time?
Investors perspective
IPO investors will worry about iffounders exit
Is the Listco a right vehicle from taxperspective?
Will the vehicle trade well given theuncertainty of cash flow streams?
Are shareholder rights protected?
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CriticsCritics
The Trust works best only when the cashThe Trust works best only when the cashflow streams are steadyflow streams are steady
The proposed idea does not lessen theThe proposed idea does not lessen the
potential conflict between LPs andpotential conflict between LPs and
shareholdersshareholders
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Some thoughts to answerSome thoughts to answer
If carry is included, valuation will be benchmarkedIf carry is included, valuation will be benchmarkedagainst other listed PE firms. Further, the Trustagainst other listed PE firms. Further, the Trust
may be structured to capture only themay be structured to capture only the
management feemanagement fee
The proposed idea is about listing the economicThe proposed idea is about listing the economic
interest, not the firm. Therefore, the Trust needsinterest, not the firm. Therefore, the Trust needsnot to please public shareholders by pursuingnot to please public shareholders by pursuing
shortshort--term performance and hence conflict ofterm performance and hence conflict of
interest will be lessenedinterest will be lessened
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A twisted structureA twisted structure
LetLets also think about its also think about it for the industryfor the industry
WCAS XI(2009)
Khosla Ventures III(2009)
SAIF Partners IV(2010)
Blackstone CP VI(2011)
PE Income Trust(Listco)
Trustee-Manager
Pools of management fee only
Unit holders
Distribution of economic interests to the Trust
Distributions to unit holdersHolding of units
Fees
Trustee and mgmtservices
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LastlyLastly
The trend of mega buyout firms going public isThe trend of mega buyout firms going public is
on the riseon the rise33 an evolutionary processan evolutionary process that thethat thePE industryPE industry will likelywill likely followfollow
As a result, one of the key success factors ofAs a result, one of the key success factors of
the industry is being challengedthe industry is being challenged safeguardingsafeguardingthe interests of LPsthe interests of LPs
The idea discussed here may be a solution, butThe idea discussed here may be a solution, but
has its own shortcomingshas its own shortcomings no eno evergreenvergreen
capital nor acquisition currencycapital nor acquisition currency
Note 3: The Carlyle Group announced on January 10, 2012 that it wouldseek an IPO on NASDAQ while TPG was widely reported in 2011 that itmight seek going public
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Thank You & Prepared ByThank You & Prepared By
Leo WongLeo Wongemail: wong_leoemail: [email protected]@yahoo.com