the guide to private equity fundraising

8/8/2019 The Guide to Private Equity Fundraising

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THE GUIDE TO PRIVATE EQUITY FUNDRAISING

THE GUIDE TO PRIVATE EQUITYFUNDRAISING

EDITOR: MVISION PRIVATE EQUITY ADVISERS LIMITED


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Introduction

Allan Cooper and Mounir Guen, MVision Private Equity Advisers

Limited

Investors in private equity: an overview

John Barber, Managing Director, Helix Associates

Investors in private equity - an abbreviated history

Investor profiles

Final thoughts

Selection of a lawyer

Josyane Gold, Partner, SJ Berwin

Why do you need a lawyer?

Which law firm?

Selecting a law firm

Due diligence on the lawyer and by the lawyer

Objectives and terms when mandating a lawyer

Raising the fund

Conclusion

Private equity fund structuring

Jason Glover, Nigel Hatfield and Matthew Judd, Private Funds

Group, Clifford Chance LLP

Introduction

Basic structuring considerations

Types of vehicle

Specific investor issues

Conclusion

Selecting and working with a placement agent

Allan Cooper, MVision Private Equity Advisers Limited

GP objectives: what are the reasons for using a place-

ment agent?

How to select the right placement agent

The cost

The role of the placement agent before, during and

after the fundraising

Different types of placement agent

So, who selects whom?

Ten things to expect from a placement agent

Christoffer Davidsson, Principal, Campbell Lutyens & Co. Ltd

Overview

Deliverables

Summary

Notes to a placement agreement

Private Equity International

Introduct ion

Key sect ions

Compensation Confidentiality

Conflict of interest

Other i tems

Annexes

Contents

7 41

45

51

11

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RESEARCH GUIDE

The offering memorandum

Bridget Barker, Partner and Stephen Sims, Senior Solicitor,

Macfarlanes

Introduct ion

Content of the offering memorandum

Terms of the offering

Verification Regulatory overview

Presenting the proposition: planning and executing

the fundraising

Robert E. Mast, Managing Director, Monument Group

Planning and preparation pay off

Executing on the plan - practicalities of the fundraising

process

Approaching the closing

After the closing

Final thoughts

Due diligence on the fund

Jens Bisgaard-Frantzen, Managing Partner and Vibeke Wounlund,

ATP Private Equity Partners

About ATP Private Equity Partners

Investment strategy and fund types

ATP PEPs due diligence strategy and process

Five focus areas

Investment process

Key focus areas: track record, team, strategy, process

and terms and conditions

Track record From concrete track records to qualitative assessments

Strategy, process and philosophy

Team

Consistency

Reference checks

Terms and conditions

Due diligence and the manager

Preparation of the Limited Partnership Agreement

Jonathan Blake and Jeanette Thompson, SJ Berwin

Importance of the Limited Partnership Agreement

Key clauses in a Limited Partnership Agreement

Negotiating issues for the Limited Partnership

Agreement

Jurisdictional issues Tax issues

Information table

When things go wrong


Market factors

People factors

Information factors

Campaign factors

SURVEYS

LP attitudes to fund terms and conditions


Introduction

Overview

Relative importance of different terms

General partner commitment levels

Management fees

Transaction fee and other income

Carried interest provisions

Keyman

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73

85

99

107

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DIRECTORY

Private equity software providers

Other technology providers

Fund administrators and outsourcers

CONTRIBUTOR BIOGRAPHIES

APPENDICES

Appendix One:

Private Equity International on fund administration and technology

Appendix Two:

Private Equity International on fundraising

Appendix Three:

Private Equity Manager on fundraising

Appendix Four:

PrivateEquityOnline.com on fundraising

Appendix Five:

About Private Equity International

Appendix Six:

About Private Equity International Books

LP attitudes to investor relations and reporting


Introduct ion

Levels of contact

Channels of communication

Benefits of contact

Importance of contact The annual limited partner meeting

Other contact

Reporting

The dedicated investor relations officer

CASE STUDIES

The new concept fund: Accession Mezzanine

Capital LP

Christiian Marriott, Director, Investor Relations, Mezzanine

Management UK Limited

The first time fund raise: Altor 2003 Fund

John Barber, Managing Director, Helix Associates

The debut US mid-market fund: Arsenal

Capital Partners LP

Terry Mullen, Co-founder and Managing Director, Arsenal

Capital Partners

Fundraising for the semi-captive: The HSBC

Private Equity European LP

Vince OBrien, Director, Montagu Private Equity Limited

The mezzanine fund: Indigo Capital IV LPChristopher Howe, Director, Indigo Capital Limited, London

The biotechnology fund: HealthCap IV

Anki Forsberg, Partner, HealthCap

122

135

136

138

140

142

145

148

151

165

171

172

186

204

217

224

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Chart Three: Strategic Allocation to Private Equity by Region

essarily lead to top-notch results. Given the importance of care-

ful manager selection, a private equity fund portfolio needed to

be properly run, either by dedicated in-house professionals, or

with the advice of external consultants or asset managers, all

with sufficient experience to ask the right questions about non-

traditional offerings.

In practical terms, many institutions in the mid-to-late 1990sdecided they could therefore afford to increase private equity

exposure to levels not thought possible before ranging up to

25% of assets in some endowments case, but settling on a typi-

cal aspiration of 5% of assets for a mainstream institution with

a conventional asset-liability profile. At the same time, institu-

tional investment staffs began as a matter of routine to include

full-time private equity fund selection specialists. Established

fund of funds managers also benefited handsomely through

growth in their assets under management, as institutions con-

cluded that private equity was either too demanding or time-

consuming a business for them to handle in-house. Many new

fund of funds businesses responded to market opportunity and

started life in this period.

Chart Two (drawn from the Goldman Sachs / Russell report)

shows the growth in private equity allocations among North

American institutions from 1995 onwards, broken down by type

of institution. Endowments and foundations in the survey, taken

as a whole, recorded by the turn of the 21st century an alloca-

tion to private equity of over 14% of assets (up from 10% in

1995), taking advantage of their ultra long-term investment

horizons. Corporate pension plans demonstrated less rapid

growth, but nonetheless had allocations to private equity

approaching 8% by 2003, well above the 5% considered neces-

sary for an impact to be felt on overall results. Public pensionplans, which controlled the lions share (68%) of the capital

among survey respondents, provided the real growth in absolute

amounts committed to the asset class. By lifting private equity

allocations by about 50%, from just above 4% in 1995 to near-

ly 6% in 2003, public pension plans were the major drivers of

the markets growth, supplying tens of billions of dollars of

incremental financing for private equity funds.

Chart Three (again from the Goldman Sachs / Russell report)

demonstrates the transformation of private equity in Europe

from a position of near-irrelevance (1.9% of all European survey

respondents assets in 1996) to one requiring attention and

influencing returns (4.0% of assets in 2003, forecast to rise to

4.5% in 2005). By 2003, despite the UKs pre-eminent position

as a headquarters for private equity investing activity in Europe,

Continental European institutions had outstripped their UKcounterparts in their allocations to private equity. While under-

standably employed in the Report, Continental European is

too general a term to apply, thanks to significant regional varia-

tions in commitments to private equity. Countries in Northern

Europe with either mandatory or well-funded pension regimes,

such as The Netherlands and those of the Nordic region, con-

tributed disproportionately to the numbers. Meanwhile, the

more Latin part of Europe (France, Italy and Spain, with large-

ly state-sponsored provision of retirement income) barely regis-

tered as sources of capital for private equity in comparison with

their relative GDPs.

In other parts of Europe, such as Germany and Switzerland,

innovative asset-gatherers designed private equity fund of fund

vehicles that utilised capital guarantees and tiering structures to

preserve capital, in the process obtaining investment grade cred-

it ratings. They proved more imaginative than many US coun-

terparts, whose appetite for capital could be satisfied by conven-

tional sources, and managed to secure commitments from

investors previously considered next-to-impossible to convert to

the private equity gospel. These converts included fixed income-

oriented and capital preservation-sensitive institutions such as

German insurance companies. These risk-averse players were

prepared to commit to these new pooled private equity vehicles

because of the promised return of capital they offered, as well asthe reassurance of their ratings.

In the main, at the time of the Goldman Sachs / Russell report

in 2003, North American and European institutions were and

remain the dominant financiers of private equity funds world-

wide, even providing the bulk of capital to those operating in

other regions, such as Asia. Private families, banks and quasi-

10.9%

6.7%

4.3%

12.8%

6.3%

4.9%

13.8%

7.3%

5.6%

14.4%

7.1%

6.1%

14.2%

7.7%

5.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Endowment/Foundation Corporate Public

%

ofTotalAssets

1995 1996* 1999 2001 2003

Source: Goldman Sachs International /Russell Investment Group "Reporton Alternative

Investing by Tax-ExemptOrganizations 2003"

* Arithmetic average of1996 strategic allocations of1999 survey respondents

1.9%

2.5%

3.6%

4.0%

4.5%

2.2%

3.7% 3.6%

4.2%

2.8%

3.4%

4.2%

4.8%

0%

1%

2%

3%

4%

5%

6%

1996* 1999 2001 2003 2005 (forecast)

%o

fTotal

FundAssets

Al l UK Cont ine nt al E ur ope

Source:Goldman Sachs International / Russell Investment Group "Report on Alternative Investing by

Tax-Exempt Organizations 2003"

N/AN/A

* Arithmetic average of 1996 strategic allocations of 1999 survey respondents

Chart Two: Strategic Allocation to Private Equity by Type of

Organization (North America)


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Why do you need a lawyer?

Raising a fund can be a long and difficult process; a good and

experienced lawyer can make that process a lot easier.

Your lawyers role is to advise on the legal aspects of structuring,

marketing, closing and (often) future operation of your fund.

This is a wide-ranging role and, to be most effective, your

lawyers should be involved at the earliest possible opportunity.

Many teams raising their first fund will inevitably start by con-

centrating on big picture issues: what kind of investments the

fund is to make, where is the vehicle going to be investing, and

what investors to approach when fundraising and how much

money to target. Clearly, these are important aspects, but it is

also important to identify any legal, tax or regulatory obstacles

early on. Doing so will often pay dividends in the long run.

Which law firm?

Clearly, your lawyer needs to be familiar with the private equity

industry, with fund structuring and the fundraising process. The

legal skills required include corporate law, tax law and knowledge of

regulatory regimes, often across a number of different jurisdictions.

Funds usually raise issues in a number of different countries -

those into which the fund proposes to invest, those where

prospective investors are based and those where the manager /

adviser are located - and legal and tax structuring across these

various jurisdictions is highly complex. It is critical to ensure

that your legal team can cover each of those countries (either

with their own expertise, or by working closely with other

firms). Because most funds pose difficult and often novel struc-

turing issues, it is essential for the legal team to have a wide

range of fund structuring experience, and to be creative in the

way in which they approach your fund structure.

Your European law firm (unless they also have a US presence

themselves) will also usually need, depending on your investor

base, a strong working relationship with a private equity law

firm in the United States. A significant proportion of the capital

available for investment in private equity and venture capital

funds comes from US investors, and many issues arise from their

involvement. A European law firm that specialises in private

equity will be very familiar with these issues and have no diffi-

culty co-ordinating the advice needed from the US and other

overseas jurisdictions.

Selecting a law firm

The most obvious choice is to use a law firm with which you

have an existing relationship, as you are already familiar with

their work. However, the specialist nature of the fundraising

process may mean that your existing lawyers do not have the

expertise that you require, and so a new relationship will need to

be established. It is still the case that relatively few law firms have

a particular specialisation and deep experience in the area of pri-vate equity fund structuring and raising.

Local private equity and venture capital associations will usually

have a list of firms with the requisite abilities: these firms will

often be members of that association. For example, in most of

Europe, the local venture capital association will include law

firms among its (associate) members. Many of these, however,

Selection of a lawyer

Josyane Gold, Partner, SJ Berwin


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position of the French tax authorities appears to be to deny tax

transparency and therefore to treat foreign partnerships as non-

tax residents and therefore not treaty protected. The net effect

of this is that, for example, French corporate investors invest-

ing via this route will be taxed on their portion of the limited

partnerships revenue at the standard corporate income tax

rate. However, it does appear from ongoing double tax treaty

negotiations between France and the UK as though this maypossibly change (i.e. English limited partnerships may, in

effect, be treated as tax transparent by the French tax authori-

ties in the future) although it is not currently known if and

when such change will come into effect.

O It will not be possible for a limited partnership to take advan-

tage of the EU parent / subsidiary directive, although subsidiary

companies owned by the limited partnership and individual

investors in the limited partnership may be able to do so.

O It will only be possible to rely on double tax treaty protection

to the extent that the underlying investor is able to do so. It should

be noted, however, that sub-fund structuring (using, for example,

Dutch or Luxembourg holdco entities) is usually employed to

minimise withholding and achieve other tax objectives.

Although it is possible to generalise about the features of limit-

ed partnerships as a type of fund vehicle, there are significant

differences between the different types of partnership established

in different jurisdictions, and it is important to understand these

differences when designing a structure.

Delaware LP

Many US brand funds have been structured using Delaware LPs.

In addition to the advantages noted above for partnerships gen-erally, specific advantages in relation to Delaware LPs include

the following:

O The standard form of private equity fund agreement used by

US institutions and US investors has been developed for a

Delaware limited partnership.

OThere is no obligation to disclose publicly the terms of its part-

nership agreement, the identity of its limited partners or its

accounts (but such information may be required to be disclosed by

a governmental investor under freedom of information legislation).

O There is no need to maintain an office or personnel in

Delaware or in the US.

O Organising a fund as a Delaware LP can be accomplished

quickly and at little cost, and annual Delaware taxes and regis-

tered agent fees normally are approximately $300.

Specific disadvantages include:

O Non-US sponsors may be reluctant to use a US-law vehicle

because of concerns about lawsuits (the US courts have tried a

significant number of private equity fund related cases, generat-

ing a body of case law which is not mirrored in other jurisdic-

tions) or becoming subject to US regulations.

O Somewhat more restrictive guidelines apply to avoid registra-

tion of a Delaware LP and its limited partnership interests with

the SEC than apply to non-US entities.

OA Delaware LP must file US partnership tax returns (but non-

US funds with US investors also often agree to file US partner-

ship tax returns), and will be treated as a United States person

for purposes of applying various US tax rules to investments in

non-US companies.

O Non-US investors may be subject to internal investment

restrictions which require that the fund vehicle is, for example,

an EU entity.

English LP

In Europe, one of the most regularly used limited partnership

vehicles is an English limited partnership (ELP) established pur-

suant to the Limited Partnerships Act 1907. ELPs have all of the

benefits noted above for partnerships generally. ELPs are tax

transparent for UK tax purposes and therefore capital gains gen-


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The primary job of the placement agent has always been to

introduce buyers and sellers of securities and facilitate the exe-

cution of the subsequent transaction. In the private equity busi-

ness, agents have traditionally made use of personal or firm rela-

tionships with prospective limited partnership investors to bring

them together periodically with the general partners of a fund

raising capital. The baton was then passed to the general part-

ners, who were responsible for selling the investors on the attrac-

tiveness of the investment proposition. Historically, this was a

fairly simple process, with many investors putting their trust in

the results of a fairly quick due diligence process, the agents rec-

ommendation or their relationship with the general partners in

question, and hopefully resulted in an efficiently, but oppor-

tunistically, assembled limited partner base.

Times have changed. Collectively, todays investors have far

more experience with the private equity asset class, and have

become far more sophisticated and demanding in their ques-

tioning and information requirements, both prior to making the

investment decision and in the ongoing monitoring of the

investment. As a result, todays GPs face increasing demands on

their time during the fundraising process, in the form of

enhanced marketing and due diligence support and multiple

meeting requirements, and an increasing investor relations

requirement afterward. At the same time, the market itself hasbecome increasingly competitive, with overextended investors

having begun to rationalise the structure of their investment

programs by pruning the number of relationships they have with

GP groups. Combined, these factors have increased the need for

careful planning of the fundraising process and diversification of

the limited partner investor base, expanding and extending the

role of the placement agent.

To make the fundraising process efficient and successful today,

the agent needs to play an important role in each step of the

process, from planning and pre-marketing at one end to advis-

ing the GP with regard to investor retention at the other.

Selected details of the agents role at various points of the process

are discussed in the pages that follow.

Planning and preparation pay off

As the prior fund moves within range of full investment and the

decision is made to gear up for a new fund, many GPs become

anxious for meetings with potential investors in the follow-on

vehicle to begin. Time devoted to planning and preparing for

the launch of the new vehicle is well spent, however, and will

generally be more than paid back through increased fundraising

momentum and enhanced efficiency of the process. Key steps in

the planning process for a private equity fundraising are outlined

briefly below, and several of these topics are covered in greater

detail elsewhere in this publication.

Development of the marketing plan and timeline

The marketing plan provides a broad outline of key steps in the

fundraising process and their anticipated completion dates. The

plan sets the stage for what needs to be accomplished, identify-ing key supporting materials (Private Placement Memorandum,

due diligence information, presentation materials, legal docu-

mentation, etc.) and assigning responsibility for their comple-

tion, and synchronises expectations regarding timing so that all

parties are in agreement and expectations aligned. The agent

should clearly communicate expectations regarding the time

required for fundraising. While some strongly performing funds

Presenting the proposition: planning andexecuting the fundraising

Robert E. Mast, Managing Director, Monument Group


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RESEARCH GUIDE

presented to an investment committee, which makes the finaldecision on whether or not to invest in a fund. Meetings of theinvestment committee are held fortnightly or as necessary.

The purpose of a due diligence is to ascertain whether a fund isin a position to deliver returns in the top quartile in its category.The methodology involves carefully reviewing all information

on the fund and in the process of doing this, looking for consis-tency, investment discipline and value-adding capabilities.

Five focus areas

To properly get to grips with a fund and its potential, the duediligence undertaken by ATP PEP focuses on five areas whichare intended to ensure that every aspect of the fund is exploredand analysed completely. These five key areas are: track record,team, strategy, process and terms and conditions.

A fund must prove its worth in all of these areas. Experienceshows that consistency between track record, team and strat-

egy often provides a solid basis for a fund being able to deliv-er top-quartile returns.

Both positive factors and risk factors are formulated for eachof the focus areas during the due diligence process . This is thenub of the due diligence process, and these factors are con-tinually expanded and deepened before being summarised inthe final investment memo.

The following looks first at the due diligence process, i.e. the

actual process as it unfolds, before discussing each of the fivefocus areas in depth in separate sections.

Investment process

The due diligence undertaken on an individual fund isintended to explore and analyse all of the aforementionedfive focus areas. The process can take anything from 2-3weeks to up to 6-10 weeks, depending in part on the avail-ability of information on the fund and how far the fund isinto the fundraising process. It is a matter of striking a bal-ance between spending no more time than necessary andensuring the necessary degree of thoroughness.

The process is not an aim in itself but rather a way of ensur-ing that all relevant areas are checked and verified. The

Definition of alpha and betaThe market risk of an investment is contributed by theestimated beta times the market return; the uncorrelat-ed risk of the investment is contributed by what is left i.e. by the volatility of the investment return minus themarket return times the investment beta. The returnassociated with this residual component, alpha, is theholy grail of active investment management.

Role of the investment committeeOMeets fortnightly or as requiredO Provides ongoing feedback on due diligence projectsO Reaches formal decision on whether to invest in a fundor not

ScreeningDue Diligence:

in three phasesInvestmentScreening

Investment Committee Investment Committee

Negotiations on termsand conditions

InvestmentDue Diligence:

in three phases

Chart One: Investment Process


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Approval or rejection

When the investment committee has seen the recommen-dation, negotiations regarding the limited partnershipagreement, side letters, tax opinion, subscription agree-ment and so on complete the due diligence process. Atthis point there will still be some uncertainties aboutwhether or not a commitment should be made. From timeto time we turn down funds due to deal-breakers in thelimited partnership agreement. At one stage we decided toturn down a fund with a good historical performance sim-ply because negotiations over terms and conditions clear-ly showed us that the GP was more focused on its man-agement fee income than on aligning interests between itand limited partners in its fund.

This is the way it has to be. Every investment must beevaluated many times during the investment process.Some make it, some do not. Even in the final stages fundscan be turned down despite the many man hours spent

and many miles travelled, but in the end those expensesare nothing compared to a potentially non-performinginvestment: the price of making bad decisions is muchhigher than the cost of the time and travel associated witha due diligence.

Key focus areas: track record, team, strategy, process

and terms and conditions

The due diligence process itself is described above. As men-tioned earlier, the process focuses on five main areas trackrecord, team, strategy, process and terms and conditions

which are explored through research, meetings and refer-ence checks. The following sections present these five focusareas in greater detail, and discuss the challenges in each.The theory is illustrated with practical examples whereverpossible. Naturally, these examples have been renderedfully anonymous.

Track record

Track record is the most objective and readily accessible of ATP PEPs five due diligence focus areas. Nevertheless, afunds track record is based on a series of assessments of thevalue of the individual companies in which the fund invests.

A funds track record consists of the following elements:

O Realised investmentsO Unrealised investments valued by means of their impliedvaluation (see later)O Partially realised investmentsO Total inves tments

If a manager has several generations of fund, each generationof fund (Fund I, Fund II etc.) are listed, and each is then bro-ken down as stated above. Charts two to four give an exam-ple of the types of data that ATP PEP will gather on all of amanagers funds when conducting its analysis of the GPs

track record.

Even during the initial screening, a funds track record playsa key role in whether we proceed with the fund as a potentialinvestment. If there is no track record or only a relatively lim-ited realised track record, the teams composition, expertiseand experience are given greater priority in our analyses. Inthese situations we also choose to focus on value creation atindividual portfolio companies. There may be many goodreasons for a limited track record, and this is not to be seenas necessarily a problem in itself.

When analysing a track record, we attach great importance tocontinuity between track record, team stability and a consis-tent investment strategy (see Consistency below).

Obtaining information is not without its problems when itcomes to stocks that are unquoted and therefore charac-terised by limited availability or low earnings visibility. Thedifficulty of getting hold of data leads to asymmetric infor-

Chart Three: Individual Track Records

Chart Two: Breakdown of Realised Multiples

0

50

100

150

200

250

300

350

400

Par t ner A Pa rt ner B Par tner C Par tner D Par tner E Pa rt ner F Pa rt ner G

$ mio

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

M

ultiple

I nvested Capital Rea li sed M ul t ip le

Chart Four: Investment Pace, 1990-2004

0

100

200

300

400

500

600

700

1990 1992 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$ mio.

0

2

4

6

8

10

12

14

16

Am oun t Nr. of I nv es tme nt s

34%

33%

10%

10%

13%

10x

Chart Four: Investment Pace, 1990-2004


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RESEARCH GUIDE

Internal rate of returnIRR is the rate of interest where the NPV is equivalentto 0.

TNPV = Pt (1+i)-t

t=0

IRR= i NPV = 0A

pharma and technology sectors will be needing 2-3 years aheadand can therefore be expected to be interested in acquiringO Deal sourcingO NetworkO Experience of developing companies from idea to revenue

When it comes to the companies in which the fund invests, theimportant considerations are:

OAbility to spot the potential in a productO Insight into future marketO Go-to-market strategyO Business developmentO Organisational development and the need for it later onO Entrepreneurial spirit

Fundamentally speaking, the venture capital fund must havegood experience of building companies. Building a companycan be compared with building a house. You need sound foun-dations if you are to be able to build at all and the foundations

dictate how large and how tall the house can be built. The tallerthe house is to be, the more important it is that its foundationsare in order.

The same goes for a venture-backed company. If it is to growand create value, it is crucial that its technology (i.e. its founda-tions) is 100% sound. The companys organisation, people andbusiness processes correspond to a buildings carcass. The sizeand success of the company depends on the quality of and inter-action between its organisation, people, processes and in partic-ular, its product (technology) as its cornerstone.

IRR and its calculation

Whilst calculation of IRR is the backbone of a track recordand plays an important role in the assessment of a fundsunderlying investments, it is very important for it to be cal-culated correctly. Our experience is that IRR can be calculat-ed in several different ways and that its interpretation canlead to different conclusions. It should also be noted that

IRR is not the only valuation parameter in the assessment ofa funds track record. In particular, IRR is often used togeth-er with a cash multiple figure.

The calculations are both retrospective and prospective. Hasthe IRR on previous investments been acceptable? Is it likelythat future investments will yield an acceptable return? Inconnection with calculating the IRR, we also look at how thecompanies value their unrealised stocks. As they are not quot-ed and so do not have any immediately measurable marketvalue, it is important that this is done realistically.

As a formula (see box-out), IRR appears relatively easy to cal-culate. But there are two factors which make its calculationmore subtle and to some degree a complex undertaking.

Firstly, it is often based on the assumption that a set numberof portions are invested over time rather than a single sum atthe beginning. Similarly the return is delivered in several por-tions over time. This means in practice that some of the

repayments actually consist of the return on the investment.

Secondly, it is important to define when payments are madeand when the IRR is being calculated from. Totally differentresults can be achieved depending on whether a payment ismade at the beginning, in the middle or at the end of the cal-culation period.

The two main ways of calculating IRR are pooled IRR andhorizon IRR:

Pooled IRR

Pooled IRR is the IRR obtained by taking cashflows from anumber of companies and aggregating them into a pool as ifthey were a single company. This is superior to either theaverage IRR, which can be skewed by large returns on rela-tively small investments, or the capital-weighted IRR, whichweights each IRR by capital committed. The latter measurewould be accurate only if all investments were made at onceat the beginning of the funds life.

Definition of cash flowGross cashflow (GCF) is used in the calculations because itis easier to reconstruct from annual reports and can becompared across funds. GCF we define as net earningsplus depreciation plus non-cash items.

Investments in a venture capital fund are likely toresult in positive value growth/creation if:O A beta product is launched successfully among testusersO A good salesman (or sales force) with market insightand large network is recruitedO Contracts are concluded with important distributors orsystem integrators on sales of the productO Partnership agreements are entered into on jointdevelopment and milestone payments from the domi-nant company in the marketO The product is integrated into other softwarepackages


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RESEARCH GUIDE

Vehicle

English limitedpartnership

Delaware limitedpartnership

German limitedpartnership (non-trading for Germantax purposes)

French FCPR

Jersey/Guernseylimited partnership

Taxtransparent?

Generally yes

Generally yes

Generally yes

Generally yes

Generally yes

Legalentity?

No

Yes

No

No

No

Can avoidPermanentEstablishmentissues?

Yes

Yes

Generally yes

Yes

Yes

Managementcharge subjectto VAT?

No

No

Generally no

Yes/No

No

Restrictions onwhere it can bemanaged?

No

No

Yes

Yes

Yes

Other issues

Most common structure for Pan European funds Loan / capital split Removal of 20 partner limit

Most common structure for North America funds Still (occasionally) requested by US investors Established body of law and responsive legislation Caught by US reporting requirements

Generally only suitable for German investors Non-trading limited partnership criteria have been revised New ITA rules generally a move away from KGs Caught by German reporting requirements

Generally drafted in French

Prevalent structure for domestic French funds Tax transparent for French purposes

Generally needs to be regulated and administered inthe Channel Islands

Has been used for a number of funds Some continental European investors still have problem

with offshore entity Liability issues in the UK


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RESEARCH GUIDE

star performers within the GP will be highlighted, there is a

growing interest amongst LPs to see evidence of meaningful risk

mitigation by GPs with regard to its personnel. To quote a UK-

based fund of funds investor: We dont want to be buying just

one guy and we dont therefore like to see just one person sell a

fund to us.

Increasingly private equity groups are appointing a senior, sea-

soned individual within the firm to be in charge of investor rela-

tions. This person will not only be pivotal in terms of nourish-

ing relations with LPs in existing funds but also will be at the

heart of the new fundraising. The presence of such an individual

has both practical and strategic benefits: they can act as point

person during the fund raise (see also Campaign factors below)

and the presence of such an individual is not lost on investors

either (he inference is that your firm takes relations with its

investors seriously).

It is also imperative that the broader fundraising team is appro-

priately structured and that it operates smoothly. Relations

between GPs and their advisors can be highly charged: the sig-nificance of raising the firms new fund, the intensity of the itin-

erary and the successive sales presentations all help ensure that a

heady mix of adrenaline, fatigue and anxiety can influence inter-

personal relations. And if the fundraising is not running as

smoothly as hoped then the tension only gets greater.

Comments one placement agent: Its like a marriage: youre

spending lots probably too much time together, you talk

about the same things again and again and poor or lazy com-

munication between one another turns a small issue into a big

problem. The lawyers involved in drafting the funds docu-

mentation are less exposed to the ups and downs experienced on

the fundraising trail but they too need to be able to gel with theprivate equity firms team. As commitments begin to be dis-

cussed and different lawyers start to get involved on behalf of

LPs, so the tension mounts as terms are negotiated. It is vital at

this stage that the GP can have total faith in its legal representa-

tion and that the lawyers themselves are equally as comfortable

with their client.

All this means that your advisors need to have enough time to

get familiar with your firm and your team. If your incumbent

legal advisors are not strong on fund structuring, make sure you

have started talking to a firm that is well in advance of launch-

ing the fund (and dont assume the first candidates will be your

final choice). Possibly even more important is selecting a place-

ment agent assuming it has been decided that you will have the

input of such a firm. There has been an increasing stratification

of the placement agent industry with successful placement

groups being in considerable demand, enabling them to be high-

ly selective as to which mandates they take on. This could well

mean that your first choice agent will not be available; to dis-

cover this one month before your scheduled fund launch is due

to start will be disastrous.

Information factors

Although market and people factors each can have considerable

impact on the success or failure of a fundraising, probably the

most important elements that shape the final outcome of a fund

raise are what can be called information factors. These are thefacts and figures that detail the history of the firm and its prior

funds; they are the profiles of the individual team members at

the GP who are tasked with investing the fund; they are the

terms tabled and the terms agreed in the Limited Partnership

Agreement (LPA). And they also relate to how such information

is managed: how due diligence questionnaires are completed;

how existing LPs are fed with timely and appropriate informa-

tion; and how information is delivered clearly and consistently

when marketing the new fund.

Prior to officially launching the new fund, a private equity group

must devote significant time and effort in preparing its privateplacement memorandum (PPM). The information presented in

this document must be extensive, accessible and crucially

accurate. And that means the GP and its advisors must repeat-

edly work through every aspect of the PPM. Bad research and

compilation now will return to haunt the fundraisers later in the

process. Recalls one GP who had a protracted fundraising: It

was at the due di ligence stage that it became clear to us that we

Strategies for dealing with people factors:

Do you have a Head of Investor Relations?

Maintain a regular, substantive dialogue with LPs

in your existing funds.

Talk to your existing LPs first about your plans for

a new fund.

Make a point of getting to know new personnel atinvesting institutions.

Train a team of fundraising presenters dont rely

on one star.

Make use of your younger/newer talent when pre-

senting.

Select your advisors in good time.

Make sure you get on with your advisory team.

The fund raise will take months even years so

be prepared to spend lengthy periods with your col-

leagues and advisors.

Remember raising a private equity fund is not just

about numbers. Tell your family they are going to see even less of

you over the coming months.


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Nonetheless, investors are mixed in their views as to whether or

not the terms and conditions of US and European funds are

converging. Almost half of respondents felt that this was the

case, with only 16% stating that in their opinion they werent

(see Chart Four). However, a substantial proportion (38%) of

investors were undecided. This may reflect the fact that many

investors in private equity funds remain regionally focused, con-

centrating largely on domestic managers. It is generally only the

larger, more experienced investors that commit to private equity

funds on a global basis, and who would therefore have the expe-

rience to know whether European and US funds are converging.

Relative importance of different terms

Private equity and venture capital funds are complicated

vehicles. Their terms and conditions cover a broad spectrum;

a partnership agreement will deal not only with the funda-

mentals of management fee and carried interest, but with

issues relating to the formation and composition of the fund,the treatment of various fees and costs flowing into and out

of the fund, and the rights and redresses given to limited

partners, amongst others. Certain issues will be considered

fundamental and will concern almost all investors. Other

considerations, such as co-investment provisions, will be of

importance to some investors but will be considered an irrel-

evance by others.

To better understand which terms and conditions are consid-

ered by investors to be of most importance, and which are

considered to be of least importance, respondents were asked

to rank a number of different issues addressed by a funds

terms in descending order of importance (rank one being the

most important, followed by rank two and so on, to rank

eight). The topics respondents were asked to rank were: car-

ried interest sharing arrangements; co-investment arrange-

ments; keyman provisions; level of management fee and oper-

ation of management fee step-down; no-fault and for-cause

divorce provisions; operation of catch-up and clawback provi-

sions; side letters; and timeliness of reporting. Respondents

were asked to use each ranking only once.

As can be seen from Chart Five, investors feel that carried inter-

est sharing arrangements and keyman provisions to be of most

importance when considering the relative importance of differ-

ent terms and conditions. Some 67% of respondents placedcarried interest sharing arrangements in either rank one or

rank two, with 61% of investors doing the same with keyman

provisions (see Chart Five).

Arrangements governing the level and timing of carried inter-

est payments will exercise investors in private equity funds, as

carried interest is the principal method by which a GP is

Chart Four: Are the terms and conditions of European and US

funds converging?

No

16%

Not sure

38%

Yes

46%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Co-investmentarrangement

Timeliness ofreporting

Side letters

No-faultand for-cause divorce

provisions

Level ofmanagementfee and

operation ofstep-down

Operation ofcatch-up and

clawback provisions

Keyman provisions

Carried interestsharing

arrangements

% of respondents

Rank 1

Rank 2

Chart Five: Terms and conditions ranked by LPs as

most important


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131


cate that they place only a little value on GP hospitality events

(see Chart Fifteen). Only 11% of respondents see a lot of value

in them, while 16% state that they see no value whatsoever.

What value there is placed on hospitality events revolves around

relationship building and networking. Properly staged, a hospi-

tality event can offer opportunities for investors to get to know

the individuals at the GP better, which in turn fosters better rela-

tionships and helps to build trust. In particular, respondents

pointed to the ability to meet with junior members of the GP as

a benefit of hospitality events, along with being able to experience

how the different levels of staff at the GP interact. Respondents

also appreciated the ability to network and interact with other

limited partners that some hospitality events can offer.

Reporting

When it comes to the frequency of reporting, general partners

are broadly in line with the expectations of limited partners.

The vast majority of investors want to receive reports on aquarterly basis (see Chart Sixteen), with a small proportion

expressing a preference for monthly delivery and the same

number selecting bi-annually. Private equity is a long-term,

fairly illiquid asset class. For that reason, some investors may

find that receiving detailed reports twice per year will be suffi-

cient. Furthermore, this long-term nature means there is little

Examples of specific GP hospitality events men-

tioned by LPs include:

O Box at the US Open.

O Cocktail parties and dinners.

O Golf (varying from outings to entire weekends).

O GP and special advisor co-sponsored legal confer-

ences.O Museum / art gallery visits.

O Night at a sports bar to watch a football game.

O Race meetings.

O Sailing.

O Shooting days.

O Theatre.

O Tours of historic venues.

O Trips to the Ryder Cup.

O Wimbledon.

O Wine tasting.

Chart Fifteen: Value placed on hospitality events

What value do

LPs place on GP

hospitality events?

None at all

16%

A little

73%

A lot

11%

Chart Sixteen: How regularly should GPs provide LPs with

reports?

4%

87%

4%0%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Monthly Quarterly Bi-

annually

Annually Other

%o

fRespondents

Chart Seventeen: In practice, how regularly are GPs providing

LPs with reports?

0%

97%

1% 0% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Monthly Quarterly Bi-

annually

Annually Other

%o

fRespondents


16/24

CASE STUDY

136

RESEARCH GUIDE

time to begin drafting the marketing materials and partnership

agreement. In the case of AMC, Blair Thompson of SJ Berwin

was key in ensuring that the funds structure was going to be

right for the investment strategy as well as being attractive and

workable for potential LPs. A key element as we articulated the

case for AMC was to stress that while it was a new concept,

Mezzanine Management had a track record of being involved in

introducing mezzanine to new markets in Western Europe in the

late 1980s and early 1990s. The basic argument was that this ele-

ment of technology transfer was nothing to faze the firm or the

members of the team who would be making investments. In

practical terms, this meant that there was also a meaningful con-

text for the inclusion of the groups 15-year Western Europeantrack record in the PPM and marketing materials. This feature

of AMCs offering arguably gave the fund significantly more

marketability among institutional investors keen to apply some

sort of relevant quantitative track record analysis to the ir invest-

ment decision.

Having launched the marketing of AMC in Spring 2001, it

was clear that the general conditions for raising capital were

not ideal. Institutions whose portfolios were suffering from

the cyclical downturn were finding it hard enough to comm it

to any private equity product, let alone something as differ-

ent as a mezzanine fund focu sing on Central Europe. In mar-keting trips to the US, it was clear that the ongoing accession

process, during which the five core countries targeted by

AMC would join the EU, was still something that many

institutions were either unconvinced by or unfamiliar with.

Indeed, Central Europe was, for many institutions, an emerg-

ing market like Latin America or the Pacific Rim.

Anecdotally, a key milestone that started to resonate with

Background

The idea of raising the first independent mezzanine fund for

Central Europe was discussed within Mezzanine Management

from as early as 1999. However, Accession Mezzanine Capital

LP (AMC) itself was not formerly launched until February

2001. That fact in itself says much about what it takes to get a

new concept fund off the ground. Any new private equity or

mezzanine fund requires planning, but taking a new financing

instrument into an emerging private equity market was always

going to be a particular challenge. And to top it all, AMC was

going to saddled with the dreaded first time fund label, some-

thing that Mezzanine Management hadnt had to contend withsince it opened its first fund back in 1988.

During the planning stage before the fund was launched, sev-

eral key milestones had to be hit, some of which were specific

to AMC, but others common to all new funds that are intro-

ducing a new concept to the private equity market. Getting the

team together and organising the corporate structure was in

many ways straightforward. The rationale for taking mezza-

nine as a product into this region had been formulated with

the two managing directors who were going to be running the

fund on a daily basis. One key advantage for AMC was that

these two gentlemen were effectively part of the MezzanineManagement family. Franz Hoerhager had sat on the boards

of the firms first two funds, while Ben Edwards had been with

Mezzanine Management from its inception and, after a short

time outside the firm, had returned to be a founding partner

in the AMC team. The shared history made this new concept

seem more familiar to those that would be involved in making

it happen.

Aside from organisation and formulation of the team, the longer

job was formulating the investment case for the fund. The desire

was for AMCs investment rationale to be confirmed internally,

validated externally, and then fine-tuned and articulated in a

way that would allow us to approach the institutional investor

community. In this respect the partnership with AMCs corner-

stone investor was key. The concept of a cornerstone investor

tends to be over-generalised by the industry, as it can mean dif-

ferent things to different people. For AMC, the cornerstone

investor provided more than capital. The European Bank for

Reconstruction and Development (EBRD) was vital in validat-

ing Mezzanine Managements thesis that there was a market for

mezzanine in Central Europe. There were definite parallels with what Mezzanine Management had achieved when setting up

shop in Western Europe: a growing private equity market, a lack

of intermediate finance and ongoing macro-economic change.

Notwithstanding the similarities, however, if the largest investor

in private equity in Central Europe didnt believe there would be

demand for mezzanine in the region, we would probably do well

to think twice.

One final aspect of the preparations was the legal due diligence

in the principal countries targeted by the fund. This involved

taking Western European loan documentation, having it trans-

lated into both local language and local law, and gaining com-fort from lawyers on the ground that key concepts such as sub-

ordination would stand up in the local jurisdictions.

Marketing the fund

So after months of working with the EBRD and talking to inter-

mediaries and private equity funds in the region it was finally

The new concept fundAccession Mezzanine Capital LP

Christiian Marriott, Director - Investor Relations,Mezzanine Management UK Limited


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RESEARCH GUIDE

Rationale

Arsenal Capitals debut fund was founded in 2001 to execute con-

trol investments of manufacturing and business services compa-

nies. Terrence Mullen, Arsenal co-founder and Managing

Director, left Thomas H. Lee Partners in 2000 on the heels of sev-

eral successful buyouts, including Rayovac Corporation and

Transwestern Publishing, in which strong operating leaders played

a significant role in delivering above-market returns. In building

out the Arsenal team, Mullen sought a strong operating profes-

sional to complement his own investment and financial back-

ground. This search tapped Barry Siadat, the former Chief

Growth Officer of AlliedSignal/Honeywell, who over 27 years attwo diversified conglomerates (AlliedSignal and W.R. Grace) held

a variety of senior managerial and technical positions in a broad

range of industries.

The founding principal behind Arsenal was to combine financial

and operating expertise to make good companies better in

growth and productivity buyouts. Mullen and Siadat believed

that this collaboration between investment and operating profes-

sionals would result in an ability to source higher quality trans-

actions; quickly and accurately identify business strengths, weak-

nesses and opportunities; more thoroughly evaluate management

teams and conduct due diligence; and actively grow and improveinvestments. The two decided to invest in industries in which

they had prior investing and/or operating experience, including

specialty chemicals, specialty manufacturing, and certain sectors

of healthcare. The team at Arsenal would be built around these

industries, as well as around certain key functional disciplines

that would apply to a broad range of businesses, including

human capital, quality, supply chain, and technology.

Execution

Firm building and fundraising were accomplished through a

staged approach of initial fundraising followed by team build-

ing, deal execution, and portfolio company improvement.

Success in team building and execution created a platform for a

rapid doubling of committed capital, and by demonstrating an

ability to improve its portfolio companies Arsenal quickly

reached an overcommitted first fund.

Mullen and Siadat were able to raise an initial $50 million on

the strength of their prior successes, with commitments coming

from their network of LP relationships and from other, smallerinvestors. They had already brought on board a Vice President

who had worked with Mullen at T.H. Lee and two Associates

with investment banking and consulting backgrounds, and after

successfully completing this initial funding in March 2001,

brought on an additional Managing Director, James Marden (an

operating and investment executive from Merck-Medco and

Medical Logistics), as well as another Vice President (also from

T.H. Lee) and a third Associate. Siadat also reached out to his

extensive network, recruiting a group of Operating Directors

consisting of senior operating executives from firms known for

their industry leadership and operational excellence, including

AlliedSignal, General Electric, General Motors, DuPont, andBristol-Myers.

This Arsenal team had proven track records in executing the var-

ious components of growth and productivity investments. The

individuals comprising the Arsenal team all had experience of

investing in basic middle-market companies, driving organic

growth while taking advantage of strategic acquisitions, and

The debut US mid-market fundArsenal Capital Partners, LP

Terry Mullen, Co-founder and Managing Director, ArsenalCapital Partners

Name of fund:

Launch date:

First close date andamount:

Final close date andamount:

Type of limited partners:

Number of limitedpartners:

Name of law firm:

Name of placementagents:

Arsenal Capital Partners, LP

May, 2001

May 30, 2001; $50 million

May 30, 2003, $65 million (total$300 million)

Fund of funds, corporate andmunicipal pensions, banks,

universities, high net worthindividuals

100

Kirkland & Ellis

George H. Carter, Zurich,Switzerland; Farrell Marsh & Co,Greenwich, Connecticut, USA

Key facts

improving competitiveness and productivity, irrespective of the

economic cycle. This strategy had resulted in above-market com-pany performance and investment returns at T.H. Lee, at

AlliedSignal, and at Merck-Medco. However, the strategy

remained unproven by the Arsenal team.

After the initial first closing on $50 million, the partners focused

on deal sourcing and execution in order to demonstrate the mer-

its of the Arsenal team and model. Over the next year Arsenal


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161


Company nameAddressPhoneFaxOther office locationsWebsiteEmail

Baring Fund Administration ServicesPO Box 71, Trafalgar Court, Les Banques, St. Peter Port GY1 3QL, Guernsey+44 (0)1481 745000+44 (0)1481 745050Dublin, Isle of Man, Jersey, London

[email protected]

Baring Fund Administration Services

Company nameAddressPhoneFax

Other office locationsWebsiteEmail

Abacus Financial Services Group Ltd.Tower 42, 25 Old Broad Street, London EC2N 1HN, United Kingdom+44 (0)20 7877 210444 (0)1481 728493

Jersey, Guernsey, Edinburgh, Cheltenham, [email protected]

Abacus Financial Services Group Ltd.

Fund administrators and outsourcers


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RESEARCH GUIDE

Having a good IT platform is not just a means of making life easierfor a GPs front and back office teams: these days, it can play a vitalrole in evidencing ability to add value and can even make a differ-ence to fundraising prospects. Andy Thomson reports on developmentsin private equity technology.

If possession of a cutting edge technology platform were ever

considered a luxury by private equity firms, that is certainly no

longer the case today. Not only do fund administrators need to

be using credible systems in order to win business from GPs,

anecdotal reports indicate that GPs increasingly need to evi-

dence use of a particular system whether by outsourced admin-

istrators or their own in-house team when on the fundraisingtrail. Given the increasing pressures on LPs to obtain regular,

detailed information on the funds in which they invest, it could

be argued that never before has technology been such a high pri-

ority when it comes to investor due diligence.

In response to this, private equity firms are more likely to turn

to off-the-shelf or tailored software systems rather than the less

sophisticated means of gathering and distributing information

that they have relied upon in the past. Its not that you cant still

use spreadsheets, but that approach is becoming less credible,

says Alan Routledge of eFront Financial Solutions, a private

equity software vendor. You need to respond to new ways of

reporting and new fund structures, and its hard to see how you

can cope with these demands using Excel or manual methods.

Peter Wooster, director of Accounting Frameworks Limited, a

private equity and venture capital software provider, says over-

reliance on spreadsheets means being exposed to the possibility

of human error. Limited partners get very upset, for example, if

the amount of a capital call is wrong or its requested at thewrong time, he says. Those who use Excel-based systems do

occasionally make such mistakes.

Wooster adds that the use of more sophisticated systems has

gone hand in hand with more detailed reporting requirements.

For example, the traditional method of valuing portfolio com-

panies at cost is being increasingly usurped by the concept of

fair value, as reflected in recent guidelines issued by a number

of European private equity associations as well as the Private

Equity Industry Guidelines Group (PEIGG) in the US.

Historically, private equity firms have kept valuations low until

it comes to realisation, and then the rabbit is pulled out of thehat. Now, accounting standards demand fair value is applied

through the life of an investment, says Wooster.

It is not just macro developments such as changes to account-

ing rules that are having an impact on reporting requirements

there is also structural change within the private equity industry

itself. Take for example the growth of funds of funds, whose part

GP-part LP status brings with it an added layer of complexity:

ranging from serving their own clients to fielding reports from

their underlying partnerships through to portfolio level data

associated with co-investments. They have forced technology

providers to rise to the challenge of meeting their uniquedemands.

This is illustrated by the case of LGT Partners, the Swiss private

equity and hedge fund manager with $5 billion under manage-

ment, which outsources its reporting to a technology vendor.

Says principal Robert Schlachter: We not only track the cash

flow and valuation between the fund of funds and the (individ-

Gaining in sophistication

June 2005

ual partnerships), but also look through to the portfolio holdingcompanies. That is all incorporated in one system.

Doubling up

Incorporation in one system is not a phrase that appears to sit

easily with the approach of many private equity firms. Wooster

says as many of half of Europes GPs are running what he calls

duplicate or shadow administrative systems, whereby the GP

continues to run its own in-house system even when fund

reporting has been nominally outsourced to an external

provider. Viewed one way, this may reflect a lack of trust in the

administrator and a desire on the part of the GP to retain somecontrol. But there are also practical reasons for such an

approach, notably the widely acknowledged but not widely

broadcast fact that administrators will normally merely provide

a rubber stamp for valuations provided by the GP rather than

taking on such a sensitive role themselves.

In viewing duplicate systems as a fact of life, Accounting

Frameworks is promoting the ASP (application service provider)

model as a way of attempting to ensure that the GP and admin-

istrator can at least access the same real-time information rela-

tively cheaply. Traditionally, private equity firms have owned

and paid for their own infrastructure, and linked the main serv-er to remote offices by means of a series of paid-for connections.

The ASP approach, on the other hand, means paying a sub-

scription to access a shared server, thus greatly reducing infra-

structure costs.

Whilst ASP systems are still in their infancy, the implications

may be profound as private equity firms seek to grow interna-


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RESEARCH GUIDE

Rather like the private equity industry it supports, the world of fundadministration and technology is becoming increasingly more com-

plex and esoteric. Here, we take an alphabetical stroll through some

of the defining words and phrases.

A is for administrator. Increasingly, firms are outsourcing parts,

if not all, of their fund administration to outsourced providers.

Start-ups and spinouts in particular look to offshore administra-

tors for all their fund reporting requirements.

B is for back office. Regardless of what the rainmaking deal

doers say, this is where its at ok its not really, but without a

robust, reliable system (and team) behind them, the deal teamswould struggle.

C is for choice. Five years ago, such an entry might also have con-

tained the words or lack thereof. Nowadays, with more options,

more systems and more suppliers, its worth researching the mar-

ketplace in depth before making a long-term commitment.

D is for detail. As limited partners become increasingly sophis-

ticated, so too do their information requirements. Funds of

funds in particular can require layers of detail that a top line

quarterly report may not be able to provide.

E is for email. Email, internet, web-based reporting, online

interaction. The future is here and its on the web. No more rain-

forest-destroying reports every quarter, all you need is a log-in

name, password and away you go.

F is for flexibility. Different types of fund investor have very dif-

ferent requirements, from the high-net-worth individual con-

tent with basic summaries of fund performance to the corner-stone institutional investor expecting more regular and detailed

data than would normally be requested. Systems need to be flex-

ible enough to respond to a wide range of demands.

G is for guidelines. How should portfolio companies be valued?

Less a straightforward question than a cry for help over the years due

to the absence of a single set of valuation guidelines. But thanks to

the recent efforts of industry associations such as the EVCA in

Europe and the PEIGG in the US, the promised land of har-

monised valuation techniques seems to have come a step closer.

H is for high-tech. The high-tech nature of todays fund admin-istration and reporting systems is replacing the Excel standard

and allowing for electronic communication between GP and LP

rather than the mailing of heavy binders of paperwork.

I is for in-house software systems. Many private equity funds of

funds develop such systems to handle the complexities of their

reporting: as LPs, they field reports from underlying general

partnerships, but as co-investors, they may be even reaching into

portfolio-level data.

J is for Jersey. The offshore jurisdiction of choice for European

private equity funds, Jersey recently enacted the Expert Fundscategory, which includes key regulatory changes designed to give

the island the edge over its offshore rivals.

K is for knowledge-led delivery. A buzz phrase much loved by

fund administrators. Another way of saying its not much use

having state-of-the-art systems if you dont have people who

know how to get the best out of them.

Fund administration and technology: the A to Z

June 2005

L is for limited partner.Never upset one. Anecdotal reports indi-cate that while having a good back office system may not exact-

ly be make or break on the fundraising trial, it is edging up most

limited partners list of priorities.

M is for mobile working. As the private equity industry con-

tinues to expand into new territories, more and more invest-

ment staff are working from remote offices, often with a min-

imum of local support. GPs need to ensure that an increas-

ingly mobile workforce remains in permanent contact with

support systems.

N is for numbers.You can provide as much detailed, strategy-level information as you like, but the bottom line is that its the

numbers that count. Chronological, quarter-by-quarter numer-

ical updates on portfolio company performance and clearly stat-

ed valuations speak more than a thousand marketing words.

O is for Outlook. New information management systems must

be compatible with Microsofts industry-leading email program

if any firms are going to be interested. In addition to working

with the email program, jet-setting front office professionals also

want systems that are able to sync with their newest appendage

the Blackberry.

P is for package. There is now a wide range of software packages

available on the market and all are designed to allow the user to

standardise, collate and make accessible relevant information.

But ownership of a package is one thing: how central you make

it to the way your business is run will determine whether or not

you can boast a successful IT operation.


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199


American venture funds (Sequoia and Kleiner Perkins come tomind) and the doyen of multi-strategy, serial fundraising, The

Carlyle Group, appear confident enough to brave the market

entirely on their own. And even some of these firms have been

known to deploy an external fund placement specialist on a par-

ticular mission such as tapping a new community of investors.

The high flyers aside, most managers still retain the services of

outside advisors, regardless of how much in-house resource they

may already have put in place. The challenge is to how best seg-

ment this market of potential clients. One fund placement veter-

an describes his universe of prospects as comprising every private

equity group on the planet minus the top 10 percent of in-demand partnerships that are able to raise any amount of institu-

tional capital more or less at will, as well as the 30 percent of man-

agers who the buy-side will refuse to back; the remaining 60 per-

cent will require hard work that will ultimately pay off which is

where this particular agent sees his professions sweet spot.

The reason why the majority of GP groups still favour using an

agent is simple: even the most dedicated investor relations pro-

fessional at a private equity firm is unlikely to be as permanent-

ly engaged in dialogue with the market as a placement agent

looking after a portfolio of client relationships. As a result, the

in-house specialists may find it more difficult to keep track ofexactly how a given limited partners attitudes and investment

requirements are shifting over time especially if the limited

partner in question is not an existing client but someone the

manager would like to bring into a future partnership. Access to

a placement agents first-hand knowledge of the shifting patterns

amongst the buy-side can be a powerful supplement to in-house

relationships and know-how.

The current increase in fundraising activity is good news for place-ment agents. But intense competition for mandates and a sharpened

focus on professional standards means a shakeout in the industry is

likely to occur, writes Philip Borel.

Global private equity is in fundraising mode. After 24 months

of intense capital deployment driven by an unprecedented push

on the worlds M&A markets, droves of general partners are

going back to institutional investors to refill their coffers. In the

worlds key money management centres, the airport lounges are

playing simultaneous host to numerous fundraising GPs. Even

in more remote locations, sightings of private equity managers

looking for fresh commitments are increasingly common aslong as you happen to be in the hometown of a US state pen-

sion headquarters, a Scandinavian insurance company or a fam-

ily office in the Middle East.

On the buy-side, investors are surveying the host of new funds

coming their way with just as much intensity. Yield-hungry

institutions are betting that private equity can provide at least

part of the answer to their performance-related difficulties.

However, the positive inclination towards the asset class does

not mean money is being thrown at private equity groups

indiscriminately. According to practitioners familiar with the

current institutional investor mindset, limited partner due dili-gence on new funds is as detailed and scrupulous as it has ever

been. Limited partners have never been busier, says John

Barber, a director at London-based fund placement advisors

Helix Associates.

As a result, queues of managers are forming outside limited part-

ner offices. Fund raising general partners are all too aware of

this, and they also recognise that the process as a whole isbecoming more and more complex. LPs are developing a more

differentiated understanding of how they want to participate in

the asset class and which types of as well as how many man-

ager they want to work with. Gone are the days, therefore, of

general partners being able to take a cavalier approach to their

fund raise and, more broadly, to their investor relations. For a

number of years now, the trend amongst the bigger private equi-

ty groups has been towards building dedicated, in-house fund

placement and investor relations capabilities, headed by senior

members of the partnership who have deep knowledge of the

theory and practice of the fundraising process as well as the inner

workings of their firm.

At face value, this trend appears to be a threat to placement

agents, those middlemen (and women) making a living out of

helping to persuade investors to entrust their capital with spe-

cific funds. The less knowledgeable of the fundraising process

their clients are placement agents get paid by the managers

they represent the greater their need for billable services.

Disintermediation, arising from this growing number of gen-

eral partners busily honing their DIY fundraising skills, is

eroding the ground on which many a private equity fund

placement business model has been built. Or as one head of IR

at a recently fund raising partnership put it: Why buy a dogand bark yourself?

Are placement agents an endangered species then? At first

glance, there is no evidence of them disappearing from view. Of

the many new campaigns being launched every year, only the

very largest LBO groups (Bain Capital, Permira, Providence and

BC Partners to give some recent examples), uber-popular North

Nice work if you can get it

April 2005


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It was the trip back in the cab from the airport early Saturdaymorning that gave the IR manager time - too much time - to assessthe likely outcome of the many meetings he and the managing part-

ner had squeezed into the past four days (and three different cities).

Its not as if any of the sessions, many of them with existing lim-

ited partners in the firms earlier funds, had been bad. But none

seemed to move beyond the pleasantly vague. All of these

prospects had received the placement memorandum and had

then taken the meeting: shouldnt that indicate serious interest?

But several of the current LPs had new people running their alter-

natives programmes now, and there was a clear sense that no GPwas going to be able to assume an automatic re-up from these

investors just because of history. As the managing partner hissed

as they walked back into the lift from one such session: This guy

has got something to prove: and were going to be the proof.

All of which depressed the IR director. The nuances of modern

fundraising were becoming starkly obvious to him now: how much

pre-marketing one needed to do; how the timing of the subsequent

official launch of fundraising set the clock ticking so that every

day before the first close mattered; how the investment partners at

the GP clearly wanted the buck to stop with him. Perhaps the deci-

sion not to use a placement agent had been premature?

But when the new fund was being planned, those meetings with

agents had turned out to be less than satisfactory. Several had

politely declined to take the conversation forward. The top tier

ones who had been involved in over-subscribed, rapid raisings

were clearly able to be ultra-selective - and the GPs track record

had to be stellar.

And talking of reputational hazard: no one at the GP wanted tobe mandating an agent perceived as representing second or third

tier funds. It was like a Saturday night dance: lots of wallflowers,

plenty of eye contact but only the golden couples out on the

floor. Neither agent nor fund wanted to be seen out with the

wrong partner. People would talk.

Then there was that particularly edgy session with one agent

who told the managing partner that they were raising the new

fund too soon, implying that a hunger for fresh management fee

income was driving a premature launch. That was a rapid no.

Time seemed not to be on the firms side either. Increasinglyinvestors were wanting to see others commit before moving to a

decision themselves, and as the pre-committal phase was drag-

ging on, the mood seemed to change - at the GP as well as

amongst the LPs. Previous decisions (who to see, what to say,

when to say it) were revisited back at the office. Meanwhile

investor attention drifted, no doubt because other eager

fundraising GPs were lining up outside the LPs office.

The IR director paid the cab and walked up the steps of his

townhouse. Just time enough to sort some fresh laundry before

Sundays flight to Asia. Would he still be on the road in a years

time he wondered?

The loneliness of the long distancefundraiser

August 2004


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Our expanding range of in-depth market reports, researchguides and directories cover the issues and trends shaping the

asset class on a global basis. They offer private equity and other

alternative asset professionals, investors, advisors and others

involved in private equity and real estate the quality research, in-

depth analysis and insightful comment they need.

Directories

These practically orientated, comprehensive and detailed publica-

tions profile investors in the private equity and real estate asset class-

es, as well as advisors, service providers and private equity firms.

The Global Limited Partners Directory

The most comprehensive international guide to investors in

private equity funds. This 990-page directory provides

detailed, in-depth profiles of the private equity investment

programs of over 870 institutional investors and advisors

from around the globe. Built from the ground-up by a team

of multi-lingual researchers, this directory is the most com-

prehensive, extensive and user friendly guide to current and

active investors in the asset class available. An indispensable

fundraising tool for those raising and marketing private

equity and venture capital funds.

The Global Directory of Investors in Private Real Estate

Funds

The only guide to investors in private real estate funds. This

directory provides detailed, in-depth profiles of the private

real estate investment programs of over 500 institutional

investors and advisors from around the globe. Built from the

ground-up by a team of multi-lingual researchers, this direc-

tory is the most comprehensive, extensive and user friendlyguide to current and active investors in the asset class avail-

able. An indispensable fundraising tool for those raising and

marketing private real estate funds of all types.

Market Reports

These highly specialised and targeted reports are aimed at cover-

ing technical issues or particular areas of the private equity

industry in an incisive manner, providing readers with a valuable

primer on these issues.

A Guide to Private Equity Fund of Funds ManagersThe definitive guide to the global private equity fund of

funds market. This 276-page Market Report consists of in-

depth editorial from leading fund of funds managers, place-

ment agents and advisors, along with the results of a survey

into the dynamics and future of the fund of funds market

undertaken with fund of funds managers, placement agents

and LPs. Also contains the most comprehensive directory of

fund of funds managers available, profiling more than 150

managers from around the globe, including contact details,

investment remits and previous funds backed. This report is

an essential purchase for anyone interested in understanding

and raising capital from this increasingly important area ofthe private equity market.

Contributors include Adams Street Partners, London

Business School, Mowbray Capital LLP, OMelveny &

Myers LLP, Partners Group, Probitas Partners, SCM

Strategic Capital Management, Standard Life Investments

(Private Equity) Ltd.

Appendix Six:About Private Equity International Books

The UK LBO ManualA practical guide to structuring private equity-backed buy-

outs in the United Kingdom. Written and researched by

leading international law firm Ashurst, this is the first in a

series of country-specific guides that address all aspects of

private equity-backed buyouts. Topics covered include: the

development of the UK buyout market; the structure of

leveraged buyouts; documentation; taking equity; debt and

security; taxation aspects of LBOs; the impact of EC and

UK merger control and anti-trust rules; public to privates;

structuring equity incentives for management; insolvency;

and more. This 156-page report is an essential resource for

all those involved in UK private equity buyouts.

Private Equity Technology: Assessing the Alternatives

An assessment of technology solutions and how they apply

to private equity firms. This 222-page Market Report covers

the importance and risks of technology, how technology

specifically applies to the modern private equity firm and

includes a detailed analysis of the technology solutions cur-

rently available to private equity firms. The guide is sup-

ported by a survey of investors use of and attitudes towards

technology, along with a unique directory of private equity

technology providers and their products/services. This guide

is essential reading for anyone involved in developing a pri-vate equity firms technology infrastructure.

A Guide to Private Equity Fund Placement Specialists

The definitive guide to private equity placement agents, this

120-page Market Report combines in-depth editorial with a

global directory of agents and the results from surveying

both LPs and GPs about their views on the role and contri-


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RESEARCH GUIDE

bution of agents in the fund raising process. The book is

filled with information and comment relevant to anyone

involved with private equity funds and fund raising.

Research Guides

Cover the broader issues, themes and trends that are helping to

shape t

the guide to private equity fundraising

Documents