private equity - guide to equity fund fundraising

THE GUIDE TO PRIVATE EQUITY FUNDRAISING


EDITOR: MVISION PRIVATE EQUITY ADVISERS LIMITED

fundraising copy.QXD 07/14/2005 10:31

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IntroductionAllan Cooper and Mounir Guen, MVision Private Equity Advisers

Limited

Investors in private equity: an overviewJohn Barber, Managing Director, Helix Associates

• Investors in private equity - an abbreviated history• Investor profiles• Final thoughts

Selection of a lawyerJosyane 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 structuringJason 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 agentAllan 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 agentChristoffer Davidsson, Principal, Campbell Lutyens & Co. Ltd

• Overview• Deliverables• Summary

Notes to a placement agreementPrivate Equity International

• Introduction• Key sections• Compensation• Confidentiality• Conflict of interest• Other items• Annexes

Contents

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The offering memorandumBridget Barker, Partner and Stephen Sims, Senior Solicitor,

Macfarlanes

• Introduction• Content of the offering memorandum• Terms of the offering• Verification• Regulatory overview

Presenting the proposition: planning and executingthe fundraisingRobert 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 fundJens Bisgaard-Frantzen, Managing Partner and Vibeke Wounlund,

ATP Private Equity Partners

• About ATP Private Equity Partners• Investment strategy and fund types• ATP PEP’s 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 AgreementJonathan 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 wrongPrivate Equity International

• Market factors• People factors• Information factors• Campaign factors

SURVEYS

LP attitudes to fund terms and conditionsPrivate Equity International

• 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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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 reportingPrivate Equity International

• Introduction• 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 MezzanineCapital LPChristiian Marriott, Director, Investor Relations, Mezzanine

Management UK Limited

“The first time fund raise”: Altor 2003 FundJohn Barber, Managing Director, Helix Associates

“The debut US mid-market fund”: ArsenalCapital Partners LPTerry Mullen, Co-founder and Managing Director, Arsenal

Capital Partners

“Fundraising for the semi-captive”: The HSBCPrivate Equity European LPVince O’Brien, Director, Montagu Private Equity Limited

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

“The biotechnology fund”: HealthCap IVAnki Forsberg, Partner, HealthCap

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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 tobe properly run, either by dedicated in-house professionals, orwith the advice of external consultants or asset managers, allwith 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 equityexposure to levels not thought possible before – ranging up to25% of assets in some endowments’ case, but settling on a typi-cal aspiration of 5% of assets for a mainstream institution witha conventional asset-liability profile. At the same time, institu-tional investment staffs began as a matter of routine to includefull-time private equity fund selection specialists. Establishedfund of funds managers also benefited handsomely throughgrowth 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 newfund of funds businesses responded to market opportunity andstarted life in this period.

Chart Two (drawn from the Goldman Sachs / Russell report)shows the growth in private equity allocations among NorthAmerican institutions from 1995 onwards, broken down by typeof institution. Endowments and foundations in the survey, takenas a whole, recorded by the turn of the 21st century an alloca-tion to private equity of over 14% of assets (up from 10% in1995), taking advantage of their ultra long-term investmenthorizons. Corporate pension plans demonstrated less rapidgrowth, but nonetheless had allocations to private equityapproaching 8% by 2003, well above the 5% considered neces-sary for an impact to be felt on overall results. Public pensionplans, which controlled the lion’s share (68%) of the capitalamong survey respondents, provided the real growth in absoluteamounts committed to the asset class. By lifting private equityallocations by about 50%, from just above 4% in 1995 to near-ly 6% in 2003, public pension plans were the major drivers ofthe market’s growth, supplying tens of billions of dollars ofincremental financing for private equity funds.

Chart Three (again from the Goldman Sachs / Russell report)demonstrates the transformation of private equity in Europefrom a position of near-irrelevance (1.9% of all European surveyrespondents’ assets in 1996) to one requiring attention andinfluencing returns (4.0% of assets in 2003, forecast to rise to4.5% in 2005). By 2003, despite the UK’s pre-eminent positionas 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’ istoo general a term to apply, thanks to significant regional varia-tions in commitments to private equity. Countries in NorthernEurope 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, themore 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 withtheir relative GDPs.

In other parts of Europe, such as Germany and Switzerland,innovative asset-gatherers designed private equity fund of fundvehicles that utilised capital guarantees and tiering structures topreserve 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 frominvestors previously considered next-to-impossible to convert tothe private equity gospel. These converts included fixed income-oriented and capital preservation-sensitive institutions such asGerman insurance companies. These risk-averse players wereprepared to commit to these new pooled private equity vehiclesbecause 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 reportin 2003, North American and European institutions were – andremain – the dominant financiers of private equity funds world-wide, even providing the bulk of capital to those operating inother regions, such as Asia. Private families, banks and quasi-

Organization (North America)

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

% o

f To

tal A

sset

s

1995 1996* 1999 2001 2003

Source: Goldman Sachs International / Russell Investment Group "Report on Alternative Investing by Tax-Exempt Organizations 2003"

* Arithmetic average of 1996 strategic allocations of 1999 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

f To

tal F

un

d A

sset

s

All UK Continental Europe

Source: Goldman Sachs International / Russell Investment Group "Report on Alternative Investing by Tax-Exempt Organizations 2003"

N/A N/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 andexperienced 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, yourlawyers 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 thefund is to make, where is the vehicle going to be investing, andwhat investors to approach when fundraising and how muchmoney to target. Clearly, these are important aspects, but it isalso important to identify any legal, tax or regulatory obstaclesearly on. Doing so will often pay dividends in the long run.

Which law firm?

Clearly, your lawyer needs to be familiar with the private equityindustry, with fund structuring and the fundraising process. Thelegal skills required include corporate law, tax law and knowledge ofregulatory 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 whereprospective investors are based and those where the manager /adviser are located - and legal and tax structuring across thesevarious jurisdictions is highly complex. It is critical to ensurethat your legal team can cover each of those countries (eitherwith 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 widerange of fund structuring experience, and to be creative in theway in which they approach your fund structure.

Your European law firm (unless they also have a US presencethemselves) will also usually need, depending on your investorbase, a strong working relationship with a private equity lawfirm in the United States. A significant proportion of the capitalavailable for investment in private equity and venture capitalfunds comes from US investors, and many issues arise from theirinvolvement. A European law firm that specialises in privateequity will be very familiar with these issues and have no diffi-culty co-ordinating the advice needed from the US and otheroverseas jurisdictions.

Selecting a law firm

The most obvious choice is to use a law firm with which youhave an existing relationship, as you are already familiar withtheir work. However, the specialist nature of the fundraisingprocess may mean that your existing lawyers do not have theexpertise that you require, and so a new relationship will need tobe established. It is still the case that relatively few law firms havea particular specialisation and deep experience in the area of pri-vate equity fund structuring and raising.

Local private equity and venture capital associations will usuallyhave a list of firms with the requisite abilities: these firms willoften be members of that association. For example, in most ofEurope, the local venture capital association will include lawfirms 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 taxtransparency and therefore to treat foreign partnerships as non-tax residents and therefore not treaty protected. The net effectof this is that, for example, French corporate investors invest-ing via this route will be taxed on their portion of the limitedpartnership’s revenue at the standard corporate income taxrate. However, it does appear from ongoing double tax treatynegotiations between France and the UK as though this maypossibly change (i.e. English limited partnerships may, ineffect, be treated as tax transparent by the French tax authori-ties in the future) although it is not currently known if andwhen such change will come into effect.

v It will not be possible for a limited partnership to take advan-tage of the EU parent / subsidiary directive, although subsidiarycompanies owned by the limited partnership and individualinvestors in the limited partnership may be able to do so.

v It will only be possible to rely on double tax treaty protectionto the extent that the underlying investor is able to do so. It shouldbe noted, however, that sub-fund structuring (using, for example,Dutch or Luxembourg holdco entities) is usually employed tominimise 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 significantdifferences between the different types of partnership establishedin different jurisdictions, and it is important to understand thesedifferences when designing a structure.

Delaware LPMany 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 includethe following:

v The standard form of private equity fund agreement used byUS institutions and US investors has been developed for aDelaware limited partnership.

v There is no obligation to disclose publicly the terms of its part-nership agreement, the identity of its limited partners or itsaccounts (but such information may be required to be disclosed bya governmental investor under freedom of information legislation).

v There is no need to maintain an office or personnel inDelaware or in the US.

v Organising a fund as a Delaware LP can be accomplishedquickly and at little cost, and annual Delaware taxes and regis-tered agent fees normally are approximately $300.

Specific disadvantages include:

v Non-US sponsors may be reluctant to use a US-law vehiclebecause of concerns about lawsuits (the US courts have tried asignificant 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.

v Somewhat more restrictive guidelines apply to avoid registra-tion of a Delaware LP and its limited partnership interests withthe SEC than apply to non-US entities.

v A 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 innon-US companies.

v Non-US investors may be subject to internal investmentrestrictions which require that the fund vehicle is, for example,an EU entity.

English LPIn Europe, one of the most regularly used limited partnershipvehicles is an English limited partnership (ELP) established pur-suant to the Limited Partnerships Act 1907. ELPs have all of thebenefits noted above for partnerships generally. ELPs are taxtransparent for UK tax purposes and therefore capital gains gen-


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The primary job of the placement agent has always been tointroduce 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 bringthem together periodically with the general partners of a fundraising 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 afairly simple process, with many investors putting their trust inthe results of a fairly quick due diligence process, the agent’s rec-ommendation or their relationship with the general partners inquestion, and hopefully resulted in an efficiently, but oppor-tunistically, assembled limited partner base.

Times have changed. Collectively, today’s investors have farmore experience with the private equity asset class, and havebecome far more sophisticated and demanding in their ques-tioning and information requirements, both prior to making theinvestment decision and in the ongoing monitoring of theinvestment. As a result, today’s GPs face increasing demands ontheir time during the fundraising process, in the form ofenhanced marketing and due diligence support and multiplemeeting requirements, and an increasing investor relationsrequirement afterward. At the same time, the market itself hasbecome increasingly competitive, with overextended investorshaving begun to rationalise the structure of their investmentprograms by pruning the number of relationships they have withGP groups. Combined, these factors have increased the need forcareful planning of the fundraising process and diversification ofthe limited partner investor base, expanding and extending therole 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 theprocess, 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 agent’s role at various points of the processare discussed in the pages that follow.

Planning and preparation pay off

As the prior fund moves within range of full investment and thedecision is made to gear up for a new fund, many GPs becomeanxious for meetings with potential investors in the follow-onvehicle to begin. Time devoted to planning and preparing forthe launch of the new vehicle is well spent, however, and willgenerally be more than paid back through increased fundraisingmomentum and enhanced efficiency of the process. Key steps inthe planning process for a private equity fundraising are outlinedbriefly below, and several of these topics are covered in greaterdetail elsewhere in this publication.

Development of the marketing plan and timeline

The marketing plan provides a broad outline of key steps in thefundraising process and their anticipated completion dates. Theplan 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 allparties are in agreement and expectations aligned. The agentshould clearly communicate expectations regarding the timerequired 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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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 informationon 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. theactual 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 committeev Meets fortnightly or as requiredv Provides ongoing feedback on due diligence projectsv Reaches formal decision on whether to invest in a fundor not

Screening Due Diligence: in three phases

Investment Screening

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 spentand 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, processand 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 ofATP PEP’s five due diligence focus areas. Nevertheless, afund’s track record is based on a series of assessments of thevalue of the individual companies in which the fund invests.

A fund’s track record consists of the following elements:

v Realised investments v Unrealised investments – valued by means of their impliedvaluation (see later)v Partially realised investments v Total investments

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 amanager’s funds when conducting its analysis of the GP’strack record.

Even during the initial screening, a fund’s 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 team’s 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

Partner A Partner B Partner C Partner D Partner E Partner F Partner G$ mio

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

Multiple

Invested Capital Realised Multiple

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

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Amount Nr. of Investments

34%

33%

10%

10%

13%

<1x 1-3x 3-5x 5-10x >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 = 0

A

pharma and technology sectors will be needing 2-3 years aheadand can therefore be expected to be interested in acquiring v Deal sourcing v Networkv Experience of developing companies from idea to revenue

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

v Ability to spot the potential in a product v Insight into future market v Go-to-market strategy v Business development v Organisational development and the need for it later on v 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 foundationsdictate 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 company’s organisation, people andbusiness processes correspond to a building’s 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 fund’sunderlying 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 fund’s 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 therepayments 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 IRRPooled 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 fund’s life.

Definition of cash flow Gross 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:v A beta product is launched successfully among testusersv A good salesman (or sales force) with market insightand large network is recruitedv Contracts are concluded with important distributors orsystem integrators on sales of the productv Partnership agreements are entered into on jointdevelopment and milestone payments from the domi-nant company in the market v 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 agrowing interest amongst LPs to see evidence of meaningful riskmitigation by GPs with regard to its personnel. To quote a UK-based fund of funds investor: “We don’t want to be buying justone guy and we don’t therefore like to see just one person sell afund 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 theheart of the new fundraising. The presence of such an individualhas both practical and strategic benefits: they can act as pointperson during the fund raise (see also ‘Campaign factors’ below)and the presence of such an individual is not lost on investorseither (he inference is that your firm takes relations with itsinvestors seriously).

It is also imperative that the broader fundraising team is appro-priately structured and that it operates smoothly. Relationsbetween GPs and their advisors can be highly charged: the sig-nificance of raising the firm’s new fund, the intensity of the itin-erary and the successive sales presentations all help ensure that aheady mix of adrenaline, fatigue and anxiety can influence inter-personal relations. And if the fundraising is not running assmoothly as hoped then the tension only gets greater.Comments one placement agent: “It’s like a marriage: you’respending lots – probably too much – time together, you talkabout the same things again and again and poor or lazy com-munication between one another turns a small issue into a bigproblem.” The lawyers involved in drafting the fund’s docu-mentation are less exposed to the ups and downs experienced onthe fundraising trail but they too need to be able to gel with theprivate equity firm’s team. As commitments begin to be dis-cussed and different lawyers start to get involved on behalf ofLPs, so the tension mounts as terms are negotiated. It is vital atthis stage that the GP can have total faith in its legal representa-tion and that the lawyers themselves are equally as comfortablewith their client.

All this means that your advisors need to have enough time toget familiar with your firm and your team. If your incumbentlegal advisors are not strong on fund structuring, make sure youhave started talking to a firm that is well in advance of launch-ing the fund (and don’t assume the first candidates will be yourfinal choice). Possibly even more important is selecting a place-ment agent – assuming it has been decided that you will have theinput of such a firm. There has been an increasing stratificationof the placement agent industry with successful placementgroups being in considerable demand, enabling them to be high-ly selective as to which mandates they take on. This could wellmean that your first choice agent will not be available; to dis-cover this one month before your scheduled fund launch is dueto start will be disastrous.

Information factors

Although market and people factors each can have considerableimpact on the success or failure of a fundraising, probably themost important elements that shape the final outcome of a fundraise are what can be called information factors. These are thefacts and figures that detail the history of the firm and its priorfunds; they are the profiles of the individual team members atthe GP who are tasked with investing the fund; they are theterms tabled and the terms agreed in the Limited PartnershipAgreement (LPA). And they also relate to how such informationis 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 consistentlywhen marketing the new fund.

Prior to officially launching the new fund, a private equity groupmust devote significant time and effort in preparing its privateplacement memorandum (PPM). The information presented inthis 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 andcompilation now will return to haunt the fundraisers later in theprocess. Recalls one GP who had a protracted fundraising: “Itwas at the due diligence 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 LPsin your existing funds.• Talk to your existing LPs first about your plans fora new fund.• Make a point of getting to know new personnel atinvesting institutions.• Train a team of fundraising presenters – don’t relyon 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 – sobe prepared to spend lengthy periods with your col-leagues and advisors.• Remember raising a private equity fund is not justabout numbers.• Tell your family they are going to see even less ofyou over the coming months.


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Nonetheless, investors are mixed in their views as to whether ornot the terms and conditions of US and European funds areconverging. Almost half of respondents felt that this was thecase, with only 16% stating that in their opinion they weren’t(see Chart Four). However, a substantial proportion (38%) ofinvestors were undecided. This may reflect the fact that manyinvestors in private equity funds remain regionally focused, con-centrating largely on domestic managers. It is generally only thelarger, more experienced investors that commit to private equityfunds 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 complicatedvehicles. 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 withissues relating to the formation and composition of the fund,the treatment of various fees and costs flowing into and outof the fund, and the rights and redresses given to limitedpartners, amongst others. Certain issues will be consideredfundamental and will concern almost all investors. Otherconsiderations, such as co-investment provisions, will be ofimportance 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 areconsidered to be of least importance, respondents were askedto rank a number of different issues addressed by a fund’sterms in descending order of importance (rank one being themost important, followed by rank two and so on, to rankeight). 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-causedivorce provisions; operation of catch-up and clawback provi-sions; side letters; and timeliness of reporting. Respondentswere 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 mostimportance when considering the relative importance of differ-ent terms and conditions. Some 67% of respondents placedcarried interest sharing arrangements in either rank one orrank two, with 61% of investors doing the same with keymanprovisions (see Chart Five).

Arrangements governing the level and timing of carried inter-est payments will exercise investors in private equity funds, ascarried interest is the principal method by which a GP is

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

funds converging?

No16%

Not sure38%

Yes46%

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

Co-investment arrangement

Timeliness of reporting

Side letters

No-fault and for-cause divorceprovisions

Level of management fee andoperation of step-down

Operation of catch-up andclawback provisions

Keyman provisions

Carried interest sharingarrangements

% of respondents

Rank 1

Rank 2

Chart Five: Terms and conditions ranked by LPs as

most important


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cate that they place only a little value on GP hospitality events(see Chart Fifteen). Only 11% of respondents see a lot of valuein them, while 16% state that they see no value whatsoever.What value there is placed on hospitality events revolves aroundrelationship building and networking. Properly staged, a hospi-tality event can offer opportunities for investors to get to knowthe individuals at the GP better, which in turn fosters better rela-tionships and helps to build trust. In particular, respondentspointed to the ability to meet with junior members of the GP asa benefit of hospitality events, along with being able to experiencehow the different levels of staff at the GP interact. Respondentsalso appreciated the ability to network and interact with otherlimited partners that some hospitality events can offer.

Reporting

When it comes to the frequency of reporting, general partnersare 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 proportionexpressing a preference for monthly delivery and the samenumber selecting bi-annually. Private equity is a long-term,fairly illiquid asset class. For that reason, some investors mayfind 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:v Box at the US Open.

v Cocktail parties and dinners.

v Golf (varying from outings to entire weekends).

v GP and special advisor co-sponsored legal confer-

ences.

v Museum / art gallery visits.

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

v Race meetings.

v Sailing.

v Shooting days.

v Theatre.

v Tours of historic venues.

v Trips to the Ryder Cup.

v Wimbledon.

v Wine tasting.

Chart Fifteen: Value placed on hospitality events

What value doLPs place on GPhospitality events?

None at all16%

A little73%

A lot11%

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

f R

esp

on

den

ts

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

f R

esp

on

den

ts


CASE STUDY

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time to begin drafting the marketing materials and partnershipagreement. In the case of AMC, Blair Thompson of SJ Berwinwas key in ensuring that the fund’s structure was going to beright for the investment strategy as well as being attractive andworkable for potential LPs. A key element as we articulated thecase for AMC was to stress that while it was a new concept,Mezzanine Management had a track record of being involved inintroducing mezzanine to new markets in Western Europe in thelate 1980s and early 1990s. The basic argument was that this ele-ment of ‘technology transfer’ was nothing to faze the firm or themembers of the team who would be making investments. Inpractical terms, this meant that there was also a meaningful con-text for the inclusion of the group’s 15-year Western Europeantrack record in the PPM and marketing materials. This featureof AMC’s offering arguably gave the fund significantly moremarketability among institutional investors keen to apply somesort of relevant quantitative track record analysis to their invest-ment decision.

Having launched the marketing of AMC in Spring 2001, itwas clear that the general conditions for raising capital werenot ideal. Institutions whose portfolios were suffering fromthe cyclical downturn were finding it hard enough to committo any private equity product, let alone something as differ-ent as a mezzanine fund focusing on Central Europe. In mar-keting trips to the US, it was clear that the ongoing accessionprocess, during which the five core countries targeted byAMC would join the EU, was still something that manyinstitutions 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 forCentral Europe was discussed within Mezzanine Managementfrom as early as 1999. However, Accession Mezzanine CapitalLP (AMC) itself was not formerly launched until February2001. That fact in itself says much about what it takes to get anew concept fund off the ground. Any new private equity ormezzanine fund requires planning, but taking a new financinginstrument into an emerging private equity market was alwaysgoing to be a particular challenge. And to top it all, AMC wasgoing to saddled with the dreaded ‘first time fund’ label, some-thing that Mezzanine Management hadn’t 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 specificto AMC, but others common to all new funds that are intro-ducing a new concept to the private equity market. Getting theteam together and organising the corporate structure was inmany ways straightforward. The rationale for taking mezza-nine as a product into this region had been formulated withthe two managing directors who were going to be running thefund on a daily basis. One key advantage for AMC was thatthese two gentlemen were effectively part of the MezzanineManagement ‘family’. Franz Hoerhager had sat on the boardsof the firm’s first two funds, while Ben Edwards had been withMezzanine Management from its inception and, after a shorttime outside the firm, had returned to be a founding partnerin the AMC team. The shared history made this ‘new concept’seem more familiar to those that would be involved in makingit happen.

Aside from organisation and formulation of the team, the longerjob was formulating the investment case for the fund. The desirewas for AMC’s investment rationale to be confirmed internally,validated externally, and then fine-tuned and articulated in away that would allow us to approach the institutional investorcommunity. In this respect the partnership with AMC’s corner-stone investor was key. The concept of a cornerstone investortends to be over-generalised by the industry, as it can mean dif-ferent things to different people. For AMC, the cornerstoneinvestor provided more than capital. The European Bank forReconstruction and Development (EBRD) was vital in validat-ing Mezzanine Management’s thesis that there was a market formezzanine in Central Europe. There were definite parallels withwhat Mezzanine Management had achieved when setting upshop in Western Europe: a growing private equity market, a lackof intermediate finance and ongoing macro-economic change.Notwithstanding the similarities, however, if the largest investorin private equity in Central Europe didn’t believe there would bedemand for mezzanine in the region, we would probably do wellto think twice.

One final aspect of the preparations was the legal due diligencein the principal countries targeted by the fund. This involvedtaking 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 fund”Accession Mezzanine Capital LP

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


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Rationale

Arsenal Capital’s debut fund was founded in 2001 to execute con-trol investments of manufacturing and business services compa-nies. Terrence Mullen, Arsenal co-founder and ManagingDirector, left Thomas H. Lee Partners in 2000 on the heels of sev-eral successful buyouts, including Rayovac Corporation andTranswestern Publishing, in which strong operating leaders playeda significant role in delivering above-market returns. In buildingout 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 ChiefGrowth Officer of AlliedSignal/Honeywell, who over 27 years attwo diversified conglomerates (AlliedSignal and W.R. Grace) helda variety of senior managerial and technical positions in a broadrange of industries.

The founding principal behind Arsenal was to combine financialand operating expertise to make good companies better in‘growth and productivity buyouts’. Mullen and Siadat believedthat 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 managementteams and conduct due diligence; and actively grow and improveinvestments. The two decided to invest in industries in whichthey had prior investing and/or operating experience, includingspecialty chemicals, specialty manufacturing, and certain sectorsof healthcare. The team at Arsenal would be built around theseindustries, as well as around certain key functional disciplinesthat would apply to a broad range of businesses, includinghuman capital, quality, supply chain, and technology.

Execution

Firm building and fundraising were accomplished through astaged 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 arapid doubling of committed capital, and by demonstrating anability to improve its portfolio companies Arsenal quicklyreached an overcommitted first fund.

Mullen and Siadat were able to raise an initial $50 million onthe strength of their prior successes, with commitments comingfrom their network of LP relationships and from other, smallerinvestors. They had already brought on board a Vice Presidentwho had worked with Mullen at T.H. Lee and two Associateswith investment banking and consulting backgrounds, and aftersuccessfully completing this initial funding in March 2001,brought on an additional Managing Director, James Marden (anoperating and investment executive from Merck-Medco andMedical Logistics), as well as another Vice President (also fromT.H. Lee) and a third Associate. Siadat also reached out to hisextensive network, recruiting a group of Operating Directorsconsisting of senior operating executives from firms known fortheir industry leadership and operational excellence, includingAlliedSignal, 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. Theindividuals comprising the Arsenal team all had experience ofinvesting in basic middle-market companies, driving organicgrowth while taking advantage of strategic acquisitions, and

“The debut US mid-market fund”Arsenal 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 limited partners:

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 theeconomic cycle. This strategy had resulted in above-market com-pany performance and investment returns at T.H. Lee, atAlliedSignal, and at Merck-Medco. However, the strategyremained unproven by the Arsenal team.

After the initial first closing on $50 million, the partners focusedon deal sourcing and execution in order to demonstrate the mer-its of the Arsenal team and model. Over the next year Arsenal


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, [email protected]

Baring Fund Administration Services

Company nameAddressPhoneFaxOther 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 728493Jersey, Guernsey, Edinburgh, Cheltenham, [email protected]

Abacus Financial Services Group Ltd.

Fund administrators and outsourcers


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Having a good IT platform is not just a means of making life easierfor a GP’s 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 everconsidered a luxury by private equity firms, that is certainly nolonger the case today. Not only do fund administrators need tobe 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 couldbe 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 turnto off-the-shelf or tailored software systems rather than the lesssophisticated means of gathering and distributing informationthat they have relied upon in the past. “It’s not that you can’t stilluse spreadsheets, but that approach is becoming less credible,”says Alan Routledge of eFront Financial Solutions, a privateequity software vendor. “You need to respond to new ways ofreporting and new fund structures, and it’s hard to see how youcan cope with these demands using Excel or manual methods.”

Peter Wooster, director of Accounting Frameworks Limited, aprivate equity and venture capital software provider, says over-reliance on spreadsheets means being exposed to the possibilityof human error. “Limited partners get very upset, for example, if

the amount of a capital call is wrong or it’s requested at thewrong time,” he says. “Those who use Excel-based systems dooccasionally make such mistakes.”

Wooster adds that the use of more sophisticated systems hasgone 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 numberof European private equity associations as well as the PrivateEquity Industry Guidelines Group (PEIGG) in the US.“Historically, private equity firms have kept valuations low untilit comes to realisation, and then the rabbit is pulled out of thehat. Now, accounting standards demand fair value is appliedthrough 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 industryitself. Take for example the growth of funds of funds, whose partGP-part LP status brings with it an added layer of complexity:ranging from serving their own clients to fielding reports fromtheir underlying partnerships through to portfolio level dataassociated with co-investments. They have forced technologyproviders to rise to the challenge of meeting their uniquedemands.

This is illustrated by the case of LGT Partners, the Swiss privateequity 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 cashflow 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 siteasily with the approach of many private equity firms. Woostersays as many of half of Europe’s GPs are running what he calls‘duplicate’ or ‘shadow’ administrative systems, whereby the GPcontinues to run its own in-house system even when fundreporting has been nominally outsourced to an externalprovider. Viewed one way, this may reflect a lack of trust in theadministrator and a desire on the part of the GP to retain somecontrol. But there are also practical reasons for such anapproach, notably the widely acknowledged but not widelybroadcast fact that administrators will normally merely providea rubber stamp for valuations provided by the GP rather thantaking on such a sensitive role themselves.

In viewing duplicate systems as a fact of life, AccountingFrameworks 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 ownedand 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 implicationsmay be profound as private equity firms seek to grow interna-


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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 someof 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 dealdoers say, this is where it’s at … ok it’s not really, but without arobust, 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, it’s 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 offunds in particular can require layers of detail that a top linequarterly report may not be able to provide.

E is for email. Email, internet, web-based reporting, onlineinteraction. The future is here and it’s on the web. No more rain-forest-destroying reports every quarter, all you need is a log-inname, 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 detaileddata 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 dueto the absence of a single set of valuation guidelines. But thanks tothe recent efforts of industry associations such as the EVCA inEurope 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 today’s fund admin-istration and reporting systems is replacing the Excel standardand allowing for electronic communication between GP and LPrather than the mailing of heavy binders of paperwork.

I is for in-house software systems. Many private equity funds offunds develop such systems to handle the complexities of theirreporting: as LPs, they field reports from underlying generalpartnerships, but as co-investors, they may be even reaching intoportfolio-level data.

J is for Jersey. The offshore jurisdiction of choice for Europeanprivate equity funds, Jersey recently enacted the Expert Fundscategory, which includes key regulatory changes designed to givethe island the edge over its offshore rivals.

K is for knowledge-led delivery. A buzz phrase much loved byfund administrators. Another way of saying it’s not much usehaving state-of-the-art systems if you don’t have people whoknow 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 mostlimited 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 withsupport systems.

N is for numbers. You can provide as much detailed, strategy-level information as you like, but the bottom line is that it’s thenumbers 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 mustbe compatible with Microsoft’s industry-leading email programif any firms are going to be interested. In addition to workingwith the email program, jet-setting front office professionals alsowant systems that are able to sync with their newest appendage– the Blackberry.

P is for package. There is now a wide range of software packagesavailable on the market and all are designed to allow the user tostandardise, collate and make accessible relevant information.But ownership of a package is one thing: how central you makeit to the way your business is run will determine whether or notyou can boast a successful IT operation.


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American venture funds (Sequoia and Kleiner Perkins come tomind) and the doyen of multi-strategy, serial fundraising, TheCarlyle Group, appear confident enough to brave the marketentirely on their own. And even some of these firms have beenknown 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 ofoutside advisors, regardless of how much in-house resource theymay 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 privateequity 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 iswhere this particular agent sees his profession’s sweet spot.

The reason why the majority of GP groups still favour using anagent 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 agentlooking after a portfolio of client relationships. As a result, thein-house specialists may find it more difficult to keep track ofexactly how a given limited partner’s attitudes and investmentrequirements are shifting over time – especially if the limitedpartner in question is not an existing client but someone themanager would like to bring into a future partnership. Access toa placement agent’s first-hand knowledge of the shifting patternsamongst the buy-side can be a powerful supplement to in-houserelationships and know-how.

The current increase in fundraising activity is good news for place-ment agents. But intense competition for mandates and a sharpenedfocus on professional standards means a shakeout in the industry islikely to occur, writes Philip Borel.

Global private equity is in fundraising mode. After 24 monthsof intense capital deployment driven by an unprecedented pushon the world’s M&A markets, droves of general partners aregoing back to institutional investors to refill their coffers. In theworld’s key money management centres, the airport lounges areplaying simultaneous host to numerous fundraising GPs. Evenin more remote locations, sightings of private equity managerslooking 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 fundscoming their way with just as much intensity. Yield-hungryinstitutions are betting that private equity can provide at leastpart of the answer to their performance-related difficulties.However, the positive inclination towards the asset class doesnot mean money is being thrown at private equity groupsindiscriminately. According to practitioners familiar with thecurrent institutional investor mindset, limited partner due dili-gence on new funds is as detailed and scrupulous as it has everbeen. “Limited partners have never been busier,” says JohnBarber, a director at London-based fund placement advisorsHelix 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 moredifferentiated understanding of how they want to participate inthe asset class and which types of – as well as how many – man-ager they want to work with. Gone are the days, therefore, ofgeneral partners being able to take a cavalier approach to theirfund raise and, more broadly, to their investor relations. For anumber of years now, the trend amongst the bigger private equi-ty groups has been towards building dedicated, in-house fundplacement and investor relations capabilities, headed by seniormembers of the partnership who have deep knowledge of thetheory and practice of the fundraising process as well as the innerworkings of their firm.

At face value, this trend appears to be a threat to placementagents, those middlemen (and women) making a living out ofhelping to persuade investors to entrust their capital with spe-cific funds. The less knowledgeable of the fundraising processtheir clients are – placement agents get paid by the managersthey represent – the greater their need for billable services.Disintermediation, arising from this growing number of gen-eral partners busily honing their DIY fundraising skills, iseroding the ground on which many a private equity fundplacement business model has been built. Or as one head of IRat a recently fund raising partnership put it: “Why buy a dogand bark yourself?”

Are placement agents an endangered species then? At firstglance, there is no evidence of them disappearing from view. Ofthe many new campaigns being launched every year, only thevery largest LBO groups (Bain Capital, Permira, Providence andBC 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).

It’s not as if any of the sessions, many of them with existing lim-ited partners in the firm’s earlier funds, had been bad. But noneseemed to move beyond the pleasantly vague. All of theseprospects had received the placement memorandum and hadthen taken the meeting: shouldn’t 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 theseinvestors just because of history. As the managing partner hissedas they walked back into the lift from one such session: “This guyhas got something to prove: and we’re going to be the proof.”

All of which depressed the IR director. The nuances of modernfundraising were becoming starkly obvious to him now: how muchpre-marketing one needed to do; how the timing of the subsequent“official” launch of fundraising set the clock ticking so that everyday before the first close mattered; how the investment partners atthe 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 withagents had turned out to be less than satisfactory. Several hadpolitely declined to take the conversation forward. The top tierones who had been involved in over-subscribed, rapid raisingswere clearly able to be ultra-selective - and the GP’s track recordhad to be stellar.

And talking of reputational hazard: no one at the GP wanted tobe mandating an agent perceived as representing second or thirdtier funds. It was like a Saturday night dance: lots of wallflowers,plenty of eye contact but only the golden couples out on thefloor. Neither agent nor fund wanted to be seen out with thewrong partner. People would talk.

Then there was that particularly edgy session with one agentwho told the managing partner that they were raising the newfund too soon, implying that a hunger for fresh management feeincome was driving a premature launch. That was a rapid no.

Time seemed not to be on the firm’s side either. Increasinglyinvestors were wanting to see others commit before moving to adecision themselves, and as the pre-committal phase was drag-ging on, the mood seemed to change - at the GP as well asamongst the LPs. Previous decisions (who to see, what to say,when to say it) were revisited back at the office. Meanwhileinvestor attention drifted, no doubt because other eagerfundraising GPs were lining up outside the LPs’ office.

The IR director paid the cab and walked up the steps of histownhouse. Just time enough to sort some fresh laundry beforeSunday’s flight to Asia. Would he still be on the road in a year’stime 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 theasset class on a global basis. They offer private equity and otheralternative asset professionals, investors, advisors and othersinvolved 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 DirectoryThe most comprehensive international guide to investors inprivate equity funds. This 990-page directory providesdetailed, in-depth profiles of the private equity investmentprograms of over 870 institutional investors and advisorsfrom around the globe. Built from the ground-up by a teamof multi-lingual researchers, this directory is the most com-prehensive, extensive and user friendly guide to current andactive investors in the asset class available. An indispensablefundraising tool for those raising and marketing privateequity and venture capital funds.

• The Global Directory of Investors in Private Real Estate FundsThe only guide to investors in private real estate funds. Thisdirectory provides detailed, in-depth profiles of the privatereal estate investment programs of over 500 institutionalinvestors and advisors from around the globe. Built from theground-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 andmarketing 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 equityindustry in an incisive manner, providing readers with a valuableprimer on these issues.

• A Guide to Private Equity Fund of Funds ManagersThe definitive guide to the global private equity fund offunds 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 surveyinto the dynamics and future of the fund of funds marketundertaken with fund of funds managers, placement agentsand LPs. Also contains the most comprehensive directory offund of funds managers available, profiling more than 150managers from around the globe, including contact details,investment remits and previous funds backed. This report isan essential purchase for anyone interested in understandingand raising capital from this increasingly important area ofthe private equity market.

Contributors include Adams Street Partners, LondonBusiness School, Mowbray Capital LLP, O’Melveny &Myers LLP, Partners Group, Probitas Partners, SCMStrategic 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 byleading international law firm Ashurst, this is the first in aseries of country-specific guides that address all aspects ofprivate equity-backed buyouts. Topics covered include: thedevelopment of the UK buyout market; the structure ofleveraged buyouts; documentation; taking equity; debt andsecurity; taxation aspects of LBOs; the impact of EC andUK 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 forall those involved in UK private equity buyouts.

• Private Equity Technology: Assessing the AlternativesAn assessment of technology solutions and how they applyto private equity firms. This 222-page Market Report coversthe importance and risks of technology, how technologyspecifically applies to the modern private equity firm andincludes 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 towardstechnology, along with a unique directory of private equitytechnology providers and their products/services. This guideis essential reading for anyone involved in developing a pri-vate equity firm’s technology infrastructure.

• A Guide to Private Equity Fund Placement SpecialistsThe definitive guide to private equity placement agents, this120-page Market Report combines in-depth editorial with aglobal directory of agents and the results from surveyingboth LPs and GPs about their views on the role and contri-


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bution of agents in the fund raising process. The book isfilled with information and comment relevant to anyoneinvolved with private equity funds and fund raising.

Research Guides

Cover the broader issues, themes and trends that are helping toshape the development of the private equity asset class.Consisting of in-depth analysis and comment, along with theresults of surveys into the attitudes and opinions of private equi-ty professionals and investors, these research-rich, multi-con-tributor studies provide readers with some of the most authori-tative and substantive comment available on private equity.

• The Guide to Private Equity Fund Investment Due DiligenceA detailed study into performing due diligence on privateequity and venture capital funds and managers designed toassist institutional investors in making investment selectionsin this inefficient asset class. This 212-page Research Guideincludes contributions from leading institutional investorsin private equity funds, placement agents, fund managersand investment consultants and advisors. It combines in-depth editorial with a global directory of consultants pro-viding specialised private equity advice to institutions, alongwith the results of a in-depth survey into limited partnerattitudes towards fund investment due diligence.

Contributors include AlpInvest Partners N.V., CooleyGodward LLP, Dow Employees’ Pension Plan, Key CapitalCorporation, Mark Weisdorf Associates Ltd., PacificCorporate Group LLC, Pantheon Ventures, PensionConsulting Alliance Inc., Probitas Partners, Proskauer RoseLLP, SJ Berwin, VCM Venture Capital ManagementGmbH, Watson Wyatt & Company.

• The Guide to Private Equity FundraisingA complete and in-depth examination of all the issues sur-rounding private equity fundraising. This Research Guideincludes contributions from leading general partners, privateequity placement agents, legal advisors and limited partners.

It combines expert editorial from leading market practition-ers with the results of two surveys of limited partners on thetopics of fund terms and conditions and investor relations,alongside a number of unique case studies of actual recentfundraisings.

Contributors include Arsenal Capital Partners, ATP PrivateEquity Partners, Campbell Lutyens & Co. Limited, CliffordChance LLP, Helix Associates, Indigo Capital Limited,Macfarlanes, Mezzanine Management UK Limited,Montagu Private Equity Limited, Monument Group,MVision Private Equity Advisers Limited, Odlander,Fredrikson & Co AB, SJ Berwin.

• Routes to LiquidityA detailed study of how liquidity is being brought to theasset class. This 224-page Research Guide includes contri-butions from leading players in the liquidity field, combin-ing in-depth editorial with a global directory of secondarybuyers and advisors, along with the results of a unique sur-vey into the attitudes towards the secondary market of buy-ers, sellers and GPs.

Contributors include Camelot Group, Campbell Lutyens,Capital Dynamics, Cogent Partners, Coller Capital,Debevoise & Plimpton, Deutsche Bank, Goldman Sachs,Greenpark Capital, Landmark Partners, Lexington Partners,LGT Capital Partners, London Business School, New YorkPrivate Placement Network, Pantheon Ventures, PartnersGroup, Paul Capital Partners, Pomona Capital, ProbitasPartners, Schroder Ventures International Investment Trust,SJ Berwin, Standard & Poor’s and Vision Capital.

If you have any queries about Private Equity International’s currentand forthcoming research publications please contact:

Nick GordonHead of Research PublicationsPrivate Equity InternationalSecond FloorSycamore HouseSycamore StreetLondon EC1Y 0SGUnited Kingdom+44 (0)20 7566 [email protected]


private equity - guide to equity fund fundraising

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