sii cpd seminar: 4 th october 2006
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SII CPD Seminar: 4 th October 2006. Private equity funds – the ‘new’ alternative. Stephanie Biggs, SJ Berwin LLP David Bailey MSI, Augentius Fund Administration. SJ Berwin LLP, 10 Queen Street Place, London EC4R 1BE. Private Equity Funds – the “new” Alternative 4 th October 2006. - PowerPoint PPT PresentationTRANSCRIPT
SII CPD Seminar: 4th October 2006
Private equity funds – the ‘new’ alternative
Stephanie Biggs, SJ Berwin LLP
David Bailey MSI, Augentius Fund Administration
SJ Berwin LLP, 10 Queen Street Place,
London EC4R 1BE
Private Equity Funds – the “new” Alternative
4th October 2006
David Bailey MSI, Augentius Fund Administration and Stephanie Biggs, S J Berwin
Growth in Private Equity
The Investment Process
Fund Structures Used
Where next?
Some Basic Facts
Private equity industry in Europe “started” in 1980 – few in the industry with more than 20 years experience
Since inception the Private Equity Industry has returned 10.3% net of management fees and carried interest (per EVCA)
In 2005 €71.8bn raised for investment in Europe and €47bn invested
The UK raised €20.8bn for investment in PE but managed 45.6bn – the UK is the European centre of PE and that is predominately London
Data per EVCA
The Evolution of Activity
71.8
8.0
48.0
27.0 27.5
20.0 20.3
25.427.5
40.0
36.9
6.8
14.5
9.7
25.1
35.0
24.327.6
29.1
47.0
13.6
19.6
10.712.5
9.18.6
29.8
7.0
3.65.8
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Funds Raised
Investments
Divestments
€ billion
2005 European Private Equity SurveyConducted by Thomson Financial and PricewaterhouseCoopers on behalf of EVCA
45.6
11.5
1.01.0
17.0
1.13.84.04.5
6.5
20.8
1.12.91.01.32.4
0
5
10
15
20
25
30
35
40
45
50
UKUSA
Fran
ce
Germ
any
Asia
Nethe
rland
sI taly
Spain
Denm
ark
Country of Origin (LPs location)
Country of Management (GPs location)
€ billion
Note: US amount of € 17 billion comprises fundraising from US LPs to European funds
2005 European Private Equity SurveyConducted by Thomson Financial and PricewaterhouseCoopers on behalf of EVCA
….and most of it happens in the UK/London
The Investment Process
Fund is raised – but committed capital not actual cash
Manager then seeks to find investment deals – 5/5 per annum
15-20 deals per fund
5 years to invest and 5 years to divest – 10 year fund life
Cash called when investment made
Cash distributed when investment sold
Funds primarily use Limited Partnership structures
The Limited Partnership Fund
StructureStephanie Biggs4 October 2006
The Limited Partnership Fund Structure
SJ Berwin LLP
• Founded in 1982
• A full service international law practice
• 150 partners and 600 lawyers
• Offices in London, Brussels, Frankfurt, Berlin, Munich, Madrid, Paris, Milan and Turin
• Relationships/associations across Europe, the United States and globally
• Commitment to excellence
• Highly commercial approach to solving legal problems
The Limited Partnership Fund Structure
Our Private Equity Team
• Over 150 dedicated lawyers across Europe
• Corporate team supported by Banking, Financial Services, Tax, Property, Pensions, Employment, EU and others
• We structure Buyout Funds, Venture Funds, Infrastructure Funds, Mezzanine Funds, PE Real Estate Funds, Funds of Funds, Secondaries Funds
• Clients include Apax, Candover, Bridgepoint, PAI, Terra Firma, TDR Capital, Nomura Phase4 Ventures, Coller Capital, Greenpark Capital, Macquarie, Benchmark
The Limited Partnership Fund Structure
Recent Awards
• "Law Firm of the Year" at the EVCA/Real Deals Private Equity Awards 2004 and 2005
• "Law Firm of the Year" at the European Venture Capital Journal Private Equity Awards 2004, 2005 and 2006
• "Best Law Firm (Fund Formation)" by Private Equity Online and Private Equity International 2004, 2005 and 2006
• "UK Firm of the Year" at the Legal Week Awards 2005
• Jonathan Blake named Global Lawyer of the Year 2005 in the Private Funds Category by the International Who’s Who of Business Lawyers 2005/06
The Limited Partnership Fund Structure
Structuring Objectives – The Investor
• Limited liability
• Investors must be no worse off than for direct investments
• The fund must be tax exempt or tax transparent as regards capital gains and income
• Accommodate specific needs
The Limited Partnership Fund Structure
Structuring Objectives – The Manager
• Tax efficient management charge - no VAT
• Tax efficient carried interest
• Suitable for all types of investors
• Capable of being marketed
The Limited Partnership Fund Structure
Why a limited partnership?
• Suitable for nearly all types of investor
• Flexible
• Limited liability for investors
• Tax transparent
• No permanent establishment in UK
• No VAT on management charge (“2”)
• Beneficial tax regime for carried interest (“20”)
The Limited Partnership Fund Structure
Basic limited partnership structure
Limited Partnership
Carried InterestPartnership
InvestorsGeneral
Partner
Manager
Management Agreement
Portfolio Companies
IHC IHC
The Limited Partnership Fund Structure
Key players
• General Partner
• Limited Partners
• Founder Partner
• Manager
The Limited Partnership Fund Structure
General partner
• Must have at least one general partner
• Unlimited liability
• Normally:
– a £100 company
– (another) limited partnership
The Limited Partnership Fund Structure
Limited partners
• Anyone who is not a general partner
• Liability limited to amount of capital contributed
• PROVIDED THAT
• Does not take part in management
The Limited Partnership Fund Structure
Founder partner
• Carried interest vehicle
• Generally a Scottish limited partnership
• Executives are limited partners
• Preserves nature of receipts (income/capital)
The Limited Partnership Fund Structure
Manager
• Not a partner in the fund
• Either a company or an LLP
• FSA authorised
The Limited Partnership Fund Structure
Life Cycle of a Buyout Fund
• Issue of PPM and marketing
• First close - Final close within 12 months
• Investment period of 5 years
• Investments held for 2-4 years
• Realisation period of 5 years (can be extended)
• Manager can usually raise a new fund once 75%-80% invested
The Limited Partnership Fund Structure
Key Financial Terms
• Commitments drawn down as needed
• Management charge of 1.5% - 2%
• Preferred return (or hurdle) of 8%
• Carried interest of 20%
– Fund as a whole
– Deal by deal
The Limited Partnership Fund Structure
Complexities
• Requirements of individual investors
– US ERISA investors
• Requirements of individual executives
• Pan-European issues
– Need for local presence
– VAT recovery
– Offshore structures
The Limited Partnership Fund Structure
GermanExecutives
Typical Pan European Fund Structure
Investors
AdvisersManager
General Partner(Scottish Limited Partnership)
French adviser
Italian adviser
Germanadviser
Guernsey Co
General Partner
General Partner
FrenchExecutives
UKExecutivesUK Co
KG
LP I - ERISA (English LP)
LP 2 - Non ERISA (English LP)
Advisory Committee
General Partner
Investors
ItalianExecutives
The Limited Partnership Fund
StructureStephanie Biggs4 October 2006
PE makes a contribution
PE managers roll their sleeves up and do things with their investments
PE has helped in shaping UK economy
PE backed companies in the UK employ approx 3 million people – 20% of UK private sector employees
MBOs – the freedom to innovate
For further information contact
David Bailey
Augentius Fund Administration LLP
Stephanie Biggs
SJ Berwin