Transcript Dia 1

Masterclass PE Fundraising
Prof. Luc Nijs
Founder & Chairman Horizon Ltd
Geneva July 2, 2009
ICBI Super Return Emerging markets Conference
How today will look like (more or less)
 9.30-11.00
 11.15-12.30
Data review
Structural considerations and
applications
Terms & conditions (I)
 13.30-14.15
 14.30-16.00
 16.00-16.30
Terms & conditions (II)
EM PE as an asset class
Wrap-up, Q&A and discussion
Where to start?
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Why not fundraising !
Despite the market conditions EM PE raised $ 66,5 bio in 2008, a 12% rise
Proportional share in total global PE fundraising raising for 5 years in a row now
Relative decoupling & economic power shifting is reinforced by current
recession
Cyclical recession became a structural one and the risk of L-shape depression is
looming (cf. Ponzi economy)
Source: EMPEA April 2009
Fundraising per region
Market outlook for fundraising
Market Outlook
 A few conflicting data:
 Preqin (April 2009):
 US leads the way with 23 bio $
 Europe 20,2 bio $
 EM 2,7 bio$
 Lot of funds postpone final closing
 Development finance will focus more on direct
investing (FOM,…)
 Force of consolidation coming in
 25-50% of GPs are struggling for survival
Market outlook for EM fundraising
The LP View
Survey April 2009
Would you consider committing to Emerging
Market funds?
 Yes
94%
 No
6%
Would you invest with a Global Emerging Market
Fund?
 Yes
50%
 No
50%
Would you consider Local Emerging Market
Funds?
 Yes
95%
 No
5%
Which Region would you invest in?
 Africa 9%
 Asia Pacific
 Latin America
 Middle East
7%
 Russia 9%
30%
45%
Which emerging country would you
invest in?
 Australia5%
 Brazil
 China 8%
 India
 MENA 8%
 Russia
 South Africa
5%
43%
18%
13%
Investors stay committed…but…
Some of the underlying fundamentals
What about the converts…
Market Outlook
 Argumentation for refusal of EM proposition:
 (Short-term) EM risk
 Lack of experience in EMs
 Only few quality GPs available in EMs
 Quantitative easing and systemic risk?
Some of the underlying fundamentals
A (new) inconvenient truth about risk
Emerging Markets Risks
Political instability
Market fundamentals
Counterparty
Emerging Markets
Curreny (F/X)
Pre-crisis Thinking
High Risk
High Growth
High Risk
High Growth
Low Risk
Low Growth
High Risk
Low Growth
Post-crisis Thinking
Market fundamentals
Developed Markets
Legal / Regulatory
Developed Markets Risks
Structural issues
Environmental
Legal / Regulatory
Av. risk premiums in EMs (%, 2008-2009)
Another inconvenience
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Capital inflows to developing world
(Source: IFF, 27 January 2009)
Historic & projected EV/EBITDA
Source: Prop. Research, averages for the clusters
Something else that is inconvenient
Past performance & GP selection
Institutional investor views: EM versus
developed (December 2008)
Institutional investor views: EM versus
developed (April 2009)
Portfolio allocation
PE penetration as an asset class
Source: Goldman Sachs, EMPEA
Portfolio exposure
Reasons for expansion or continuation
Source: EMPEA 2008
EM Private Equity performance
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
Comparative end-to-end results 6/30/2008
(*) Statistical noise likely due to low sample distribution
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
Impact on portfolio construction
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In 2008 about 1/3 of the total pool of LPs had some kind of exposure to EMs
Portfolio weighting somewhere between 10-30%
Do or die for LPs the next couple of years
Systemic risk in Western markets are not reflected in risk premiums
Source: Proprietary data
Smoke & mirrors…
 BVCA and E&Y 2008 performance study
A disaster waiting to happen
So now what…
 If PE is an activist shareholders’ position than why
have these funds been managed as investment
vehicles
 Demonstrate inept to manage companies
 Focus on financial engineering
 Models have to change
 Fund structure
 Terms & conditions
 Exit modeling
 Valuation and transparency
So now what…life after leverage
 Value creation/operational side
 Impact of average /holding periods
 Massive room for improvement
of private capital formation
 Put capital to work
 But do they have
the right ‘human capital in place’?
Is this time going to be different for EMs?
 During previous booms and busts the developed
and developing world evolved in a parallel fashion
 This time there is a (partly) contra-cyclical pattern
 Political & regulatory impact
 Global versus local teams: the best of both
 Business model rethinking & paradigm shift
 EM debt usage less or more prudent
Is there something we can learn
from the past?
Natural questions
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Is this a crises like every other or a profound shift?
How will the industry evolve in the next decade?
What are the implications for the asset class?
What is the position of EM propositions within this
space?
 What is the impact on portfolio management and
allocation
 Can we learn something that might affect the
fundraising effort?
This talk
 Will seek to answer these questions by looking
backwards
 Traditionally, very hard to understand key drivers
of private equity success
 In recent years, much more information
 Drawing on large-sample and case evidence
 Thoughts about future of private equity more
generally…
 And particularly in new private equity markets
Everyone does about the same
 Frequent claim among investors:
 Emphasis on balancing portfolio by:
 Type of fund
 Location of fund
 Vintage year
 Similar to what’s seen in public market investing
Recent work
 Has sought to understand how much difference
is…
 Between fund classes
 Between funds
 Seeking to distinguish importance of individual
performance
Evidence from the Yale endowment
Bond Funds
Difference Between
Top and Bottom
Quartile
Equity
Funds
Private
Equity
0%
Source: Lerner [2003]
5%
10%
15%
More general patterns
20%
15%
10%
5%
0%
All Private Equity
Source: Kaplan and Schoar [2005]
Venture Capital
Buyouts
The reality
 The key difference is between different funds:
 Unlike public markets
 Investing in the right categories is not nearly as
critical as getting into the right companies!
“Regression to the mean”
 Frequently heard stories…
 “Our last two funds were a disappointment, but
we’re getting back on track…”
 “I considered investing in the fund, but I decided
that their success must be a fluke...”
Recent work
 Has sought to understand nature of performance:
 Is there little continuity from quarter-to-quarter?
 Many studies of public markets suggest little
persistence:
 Mutual funds
 Hedge funds
 Or is the reality different?
Persistence of performance
Bottom
Medium
Bottom Tercile
61%
22%
17%
Medium Tercile
25%
45%
30%
Top Tercile
27%
24%
48%
Source: Kaplan and Schoar [2005]
Top
• High likelihood that the
next funds of a given
partnership stays in the
same performance
bracket
 Persistence
• 1% boost in past
performance → 0.77%
boost in next fund’s
performance
The reality
 Performance seems to be very “sticky”:
 Good continue to do well
 Underperformers continue to do so
 While exceptions, seems to be the basic rule:
 Seen in buyouts as well as venture
Growth doesn’t hurt
 Numerous venture groups have grown
dramatically.
 Mid 1980s and late 1990s.
 Recent dramatic growth by buyout funds
 Have typically argued that can sustain performance
despite growth
 But powerful incentives to grow may induce skepticism
 Market is now clearly turning away from the at this stage
Fund sequence number
• Positive relationship
between IRR and fund
sequence number
• First time funds perform
especially poorly
• Regression results control
for vintage year effect,
fund category and fund size
IRR and Fund Sequence Number
25
20
IRR
15
10
5
0
1
2
3
4
5
6
7
Sequence Number
Source: Lerner and Schoar [2005]
8
9
10
11
Fund size
 Concave relationship
between IRR and fund size
 Fund size is measured as
capital committed at
closing
 Regression results control
for vintage year, fund
category
Relation IRR and Fund Size
14
12
10
IRR
8
6
4
2
0
1
2
3
4
5
6
7
Fund size in $100 m illion
Source: Lerner and Schoar [2005]
8
9
10
11
Change in fund size
• Negative relationship
between change in IRR and
change in fund size for a
given firm
• Fund size is measured as
capital committed at
closing
• Regression results control
for vintage year effect,
fund category, and firm
fixed effects
Source: Lerner and Schoar [2005]
Partner to size ratio
IRR and Partner to Size Ratio
• Positive relationship
between IRR and the ratio
of partners to committed
capital
• Regression results control
for vintage year effect,
fund category, and fund
size
30
25
IRR
20
15
10
5
0
0
0.2
0.4
Number of Partners to $100 million in committed capital
Source: Lerner and Schoar [2005]
0.6
Partner to total staff ratio
IRR and Partner to total staff ratio
16
14
12
IRR
10
8
6
4
2
0
0.1
0.3
0.5
Number of partners to total staff
Source: Lerner and Schoar [2005]
0.7
• Positive relationship
between IRR and the ratio
of partners to total staff
• Total staff includes
associates, principals etc,
excludes purely admin.
positions
• Regression results control
for vintage year effect,
fund category, and fund
size
Difference in deal success rate
 Specialist firms are
more likely to have
successful deals
3%
 I.e., 30% vs. 32.1% vs.
33.1%.
2%
 Partners’ focus
especially matters
1%
0%
Specialized Generalist Generalist
Firm with
Firm with
Firm with
Specialized Specialized Generalist
People
People
People
Source: Gompers, Kovner, Lerner and Scharfstein [2005]
Returns: Disparity between recent past
and historical pattern
25%
20%
Small Funds
Medium Funds
Large Funds
Mega Funds
15%
10%
5%
0%
10/86-9/06
10/03-9/06
Source: Venture Economics
Returns: One past episode
50%
40%
Small Funds
Medium Funds
Large Funds
Mega Funds
30%
20%
10%
0%
12/86-12/89
Source: Venture Economics
One past episode (continued)
50%
40%
Small Funds
Medium Funds
Large Funds
Mega Funds
30%
20%
10%
0%
12/86-12/89
12/89-12/92
Source: Venture Economics
The reality
 Funds with higher sequence number, i.e., established funds,
perform better
 Larger funds have better performance—to a point
 Rapid growth in capital under management is associated
with performance deterioration
 May be driven by less impact of partners:
 Funds with more partners per dollar managed have higher returns
 Funds with higher partner-to-non-partner ratio have higher returns
 Decline in specialization leads to poorer performance
Anyone can play
 Lately, great deal of interest from new investors:
 Public pension funds
 Non-U.S. governmental entities
 Attracted by high returns that established
investors have enjoyed
Recent research
 Has sought to understand the differences between
investors
 Does everyone do the same?
 Or are there substantial differences?
 Key data:
 LP investment decisions
 Fund returns
 GP and LP characteristics
Performance summary
 Substantial performance differences:
 ~13% differential in annual returns between
endowments and next best
 Entirely driven by early- and late-stage VC
 Advisors and banks particularly poor
 Patterns true when weighted as well
Performance by investor type
Banks
Advisors
Public Pensions
Insurance Companies
Private Pensions
Endowments
-5%
Source: Lerner, Schoar and Wang [2005]
0%
5%
10%
15%
20%
Concerns with univariate tests
 Do these reflect other differences:
 E.g., endowments early investors and more
heavily weight VC
 Examine through regressions:
 Regress IRR on fund and LP characteristics
 Only include <1999 funds to insure meaningful
performance numbers
Regression analyses
 Differences persist:
 Endowments outperform; corporate pensions
and banks underperform
 Proximity negatively associated with
performance
 Younger LPs do worse:
 At least among advisors, banks, corporate pensions,
and insurers
Regression analyses (cont’d)
 Market inflows:
 Negative in general
 Especially for advisors, corporate pensions, and
insurers.
 Hot markets appear to lead to more herding by these
investors
 Question: Does a bear market have the same effect?
Reinvestment decisions
 Reinvestment decision should be made with better
information and without access constraints
 Look at follow-on funds in our sample:
 Only look at same classes of funds
Statistics on reinvestment
 Reinvestment rates differ:
 Public pensions, insurers higher
 Higher in VC than buyouts
 More likely to reinvest when high IRR
 Next fund has higher IRR when reinvest
Reinvestment (continued)
 Pension funds and advisors tend to invest when
current returns are high
 But much more dramatic difference in future
returns from endowments
 Also smaller funds
 Substantial differences in ability to identify or act
on inside information
Reinvestment and current returns
40
30
20
Reinvested
Did Not Invest
10
0
Advisors
Banks
Corporate Endowments Public
Pensions
Pensions
Source: Lerner, Schoar and Wang [2005]
Reinvestment and future returns
40
30
20
Reinvested
Did Not Invest
10
0
-10
Advisors
Banks
Corporate Endowments Public
Pensions
Pensions
Source: Lerner, Schoar and Wang [2005]
Is access an explanation?
 Do endowments do well because they were “there
first”?
 Other way to look at:
 Funds that were undersubscribed
 Funds which took a long time to raise
 Same patterns appear!
The reality
 Huge disparities in performance.
 Superior performance has been largely confined to
endowments.
 Raise substantial questions about ability of new
entrants to succeed.
Summary
 Funds with higher sequence number, i.e.,
established funds, have performed better
→Lesson: Being early is critical
 Rapid growth in capital under management was
associated with performance deterioration
 May be driven by organizational challenges:
 Funds with more partners per dollar managed have higher returns
 Funds with higher partner-to-non-partner ratio have higher
returns. Decline in specialization leads to poorer performance
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→Lesson: Managing growth is major challenge
 Investors have had wildly uneven returns.
→Lesson: Having right investment partners matters
The special challenges of new private
equity markets
 Lessons from Celtel, Skype and Shanda:
 HBS field cases written on all three
 Represent Africa, Europe and China
 The checks have cleared!
All markets are global
 Skype’s business model depended on consumers
calling across borders
 Celtel’s pan-African strategy attracted international
telecoms equipment companies to become second
largest source of financing
 Shanda’s revenues were more than 80% dependent
on a game written and owned by a Korean
company
Expect deals to be massively more
work intensive
 Skype’s code was written in Estonia, the
management team was spread throughout Europe,
the customers were all over, and the founders could
not travel to the US
 Celtel needed to raise over $400mm from 2001 to
2004 during the meltdown of the
telecommunication investing markets—all of it to
be spent in Africa
 Shanda was threatened by a lawsuit from the
Korean vendor whose game accounted for most of
their revenue
Back to basics
 Skype’s founders had control over a sale
 Celtel had minority partners in all 15 of its
operations (i.e.: 15 different groups in 15 different
African countries). It also had an all common stock
equity capitalization
 Shanda management was furious that SAIF sold
some stock after the IPO
The real value added is transparency
 Skype owned its technology as a result of the VC
investment
 Celtel had a prestigious board who insisted on
transparency and openly refused licenses that had
the taint of corruption
 Shanda’s settlement with its key vendor was
negotiated by SAIF
Luck still counts
 (this space intentionally left blank)
Advice: Top tier firms must be global
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LPs will prefer to go global with people they know, but
will be skeptical about execution—so they will pursue a
mixed model
The top tier firms will need to be global to maintain top
tier status—there is simply too much information they
would otherwise miss, and the overseas growth and
return rates will be higher than US return rates
Global top tier firms will outperform local top tier firms
over longer periods of time
Brands will likely cross borders but are no guarantee of
success
Advice: Tourist VCs will not be successful,
you must be on the ground
Act global but think local.
Local, permanent, day in, day out presence is
an absolute must
Advice: The industry will not be
replicate that in the U.S.
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Less developed PE markets require much
more resource on each deal
Investment strategy may vary from location to
location:
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Less of a premium for early stage investing in less
developed markets
Advice: There are no settled models for
running a global private equity firm
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Lots of models to choose from:
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Large PE firms provide useful models of satellite
offices
There are interesting models of building an affiliate
firm with different GPs and LPs (Accel, Benchmark);
There are many examples of investment in
independent firms (Chengwei, Argnor)
But no set answers yet
Keys to success: communication among investing
partners, expectation setting between offices,
portfolio management globally
Advice: You can’t do this on the
cheap
Must be approached with the same intensity
and vigor and commitment as your most
important initiative
Advice: The key company value builder is
transparency
Exits are through one global market, whether they
are M&A or public floats (NY/London)
This is the lesson of the 60’s and 70’s all over again:
don’t treat portfolio companies as small
companies, treat them as large companies who
happen to be small right now
PE firms will need to stockpile management talent
and keep overseas offices staffed well enough for
frequent, persistent oversight of portfolio
companies
Five Easy Pieces (of Advice)
1. Top tier firms must be global
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Global top tier firms will outperform local top tier firms over longer
periods of time
2. Tourist VCs will not be successful, you must be on
the ground
3. Overseas industry will not be replicas of U.S.
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There are no settled models for running a global private equity firm
4. PE Firms can not go global on the cheap
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Must be approached with intensity, vigor and commitment.
5. The key company value builder is transparency
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Teaching the culture of minority equity ownership may be the lasting
legacy of US venture capital.
An appreciation of the current state of
play
 Despite the record write-offs, liquidity constraints
(distribution drought & the denominator effect)
and possible defaults LPs are facing there seems to
be a continued interest in the asset class.
 UK pension fund association (April 2009): continued support for the PE
environment through allocations
 CalPERS to put less in stocks, raise bet on private equity (June 2009)
 Role of private equity in institutional investor portfolios to increase,
says fund of funds manager Adveq (June 2009)
An appreciation of the current state of
play
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Short-term tough with limited visibility
LP momentum
How to manage a new equilibrium
What is the new ‘normal’
How do normal people behave in ‘abnormal times’
Fundraising efforts
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First-time fund (infra)
Follow-up fund
Who are you as a team/organization?
Track record
What is considered important
 Survey institutional investors by BNY Mellon
(May 2009)
1. Alignment of interests
2. Transparency
3. Performance
4. ….
5. ….
Do you have a fundraising strategy?
Competency
Target
investors
FR
strategy
Time horizon
Track record
Who do you want to approach?
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UHNWI
Family offices
Pension funds
Insurance funds
Endowments
SWFs
FoF
Other institutional investors
In the West or in EMs
Are EM LPs different than their Western
peers
 Better understanding of EMs?
 More sensitive to (Western) brand association
when selecting GPs
 Diverting capital flows during crunch times
(reversed globalization)
 Quite often larger allocations than Western peers
 Often faced with regulatory restrictions
 Lack of transparent decision-making and
communication process
And what do you know about them?
 In particular:
 Their asset allocation program
 Geographical coverage
 Recent performance
 Their understanding and experience in PE and
alternative assets
 Consistency of in-house team
 Timeline of their liabilities
 F.e. defined benefit vs. defined contribution plans
And who are you as a sponsor?
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What have been your previous fund strategies?
Regional/country versus global?
Single- versus multi-industry approaches
Open ended or closed funds
How are you organized?
Who is doing fundraising? Fulltime?
Do you have Investor relationship managers?
What kind of communication protocol do you have
in place?
What comes first?
 Putting the whole structure in place
 Or raising funds and when feasible put stuff in
motion?
 The latter occurring more often recently given the
uncertainty in the fundraising cycle
The use of FoF
 Everybody has its own agenda
 Is there still place for FoFs in an economic
environment where things are ‘back to basic’
 Only very few FoFs have decent EM experience
(despite what they tell you)
 Do you want to invest someone’s money you don’t
know (remember Bank of NY Mellon survey)
 What kind of mandate do they have?
 Did they (FoFs) deliver for their investors?
 Let’s look at the reasons why they exist anyway?
The use of FoF
 Avoid them if you can
 Not instrumental for your business going forward
 Reality is a bit against my position:
 In hedge fund space 50% of commitments come
through FoF (but are more specialized as well)
 ‘Hot money’ issue is something you want to
avoid
UHNWI
 Easier to build a relationship with
 But reality tells us that given the time lag between
commitment and ‘draw down’ defaults are more
common than with institutionals
 Often need a feeder fund to facilitate smaller
commitments
Your LPs
 Do you believe it is your job to educate them?
 On emerging markets?
 On the asset class?
 On expectation re returns?
The value-add of placement agents
 Besides raising capital by putting their Rolodex to
work
 Expansion of LP network beyond your core
geographies
 Market your fund knowing local cultures re
fundraising and investment strategy
 Add value towards PPM and content
The value-add of placement agents
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How to position the fund towards investors
Pinpoint a meaningful amount to be raised
Coordinate road shows and be more efficient
Make your fundraising more efficient
Pimp up your marketing materials
What are the internal processes you have to go
through
 Match LPs with your investment strategy-Who is
buying what?
 Moving headcount among LPs
First-time funds
 Feels often like climbing the Everest without
oxygen
 Team-up with existing player
 Work with non- financially focused LPs
 Include anchor investors
 LPs are not there to create a barrier to entry
 Most LPs have boilerplate DD processes
whatever they proclaim
What are they looking for
Track record
Strategy
Significant realizations
Consistent application
Compelling returns
Ability to execute
Consistency
Uniqueness
Attribution
Clarity
Core attributes
Focus
Consistent top quartile performance
Desirable and differentiated strategy
Team
Strong & stable team
Proper firm structure
Structure
Stability
Lack of conflicts
Reputation/Integrity
Plan for succession
Ethical culture
Defendable fund size
Properly sized
Proper team motivation
Applicable experience
Market terms & conditions
Complementary skills
Track record
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In what?
Barrier to entry
Why is it so important?
Sometimes legal constraints by institutional
investors
Impressive team & people versus track record?
Funds perform consistent within quartiles
History tells us something about the future
In particular important in environment where new
GP have been mushrooming
Strategy
 ESG principles in EMs: risk management or value
creation?
 In what strategies would that show up?
 Real issue in relation to EMs
 Are they all executed the same way
 Relevant for your portfolio companies but also for
yourself as a GP
Team
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What is the DNA of your team?
What is the set-up of the team? Locations?
How is decision-making shared?
How is the carry shared?
Stability- How are you going to execute your
strategy
 Is your team ready for the ‘new normal’ ..i.e.
generating returns by improving operations and
creating synergies rather than leverage
 Can your HC live up to that test?
Team
 The HC rainmaker paradox
 Human Capital center of excellence
 Retention
 Change management
 Compliance
 Organizational Development
 Recruiting
 Sourcing
 Resource Development
The due diligence process
 They will tell you that they have a very
sophisticated system which is thorough and even
groundbreaking
 Reality is that most of the process is boilerplate
and based on gut feeling
 Some of them will not go beyond your track record
 That way great time ‘first-time funds’ are missed
out on
 Be aware of those that tell you the are interested
in emerging markets but have never made an
allocation before
The due diligence process
 Manage the timeline
 It can also help you emerging your true potential
 Often external advisors are hired to execute the
DD
 Re-run of older fund number to measure
accurateness
 What are they looking for?
 Besides everything discussed
 Deal flow origination capabilities
 Exit strategies
The due diligence process
 Important given the high dispersion of results in
the asset class
 Excess returns depend largely on manager
selection
 Identifying risk and relating then to the return
capacity of any given manager against the
background
of
competing
investment
opportunities
The due diligence process
 Size, geography and strategy screen
 Formal part starts with a meeting
 Following that the LP will (in)validate the
investment thesis through
 Site visits at GP and some portfolio companies
 Reference checks with existing LPs, portfolio
company management team, etc
 Track record analysis
 Market positioning analysis
 Review of legal conditions
Terms & conditions
 Compensation
 2 & 20
 Alternatives? After the investment period?
 Imputing transaction fees by GP?
Source: SJ Berwin AS 2009
Terms & conditions
 Compensation
 Carry vs. hurdle rate
Subject to delay until clawback unlikely
Source: SJ Berwin AS 2009
Terms & conditions
 Fund structure
 Open or closed fund structure
 Key terminology
 Basic considerations
 Master/feeder structure
 What types of vehicles to use
 European vs. US vs. EM investors ?
 You can’t be everything to everybody
 Offshore structures(?)
 Are you the danger zone after the G20
Terms & conditions
 Fund structure
 Tax transparency
 Limited liability for LP and GP
 Authorization and/or regulation of fund and
manager
 Does it support an alignment of interest
between GP and LPs
 Tax-efficient structuring of man. Fees and carry
 Nature of co-investment arrangements
 Permanent establishment & operational issues
Terms & conditions
 Fund structure
 Combining structures is an option
 Increases complexity and costs but will appeal
to a wider range of LPs
Terms & conditions
 Governance
 EM GPs have reduced track record relative to their
Western peers
 Different regulatory environment and legal
protection of shareholders/partners
 Common law vs. Rule of law systems
 Role of the Investment committee’s liabilities and
responsibilities
 Pinning down investment policy to prevent style
drift
Terms & conditions
 Managing expectations
 Re future returns
 Re existing funds
 Re the latter:
 Re-invest proceeds of realizations, including an
ability to re-draw proceeds already distributed
 Extended investment periods or reopened a
closed fund to new capital, while some have
raised annex or top-up funds
Terms & conditions
 Managing expectations: distressed situations
 Allow (some) investors to scale down
commitments in exchange for some dilution of
their interest?
 Do you know where you fit in your LPs portfolio?
Terms & conditions
 Communication strategies:
 LPs are your primary clients…ALWAYS!!!
 How, how much and on what?
 Portfolio valuation?
 Deal affairs
 Quarterly scorecards?
 Watch how you communicate as it is determined
by your overall objective re the relation with
your LP/LP community
 Key components of a good IR program?
Terms & conditions
 No-fault divorce?
 Once again downward protection mechanism
 Big deal or not?
Terms & conditions
 Who are your advisors?
 Do they shine off on you?
 Madoff
 Stanford and the likes
 Bring them in for hot issues:
 Valuation of the entire portfolio once a year
 Structuring the deal
 Don’t be stingy: bring in the big guns-it will pay off
 What do you want your lawyers to do
 Selecting a law firm
Terms & conditions
 Co-investment rights?




Benefits
Detriments
Limits
Consequences going forward
Terms & conditions
 Co-decision rights?






Independence versus commitments
Value of independence
Board of advisors vs. Investment committee
Who is the captain on your ship?
Under what conditions
Financial conditions for anchor investors?
Terms & conditions
 The Private Offering Memorandum






Purposes of the offering memorandum
Stages in the life of the offering memorandum
Sponsor considerations
Contents of the offering memorandum
Key terms
Marketing and regulatory considerations
Terms & conditions
 The Private Offering Memorandum
 Material omissions
 Compliance with securities laws for private
placement of securities
 What does it serve: (1) market the fund and (2)
describe risks to avoid liabilities, (3) facilitate
due diligence
Terms & conditions






Risk management in EM
Creating alpha?
What is the system you’re going to use?
How to deal with non-economic risk
Does Value-At-Risk work the same way here
Designing your own system is probably more
authoritative
Risk management
CLEAR (*)
framework
DESIX (**)
Opacity index
Prop.
research
(*)(*)
Corruption,
LegalLegal
systems,
Enforcement
policies, Accounting
Regulatory transparency
and quality
Corruption,
systems,
Enforcement
policies,transparency
Accounting&transparency
&
(**)
Deutsche
Bank
Eurasia
Group
Stability
Index
Regulatory transparency and quality
(**) Deutsche Bank Eurasia Group Stability Index
Terms & conditions
 Put your money where your mouth is
 How much do you support the fund with your own
money?
 Difficult one for first-time-funds
 Co-investing in deals by partners privately?
 Cross-fund investing not appreciated by LPs
Terms & conditions
 Distributions and balancing carry





Avoid clawbacks
Fund or deal level
Re-investment periods
…
Redemptions under what conditions
Contact
Riga Graduate School of Law
Law & Finance Chair
Strelnieku iela 4k-2
Riga LV-1010
LATVIA
[email protected]
Tel. +37167039230