Invest Europe’s Professional Standards An Overview of the Handbook and Its Applications Presented by William R. Watson October 2017

Strictly private and confidential 1 The opinions expressed in this presentation and on the following slides are solely those of the presenter and not necessarily those of V4C. V4C does not guarantee the accuracy or reliability of the information provided herein.

Strictly private and confidential 2 Invest Europe: The Voice of Private Capital in Europe

• Invest Europe is private equity’s only pan-European association bringing together GPs, LPs and associated professions (1,200 members) • Invest Europe incorporates different platforms, representing the industry’s diversity and giving a voice to all constituents • Membership is voluntary but brings an obligation to follow the Code of Conduct

• Invest Europe represents the industry at the European political level, interacting with legislators, regulators and other stakeholders to represent the industry’s interests • It works closely with the national private equity and venture capital associations, including PSIK, to ensure a coordinated approach

• Invest Europe seeks to promote industry standards that will support the long-term sustainability of our activities, and further the overall development of the industry in today’s environment In the beginning PE was a simple, private system

Investors A few investors…. Investors Investors

…Created a partnership The with a manager…. The Private Equity Fund General Partner

…to buy and then sell a few Investors private companies. Investors Portfolio Companies

Strictly private and confidential 4 With success came growth and public attention

Int’l Investors Domestic Diversified pool of (pension GPs Own IFIs Investors - funds, Capital investors... insurance, HNWs FoF, SwFs ….With objectives beyond profit. The The Private Equity Fund General Partner Increased regulation and structural complexity. Portfolio Companies

Bigger and visible targets, themselves Suppliers Suppliers more subject to Clients Clients stakeholder issues. Employees Employees

Community Community

Strictly private and confidential 5 And then, we (and the world) were not so private

Government

Int’l Size and success – or is Investors Domestic

(pension GPs Own that excess? IFIs Investors - funds, Capital insurance, HNWs

FoF, SwFs egulators

Availability of R information and the power of image The The Private Equity Fund General Partner

Advent of corporate responsibility Union Portfolio Companies s Press Do we want the

“Barbarians at the Suppliers Gate?” Suppliers NGOs Clients Social Clients Media Employees Employees Community Community

Strictly private and confidential 6 How do we procure our societal “License to Operate”?

Legal Industry Regulatory Society

Contractual Personal

Obligations Expectations

Professional Standards

Strictly private and confidential 7 We decide what kind of investors we want to be

• Many of us own and are responsible for our businesses and the decisions our portfolio companies make

• Even at junior levels, the private equity model provides enormous opportunities to influence decisions and outcomes

• Our business models provides enormous leverage to have an impact

• €7.6bn of investment by private equity in Polish companies 2007 to Q1 2017

• 765 companies backed by private equity in Poland during this period

• 450 Polish companies currently in the portfolios of PE funds

8 The Handbook is our clear commitment and benchmark

Wydanie: Listopad 2015

KODEKS STANDARDÓW PROFESJONALNYCH

Wersja polska: Polskie Stowarzyszenie Inwestorów Kapitałowych

Strictly private and confidential 9

Wydanie: Listopad 2015

KODEKS STANDARDÓW PROFESJONALNYCH

Wersja polska: Polskie Stowarzyszenie Inwestorów Kapitałowych The Handbook - Overview

10 By the Industry for the Industry

• The Handbook is maintained by Invest Europe’s Professional Standards Committee, composed of practising members of Invest Europe: • By the industry for the industry • Building on a long tradition of guidance to members

• Its aim is to state the principles of ethical behaviour that members of the Invest Europe abide by: • To assert on behalf of the membership of Invest Europe the view that high standards of commercial integrity and just and equitable principles of trade and investment should be observed

• Failure to abide by the Code of Conduct can result in a firm’s expulsion from Invest Europe • Expulsion is at the firm, not individual, level

• The Handbook’s guidance seeks to strike a balance between accepted good practice and emerging standards

• PSIK is the first national association to translate it into the local language

Trust and ethical behaviour underpin our success

“Ethical behavior is fundamental to the success of our industry. Industry participants operate in an environment of trust. Invest Europe members are entitled to expect their peers to act in accordance with the highest ethical and Portfolio Limited Companies Partners professional standards and are expected to behave in a similar manner towards portfolio companies, service TRUST providers and other stakeholders. Further, in order to ensure sustainable, equitable and positive conditions for the General industry across Europe, it is in members’ best interests to Partners promote confidence in the industry for the public at large. “

Introduction to the Invest Europe Professional Standards Handbook

Strictly private and confidential 12 Covering the full private equity cycle

• The Handbook covers the full cycle of private equity activities

• It sets out the basis for the industry’s views on and Fundraising behaviour in relation to: • Responsible investment • Accountability GP Investing • Governance Management Divesting • Transparency

• The Handbook also includes more technical standards: Fund and LP Portfolio • IPEV Valuation Guidelines: incorporated as Management Management Invest Europe adopted guidance • Invest Europe Reporting Guidelines: providing examples not templates • Guidance for Placement Agents: applying the Code of Conduct to placement activities

Reflecting the wider regulatory framework

• AIFMD has made PE in Europe (basically) a regulated industry • The Handbook is not a compliance guide for AIFMD • But, AIFMD does set the benchmarks for many Handbook topics including risk management and remuneration

• The extra-territoriality of many legislative initiatives impacts practises everywhere • The SEC is increasingly addressing PE topics • All governments are promulgating “Anti” legislation: money laundering, terrorist financing, tax avoidance, bribery and corruption

• A range of other regulations and guidance also impact our activities, such as: • UN Principles for Responsible Investment (April 2006) • Walker Guidelines in the UK (2007), BvK’s Transparenz-Richtlinien in Germany (2008) • ILPA: Private Equity Principles (2009), Fee Transparency Template (2016) • IOSCO Conflicts of Interest (2009) • EU Green Paper: also looking at Corporate Governance for non-listed companies (2011)

• The Handbook is not a guide to compliance with all regulations and all standards

Focusing on the key relationships

• The Handbook focuses on private equity’s core relationships: . . Stakeholders. . Stakeholders • LPs and the GP . . . . • GPs and portfolio companies • The industry and society LP LP GPLP • These relationships are fundamental because: LP LP • Port PE is a partnership, not a trade or deal. Port GP LP Co.Port LPs • The GP/LP partnership is established for the Co.Port Co.Port long term Co.Port Co.Port • GPs are typically highly active and impactful Co.Port Co.Port owners Co.Port Co.Port Co.Port • The companies are typically private, without Co. the regulatory framework that defines the Cos. public company relationship Stakeholders. . . . • Through its LPs and portfolio companies, PE Stakeholders. . touches an enormous range of stakeholders . .

Building on core principles

• The Handbook is composed of three sections: • The Code of Conduct • The Commentary on the Code • Guidance on the Application of the Code of Conduct

The Handbook aims to cater for the diversity of the industry and the Invest Europe membership by explaining, guiding and recommending: not by prescribing rules for every situation.

The Code of Conduct

1. Act with integrity

2. Keep your promises

3. Disclose conflicts of interest

4. Act in fairness

5. Maintain confidentiality

6. Do no harm to the Industry

Handbook, page 8 • Simple principles that transcend the industry’s relationships

• Derived from the IOSCO “Model Code of Ethics”

• Applicable to all segments of the industry and all participants

• An easy mental checklist for responsible, professional behaviour

Applicable to all our relationships and activities

1. Act with integrity Zbyszek is in full flow. Meeting his largest LP, he boasts of the 5x offer just in on 2. Keep your promises the fund’s largest investment.

3. Disclose conflicts of interest “Hey, what he doesn’t know 4. Act in fairness can’t hurt him, right?”

5. Maintain confidentiality Marta, an LP, just got approval on 6. Do no harm to the Industry a co-investment in SuperCarry with Harry Buyout Shop. She calls SuperCarry’s current owner, a GP

of another fund with which Marta Cheetham, is also invested to celebrate. a buy-out shop, has just closed the purchase. They announce layoffs of 20% of the workforce, “Sign now or you can call me effective 25/12. a taxi!” screams Jacek

Providing the context

• The Commentary provides the key messages and context for interpreting the Code of Conduct 1. Would your actions stand up to public scrutiny? 2. Would you find it acceptable if other parties were to pursue the same course of action?

Key Messages from the Commentary on the Code of Conduct Act with integrity Integrity is the fundamental building block of trust in business relationships.

Keep your promises Ethical business behaviour implies keeping promises regardless of whether or not there is a legal obligation to do so.

Disclose conflicts of Procedures to ensure the management and disclosure of conflicts should be in place at all firms, and conflicts of interest should be interest diligently identified and disclosed to all parties concerned. Act in fairness Fairness means “playing by the rules,” whether legislative or not, based on facts and circumstances. Fairness must also take account of the impact of decisions and actions on others, both as individuals and groups, and how these actions would be perceived. Maintain The GP will treat portfolio company or LP information as confidential in so much as they are made aware that, or should expect that, confidentiality it is confidential or commercially sensitive. Any usage of such information should be restricted to what has been agreed with the owner of such information or may be mandated by law or regulation. Do no harm to the The pursuit of competitive advantage is not in itself harmful to the industry. Industry members should, however, conduct their industry business in a responsible manner and not engage in practices that are foreseeably damaging to the public image and general interests of the industry and its stakeholders. All participants in the industry should promote best practices for the wider benefit of long-term, sustainable investment, economic growth and value creation.

Handbook, page 12-13

And now for the detail…

Explaining, Guiding and Recommending

• Primarily oriented to a General Partner perspective • Future updates are expected to add more specific guidance to specialist areas

• Follows a Question, Explanation, Recommendation format

• The guidance reflects common and good market practice • A consensus of GPs and LPs, which gives added credibility to the Guidance Handbook, page 20 • There is no stand alone ESG / RI section: it is an integrated part of all aspects of the Guidance

Fundraising and Fund Formation

Strictly private and confidential 24 Fundraising & Formation

3.1 Fund formation 3.1.1. Early stage planning 3.1.2. Fundraising and regulation 3.1.3. Structuring Key Messages 1. Plan, plan and plan again 3.2 Fundraising 3.2.1. The Fundraising process 2. Good structuring helps avoid conflicts 3.2.2. Target LPs 3. Disclosure helps manage conflicts 3.2.3. Know Your Investor 3.2.4. Structure of the Offer / Terms of Investment 4. Pay attention to regulation: AIFMD, AML 3.2.5. Fundraising Documents 3.2.6. Terms in the Fund Documents 5. Define the Terms: including fees (sharing) 3.2.7. Presentations to LPs 6. Consider the documents: track record, forecasts, 3.2.8. Responsible Investment ESG 3.2.9. Track Records 3.2.10. Forecasts 3.2.11. Time period for Fundraising

Applying the Principles

Fundraising has been difficult. The CEO believes that offering a lower management fee to a key cornerstone investor can secure an early commitment. The IR Director objects pointing out that the same fee should be offered to all investors. This would materially reduce the firm’s resources to execute its strategy.

• All LPs should be treated equally, fairly and transparently.

• But, preferential treatment can be justified.

• Disclosure is essential.

Handbook, Section 3.2.4, page 21

Investing the Fund

Strictly private and confidential 27 Investing the Fund

3.3 Investing 3.3.1. Due diligence 3.3.2. Approach to responsible investment 3.3.3. Investment decision Key Messages 3.3.4. Structuring investments 1. The right process for reaching the decision 3.3.5. Responsibilities to other shareholders in the same or other classes of shares and to bondholders • Diligence 3.3.6. Investment Agreement • Senior involvement and attention 3.3.7. GP’s consent to Portfolio Company actions and 2. Integrate ESG in all aspect of the process board appointments 3.3.8. The Portfolio Company’s corporate strategy 3. Execute ownership responsibilities 3.3.9. Co-operation with co-investors and syndicate • To the company and other shareholders partners 4. Manage the company strategy 3.3.10. Co-investment and parallel investment by the GP and its executives 5. Exit before entering 3.3.11. Co-investment and parallel investments by LPs and other third parties 3.3.12. Divestment planning

Applying the Principles

Easy VC LLP is negotiating a Shareholders Agreement. Erika, the managing partner, is resisting expanding the text of the agreement. The other investors are particularly concerned what will happen in a future financing round. Her answer is a simple 2/3 shareholder approval for any capital raising: a financing proposition is made, and accepted or not. Easy VC will hold 60% of the shares. Separately, Erika is completing negotiations to acquire the GP of another VC fund, which has in its portfolio a 15% stake in the target.

• Negotiations should be conducted openly and with clarity among investors

• Due consideration should be given in advance to potential areas of conflict

Handbook, Section 3.3.5, page 28

Managing the Investments

Strictly private and confidential 30 Managing the investment often poses the biggest challenges

• Time and resource intensive

• Largest exposure to diverse range of stakeholders

• The GP often has no direct relationship to many of the key value drivers

• ESG risks and opportunities are extensive

• Its where the financial returns are made

Managing the Investment

3.4 Management of an investment 3.4.1. Investment monitoring Key Messages 3.4.2. Environmental factors 3.4.3. Social factors 1. Dedicate sufficient time and resources 3.4.4. Governance factors • Senior time and attention 3.4.5. Board structure • Sufficient information and experience 3.4.6. Board membership 3.4.7. Exercise of GP consents 2. Reflect Environmental & Social Issues 3.4.8. Exercise of influence on responsible investment 3. Corporate Governance is crucial factors 3.4.9. Responsibilities in relation to other stakeholders • Appoint appropriate directors 3.4.10. Follow-on investments • Ensure decision making is clear and duties 3.4.11. Underperforming investments separated 3.4.12. Factors particular to investing in distressed assets 4. Fairness in co-investment arrangements need 3.5 Disposal of an investment 5. Follow-ons should be planned 3.5.1 Implementation of divestment planning 3.5.2 Responsibility for divestment decision-making 3.5.3 Warranties and indemnities 3.5.6 Cash vs. shares/earn-outs on realisation Private Equity is distinguished by active investment 3.5.7 Sale of a portfolio company between funds and long term value creation managed by the same GP 3.5.8 Managing quoted investments Applying the Principles

Green & Co, a mid-market growth investor, has commissioned an Environmental Due Diligence on one of its portfolio companies. The diligence reveals that the soil of the factory site is contaminated by oil and other chemicals, although the current business has ceased to use these products in its processes several years ago as standards changed. The investment committee has been convened to consider the firm’s response.

• Diligence should include an environmental assessment

• GPs are expected to actively manage environmental risk factors in portfolio companies

Handbook, Section 3.4.2, page 33

Applying the Principles

Tomasz, the buy-out shop Quick & Easy’s associate, has been appointed to the Board of the newly acquired portfolio company. Q&E has also appointed a retired industry executive, Frank, and the firm’s managing partner, Marcin, to the five member board. The CEO and CFO of the company are the other two board members. Marcin has yet to attend a Board meeting due to fundraising commitments. The industry executive has told Tomasz that at 75 years old, this is his last appointment.

At a Board meeting about 6 months after investment, the CEO opens with a presentation proposing to launch a new product and cut prices on the old one by 50% as they are “getting clobbered” by a competitor’s ad campaign. Somewhat surprised as this is the first he has heard of a new product, Tomasz turns to wake Frank (who has nodded off during the presentation) while SMSing Marcin to see if he has any instructions. • Appointments made in the best interest of the portfolio company

• A director should devote sufficient time

• Consider the right level for consents for significant developments in the business Handbook Section 3.4.5, page 35 (& 3.3.8)

Managing the Fund and LPs

Managing the Fund and LPs

3.6 Distributions 3.6.1. Distribution provisions 3.6.2. Timing of Distributions

3.7 LP relations Key Messages 3.7.1. Reporting obligations to LPs 3.7.2. Transparency to LPs 1. Distribute as agreed in the terms 3.7.3. LP relations generally 3.7.4. LP conflicts of interest 2. LP relations bring responsibilities 3.7.5. LP Advisory Committee 3.7.6. Key Person Provisions • Good processes are the key to success

3.8 Secondaries • Reporting, Transparency, and Conflict 3.8.1. LP Secondary Transactions Management are the cornerstones 3.8.2. Secondary Direct Transactions 3. The LPAC: a key tool for both LP and GP

3.9 Extension and Winding up of a Fund 4. Conflicts mean disclosure and discussion 3.9.1.Fund Extension 3.9.2 Liquidation 3.9.3.Fund documents

3.10 Management of Multiple Funds 3.10.1. Conflicts of interest 3.10.2. Establishment of new Funds Applying the Principles

Jacob is not pleased. Every annual meeting, the same investor, the same question: “when will you return my money?” Again he explains what was written in the last three Annual Report: when we are ready. Jacob also feels trapped because the confidentiality agreement he just signed with the strategic buyer for the sale of the fund’s biggest investment prohibits disclosure until closing. Big mouth investor would blab it for sure, reflects Jacob. Maybe he should just agree to go into liquidation as the LPAC recommended when they met last week. But the lawyers can’t assure him he would remain in control of the Fund.

• Follow Invest Europe reporting guidelines

• A GP should not breach confidentially but should seek to be released if it impedes reporting

• The LPAC should advise and not make decisions

• The Fund documents should include provisions on liquidation Handbook Section 3.7.1, 3.7.2, 3.7.5, and 3.9

Managing the Firm

Managing the Firm

3.11 GP’s internal organisation 3.11.1. Management are responsible for establishing the control environment 3.11.2. Management are responsible for establishing Key Messages procedures for risk assessment and management 1. A much bigger (and more complicated) issue 3.11.3. Management are responsible for control with AIFMD and national regulations activities 3.11.4. Human resources 2. A GP must ensure it has adequate resources 3.11.5. Incentivisation • Investing / Management / Divesting and 3.11.6. Financial resources adding value 3.11.7. Segregation of Fund assets 3.11.8. Procedures and organisation • Fundraising / LP relations 3.11.9. Internal reviews and control • Compliance 3.11.10. Management are responsible for the organisation’s information and information 3. Practice what you preach to the portfolio systems and for communications within and • Governance outside the organisation 3.11.11. External communication • Communication 3.11.12. Market Transparency – EVCA Research and • Controls and Systems Data 3.11.13. External assistance 3.11.14. Considerations relating to monitoring of governance – GP governance Applying the Principles

It is bonus time and Kasia’s firm are all waiting for their numbers. It was tough deciding, but she made her mind up last night and will make the announcements today. A big cash bonus is going to Rafal; Kasia hopes it will help motivate him to take on the added role of Investor Relations as well as CFO. Luckily Kasia’s son is set to become the compliance officer and take that load from Rafal. She had to put him somewhere after he nearly blew the big exit by forgetting to get the LPAC sign-off to sell it to another LP.

Oh yes, there is an IC meeting later today too that she must dial into. Better skim through the papers, she thinks. Its Robert’s deal so it should be well prepared; not much to worry about there. And he knows the sector– his family has been in it for generations.

• Governance should incorporate elements of independence • Have staff with appropriate skills • Ensure suitable remuneration for its staff • Procedures for investment decision making include senior time and attention Handbook Section 3.11.1, 3.11.5. 3.11.6, 3.11.9

Invest Europe Reporting Standards

Strictly private and confidential 41 Reporting Guidelines

• Not an accounting but a reporting guideline

• Focus on transparency and the key disclosures needed to underpin the relationship between GPs and LPs • Updated to reflect current thinking and practice on non-financial disclosures such as fee calculation and ESG issues

• Based on the former IPEV Guidelines, brought back to Invest Europe in 2015

• Builds on long tradition of reporting guidance from Invest Europe and its consensus driven approach of LP and GP input

• Consists of “requirements” and “other possible disclosure” • Following the required disclosure allows a fund to claim compliance with the Guidelines

• An example, not template, driven document

Strictly Confidential 42 Reporting Guidelines: detailed issues

• The Guidelines contain enhanced clarity on reporting metrics • Paid in Capital, Capital Calls (including return of capital calls), Distributions (including recall of distributions) • DPI, RPI, TVPI • Gross IRR, Fund Net IRR vs Net IRR to an individual LP, etc.

• Fee calculation and disclosure • A different, but complimentary, approach to the ILPA template

• Emerging issues: • Use of leverage at the fund level: “drawdown facilities” • Reporting on the impact of leverage on returns

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Wydanie: Listopad 2015

KODEKS STANDARDÓW PROFESJONALNYCH

Wersja polska: Polskie Stowarzyszenie Inwestorów Kapitałowych

Summary & Conclusion

44 Summary & Conclusions

• Private Equity professionals face a diverse set of demands and challenges…

Fundraising

GP Investing Management Divesting

Fund and LP Portfolio Management Management Summary & Conclusions

. . Stakeholders. . Stakeholders . . . .

LP LP GPLP LP Port LP • ... With a range of interests Port GP LP Co.Port LPs and duties to address. Co.Port Co.Port Co.Port Co.Port Co.Port Co.Port Co.Port Co.Port Co.Port Co. Cos. Stakeholders. . . . Stakeholders. . . .

Strictly private and confidential 46 Summary & Conclusions

• Professional Standards and the Code of Conduct provide a compass for our journey

1. Act with integrity

2. Keep your promises

3. Disclose conflicts of interest

4. Act in fairness

5. Maintain confidentiality

6. Do no harm to the Industry

• The Code of Conduct provides a framework for making the right choices on how we operate

• The Handbook provides explanations, guidance and recommendations on how to conduct the business: it is there to be used

• It remains up to each of us what kind of a business (and professional) we want to be

Strictly private and confidential 47 What will you do?

Can you imagine The risk assessment how that is outdated; we need would read In my view it will be fresh eyes on this. achieved by implementing The upside on this in the press? an integrated ESG investment will be programme. generated by synergies and cost reductions.

We have got to The company Yea, their start by changing needs investment the management in its IT and supply IT is almost team. chain. as bad as ours! www.value4capital.com

William R. Watson Managing Partner 47/49 ul. Wspólna 00-684 Warsaw, Poland Tel: + 48 22 627 4000 Fax: + 48 22 627 4001 [email protected]

Strictly private and confidential 49