privcap The Monthly Magazine of Privcap.com Digest/ May 2013

Mega-Manifest Destiny Is PE becoming the new Wall Street? by David Snow

In This Issue:

Can Unions and PE Get Along?/ 06 Fundraising’s New Rules / 09 Coming Home: The Real Estate Rebound / 12 T.J. Maloney: Deal Hunter / 15

This publication is exclusively for Privcap subscribers © 2013 Privcap LLC 2 / Contents

In This Issue

Up Front Quotable Privcap LLC 03 A roundup of market intelligence shared on Privcap.com David Snow Snow’s Notes Co-founder and CEO Is PE the new Wall Street? By David Snow Gil Torren 04 Co-founder and President Getting Along 06 Carlyle’s Brian Bernasek on working with Content unions. By Danielle Fugazy Deal Story: South Beach Diet Matthew Malone MidOcean Partner’s Ted Virtue on its recent Editorial Director 07 acquisition Tanya Klitch Media Manager Must See 08 Privcap’s upcoming programming schedule Design

Miguel Buckemeyer Features Art Director Fundraising’s New Rules Vasheena Doughty 09 Our experts explain how to adapt to the Production changing dynamics of raising money Coming Home Contributors 12 Dan Vene on the real estate rebound. By Tanya Klitch Tom Stein & Tim Devaney Danielle Fugazy ESG in the Emerging Markets 13 PE pros looking to make good on ESG would do Contacts well to observe the world’s developing economies Deal Hunter Editorial Lincolnshire Management’s T.J. Maloney on David Snow / [email protected] 15 maintaining deal flow. By Danielle Fugazy (646) 233.4558 Matthew Malone / [email protected] (646) 801.2337 From Our Sponsors Sponsorships & Sales Expert Q&A Gill Torren / [email protected] 16 Steven Menkaer of McGladrey (646) 233.4559 Interview transcripts in this issue have been edited for clarity and length. For subscriptions, please call 855-PRIVCAP or email [email protected]

About Privcap Digest

Privcap Digest is a monthly publication exclusively for Privcap subscribers. It offers in-depth features and edited summaries of the most recent and important thought-leadership from Privcap.com. The Privcap editorial team has extensive experi- ence reporting on the global alternative investment industry.

For inquiries about the Digest, please contact Matt Malone at [email protected].

Copyright © 2013 by Privcap LLC All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechani- cal methods, without the prior written permission of the Privcap LLC. For permission requests, contact Gill Torren at [email protected]. Privcap Digest / May 2013 / 2 3 / Market Intelligence Quotable/ A roundup of market intelligence shared on Privcap.com

I stay away from social media. I You see volatility in the markets, I think most people in the private would jokingly call this a reverse and from our point of view, volatil- equity community probably get Russian roulette. There’s only one ity is really what creates opportunity. If things strategically close to right. But chamber without a bullet.” the world had perfect information and the key difference is how you execute Axel Tillmann, RVC-USA, from “From Russia, asset flows were consistent, everything it, how you monitor it and how you With Capital” )Link would move in a very rational line.” bring it to fruition.” Erik Falk, KKR, from “Credit Investing in An Frank Schiff, MidOcean Partners, from Uncertain World” )Link “MidOcean’s 100 Day Plan” )Link

That availability of local capital can One of the challenges in this I think it’s constantly being in really be an important detonator industry is that GP’s don’t really front of those individuals that for the development of the industry.” know how to communicate effectively have the potential to bring you an Cate Amrbose, LAVCA, from “The Colombia with LP’s. They don’t really understand opportunity is really the key to the Private Equity Opportunity” )Link the questions that we ask because it’s business.” really not their day job.” TJ Maloney, Lincolnshire Management, from Andrea Kramer, Hamilton Lane, from “How Lincolnshire Does Deal Origination” )Link “Effective IR for GPs” ) Link

Professionals from the following firms and organizations recently appeared on Privcap: On Camera New Mountain Capital • ConceptONE • Cambridge Associates • Independence Capital Partners • ILPA • Castle Harlan Partners Group • Argosy Private Equity • Adams Street Partners • Cogent Partners • StepStone Group • Sound Harbor Partners Zurich Alternative Asset Management

Privcap Digest / May 2013 / 3 4 / Commentary

Snow’s Notes Mega-Manifest Destiny It’s only a matter of time before the big firms known as ‘PE shops’ are all in the same businesses and geographies very ten years or so, the private equity A distinctive term is necessary because these industry wrings its hands over what firms are unique entities on Wall Street, even as exactly it should call itself. The repel- they increasingly are coming to define the Wall lent “corporate raiders” gave way Street of the 21st century. And while all firms to the still-ominous phrase, “lever- remain different by way of strategy, resources aged buyouts.” “Private equity” ar- and culture, they are all getting into similar busi- rived as a sanitized, hostility-free alternative, though nesses and geographies. It is as if a treasure map Market it, too, has acquired a pejorative edge. Nonetheless, it to a new kind of Wall Street powerhouse has been analysis by appears that “private equity” is here to say. unearthed, and everyone is racing to find it. Privcap CEO But the industry has a new naming problem— To see what the race looks like, I created a David Snow while “private equity” is a technically accurate back-of-the-napkin comparison of eight of the term for a certain kind of investing, it is now being biggest multi-strategy firms to see who was and applied to the entire range of investment and wasn’t in certain strategies and certain parts of the advisory activities now overseen by firms that world (page 5). I’ve given each a “diversification” started life as LBO shops. score based on the breadth of their operations. Blackstone is one of the largest real estate in- A few observations: vestment firms in the world; in fact, its property arm is larger than its private equity group. “Private • Of the largest eight firms, only Bain and TPG equity” firm Oaktree is a dominant credit investor. are not publicly traded. How long can this last? Mitt Romney’s former “private equity” firm has Perhaps the current senior partners at these five major business lines, only one of which is two firms say they have no interest in going focused on traditional private equity. public, but what about the next generation? But what else to call the collection of firms that • Every firm now manages a credit strategy, continue to diversify their businesses as they in some cases enormous platforms like Black- grow? Perhaps “private equity” will take on a stone’s GSO. Credit and buyouts seem to useful designation that is independent of its roots, marry very well, all the way down to the much as “investment banking” defines a range of middle market, where BDOs and lending activi-ties on Wall Street, most of which are divisions have proliferated. neither investing nor banking. • All eight have operations in North America, Western Europe and East Asia. It is as if a treasure map to a new kind Some of the strategy/geography “holes” are of Wall Street powerhouse has been notable, and could indicate the next big hire or acquisition. Blackstone does not offer any direct unearthed, and everyone is racing to hedge funds, though it has one of the largest hedge find it. fund-of-funds platforms. By contrast, its acqui- sition of the Credit Suisse secondaries division means it is now in the business of managing the fund interests of rival private equity firms, despite having its own direct private equity investment

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Privcap Digest / May 2013 / 4 5 / Commentary

platform. Bain is the last of the “megas” with no real estate division. Apollo, despite being a master of the capital markets, offers no advice-for-fee in this area, like Blackstone and KKR. Another hole—Carlyle is everywhere in the world but Russia. But it’s the only firm with a presence in Africa. In ten years will any of these firms (if they remain independent entities) remain holdouts for any of these strategies or geographies? Not likely. And the list of businesses lines operated by “private equity firms” may very well be twice as long. ■

L Follow David Snow on Twitter @SnowsNotes

A look at the business lines and geographic operations of seven of the Mega-PE Diversity Grid largest diversified alternative investment firms. Each firm is awarded a “diversity point” per strategy and geography.

Strategies TPG Blackstone KKR Goldman * Carlyle Apollo Bain Oaktree Private Equity XXXXXXXX Real Estate XXXXXX X Credit XXXXXXXX Hedge Funds X XXX XX Infrastructure/Energy XXXX X Asset Management XXXX Capital Markets XXX Listed Products XXXXX

Geographies N. America XXXXXXXX L. America X XXX W. Europe XXXXXXXX EE/Russia XX X MENA XXXX Africa X India XXXXXXX Asia/Pac XXXXXXXX DiversificationP oints: 10 13 14 15 14 8 7 8

*For comparative purposes, the Goldman Sachs entry is a compilation of units from the firm’s merchant banking as well as asset management businesses.

Privcap Digest / May 2013 / 5 6 / Takeaway

By Danielle Fugazy Click to watch this video at privcap.com Unions: The “Win-Win” Way Brian Bernasek of The Carlyle Group says unions and PE can get along

Yet Brian Bernasek, a managing director with the Carlyle Group, says it doesn’t need to be that way. “When you come at an opportunity with the mind-set that everybody can win, then you can find opportunities that you might not otherwise,” says Bernasek. Bernasek focuses on investment opportunities in the industrial and transportation sectors—industries with a history of an active union workforce. Over the years, he has been actively involved in several such investments, including Allison Transmission, AxleTech International, and the Hertz Corp. Allowing the union to participate in the upside of private equity ownership is often key. While Carlyle owned Allison Transmission, Bernasek structured a labor agreement with the local United Auto Workers union that gave workers a bonus plan with the same incentives provided to management. The union had had no bonus participation under its prior owner, nion negotiations are part of life for General Motors. most private equity firms, and more Legacy union contracts are often the biggest hur- often than not both sides emerge dle. To reduce costs but appease existing workers, worse for wear. Just look at Ripple- Bernasek implemented a two-tier wage program wood Holdings, whose union dealings that gave veteran employees greater financial with Hostess left it looking like a Twinkie stuffed in upside than new hires. “This allowed us to hire the bottom of a backpack. more people, which the union appreciated and liked,” says Bernasek. “But it allowed us to do it The Carlyle Group in a more cost-effective way.” Under Carlyle’s ownership, revenue increased by approximately 15 percent, additional product lines Investment: Allison Transmission were developed, and debt was lowered. Headquarters: Indianapolis The trick to doing a successful deal with a compa- Purchase date: 8/07 ny that has a union presence is gaining the union’s Purchase price: $5.58 billion (with Onex Corp.) trust, something Bernasek admits is a challenge. Fund investment was made out of Carlyle Partners IV “There’s a hurdle that we have to get over every Growth: Under ownership grew EBITDA from $544 time we have a discussion with the union,” he says. million to $712 million “We have to make them understand that there is an Exit: Went public 3/12 (NYSE: ALSN) opportunity for a win-win. A lot of it is reference- based. What you’ve done in the past matters.” ■

“When you come at an opportunity with the mind-set that everybody can win, then you can find opportunities that you might not otherwise.”

Privcap Digest / May 2013 / 6 7 / Deal Story

Click to watch this video at privcap.com MidOcean Partners ⬌ South Beach Diet As told by Ted Virtue, CEO, MidOcean Partners

The Details

The company The South Beach Diet sells health products including books, a subscription-based website and a line of branded food products. Investment Date August 2011

Founded by Florida-based cardiologist Dr. Arthur Agatston, who wrote The South Beach Diet in 2003

MidOcean’s past investments in health brands: LA Fitness (Europe), Jenny Craig and Vitaquest

The Story Dr. Agatson succeeded as a preventive cardiologist and bestselling author, but Ted Virtue of MidOcean Partners said the doctor needed help with professionally managing his booming health and lifestyle brand. With more than 23 million copies of The South Beach Diet in print and a vibrant website sub- Success in the scription base, MidOcean’s objective was to elevate the brand with a relaunch of its high-protein diet ) Slimming Sector bars, cereals and smoothies. Hear the whole story at Link. MidOcean and ACI Capital acquired “We’re in the early stages of this deal, but we bought the a majority stake deal at a very attractive price. It’s a great brand and one in Jenny Craig for $115 million in 2002, we think has an enormous amount of opportunity to then sold it to grow into a major brand category.” –Ted Virtue Nestlé for about $600 million in 2006.

Privcap Digest / March 2013 / 7 8 / Calendar Must See / Upcoming programs on Privcap.com

Calendar May 6, 2013

The ILPA Benchmark The launch of a private equity index and how GPs can use it as an IR tool

Information Overload: Meeting LP Demands for Data How GPs can deliver data that holds real weight with LPs

Leon Black for The Melanoma Research Alliance The founder of Apollo Global Management co-founded MRA as part of his personal war against melanoma

May 13, 2013

Brazil: Real Assets Panel on how capital can be deployed into real assets in the Brazilian economy

Transformative Marketing: Growing a Portfolio Company A Privcap conversation with Mike Duda of Consigliere Brand Capital

May 20, 2013

The Overhang: Overhyped? Defining overhang—and­ whether LPs should consider it before investing in a fund

Alvaro Goncalvez Q&A A Privcap conversation with Alvaro Gonçalves, CEO of Stratus Group

Richard Jaffe Q&A A Privcap conversation with Richard Jaffe, co-head of the Private Equity Group at Duane Morris

Inside the Multilateral Investment Fund The MIF’s Susana Garcia-Robles on private sector development in Latin America

May 27, 2013

Randy Mehl Q&A A Privcap conversation with Randy Mehl, a partner with Baird Capital’s U.S. Private Equity Team

Keynote from Scott Budoff A Privcap conversation with Scott Budoff, partner at Saw Mill Capital

Privcap Digest / May 2013 / 8 9 / Deep Dive

Click to watch this video at privcap.com New Rules of Private Equity Fundraising The balance of power between LP and GP has shifted, possibly changing the fundraising landscape forever. Firms are being forced to rethink their investment strategies and demonstrate competence like never before. Fundraising also costs more, takes longer, requires more travel, and is just generally harder.

Three leading PE professionals—John Greenwood of Pantheon Ventures, Mounir Guen of MVision Private Equity Advisers, and Russell Steenberg of BlackRock Private Equity Partners—explain how GPs can adapt to the new rules of fundraising, and ultimately succeed. Key Findings

➊ Expect everything to be more difficult ➋ GPs must demonstrate deep insight ➌ Your next fund will be different from your last fund ➍ Cash-on-cash has maximum cachet ➎ LP “influencers” are more influential than ever

Finding 1 For starters, it drastically increases the number of potential investors GPs have to process. And Expect everything to be more difficult that means more travel, longer lists to review, more next steps, and more to-dos—all while LPs A fundraise isn’t what it used to be—general part- are expecting quicker response times. ners must work twice as hard to raise half as much. Another obstacle for GPs: The portfolios of One of the tallest hurdles for GPs is fund size, limited partners are more mature than ever, and Guen said. “If you’re going to raise about $3.5 most LPs are now trying to prune the number of billion, there are basically 20 investors globally GP relationships they manage. “If you’re a new GP, that will constitute the main portion of that. If it’s very difficult,” Greenwood said. “Not only do those 20 don’t common-rate your number-one you need to impress them that you’re somebody core holding, you have gaps. And the only way who deserves their allocation of capital; you also to fill them—because there is a lack of other need to demonstrate why you should replace mega-investors—is by going to a broader list. another GP relationship that fund manager has.” And that completely changes the topography and the dynamic of the fundraise.”

. CONTINUES ON NEXT PAGE Privcap Digest / May 2013 / 9 10 / Deep Dive

“If you’re a new GP, it’s very difficult. Not only do you need to impress them that you’re somebody who deserves their allocation of capital; you also need to demonstrate why you should replace another GP relationship that fund manager has.”–John Greenwood

investors then start negotiating. Finding 2 “We’re seeing investors showing up with lists and saying, ‘You’re not going to get to the first close without us. This is our list of conditions of GPs must demonstrate deep insight what your business will look like. We don’t want you in the fundraise more than 12 months or LPs are tightening their focus on industry and even nine months.’ All sorts of things are now operating expertise, and that is influencing not emerging.” only investments but GP marketing strategies. Partners who want to impress LPs must demon- strate that they have the industry insight and Finding 4 operating chops required to deliver returns. “There’s two features here,” Guen said. “The first is ‘How and what have you done with the Cash-on-cash has maximum cachet company? And can you repeat this?’ But the most important—and the new aspect that’s Today, confusion over private equity valuations come into play—is ‘how and what do you do reigns. That means LPs are more interested than with problems?’ An ability to tenaciously work ever in a GP’s cash-on-cash record. through your difficult investments, and to put Greenwood said IRRs are still important, but in the resources and the understanding to pre- noted that there are a lot of variables in calculat- serve capital, is what investors want to see. The ing an IRR. “The beautiful thing about cash-on- last component that they consider is the ability cash is we can all understand it. It’s a full-cycle to deliver—and to consistently deliver.” measure of how an investment has performed. Steenberg recalled that in the late ’80s and It takes away the complexity of trying to wrestle early ’90s, every GP raising money said exactly with valuation issues, the impacts that time can the same thing: “I have proprietary deal flow.” have on IRRs with relatively short hold periods. Today it’s, “I have operating skills.” Being able to demonstrate that you’ve bought a “From a due-diligence point of view, it is the company as planned, developed the company as challenge of the limited partners to verify that,” you planned, and were able to successfully exit he said. “It’s to understand what those operating that for cash is really the full cycle that we’re all skills are, and how and if they add value. Like pro- ideally looking to understand.” prietary deal flow, operating skills can be elusive.” Steenberg added that numbers are only part of the equation in measuring a GP. “Let us not forget that returns are the result of an investment Finding 3 process. And it is that investment process that you really have to do the due diligence on, to ascertain whether or not they were lucky getting those Your next fund will be different from returns or whether they were actually ‘good.’” your last fund He said BlackRock does not focus solely on cash-on-cash or IRRs in due diligence. “The a sin- The balance of power between GP and LP has gle biggest reason I’ve found in 30 years of private shifted, and this has serious consequences for equity why general partners don’t deliver the limited-partnership agreements and fundraising. returns that they have in the past, it’s because Guen described the new dynamic this way: they strayed from that discipline of process that “The investors stare at the marketing plan, they allowed them to do so well. It’s in those areas that stare at the fundraise, and they take a view on the real due diligence has to go on if you’re going whether it will achieve its targets.” And because to assure yourself that it’s a group you want to GPs are urgently trying to get to the first close, put money with.” . CONTINUES ON NEXT PAGE Privcap Digest / May 2013 / 10 11 / Deep Dive

“The single biggest reason I’ve found in 30 years of private equity why general partners don’t deliver the returns that they have in the past, it’s because they strayed from the discipline of process that allowed them to do so well.”–Russell Steenberg

Participating in the Privcap thought-leadership series “The Fundraising Market” are John Greenwood, Pantheon Ventures; Mounir Guen, MVision Private Equity Advisers; Russell Steenberg, BlackRock Private Equity Partners; and David Snow of Privcap

in the recent year or two is gatekeepers,” he said. Finding 5 “Not only do they represent important capital, but they’re also winning capital in new areas, in Asia and the Middle East, in Europe.” LP “influencers” are more influential The key to unlocking gatekeepers is to under- than ever stand who they are and how they operate, then work closely with them. And remember, Guen The re-up rate for follow-on funds stands at just said, “you can’t sell a gatekeeper, because a gate- 50 percent—a daunting number for GPs about to keeper structures a portfolio and executes the fundraise. Those partners who succeed often do portfolio that they believe is best for clients.” so by leaning on “influencers,” those LPs whose Private equity is now more complex than investments are closely monitored by other LPs. ever, Steenberg observed. The GP model has had Guen said there are two approaches to raising to evolve to meet the intricacies of the world, new capital. There’s the traditional way—meet with “and where you’re seeing it the most is on trans- several hundred investors and see who sticks—but parency and communication and in dealing he advises against it, “because if they have issues with a limited-partner base. In the old days, it with you, that can proliferate.” was ‘Give me the money and go away for 10 Alternatively, a GP can target influential inves- years—I’ll just send it all back to you.’ Those tors and hope they amplify the fund rate. “One days are long, long gone.”■ group of investors that have had a lot of influence

Privcap Digest / May 2013 / 11 12 / Insight

By Tanya Klich Click to watch this video at privcap.com Coming Home The real estate rebound with Dan Vene of Fir Tree Capital

Yet with U.S. growth showing increasing signs of stabilization, the world of private capital is once again putting billions to work in commercial— and even residential—real estate. Dan Vene, the recently departed head of real estate capital- raising at Fir Tree Capital, sat down with Privcap to discuss the real estate rebound and long-term outlook. What’s driving the renewed interest in real estate investing today?

We had a lost decade in stocks. If you look at a 10-year Treasury rate today, coupled with an inflation rate of three percent, you still have a negative real rate of return in the fixed-income market. So most investors looking at real estate today are looking for yield. They also demand more conservative underwriting, because several of them got burned in the last downturn, when you had unrealistic assumptions built into these In the early days of the Great Recession, real estate models. When we think about what the market investments piled up like so much radioactive waste. is looking for, clearly they’re looking for more It wasn’t just bad loans and tight credit that drove stable managers and less financial engineering. deal activity to a halt for large institutional investors. Can you describe how investors are looking to invest? The fallout called into question the viability of the Is the interest more in commingled funds or direct asset class as a whole. opportunities?

They have generally looked at joint ventures Housing Up Sharply and direct real estate ownership as an additional from the S&P/Case-Shiller Home Price Indicies vehicle. What tends to happen is that an offering or a project is put in front of them, and they have 24% Source: S&P Dow Jones Indices & CoreLogic maybe two or three weeks to decide if it’s suitable 20% for them. That takes a lot of work. They start to 18% remember why they liked the fund model. So I 12% think what we saw in 2008 and 2009 was a knee-

8% jerk reaction saying, “I’m not going to invest in

4% funds for the time being. I’m going to look at other ways to get exposure to the real estate asset class.” 0% What happened in reality? They realized that many -4% of these fund managers made mistakes, but there -8% are also a tremendous number of high-quality -12% managers that did exactly what they said they Percentage change, year ago -18% were going to do. Those managers are now prevail- ■ -20% ing and easily raising capital.

-24% ’88 ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’04 ’06 ’08 ’10 ’12

10 City Composite 20 City Composite

Privcap Digest / May 2013 / 12 13 / Insight

Click to watch this video at privcap.com How ESG Creates Value in Emerging Markets Environmental, social, and governance (ESG) mandates are now fundamental to due diligence. Increasingly, private equity firms active in emerging markets are adding ESG programs to their toolkits—often at their LPs’ insistence.

ESG is especially important in the emerging markets, where many businesses are growing rapidly and in need of systems for improving performance and mitigating risk. Three emerging-markets private equity veterans—Jeremy Cleaver of CDC Group, Sandile Hlophe of Ernst & Young, and Dushy Sivanithy of Pan- theon Ventures—share success stories and cautionary tales about how ESG can create value and, when neglected, put value at risk.

Bio Bio Bio

Sandile Hlophe, Ernst & Young Dushy Sivanithy, Pantheon Ventures Jeremy Cleaver, CDC Group Sandile Hlophe is a chartered accountant Dushy Sivanithy is a principal with 9 years of Cleaver joined CDC in 2011 and is a Port- and the Transaction Advisory Services private equity experience. folio Director responsible for sourcing, leader for Africa at Ernst & Young. He is a Focused on the evaluation, selection and executing and monitoring fund-of-funds member of the Ernst & Young Africa Execu- monitoring of European investment oppor- investments in Africa. Prior to joining CDC, tive team and the EMEIA TAS Leadership tunities and is a member of the European Jeremy worked for the Asian Development team with extensive transaction advisory, Investment Committee. Bank (ADB) in Sydney as a private sector mergers & acquisitions, project finance, Dushy has specific responsibility for development specialist. Jeremy holds a debt advisory and financial restructuring German and Central and Eastern European BSFS from Georgetown University and a experience. The TAS team advises capital Primary Funds. He also focuses on venture MBA from Columbia Business School. markets leaders and c-suite executives on and cleantech funds in Europe. the capital agenda with regards to raising, Prior to joining Pantheon, Dushy worked investing, preserving and optimizing capital. for Hermes Private Equity as an analyst on both fund and direct investments. Previously, he worked for Morgan Stanley as a research analyst in the investment banking division, primarily involved in the telecoms and media sectors. Dushy received a BSc in Biochemistry from the University of London. He is based in London. . CONTINUES ON NEXT PAGE Privcap Digest / May 2013 / 13 14 / Insight

Doing Well by Doing Good Sandile Hlophe

A small investment in ESG up front can significantly increase long-term returns. Hlophe recalls a client in Africa that acquired a sporting goods retailer just before the most recent soccer World Cup, held in South Africa. In the diligence process, the client emphasized issues like the sustainabil- ity of the manufacturing process and its use of domestic raw materials. The client also took a close look at how the retailer could better engage with the local community by funding soccer clinics and programs at schools. “That in itself was a massive investment,” Hlophe said. “[The client] paid a premium, because they invested significantly in driving out an ESG program through- out the portfolio investment.” The investment paid off in 2011, a year after the soccer fanatics left town. When the company did not get the price it hoped for in the private market, it decided on an IPO and leveraged its good reputation in the community. “Through an IPO, they actually got much more significant value in that exit,” Hlophe said. “That’s a very good example whereby paying attention to ESG during the investment strategy—making sure you follow through and execute on that—added real significant outside value in the exit.” ■

An Ounce of Prevention Dushy Sivanithy

It’s easy to measure the costs that go into an ESG program, but it’s often difficult to measure its benefits. In some sense, ESG is like any precautionary measure: You never truly know what you prevented. “We looked at a secondaries deal in Africa with very nice underlying investments and a very steep discount available,” said Sivanithy. “Through our ESG work, we found a co-investor in one of those deals that we were very uncomfortable with and discussed it with the general partner, who we felt hadn’t managed the issue appropriately.” It turned out the co-investor was under indictment in the United Kingdom, and Pantheon decided it would not be a good idea to be involved with the person, even at a distance. “Despite the significant discount and [the fact that] we quite liked the assets, we decided to walk away from that deal,” Sivanithy said. “We feel that was still the right decision. The issue did eventually resolve itself, but we weren’t willing to take that risk.” ■

Extracting ESG Value Jeremy Cleaver

From an ESG perspective, some of the most complicated investments are those in the mining, natural resources, and energy industries. Regulatory and environmental issues abound. So how should investors approach such sectors? CDC is involved in the mining industry, but it invests at the exploration stage, not in businesses doing the extraction. “What we find is the exits for those exploration-stage businesses are to the large global mining companies like BHP Billiton or Rio Tinto or, indeed, to list on stock exchanges,” said Cleaver. “For both of those exit routes, clear and functioning ESG policies and systems are absolutely critical.” He added that ESG issues are especially important in mining because companies in the sector can change very quickly once a resource is discovered. “It changes from a couple of guys with a spade and a pan to a very large operation which is looking to identify a resource—and then quickly extract that resource,” he said. “From a governance perspective, there need to be fast and significant changes at several intervals over the period of exploration.”■

Privcap Digest / May 2013 / 14 15 / Takeaway

By Danielle Fugazy Click to watch this video at privcap.com Deal Hunter Sustaining deal flow is hands on work, says Lincolnshire Management’s T.J. Maloney

“We have a number of Europeans in our New York office that cover different parts of Europe and source deals there as well,” says Maloney. In Maloney’s view, the structure puts the firm in a position to find strong investment opportunities and develop a macro view. “We’re generally looking at somewhere between 700 and 1,000 opportunities a year,” he says. “We know we never see all the opportunities that are out there, but we think calling companies makes us better investors and gives us a leg up in terms of finding a good opportunity in a particular sector. When we see one particular industry suddenly putting 10 or 12 businesses for sale, we might say, ‘Maybe something is going on in that industry that should make us a little skeptical.’” It’s an approach that appears to be bearing veryone in the private equity indus- fruit. The firm deployed more capital in 2012 try knows that sustaining deal flow than in its first 15 years of existence, including is harder than ever. Some firms rely acquisitions of firms such as PADI, True Temper solely on investment bankers, others Sports Inc., and the National Pen Company. “We cold call, and others a combination of think it’s a good time to put out capital,” says the two. At Lincolnshire Management, a team of Maloney. “We see the economy slowly recover- dedicated “sourcing” professionals calls on poten- ing—and with slow recoveries, you don’t want tial target companies. What’s significant is that to invest early. You want to invest late. We think it’s not a group slapped together in haste—it was that we have gotten the timing right. It’ll be a formed almost 26 years ago. few years before we’ll know if that assumption “Part of the thinking is that you have to is correct, but that’s our belief.” source on a geographic basis,” says T. J. Malo- The firm’s record is strong. In 2012, Oliver ney, Lincolnshire’s president. “Deals that you’ll Gottschlag, a professor of management strategy see on the West Coast don’t tend to come to the at HEC in Paris, teamed with Dow Jones to deter- East Coast. Sometimes you’ll find that businesses mine the best-performing private equity firm of in the Midwest are not particularly interested in the past 10 years. They included firms that had talking to financial people in New York, but they raised at least two funds during the period with are comfortable with fellow Midwesterners. The aggregate capital exceeding $500 million. same is true for the Southeast.” To address those Lincolnshire’s ranking? Fifth. ■ regional preferences, Lincolnshire staffs satellite offices in Atlanta, Chicago, and Los Angeles.

“A recent study evaluated PE performance over the past decade among firms that have raised two funds and managed aggregate capital over $500M. Lincolnshire ranked 5th.”

Privcap Digest / May 2013 / 15 16 / From Our Sponsors

Click to watch this Expert Q&A/ video at privcap.com Expert Q&A with Steve Menaker, Assurance Partner, Eastern Region Manufacturing Leader, McGladrey

Steve Menaker, Assurance Partner, Eastern Region Manufacturing Leader, McGladrey

email: [email protected] Web: www.mcgladrey.com

How does a McGladrey engagement with a pri- Snapshot Then we roll into other important processes, vate equity client typically begin and evolve? such as tax returns, tax structuring and all the The first phase of engagement is usually Expertise: compliance steps. Those are just as critical as when the funds are considering a purchase 30 years of the upfront costs because you’ve got to make transaction. They want to “kick the tires” and experience in sure that everything is properly structured and gain a deeper understanding of the numbers. public accounting, that the financial statements can ultimately be We typically involve our transaction advisory focusing on value audited. We have seen many instances where group specialists who focus on evaluating the creation and due getting our firm involved right after the trans- quality of a company’s financial information. By diligence support action can improve the financial reporting using people that have experience working on to financial and process and ensure strong coordination with manufacturing companies, we can identify strategic buyers the tax and consulting groups. ■ some of the weaknesses, and/or potential Education: opportunities. This way, the private equity BSBA in Business/ groups have a good grasp of the companies Accounting from where they may invest a sizeable amount of the University of funds. North Carolina If the transaction proceeds, our services can evolve. Larger deals may need help integrat- ing new systems. We’ve seen this happen in carve out situations. Some clients need help with transitioning to, different reporting sys- tems and improved reporting to private equity groups.

Privcap Digest / May 2013 / 16