Investment Companies 13 October 2011

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Marketing Communication Investment Companies 13 October 2011

Research Listed Private Equity Charles Cade +44 (0)20 7260 1327 What are the True Costs? [email protected] George Crowe Transparency has improved significantly within the listed Private Equity sector in +44 (0)20 7260 1280 recent years, and valuation methodologies have become more standardised with [email protected] the adoption of fair value accounting. This has made it much easier for investors Ewan Lovett-Turner to differentiate between listed Private Equity funds (LPEs) on the basis of their +44 (0)20 7260 1299 portfolio characteristics and balance sheet risk. However, it is still far from [email protected] straight-forward to compare the costs of LPEs in terms of fees and finance Colette Ord charges. In contrast, private equity Limited Partnerships (LPs) have relatively +44 (0)20 7260 1290 standardised fee arrangements and simple balance sheets with no debt. [email protected] In part, these complications reflect the evergreen nature of most LPEs, whereby they Sales offer exposure to a range of investment vintages. As a result, management fees are James Glass typically charged on the value of assets rather than initial commitments. Listed funds +44 (0)20 7260 1369 also face additional operating costs such as directors‟ fees and administration, and often [email protected] adopt more diverse investment strategies, including directs, co-investment and funds. Chris G00k Some have feeder fund structures, with fees charged indirectly by the manager, while +44 (0)20 7260 1378 others are self-managed and pay staff costs rather than a defined management fee. [email protected] Also, the corporate structures of LPEs are often more complicated than LPs, with Tod Davis different share classes and borrowing/over-commitment strategies. +44 (0)20 7260 1381 [email protected] The majority of LPEs utilise debt to leverage the portfolio or to facilitate an over- Katherine Miller commitment strategy. However, the nature of borrowings varies widely (including bank +44 (0)20 7260 1380 facilities, loan notes, ZDPs and convertibles), and the low return on cash at present [email protected] means that financing costs can be a significant drag on investor returns. Of course, gearing can also enhance returns and our analysis makes no allowance for returns from Website: www.numis.com/funds the assets financed or for different levels of leverage within the underlying portfolios.

In the chart below, we summarise LPE expenses, including management fees and annual financing costs. This excludes performance-related fees due to the difficulties in comparing like-with-like, but includes an estimate of management fees charged on underlying PE funds. Ultimately, fees in private equity are high relative to other asset classes reflecting the specialist expertise that is required. The key is to find funds where the drag from expenses is not a major handicap to delivering attractive returns. Figure 1. Summary of Management / Financing Costs 7% 6% 5% 4% 3% 2% 1%

% Shareholders Funds % Shareholders

LMS

Better

NB PE NB

Oakley

Electra

Std Life Std

F&C PE F&C

Dunedin

3i Group3i Graphite

Candover Pantheon Aberdeen

HgCapital

JZ CapitalJZ

JPMorgan

Conversus

SVG Capital SVG PE Princess HarbourVest

This marketing communication was Direct Fund of Funds prepared and approved by Numis Securities Ltd. Management fee / Staff costs Other Underlying funds Finance costs The London Stock Exchange Building Note: excludes incentive fees (carried interest). Source: Numis Securities Investment Companies Research 10 Paternoster Square London EC4M 7LT, UK For FSA purposes this marketing communication has not been prepared in accordance with legal Tel +44 (0) 20 7260 1000 requirements designed to promote the independence of investment research. Important disclosures Fax +44 (0) 20 7260 1010 relating to Numis Securities Limited are on pages 55 to 56 and include the analyst certification on page 55. For investment banking relationships, if any, with companies mentioned in the report, potential conflicts of Email [email protected] interest and additional disclosure please refer to pages 55 to 56. When applicable, disclosures regarding1 ratings maybe found at http://www.numiscorp.com/x/us/regulatory.html

Registered No 2285918. Authorised and Regulated by The Financial Services Authority. A Member of the London Stock Exchange www.numiscorp.com

Investment Companies 13 October 2011

Contents

Fee Structure of Limited Partnerships 3 Summary of LPE Management/Advisory Fees 3 Nuances of LPE Management Fees 4 Self-Managed Funds 5 Summary of LPE Performance Fees 5 Realised or Unrealised Gains 5 Individual Investments or Portfolio Approach 5 Performance Hurdles 8 High Watermarks 9 Other Expenses Faced by LPEs 10 Total Expense Ratios 11 Our Methodology 11 Treatment of Performance-Related Fees 11 Other TER Complications 13 Financing Costs 18 Bank Debt 19 Corporate Debt 20 ZDPs 21 Convertible Bonds 22 Other Forms of Financing 23 Financing – A Summary 25 Conclusions on Fees and Financing Costs 29 Comparison with TERs of Other Investment Companies 31 Are the Costs of LPEs Justified? 32 Appendix I – LPEs: Summary of Underlying TER Data 36 Appendix II – LPEs Balance Sheet Summary 38 Appendix III – LPEs Summary of Mandates 39 Appendix IV – Fund of Funds Portfolio Comparisons 40 Appendix V – Share Price Performance of LPEs 41 Appendix VI – Summary of Management Fee Details 44 Direct LPEs 44 Fund of PE Funds 50

Registered No 2285918. Authorised and Regulated by The Financial Services Authority.Registered A Member No 2285918. of the London Authorised Stock and Exchange Regulated by The Financial Services Authority. A Member of the London Stock Exchange www.numiscorp.com

Investment Companies 13 October 2011

Fee Structure of Limited Partnerships Standard charges of 2% plus The overall fee structure for unquoted Limited Partnership funds (LPs) investing in 20% for private equity LPs private equity is relatively standardised. They tend to charge:

- 1.5-2.0% on commitments during the investment period (switching to cost of invested capital adjusted for write-downs/realisations thereafter).

- 20% of realised gains subject to a hurdle of 8% pa with full catch-up.

Historically, PE funds would charge 2% pa on commitments, but this has typically fallen to 1.5% pa for large cap buyout funds and 1.75% pa for mid-cap buyout funds. Smaller, more specialist buyout funds and venture capital funds still charge 2.0% pa. However, there is increasing pressure on fees given the difficult fundraising conditions at present.

Some LP funds offer favourable terms or rebates to specific investors (e.g. large investors or those coming in on the first close). For instance, Permira is seeking to charge a fee of 1.5% on its new buyout fund, with a discount of 5% available for investors coming in at the first close, as well as on commitments in excess of €200m.

Fund of PE Funds often Unquoted Funds of PE Funds typically have a similar fee structure, albeit at a lower charge 1% plus 10% level. They tend to charge 0.75-1.0% of committed capital, with an incentive fee of up to 10% of realised gains, usually subject to a hurdle of 8% pa. Fees for LP funds focused on Secondary investments will tend to be higher than those focused on making Primary commitments, reflecting the additional resources and expertise required. Summary of LPE Management/Advisory Fees

Fee structures are more For LPEs (listed PE funds), the fee arrangements are often far more complicated, complicated for LPEs making comparisons difficult. The annual management fees for LPEs typically range from 1-2% pa, but are based on one of several measures:

 Net assets: equivalent to shareholders‟ funds. Within the Investment Companies universe, in general, this is the most common measure to calculate management fees.

 Gross assets: This represents the value of the fund's total assets including gearing.

 Investments: A similar measure to gross assets, although it excludes cash / cash equivalents.

 Undrawn commitments: Several funds charge an additional fee on undrawn commitments, often at a different rate than on invested assets.

 Original commitment / initial proceeds: Better Capital‟s fee is structured in a similar way to an LP, with the fee charged by the General Partner (GP) during the investment period based on the initial proceeds raised. Similarly, the majority of Oakley Capital Investment‟s fees are based on commitments to the underlying LP, while HgCapital Trust is charged fees on its commitment to Hg6 on the same basis as other LP investors.

The reason why LPEs often charge fees on assets rather than initial commitments reflects the fact that they do not usually have a fixed life or defined investment period. In addition, the capital structure may change over time, with new capital issued or repurchased, and the use of leverage/over-commitment strategies. This contrasts with the relatively static structure of an LP, with defined vintages (Better Capital is an exception as it mimics the LP structure through a listed fund).

Investment Companies 13 October 2011

Fees on commitments may be All else being equal, calculating management fees on the valuation of assets, rather lower for LPEs than the level of capital committed, is likely to lead to higher fees (assuming that the fund is fully invested and delivers positive returns). Offsetting this, however, many LPEs do not charge on committed capital that is not invested (or charge a lower rate).

The table below summarises basic management fee arrangements for our universe of LPEs. This includes the major Private Equity vehicles traded in London, including funds listed on the London SE main market, AIM and EuroNext. We have excluded some of the smaller, specialist funds. Table 1. Base Management Fees of LPE funds Annual rate Based on Notes LPEs Direct 3i Group n/a - self-managed - Staff costs and expenses Better Capital 1.48% Placing proceeds 2.0% to £100m, 1.0% above Based on invested capital after investment period Candover Investments 1.50% Investments & outstanding commitments Self-managed until 2011 Dunedin Enterprise 1.5% / 0.5% Investments / Cash & undrawn commitments to FoFs 2.0% on commitments to Dunedin managed funds Electra PE 1.50% Investments & cash - HgCapital Trust 1.50% / 1.75% Pre-Hg6 portfolio value / Hg6 commitment - JZ Capital Partners 1.50% Average total assets - LMS Capital n/a - self-managed - Staff costs and expenses Oakley Capital Inv. 2.0% Co-investments & investments in LP 1% on cash SVG Capital n/a - self-managed - Staff costs and expenses LPEs - Fund of Funds Aberdeen PE 1.50% Net assets - Conversus Capital 0.75% / 0.375% Investments / Commitments Fees cut by 25% from Sep-11 F&C PE 0.90% Net assets & long-term debt - Graphite Enterprise 1.5% / 0.5% Investments / undrawn commitments No fee on cash (mgmt fees changed in 2007) (excl. Graphite funds) Same fees as other investors in Graphite funds HarbourVest Global PE 0.85%/ 1.0% / 1.75-2.25% Primary / Secondary / Direct Avg fees paid on underlying HarbourVest funds JPMorgan PE 1.00% Gross assets - NB PE 1.50% Net assets Including ZDPs Pantheon Int‟l Part. 1.0%-1.5%* / 0.5% Gross assets / Commitments * 1.5% to £150m, 1.0% > £150m Princess PE 1.5% / 1.75% / 2.0% Funds / Secondary / Direct Paid on invested assets & undrawn commitments Rebate of 0.5% pa net assets for investors >€1m Std Life European PE 0.8% Net assets - Source: Numis Securities Investment Companies Research Nuances of LPE Management Fees

Different fees for different types of investment: For instance, HarbourVest Global PE charges different fees for direct investments, co-investments and investments in third party funds.

Scaling down: Better Capital charges 2.0% pa on the first £100m of placing proceeds, reducing to 1.0% on additional funds above this amount. Based on the total funds raised of £210m, this is equivalent to a weighted average fee of 1.48%.

Fees often fall after the Different fees over the investment cycle: During Better Capital‟s investment period to investment period December 2012, fees are based on the proceeds of fundraising. Thereafter the base fee will be calculated on the acquisition cost of investments adjusted for realisations and write-downs (which will reduce the management fee payable). Similarly, HgCapital‟s fees on Hg6 fall from 1.75% of commitments to 1.50% of invested capital once the investment period closes.

Lower fee with realisation Fee reductions: Conversus Capital offered a 20% reduction in fees while pursuing a strategy realisation strategy from July 2009 to July 2011, effectively reducing its fee to 0.8% pa of invested assets. After briefly switching back to a 1.00% pa fee, Conversus recently cut its fee to 0.75% after reverting back to a realisation strategy.

Investment Companies 13 October 2011

Fee rebates: Investors in Princess PE with a holding valued at over €1m (based on the NAV) are eligible for a rebate of 0.5% pa of the company‟s NAV from the investment manager, Partners Group. This rebate is paid semi-annually based on the NAV at 30 June and 31 December each year. Over half of the share capital by value currently receives this rebate according to the Manager.

Self-Managed Funds

Most LPEs employ no executive staff and have a fee arrangement with an external manager. However, a few are self-managed, namely 3i Group, LMS Capital and SVG Capital. Candover Investments was self-managed until early 2011, when a separate management group, Arle Capital Partners, was established through an MBO of Candover Partners, backed by Pantheon. Candover Investments still employs its own CEO, Malcolm Fallen, whilst Conversus Capital also employs some staff directly and has its own Chief Financial Officer, Tim Smith.

Staff costs rather than No management fees are usually charged by self-managed funds (SVGA charges a fee management fees to SVG Capital, but the manager is a fully owned subsidiary of the fund). However, there are still costs associated with the management of the fund. These include staff salaries, bonuses, office costs and potentially, pension liabilities (e.g. 3i Group incurred pension charges of £71m in FY 2010).

Third party assets complicate In the case of LMS Capital, there are no third-party assets and so the staff costs can be the calculation regarded as equivalent to the management fee. However, for 3i Group and SVG Capital, which also manage third party assets, we believe that including the full staff costs overstates the true costs of managing the company‟s portfolio. We favour taking net operating costs by netting-off revenue from third-party funds against overall running costs. This can result in negative operating costs if the third party revenue exceeds staff costs and other expenses, as is the case with SVG Capital. Summary of LPE Performance Fees

Performance fees are an integral part of the private equity industry, albeit that they are called “carried interest”. Whereas many Investment Companies pay incentive fees based on performance relative to a benchmark index, the LPEs all have incentive arrangements based on absolute returns. As with management fees, a wide variety of performance fee structures exist within the LPE sector.

Realised or Unrealised Gains

Investment companies LP funds charge carried interest on realised gains over the life of the fund. However, typically charge on NAV most Investment Companies, including many LPEs, charge incentive fees based on returns, rather than realised NAV movements. This reflects a portfolio approach, with a diversified spread of gains investments and no defined vintages. In our view, this is appropriate for the Funds of PE Funds, as long as there are appropriate hurdles/high watermarks. However, for Direct LPEs with more concentrated portfolios, we believe there is a strong case to charge incentive fees on realised gains. This is generally the case, and HgCapital switched from charging carried interest based on three-year rolling NAV returns to carried interest on realised gains in relation to its investment in Hg6.

Individual Investments or Portfolio Approach

Another variable that can significantly impact the performance fees paid by investors is whether they are based on performance of the whole portfolio, on individual investments, or using a sub-set of the portfolio (defined by type or vintage). In some instances, managers may be incentivised by the fund‟s share price (e.g. share options for staff at SVG Capital).

Investment Companies 13 October 2011

Fees are usually based on Portfolio gains: This is the most common measure. Rewarding managers on whole portfolio performance of the entire portfolio aligns their interests with those of the investors. Managers are incentivised to maximise the value of all investments, and their fees are reduced by unrealised/realised losses on other investments.

Charging on specific vintages Portfolio sub-sets: Splitting the portfolio by type of investment allows different fees to or type of investment is an be charged according to the risk/return profile of the investment and the level of alternative management expertise required. For instance, co-investments or direct investments often charge different incentive fees from investments in PE funds. In our view, dividing a fund‟s assets into vintages makes sense if incentive fees are based on realised gains, as it is easier to measure returns for a defined portfolio. In addition, incentives can be attributed directly to staff present during the investment period.

Charging on individual Individual investments: The drawback of paying carried interest on individual investments leads to an investments is that it results in an asymmetric pay-off whereby managers earn fees on asymmetric pay-off profile profitable investments without having to offset the losses from poor investments. This is likely to result in significantly higher fees than would be the case if they are based on the performance of the entire portfolio. Indeed, such a structure could result in a situation where a manager incurs a loss across the portfolio as a whole yet still receives performance fees on the back of a small number of profitable investments.

Differences in investor The level of fees paid, and therefore the impact on net returns to shareholders, can be returns can be significant substantially different if performance fees are based on individual investments rather than the whole portfolio. The magnitude of this differential is determined primarily by the dispersion of returns.

We have illustrated this in the table below for a hypothetical PE fund that makes 10 investments of £10m each. For simplicity, we ignore the basic management fee and assume that all the investments are realised after five years. We have assumed a range of returns for investments made by the fund, including two written off, and two that deliver a 4x return. Overall, the portfolio delivers a gross return of 1.77x cost, equivalent to an IRR of 12.1%.

Based on an incentive fee of 20% of gains, the outcomes are:

 Portfolio approach: performance fee of £15.4m, with net IRR to investors of 10.1%.

 Individual investments: performance fee of £20.4m, with net IRR to investors of 9.4%. Table 2. Impact on Charging Fees on Individual Investments Realised Return on Cost IRR Investments Cost Value (x) (%) 1 10 40 4.0 32.0 2 10 40 4.0 32.0 3 10 30 3.0 24.6 4 10 20 2.0 14.9 5 10 16 1.6 9.9 6 10 16 1.6 9.9 7 10 10 1.0 0.0 8 10 5 0.5 (12.9) 9 10 0 0.0 (100.0) 10 10 0 0.0 (100.0)

Gross portfolio 100 177.0 1.77 12.1 Fee Basis Carried Interest on Portfolio 100 161.6 1.62 10.1 Carried Interest on Investments 100 156.6 1.57 9.4 Source: Numis Securities Investment Companies Research

Investment Companies 13 October 2011

Table 3. LPE – Details of Carried Interest and Performance Fees

Percentage Based on Time period Benchmark Hurdle Type HWM Notes LPE - Direct 3i Group Typically 20% Investment vintages (carried interest) Life of vintage Not disclosed Hurdle with catch-up - Plus staff bonuses and share plans Better Capital 20% Initial capital plus realised gains less Annual 135% of initial Hurdle with catch-up Yes Fees charged by underlying LP unrealised losses proceeds (50:50 split) Candover Investments n/a Share of carried interest on old funds Life of vintage 8% pa Hurdle with catch-up - Also incentivised on asset strip acquired by Pantheon/Arle Dunedin Enterprise 10% FoF LP - Annual investment pools After 3 years and 8% pa Hurdle with catch-up Yes Carried interest of 20% on Dunedin managed funds annually thereafter } 10% Individual Co-investments Life of co-investments 8% pa Hurdle with catch-up - Electra Private Equity 18% Direct investment pools 3 years 8% pa Hurdle with catch-up - } 9% Fund investment pools 3 years 8% pa Hurdle with catch-up - } 10% Portfolio pre-March 2006 Life of portfolio 15% pa Hurdle with catch-up -

HgCapital Trust 20% Realised return on Hg6 investment Life of Hg6 8% pa Hurdle with catch-up -

} 20% Earlier investments: NAV total return 3 year (rolling) 8% pa Hurdle -

JZ Capital Partners 20% Net realised capital gains Annual - - Yes } 20% Net investment income Quarterly 8% pa Hurdle with catch-up - LMS Capital Up to 20% Annual investment pool (carried interest) Life of pool 8% pa Hurdle with catch-up - Plus staff bonuses and share plans (6% pa pre-2010) Oakley Capital Investments 20% Co-investments (measured as a pool) Life of co-investments 8% pa Hurdle Yes } 20% Investments in LPs Life of vintage 8% pa Hurdle with catch-up - SVG Capital - Staff share plans and bonuses - - - - 20% carried interest on underlying Permira funds LPE - Fund of Funds Aberdeen Private Equity 10% NAV Annual 8% Trigger Yes Current HWM is 100p Conversus Capital 10% NAV total return 3 year rolling period 7% pa Hurdle with catch-up No Performance fee expected to be earned for three years to 31 Dec 2011 F&C Private Equity 10% NAV total return Aug 2006 to June 8% pa Hurdle - 30 June in any one of the years 2010 to 2013 (to be 2010-2013 determined by manager) Graphite Enterprise 10% Individual investments Life of investment 8% pa Hurdle with catch-up - Carried interest scheme whereby employees contribute 0.5% of cost of each investment and receive 10% of gains subject to achieving threshold. HarbourVest Global PE 10-12.5% Secondary - - - - Range of fees paid on underlying HarbourVest funds } 10-20% Direct - - - - JPMorgan Private Equity 7.5% NAV total return (Ord & ZDP) Annual 8% pa Hurdle Yes Performance fee last paid in 2008 NB Private Equity 7.5% NAV total return (Ord & ZDP) Annual 7.5% pa Trigger Yes Pantheon International 5% NAV total return Annual 10% pa Hurdle Yes Current HWM estimated to be 1,475p Princess Private Equity 15% Individual direct investments Life of investment 8% pa Hurdle with catch-up - No performance fee payable on primary fund investments. } 10% Individual secondary investments Life of investment 8% pa Hurdle with catch-up - Standard Life European PE 10% NAV total return 5 yrs from 1 Oct 2011 8% pa Hurdle - Fee to be approved at AGM in early 2012 Source: Numis Securities Investment Companies Research 7 www.numiscorp.com

Investment Companies 13 October 2011

September 2011

PE managers often have carried interest schemes whereby managers co-invest in the leverage equity of specific deals, which gives them a similar pay-off profile. For instance, 3i Group incentivises its staff via carried interest, while Graphite Capital‟s performance fees are structured on a similar basis (albeit that the managers are required to invest their own capital in each holding).

Performance Hurdles

Private equity performance Most hedge funds charge 20% of all gains for each calendar year, so long as the return fees typically have a hurdle of is positive, subject to a high watermark. In contrast, private equity funds (including 8% pa LPEs) typically have to deliver a minimum pre-determined return before the managers are entitled to a share of the gains, usually 8% pa.

However, the way that the hurdle is applied can have a significant impact on the performance fee paid:

Hurdle: The use of a “hard” hurdle rate means that a manager only earns an incentive fee based on performance over and above the hurdle rate.

Hurdle with catch-up is Trigger/Hurdle with catch-up: A trigger means that once a fund achieves the target standard in PE industry return, the performance fee becomes payable on all gains. A hurdle with catch-up differs slightly in that it ensures that the performance fee itself does not reduce investor returns below the target return. The catch-up rate is usually 100% to the manager, although it can be set at another rate (e.g. 50% for Better Capital).

Type of hurdle has a The differences between a performance fee with a Hurdle or a Hurdle with Catch-up can significant impact on fees be substantial, as illustrated in the chart below. For a fund delivering a portfolio return of 15% pa (after basic fees and expenses) over five years, the net investor return would be 13.7% pa if there is a hard hurdle at 8% pa, or 12.6% pa if there is a catch-up agreement in place. Figure 2. Carried interest payable at different levels of portfolio return

30 25 20 15 10

Feespaid (£m) 5

0% 2% 4% 6% 8%

10% 12% 14% 16% 18% 20% Portfolio Return % pa Hurdle Trigger Hurdle with catch up

Assumes opening net assets of £100m, a 20% performance fee and 8% hurdle/trigger rate, with the portfolio realised after five years Source: Numis Securities Investment Companies Research All else being equal, we would favour funds that have a hard hurdle (e.g. Pantheon International Participations, Standard Life European PE, JPMorgan PE) over those with full catch-up (e.g. Conversus Capital, Graphite Enterprise, NB PE).

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Investment Companies 13 October 2011

September 2011

High Watermarks

HWMs prevent fees being Most performance fee arrangements based on NAV returns incorporate a high paid to regain losses watermark (HWM) to ensure that managers are not rewarded merely for regaining ground following losses. The HWM is typically the highest level of NAV at which a performance fee was previously earned (adjusted for any dividends/distributions). This provision is generally less relevant if performance fees are based on realisations of individual investments or vintages.

Measurement Period of HWM Conversus has a rolling three- Conversus Capital‟s performance fee is measured over rolling three-year period and so year HWM and will earn a fee it earned no performance fees in 2009 and 2010, despite NAV returns of 14.6% and on recovering losses from 12.1% respectively, as a result of a 28% decline recorded in 2008. However, because 2008 the fund has a rolling three-year HWM, a significant fee is expected to be paid for the year ending 31 December 2011. The last published NAV of $29.44 at 31 August is up 41% since the end of 2008 and we estimate that it could earn a fee of $55m, equivalent to 2.9% of shareholders‟ funds. The NAV at launch in mid-2007 was $25 and the managers are likely to be paid carried interest even though the return since launch is just 3.9% pa. Effectively, the managers will be receiving an incentive fee for the recovery of performance in 2008 when the NAV fell by 27.4%.

Rebasing of HWM Pantheon rebased HWM in Occasionally, listed funds may rebase HWMs in order to reincentivise the manager. For 2007 instance, in 2007, the Board of Pantheon International Participations agreed to rebase the high water mark for its manager, Pantheon Ventures, as it considered that it was no longer attainable and did not represent an effective incentive for the manager. At that time, an increase in net assets of 65% would have been required over the year for a performance fee to be payable. The hurdle was lowered to 10% pa (from 15% pa) and the performance fee rate was reduced to 5% pa (from 10% pa). In addition, the manager granted PIP an increased allocation to its secondary investment opportunities. A performance fee of £5.163m was paid to the manager in respect of the initial 18 month performance fee calculation period ended 30 June 2008. However, no performance fee has been paid since then and the fund‟s NAV is still well below the HWM, which compounds at 10% pa. We estimate that the HWM at 30 June this year was 1,475p, compared with the published NAV of 1,104p.

Candover‟s management Candover Investments‟ management team, Arle Capital Partners, has a share in carried incentivised on asset strip interest earned on older funds launched by the group. In addition, the team is incentivised on the performance of a £65m asset strip which was sold by Candover Investments to an entity backed by Pantheon funds and Arle at a 14.3% discount to carrying value in December 2010. Although this incentive fee has no direct impact on Candover Investments, we believe it will have been reflected in the discount to NAV at which the asset strip was sold.

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Investment Companies 13 October 2011

September 2011

Other Expenses Faced by LPEs

Average expenses of 0.4% of As well as the basic management fee, there are a number of other expenses that are shareholders‟ funds commonly charged to shareholders. Based on a simple average of the LPEs (excluding 3i Group), these expenses represent 0.4% of average shareholders‟ funds. However, there is a significant range from 0.2% for Standard Life European PE to almost 0.9% for NB Private Equity. In theory, the ratio should be higher for smaller funds as fixed costs are spread over a smaller asset base. Other expenses include:

Directors‟ fees – a typical LPE has total fees for the non-executive directors of around £200,000 pa. These fees tend to be higher than for most investment companies, reflecting the specialist nature of the asset class.

Professional fees – these include the auditor‟s fee, broker fees, tax advice and legal expenses.

Administration – secretarial and custodian services are generally excluded from the basic management fee. These may be charged at a fixed rate or linked to the level of assets.

Investment Companies no Historically, UK domiciled investment trusts suffered VAT on management and longer pay VAT on performance fees, but this changed after an appeal by the Association of Investment management fees Companies (AIC) to the European Court was upheld. No VAT has been charged on fees since October 2007, and funds have been able to claim back VAT previously paid (we have excluded any reclaims from our TER analysis as it is a non-recurring benefit).

Deal fees are usually offset Deal fees: These are typically paid by portfolio companies upon completion of a against management fees transaction, but there is little transparency on the size of fees paid. We believe that they are typically in the region of 2-3%, although they can range from 0.5% to 5%. Similarly, there are abort costs to cover due diligence and advisor fees if a transaction is aborted.

Historically, deal fees were often a way for PE managers to enhance their revenues. Typically, however, LPEs now pay deal fees (net of abort costs) to the company or offset them against the management fee. Electra PE and Dunedin Enterprise split deal fees (net of abort costs) 50:50 between the fund/manager. In 2009, Dunedin Enterprise suffered a charge of £90,000 for abort costs, while HgCapital Trust appears to have paid c.£1m in 2010 for its share of abort costs (although we believe that some of this will be written back in 2011 following the subsequent completion of a deal). Deal fees are less relevant for the Fund of LP Funds as they are unlikely to be paid a transaction fee on fund commitments or co-investments. Table 4. Treatment of Deal Fees and Abort Costs for Direct funds Fund Deal Fees Abort Costs 3i Group Company Company Better Capital Manager, but offset against Company, unless exceed deal fees (then management fee excess is offset against management fee). Candover Investments n/a - realisation strategy Dunedin Enterprise Manager, but 50% offset against Split 50:50 manager:company management fee Electra Private Equity Excess over abort costs split 50:50 Company manager:company HgCapital Trust Manager, but off-set against Company management fee LMS Capital Company Company Oakley Capital Inv. Manager, but set off against Company management fee SVG Capital n/a - invests through Permira funds Source: Numis Securities Investment Companies Research

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Investment Companies 13 October 2011

September 2011

Total Expense Ratios

Our Methodology

Comparing TERs is difficult There is increasing emphasis on comparing the costs of financial products sold to for listed PE funds investors. Ideally, the total expense ratio (TER) should provide a single figure that can be used to compare the annual operating costs of funds relative to the size of their asset base. In theory, it is straight-forward to compare total expense ratios between funds. After all, it is just a matter of calculating Total Expenses/Assets. In practice, though, TERs of LPEs are often calculated in different ways, which can provide a misleading picture for investors. A consistent methodology is therefore needed to provide a meaningful comparison across the peer group.

We have calculated TERs for LPEs using the following formula:

TER = [Basic Management/Advisory Fee + Other Expenses] / Shareholders‟ Funds

Where:

- Fees/Expenses: are based on the latest annual results (interims do not usually provide sufficient information).

- Other Expenses: include Directors‟ fees, auditor‟s remuneration, custodian fees and secretarial fees. Where possible, we exclude one-off corporate fees (e.g. reconstruction costs or listing fees) as we believe these would distort the analysis.

- Shareholders‟ Funds: are calculated using the average of net assets at start and end of the financial year.

- Interest charges and other costs of financing: these are excluded from the TER. We review these separately, later in this report.

Treatment of Performance-Related Fees

Including carried interest can TER comparisons generally exclude performance-related fees (carried interest). This is distort comparisons understandable since the incentive fee paid in any year depends upon the fund‟s performance over a specific period and thus two funds with identical fee arrangements could appear to have very different expense ratios. In this situation, the fund with the worse performance record would appear to have a more favourable fee structure. Furthermore, including performance fees in TERs means that total expense ratios can vary widely from year to year. Taking an average TER over several years might seem to be a solution, but there are still significant pit-falls, in our opinion, due to changes in balance sheets and fee structures.

Carried interest not always Another difficulty is that for Fund of PE Funds or investments through a feeder fund disclosed structure, the level of carried interest is rarely disclosed. Rather, valuations and returns are quoted net of any incentive fees earned. The same is true for some of the Direct LPEs that invest through in-house vehicles.

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Investment Companies 13 October 2011

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A simple comparison of On the other hand, ignoring performance fees altogether can be equally misleading, incentive schemes would particularly for Private Equity funds as carried interest typically represents a significant require numerous proportion of long-term expenses. In theory, it might be possible to value the assumptions performance fee as an option, but this requires assumptions on volatility and adjustments for high watermarks. In our view, a fund‟s historic risk/return profile may not necessarily be a good indicator of the future due to changes in investment strategy and the nature of the balance sheet. A more intuitive approach would be to show TERs for different portfolio return scenarios. However, this is complicated by the need for assumptions on future portfolio leverage, and is potentially distorted by funds which charge carried interest on individual investments rather than the portfolio as a whole.

The valuation of investments for NAV purposes will usually include an accrual for carried interest where appropriate. As a result of the move to fair value accounting, PE valuations are arguably less conservative than in the past, implying a lower uplift on realisation. This suggests that performance fees will be accrued earlier than in the past on unrealised gains.

Oakley Capital had highest In the chart below, we have estimated TERs for our universe of LPE funds, both performance related fee in excluding and including performance fees (where information is available). By far the last accounting period biggest performance fee as a proportion of assets was earned by Oakley Capital Investments following the realisation of Host Europe in September 2010. Electra Private Equity made provisions under various incentive schemes of £16m, equivalent to 2.5% of average net assets. HgCapital Trust paid carried interest of £1.1m in 2010, but an amount of £2.4m was earned in H1 2011. For 3i Group, the carried interest payable is net of carried interest earned on third party funds. Figure 3. Comparison of LPE TERs – Incl. and Excl. Performance Fees

8% 7% 6% 5% 4% 3% 2% 1%

0% %Shareholders Funds Avg

-1% 3i

SVG LMS

Better

Electra NBPE

Oakley

F&CPE

Dunedin Graphite

Pantheon

HgCapital

Aberdeen

Candover

JPMorgan

JZ Capital JZCapital

Conversus

Princess PE Princess

Std Life Euro Life Std HarbourVest Direct Fund of Funds TER (excl perf fees) TER (incl perf fees)

SVG Capital's direct expenses are fully offset by revenue from third party asset management business Note: not all funds disclose carried interest or other incentive fees (these may simply be reflected in valuations). Source: Numis Securities Investment Companies Research Whilst we recognise that carried interest is an integral part of the remuneration structure within the private equity industry, we feel that a comparison of LPE TERs can be misleading if performance fees are included. In our view, the best solution is to calculate expense ratios in a conventional manner (including the basic fee and other expenses) and then provide separate details of performance related incentives. In the chart below, we show TERs excluding performance fees (separating out Directors fees and other expenses).

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Investment Companies 13 October 2011

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Figure 4. LPE TERs (excl. Performance Fees)

%Shareholders Funds Avg 3i

SVG LMS

-1% Better

Electra NBPE

Oakley

F&CPE

Dunedin Graphite

Pantheon

HgCapital

Aberdeen

Candover

JPMorgan

JZ Capital JZCapital

Conversus

Princess PE Princess

Std Life Euro Life Std HarbourVest Direct Fund of Funds Mgmt Fee / Staff Costs Board Other

SVG Capital's direct expenses are fully offset by revenue from third party asset management business. Does not include Princess PE rebate of 0.5% of NAV to clients with a holding of at least €1m Source: Numis Securities Investment Companies Research Other TER Complications

Performance fees are not the only complication when calculating TERs and we believe that some publicly-available comparisons are highly misleading. For instance, the AIC‟s data on TERs shows that HarbourVest Global PE has one of the lowest expense ratios in the investment companies sector at just 0.6%. However, this ignores that fact that fees are charged by HarbourVest on the vehicles through which it invests, as well as by managers of the underlying private equity funds.

Underlying Expenses The Financial Statements of several LPEs omit costs to which the investor is indirectly exposed:

Fees may be not be charged Feeder fund structures: Several LPEs have feeder fund structures whereby they at the listed fund level invest all of their assets through another vehicle run by the same management team. Examples include Better Capital and HarbourVest Global PE. In addition, Dunedin Enterprise, Graphite Enterprise, HgCapital Trust and Oakley Capital Investments invest a significant proportion of their portfolio via in-house LPs. However, the treatment and disclosure of these costs varies. HgCapital includes the management fees (priority profit share) as a charge against investment income (or if income is insufficient, as a loan to the general partner) and also discloses carried interest, which is reflected in portfolio valuations. Dunedin, Graphite and HarbourVest all disclose underlying management fees (but not carried interest) on investments in underlying funds. Better Capital and Oakley provide details of the fee arrangements, but give no details on the actual fees charged. We have tried to include costs of fees paid to in-house funds in our TER analysis. However, this is usually difficult for carried interest.

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Fund of PE Funds rarely Underlying charges on fund investments: For listed Funds of PE funds, the costs disclose underlying charges charged by the underlying fund managers are rarely disclosed (Conversus Capital is an exception). Excluding these charges suggests that the Funds of PE Funds have lower expense ratios than the Direct LPEs, even though the reverse is likely to be true. However, making an estimate is not straight-forward as the valuation of fund investments will differ from the initial commitments on which fees are charged. In addition, the level of fees charged will vary and some of the underlying funds will be past their initial investment period. Furthermore, it is particularly difficult to factor in carried interest expenses on the underlying funds as these are hidden in valuation movements.

More mature portfolios will In the chart below, we have included an estimate for the underlying management costs tend to have lower underlying (excluding carried interest) based on 1.2-1.4% of fund investments and active undrawn fees commitments (no fees are typically payable on commitments to funds that have passed their investment period). This is rather arbitrary, but it is difficult to be more precise given the level of disclosure provided. More mature portfolios will tend to have lower fees since the portfolio is often valued significantly above cost. In addition, there is typically no management fee payable on co-investments (although there may be carried interest).

Conversus Capital is the only Conversus Capital includes a cost of $20.7m in 2010 for fees and expenses charged by fund to disclose underlying the underlying funds (excluding carried interest), equivalent to 0.94% of its Fund charges portfolio and active undrawn commitments. Similarly, JPMorgan PE estimates that the average fee paid on invested assets and undrawn commitments is around 1% pa. HarbourVest Global PE and Pantheon International Participations also tend to have more mature portfolios, but the underlying fees are not disclosed (we provide data on portfolio maturity in Appendix IV). Figure 5. LPE TERs – Including Estimate of Underlying Fund Fees

5% 4% 3% 2% 1%

% Shareholder Funds % Shareholder 0%

LMS

Better

Electra NBPE

Oakley

F&CPE

Dunedin Graphite

3i Group 3i

Pantheon

HgCapital

JZCapital Aberdeen

Candover

JPMorgan

Conversus

SVG Capital SVG PE Princess

Std Life Euro Life Std HarbourVest Direct Fund of Funds

Management fee / Staff costs Other Underlying funds

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SVG Capital is still paying We classify SVG Capital as a Direct PE fund, as it invests primarily through Permira fees on its original vehicles. Permira funds represented over 80% of SVG Capital‟s portfolio as at 30 June, commitment to Permira IV including exposure through Permira feeder vehicles, while Permira IV represented two- thirds of the portfolio. However, there is little information available on the costs of the underlying funds, as investment returns are shown net of fees and carried interest. Furthermore, the situation is complicated by the fact that SVG Capital is still paying management fees on its original €2.4bn direct commitment to Permira IV even though its commitment was capped at 60% as a result of the scale-back agreed in early 2009. Based on a fee of c.1.3% pa, this represents additional charges of £11m pa, equivalent to 0.9% of net assets on the excess (these additional commitment fees are only payable during PIV‟s investment period and so SVG Capital should benefit from a significant reduction in fees from September 2012). Under this agreement to cap its commitment, SVG Capital also faces a 25% reduction in future distributions from its interests in Permira IV, but the impact on future returns is already reflected in portfolio valuations.

Measurement of Assets It is not always clear what the definition of “Assets” should be when calculating a fund‟s TER. Complications include:

We treat ZDPs as debt rather Other share classes: We believe that the best way to compare expense ratios is to than equity in our TER calculate them as a proportion of the net assets attributable to shareholders. However, calculation this is complicated by the presence of other share classes. We believe that share classes that participate in asset growth (such as Pantheon‟s Redeemable shares) should be included as part of the net assets, but we exclude share classes that are effectively a form of leverage for the Ordinary shares (including ZDPs, as well as Convertibles which are out of the money).

Standard methodology is to Invested assets and commitments: Some funds express their expense ratio as a base TERs on average net percentage of gross assets/invested capital (i.e. including debt), and there is also an assets argument to include undrawn commitments. The justification is that this represents the assets being managed, but a counter argument is that it results in a lower TER for funds with leverage and/or an aggressive over commitment strategy. In our view, it is arguable which measure of assets should be used, but we feel that the standard methodology should be based on net assets, in-line with other investment companies. This makes it easier for investors to compare TERs across different asset classes. Nevertheless, we show TERs in the appendix with assets calculated in a variety of ways. The chart below is calculated on the basis of invested assets, rather than shareholders‟ funds.

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Figure 6. LPE TERs – Incl. Underlying Fund Fees based on Invested Assets

4% 3% 2% 1%

% Invested Assets 0%

LMS

Better

Electra NBPE

Oakley

F&CPE

Dunedin Graphite

3i Group 3i

Pantheon

HgCapital

JZCapital Aberdeen

Candover

JPMorgan

Conversus

SVG Capital SVG PE Princess

Std Life Euro Life Std HarbourVest Direct Fund of Funds

Management fee / Staff costs Other Underlying funds

Note: Excludes carried interest / performance fees Does not include Princess PE rebate of 0.5% of NAV to clients with a holding of at least €1m Source: Numis Securities Investment Companies Research Adjustments need to be made Changes in the capital base: In the vast majority of cases, management fees relate to for fund raising or capital the assets under management over the past financial year, yet some funds calculate return expense ratios based on either opening or closing assets. This can lead to significant distortions where there has been a sharp increase or fall in assets over the year. As a result, we believe that assets should be averaged over the year to avoid this distortion. The TER can still be skewed if there have been significant changes to the balance sheet during the year. For instance, Better Capital more than doubled its size during its last financial year to 31 March 2011. We allow for this by making a time-weighted adjustment to the net assets under management.

Timing Timing of year-ends differ The best source of data on a fund‟s expenses is provided in the annual report, but different financial year-ends mean that one is not always comparing like-with-like. We base all of our figures on the latest annual report (or the latest final results statement where sufficient information is provided). In practice, this means that most of the expense ratios in this report are for year-ends from 31 December 2010 to 30 June 2011. Where the accounts cover a period of more or less than 12 months, we have made a pro-rata adjustment to the basic management fee, and an educated adjustment to other expenses (not all are charged on a pro-rata basis). For instance, Better Capital‟s latest Annual Report covers the period from launch in December 2009 to 31 March 2011, while Graphite Enterprise had a 13 month reporting period last year following a change in the year-end to 31 January.

One solution is to apply a fund‟s fee basis to its current assets in order to calculate the TER. This is logical, but difficult to achieve for LPEs which are self managed or charge fees through underlying vehicles. Candover‟s fee basis has changed significantly over the past year, although we estimate that the TER is broadly similar if exceptionals are excluded.

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Treatment of Third Party Assets TER analysis distorted by Most LPEs are managed through a fee arrangement with an external manager. third party fees However, 3i Group and SVG Capital have significant third party assets under management, which can distort TER analysis. Including the full staff costs will therefore overstate the true costs of managing the company‟s balance sheet assets, yet apportioning costs on a pro-rata basis may also be misleading. For instance, the majority (88%) of 3i‟s balance sheet assets are invested in Private Equity, with 11.6% in Infrastructure and just 0.4% in Debt Management. In contrast, 27% of third party assets are in Debt Management, 13% in Infrastructure and 60% in Private Equity. However, the fees to manage Debt portfolios are typically far lower than on Private Equity assets.

3i‟s TER can be calculated in Calculating 3i‟s TER on different measures can lead to significant differences in numerous ways outcome. For instance, the company highlights its “cost efficiency” of 3.2% based on operating costs, net of management and advisory fee income, as a percentage of opening portfolio value. It also discloses a Cost/AUM ratio of 1.8%, which represents total operating costs as a proportion of weighted average assets under management (including third party funds). This compares with 3.6% when calculated using net operating costs as a proportion of average net assets (our standard TER methodology detailed above).

SVG Capital provides an Another complication is whether or not to include the value of the third party fund annual valuation for its funds management business as part of the asset base when calculating the TER. This is business relevant for SVG Capital, which provides an annual valuation for SVG Advisers (SVGA), its wholly-owned management subsidiary. SVGA was valued at £53.7m at 31 December 2010, equivalent to 5.7% of SVG Capital‟s shareholders‟ funds. However, we exclude this value from our measure of average net assets when calculating the TER. Instead, we offset third-party asset management revenue against the group‟s operating expenses (as discussed above). SVG Capital‟s accounts show a charge of £5.9m payable to SVG Advisers, based on 0.5% pa of gross assets, with total administrative expenses for the company of £7.53m (apportioning staff costs and other expenses to the group). However, given that SVGA is a wholly owned subsidiary of SVG Capital, we calculate the group‟s TER on a consolidated basis.

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Financing Costs

Attitude towards leverage has For many years, LPEs have struggled to align shareholders' funds with invested capital. changed During the time of easy credit in 2006-07, many funds sought to make their balance sheets “more efficient” by aggressive over commitment strategies (e.g. SVG Capital) or through replacing equity with debt (e.g. 3i, Candover). In addition, most of the Fund of Funds were significantly over-committed in order to maintain a fully invested portfolio over the cycle. However, the attitude towards leverage has changed dramatically in the past few years and managers/Boards of LPEs are now far more conservative, both about their assumptions on future cash flows and the ability to finance debt.

ZDPs were a solution to the In the aftermath of the collapse of Lehman Brothers, debt finance for private equity lack of bank debt post backed assets was extremely difficult to obtain. As a result, LPEs needing to strengthen Lehman collapse their balance sheets during 2009 were often forced to consider alternative sources of financing. 3i Group and SVG Capital raised equity capital through dilutive rights issues. Others were forced to sell assets at discounts (e.g. Pantheon and Standard Life European PE) or to raise more expensive debt, including through ZDPs.

The current balance sheet structures of LPEs are partly a product of history. For instance, several LPEs have been restricted from making new investments/commitments since 2008 as a result of balance sheet constraints. In future, we believe that LPEs will operate with far lower levels of gearing. This will reduce the potential upside for investors, though experience has shown that it is far preferable for shareholders to suffer some cash drag rather than face the possibility of breaching debt covenants or being unable to meet commitments.

Partly paid structure is The drawdown structure of LPs is rarely appropriate for listed funds, as partly paid difficult for listed funds shares are ineligible for the main market of the London SE. In theory, they could be listed on the Specialist Fund Market (SFM), although we believe that there are still complications due to settlement. In addition, we believe that many investors in listed funds, notably private client wealth managers, find it difficult to accommodate a partly paid structure as they would need to hold cash in client accounts against the future liability.

Difficult to match fund raising Despite the pitfalls of leverage, some level of over commitment is usually required given with capital requirements the fluctuations in calls/distributions, and the difficulty of raising equity capital to coincide with investment opportunities. The most common option for LPEs is to use bank facilities to cover potential draw-downs, although some funds have also issued loan notes, ZDPs or convertibles.

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Bank Debt

Interest rate does not capture Most LPEs have bank facilities in place, but simply looking at the interest rate paid on full costs bank debt does not capture the full costs. There are other direct costs such as arrangement fees and non-utilisation fees, which are usually disclosed. In addition, there are usually covenants that need to be met. Table 5. Terms for LPE Bank Facilities Name Type of facility Size of facility Drawn Maturity Rate Fees on undrawn balance Direct 3i Group Multi-ccy bank facility £100m £69m Oct-12 Libor + 2.75% to 3.00% 1.375% to 1.5% Multi-ccy bank facility £300m £156m Oct-12 Libor + 2.75% 1.38% Multi-ccy bank facility £200m £50m Nov-14 Libor + 3.75% 1.88% Better Capital None - - - - - Candover Investments None - - - - - Dunedin Enterprise None - - - - - Electra PE Bank facility £185m £169m Jan-13 Libor + 3.0% Not disclosed HgCapital Trust None £40m - Aug-14 Libor +2.75% 1.10% LMS Capital Multi-ccy bank facility £15m - Sep-11 Libor + 3.0% 1.50% Oakley Capital Inv. None - - - - - SVG Capital Bank facility €315m €64.1m Jan-13 Libor + 2.75% 1.375% Fund of Funds Aberdeen Private Equity None Conversus Capital Bank facility $325m $1m Dec-14 Libor + 2.95% 0.75% F&C PE Bank facility £40m £9m Apr-12 Libor + 2.75% 1.38% Graphite Enterprise Bank facility £60m - Apr-15 Libor + 3.5% 2.00% HarbourVest Global PE Multi-ccy bank facility $500m $99.1m Dec-14 Libor + 1.5% 0.40% JPMorgan PE Multi-ccy bank facility $150m $75m May-13 Libor + 2.75% to 3.25% 1.00% NB PE Secured loan facility $250m - Aug-14 Libor/Euribor + 1.35% 0.40% Pantheon Bank facility $82m - Jun-15 Libor + 2.75% 1.10% Bank facility €57m - Jun-15 Euribor + 2.75% 1.10% Princess PE Multi-ccy bank facility €80m - Jul-14 Euribor + 3.25% 1.05% Std Life European PE Bank facility £120m £49.6m Dec-13 Libor + 2.5% 1.00% Source: Numis Securities Investment Companies Research Interest rates vary across the sector depending upon the size of the loan, the time when it was agreed, the nature of the balance sheet/portfolio, and the group‟s relationship with lenders. NB PE has one of the cheapest facilities at Libor/Euribor +1.35% with 0.40% on any undrawn balance to August 2014. In contrast, Graphite Enterprise agreed a £30m facility in April 2011 at Libor + 3.5%, with a 2.0% non-utilisation fee and a 3.5% arrangement fee (this facility was recently increased to £60m on the same terms).

Princess PE refinanced its There is usually the ability to refinance expensive loans once lending conditions debt at more favourable terms improve. For instance, Princess PE recently replaced an expensive tiered arrangement agreed in 2009 (with a margin over Libor of 5.00-8.75% plus a non-utilisation fee of 2.25% pa), with an €80m facility at Euribor +3.25%. Conversely, in June 2011 Pantheon International Participations replaced its previous £150m facility at Libor +1.25% with a smaller £100m facility in US$/Euros at a higher rate of Libor/Euribor + 2.75%.

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Arrangement and Non-Utilisation Fees Bank fees have risen In some cases, debt facilities may never be utilised and they simply provide insurance significantly since financial that the fund is able to meet its undrawn commitments. Nevertheless, there are still crisis significant costs in the current lending environment, as banks typically charge an upfront arrangement fee, ranging from 0.25% up to 3.5% of the facility. In addition, there are non-utilisation fees which range from 0.4% to 2.0% on the undrawn balance. These fees are generally far higher than before the financial crisis. However, without these bank facilities, LPEs would need to hold significant amounts of cash and may be unable to take advantage of opportunistic investments.

Corporate Debt

While bank facilities are commonly used by LPEs, some have issued notes to institutional investors. Due to the transaction costs involved, this option is usually only available to larger funds. Loan notes may be issued in different currencies to reflect the fund's investments, and may carry a fixed or floating interest rate. The table below provides a summary of note issuance within the sector. Table 6. LPE - Corporate Debt Size Maturity Type Interest Rate 3i Group €346.5m Jun-12 Public Floating Euribor + 0.2% €300m 2013 Private Floating Not disclosed $50m 2013 Private Floating Not disclosed £309m Mar-17 Public Fixed 5.625% £200m Mar-23 Public Fixed 6.875% £375m Dec-32 Public Fixed 5.750%

Candover $173.3m Oct-14 Private Fixed (Swap to floating) 7.02%* €18.5m Oct-14 Private Floating Euribor + 1.4% £30m Jan-15 Private Fixed (Swap to floating) 7.45%*

SVG Capital £1m Jul-13 Private Floating Not disclosed $85m Jul-13 Private Fixed 9.10% $116.7m Jul-14 Private Fixed 8.49% £36.7m Jul-15 Private Fixed 9.10% * swapped to floating rate with effective charge of Euribor plus 1.4% Source: Numis Investment Companies Research SVG has been repurchasing 3i Group, the largest London-listed PE fund, has the most diverse funding structure, its debt comprising both fixed and floating rate debt with maturities extending out to 2032. SVG Capital has been active in buying back its Senior Notes, repurchasing £35.3m during H1 2011 which reduced the overall liability to £161.3m and saved £4m pa in interest costs. The coupon payable to note holders rose in late 2008 in exchange for an increase in LTV covenants.

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In 2007 Candover Investments issued a series of private placement notes, repayable in 2014/2015. Two of these notes have fixed rates of 7.02% and 7.45%, respectively, as detailed in the table above, but these were swapped to a floating rate through an interest rate swap, resulting in a weighted average margin over Euribor of 1.40-1.44%. Under the terms of the private placement notes, the fund can offer to pre-pay the notes at par using proceeds from realisations. Following the sale of an asset strip to Pantheon/Arle Partners for £64.6m, Candover Investments made an offer to all note investors pro rata to their holdings. The holder of the Sterling notes declined the offer, while there was partial acceptance from the holders of the US$ (c.£17m) and Euro notes (c.£10m). Overall, £27.2m was prepaid, leaving a remaining liability from the notes of £154.3m at 30 June. Most of these proceeds are likely to be held in cash until maturity, resulting in a significant drag for the fund‟s ordinary shareholders.

ZDPs

ZDPs have pros and cons for The absence of conventional lenders to private equity investors in 2009 meant that LPEs LPEs were forced to look for alternative sources of financing. Zero Dividend Preference shares (ZDPs) provided such an option. These seek to pay a pre-determined amount to investors at a future date. As a result, ZDPs have similarities to conventional borrowings, but they typically benefit from far less restrictive terms, with few covenants that need to be met during their life, and no interest payments. The ZDPs also have the benefit that they are not dilutive to existing shareholders, unlike issuing equity at a discount or convertibles. On the downside, the borrowings are fully drawn at issue and there is no tax relief on interest (as no interest is payable). In addition, there is a one-off bullet payment that will need to be financed at a future date, though it is possible to spread the final payment over more than one year (as JPMorgan PE and Aberdeen Development Capital have done).

Investors wary of ZDPs from In terms of demand, ZDPs are attractive to UK private client investors as they roll-up funds with illiquid assets and returns which are taxed as capital (a lower marginal rate than income tax - currently prior debt 28% vs a top marginal rate of income tax of 50%, (18% vs 40% in 2009 when most of the ZDPs were issued). However, a typical ZDP buyer is risk averse and wary of illiquid asset classes such as private equity, as well as funds with prior debt claims. This means that the ZDPs issued by LPEs need to be very well covered by existing assets in order to attract demand. In addition, they are typically far more expensive than bank facilities, with GRYs (gross redemption yields) at issue ranging from 6.5% for Electra PE to 8.75% for F&C PE. Furthermore, the ZDPs need to be denominated in Sterling to attract UK private clients which leads to a currency mismatch for many LPEs, although the liability can be hedged (NB PE and JZ Capital Partners hedge their ZDP exposure).

Bullet repayment leads to Several funds with ZDPs have held the proceeds in cash which leads to a significant refinancing risk drag on performance given the low level of interest rates at present. The bullet payment of a ZDP also raises refinancing risk at maturity. For example, JZ Capital Partners held a dilutive equity fund-raising in order to finance the repayment of its June 2009 ZDPs. In addition, Aberdeen Development Capital has been forced to adopt a realisation strategy and return capital to its 2010/2012 ZDP holders as assets are realised.

JPMorgan PE has issued Not all ZDP issuance has been as a result of stressed balance sheets. In 2009, JP ZDPs to exploit investment Morgan PE raised £30m through an issue of 2015 ZDPs and also raised $93.4m of opportunities equity capital at a 30% discount to NAV in order to pursue opportunistic investments in smaller secondary funds. More recently, JPMorgan PE has issued £19.8m ZDPs at a GRY of 8.25% to December 2017 in order to help finance the acquisition of a secondary portfolio of PE interests.

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Table 7. LPE ZDPs (£m) GBp/share GRY at Issue Current GRY Fund Maturity Current Liability Redemption Redemption (%) (%) Electra Private Equity 05-Aug-16 52.7 73.5 155.41 6.47 5.70 F&C Private Equity 15-Dec-14 34.8 45.6 152.14 8.75 6.20 JPMorgan PE 2013 28-Jun-13 40.4 46.2 73 7.00 4.10 JPMorgan PE 2015 31-Dec-15 41.5 59.9 87.3 8.25 5.70 JPMorgan PE 2017 31-Dec-17 19.8 32.6 107.1 8.25 5.80 JZ Capital Partners 22-Jun-16 52.1 76.6 369.84 8.00 5.30 NB Private Equity 31-May-17 34.1 50.9 169.73 7.30 5.60 Data as at 30 Sep 2011 Source: Numis Securities Investment Companies Research Convertible Bonds

Convertible bonds provide another source of non-bank financing. The interest rates on convertibles are typically lower than for other notes or ZDPs due to the value of the option to convert to equity. As with ZDPs, they are subordinated to other types of debt in the capital structure and therefore do not impact bank covenants.

May be dilutive for Ordinary Historically, convertibles have also been used by Investment Companies as a way to shareholders raise deferred equity capital whilst trading at a discount. They are effectively a combination of a bond and a warrant. As a result, they may be quasi-equity (if in the money) or have the characteristics of a bond (if well out of the money). While they may be cheaper than conventional debt in terms of the interest paid, convertibles will potentially dilute future returns of ordinary shareholders. In addition, they have less flexibility than bank facilities as they are fully drawn at the time of issue.

For investors, convertibles provide upside participation in a fund‟s growth, whilst at the same time providing downside protection and a higher yield. There is considerable flexibility over the characteristics of the convertible (yield, life and conversion price) and the terms are set largely through negotiation with potential buyers.

3i‟s convertible expired earlier 3i Group previously had a 3.625% convertible in issue, but this was repaid at par in May this year 2011. At maturity, only £138m of the £430m initial issue remained outstanding, as the company took the opportunity to buy back the liability at a discount in the secondary market.

SVG Capital has convertibles in issue that are well out of the money with a conversion price of 648p. These were issued in June 2008 with a coupon of 8.25%, although the company has repurchased around £10m of the original issue (reflecting an opportunistic policy to buy back the fund‟s liabilities if they can be acquired below par value).

Electra issued a £100m 5% More recently, Electra PE issued a £100m 5% Convertible in December 2010. Electra‟s Convertible in December 2010 justification for the Convertible issue was that the managers saw significant investment opportunities over the next few years and were unwilling to rely on the ability to refinance their bank debt of £185m that expires in January 2013. However, the company now has substantial investment resources, equivalent to £323m or just over 40% of net assets, and the cash raised from the convertible will be a drag on NAV returns unless it is invested. Table 8. LPE Convertibles Nominal Rate Convertible Conversion Ord. share Conversion (£m) (%) Maturity price (GBp) price (GBp) price (GBp) premium (%) Electra PE 100 5.00 29-Dec-17 1,080 2,050 1,331 54 SVG Capital 111 8.25 29-May-16 97 648 196 230 Source: Numis Securities Investment Companies Research

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September 2011

Other Forms of Financing

Commitment “get out” clause HgCapital‟s “get out” clause HgCapital Trust has negotiated a unique “get out” clause on its £285m commitment to is unique Hg6 (of which just under 50% is outstanding). It is entitled, without penalty, to opt out of any investment that would cause it to: lose its status as an investment trust; have insufficient cash resources to meet projected liabilities or expenses; and/or be unable to pay a dividend or undertake any intended share buyback (although it would still be liable to pay management fees on its original commitment). This agreement is a very efficient way to give the fund more flexibility in its commitment policy. However, other LPEs, investing through third party managers, are unlikely to be able to negotiate such favourable terms.

Subscription Shares / Warrants Subscription shares are In April 2010, HgCapital Trust raised £50m of equity at 845p per share, which warrants that are eligible for represented an 8.8% discount to the last published NAV. At the same time, it issued ISAs bonus Subscription shares to new and existing holders on a one-for-five basis. Subscription shares are essentially warrants that are eligible for inclusion in ISAs and they give the potential to raise cash provided the share price rises above the call price. HgCapital Trust's Subscription shares are exercisable every six months at 950p to 31 October 2012, rising to 1,025p at the final exercise date of 2013. As the Subscription shares are “in the money”, there is the potential for HgCapital Trust to raise up to £52.5m from their exercise in October 2012, albeit at the expense of some dilution to Ordinary shareholders.

JPMorgan PE issued warrants to Equity shareholders on 17 August 2009 on a one-for- six basis. There are currently 57.9m in issue, exercisable into Equity shares at $1.39, $1.45 and $1.47 on 30 June in 2012, 2013 and 2014, respectively. The warrants are trading at just $0.015, reflecting the fact that the exercise prices are well above the current Equity share price of $0.83.

No guarantee that The downside of Subscription shares / Warrants is that there is no guarantee that they Subscription shares will be will be exercised, which means that they cannot be relied upon as a way to finance exercised future commitments. In theory, it would be possible to issue warrants with a call price well below the current market price of the Ordinary shares, which should ensure future conversion. However, this would result in significant dilution for existing shareholders who may not be supportive, even if there are pre-emption rights.

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September 2011

Redeemable Shares and Standby Agreements PIP‟s Redeemable shares Pantheon International Participations (PIP) has two quoted share classes, Ordinary were designed to reduce cash shares and Redeemable shares (which have the same NAV as the Ordinary shares but drag no voting rights). This structure was introduced to overcome the problem of “cash drag” on NAV returns as the redeemable shares can be repurchased at NAV at PIP‟s discretion. Furthermore, some institutional investors entered into “standby” agreements (at a cost to the fund of 0.5% pa) to subscribe, if called upon by PIP to do so, for £150m of new redeemable shares at NAV. Subsequently, £100.5m of the standby commitment was converted to unsecured subordinated loan notes paying a rate of interest of LIBOR + 1.5% pa and a maturity of November 2011. These were subsequently converted into new Redeemable shares in August 2011 based on the NAV at 30 June. As a result, there are now 37.521m Ordinary shares and 37.974m Redeemable shares in issue. PIP still had £49.5m of standby commitments, but these were terminated on 30 September 2011.

Dual share structure has hit Historically, PIP‟s returns had suffered in relation to Pantheon‟s LPs from holding too PIP‟s trading liquidity much cash over the investment cycle. Although the Redeemable shares overcame this problem, PIP has suffered from too much leverage / over commitment in recent years. Furthermore, the dual share class structure means that the fund‟s trading liquidity is poor relative to its size, and that there is virtually no turnover in the redeemable shares. In its interim results to 31 December, PIP‟s Board stated that it “intends to review how it could simplify its equity capital structure going forward”. However, this is not a simple task as we believe that some holders of the Redeemable shares are not currently required to use the market price to value their stake.

Structure unlikely to be We do not expect this kind of structure to be repeated within the LPE sector due to the repeated within LPE sector drawbacks to trading liquidity. Furthermore, institutional investors are likely to be reluctant to enter into such standby commitments in future where they have little or no control over the timing of the draw-down and face the possibility of having to buy shares at NAV when they are trading at a substantial discount. Another problem with the standby commitment was that some investors in PIP became concerned over the ability to enforce the obligation.

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Investment Companies 13 October 2011

September 2011

Financing – A Summary

The table below compares the estimated total annual cost of bank facilities (including the cost of undrawn balances), loans, ZDPs and convertibles. These are based on the current balance sheet (with allowance for the amortisation of historic issue costs where these are relevant). Figure 7. LPE Annual Finance Costs

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%

0.0%

% shareholders funds % shareholders

LMS

Better

NB PE NB

Oakley

Electra

Std Life Std

F&C PE F&C

Dunedin

3i Group3i Graphite

Candover Aberdeen Pantheon

HgCapital

JZ CapitalJZ

JPMorgan

Conversus

SVG Capital SVG PE Princess HarbourVest

Direct FoF Bank interest Non-utilisation fees Loan notes ZDPs Convertibles

Source: Numis Securities Investment Companies Research Looking solely at costs of The table above only shows the costs of debt, and makes no allowance for the returns finance, ignores investment from the assets that are being financed. Shareholder returns may be enhanced if the benefits portfolio is leveraged (assuming the NAV goes up) or if the debt enables a fund to operate an over commitment facility effectively. However, several LPEs hold significant amounts of cash and the spread between financing costs and the return on cash held is substantial at present.

NB PE, Electra and Candover Funds with significant levels of uncommitted borrowings include 3i Group, Candover have uncommitted Investments and Electra PE (although Electra PE uses multi-currency borrowings to borrowings hedge its currency exposure). At the other end of the scale, some funds, such as Oakley Capital Investments, have significant cash to invest and no borrowing costs. This is the traditional “cash drag” suffered by LPEs due to the time to invest capital. LPs largely avoid this problem as capital is drawn down from investors as required to meet investment calls. This difference will often boost IRRs of LPs relative to LPEs, although it could be argued that this calculation is misleading if investors are required to hold cash to meet potential draw-downs.

Wide range of gearing levels The chart below shows the current balance sheet position of the LPEs in terms of invested capital and commitments. The funds are ranked based on the level of net leverage for Ordinary shareholders (treating ZDPs and Convertibles as debt). Within our universe of LPEs, the proportion of Ordinary shareholders‟ funds invested ranges from 60% for Oakley Capital to 145% for JPMorgan PE (adjusting for its recent ZDP issuance).

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September 2011

Figure 8. LPE Leverage and Commitments

200

150

100

50 % of Shareholders' FundsShareholders' of %

Ent. Ent. Better NBPE

Capital

Oakley

F&CPE

Graphite Dunedin Princess

3i Group 3i

Pantheon

HgCapital

Aberdeen JZCapital

Candover

Electra PE Electra

Conversus Morgan JP

LMS Capital LMS Capital SVG

HarbourVest Euro Life Std

Investments Covered Commitments Uncovered Commitments Uncommitted Cash Uncommitted Borrowings

Note: Funds are ordered by Invested portfolio as % of shareholders’ Funds (excl. ZDPs/Convertibles). HgCapital Trust has a "get out” clause on its commitment to Hg6 Source: Numis Securities Investment Companies Research In this analysis, ZDPs and Convertibles (out of the money) are treated as debt, rather than equity. Definitions of terms used in the chart above are as follows (all expressed as a proportion of shareholders‟ funds):

 Investments: Invested capital excluding cash or cash equivalents.

 Covered Commitments: Undrawn commitments that can be financed from existing cash resources or debt facilities.

 Uncovered Commitments: Undrawn commitments that are not covered by existing cash or debt facilities.

 Uncommitted Cash: Shareholders‟ funds that are not invested or committed.

 Uncommitted Borrowings: Debt that is not invested or committed (excludes undrawn bank facilities).

Uncovered commitments are Uncovered commitments, represented by the dark grey bar in the chart above, are now far lower than in 2008/09 potentially a concerning feature for investors. However, we believe that the current level of uncovered commitments across the LPE sector is not excessive and that these liabilities should be met through cash flow from distributions, with little threat of forced asset sales or dilutive equity raising. The situation is very different from late 2008, as illustrated in the chart below for 3i Group, SVG Capital and Candover Investments.

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September 2011

Figure 9. Change in Balance Sheet Strength over Time

400 350 300 250 200 150 100 50

% of Shareholders' FundsShareholders' of % 0

SVG SVG

Capital Capital

3i 3i Group 3i Group

Candover Candover Late-2008 Current Investments Covered Commitments Uncovered Commitments Uncommitted Cash Uncommitted Borrowings

Source: Numis Securities Investment Companies Research

LPE Gross Leverage The chart below shows gross debt drawn and the gross debt available to LPEs (without adjustment for covenant restrictions). Figure 10. Debt as % of Ordinary share net assets

90% 80% 70% 60% 50% 40% 30% 20% 10%

% shareholdersfunds % 0%

Better

NB PE NB

Oakley

Std Life Std

F&C PE F&C

Dunedin

3i Group3i Graphite

Candover Aberdeen Pantheon

HgCapital

JZ CapitalJZ

JPMorgan

Electra PE Electra Conversus

SVG Capital SVG PE Princess

LMS Capital LMS HarbourVest

Direct FoFs

Debt Drawn Undrawn Bank Facility

Note: Debt drawn includes bank debt, loan notes, ZDPs and Convertibles Source: Numis Securities Investment Companies Research

LPE Refinancing Risk LPEs do not face near-term There has been a lot of publicity about the “wall of refinancing” within private equity refinancing risk owned companies from 2012-14 reflecting cheap seven year debt for leveraged buyouts from 2005/07. The LPEs themselves also face some refinancing risk, although little of the sector‟s debt expires before 2013. Furthermore, we believe that the more conservative management of balance sheets means that the LPEs should not face the same difficulties in refinancing as in 2009.

3i Group recently repurchased €85m of its 2012 Euro floating rate notes as part of its ongoing balance sheet management, leaving €346.5m repayable on maturity. Among the other LPEs, two significant bank facilities are due to expire in January 2013: SVG Capital‟s €315m facility (which was £57.9m drawn at 30 June 2011) and Electra PE‟s £185m facility.

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Figure 11. LPEs (ex 3i) – Debt Maturity Figure 12. 3i Group – Debt Maturity

1200 800 1000 700 800 600 500 600 400 £ million£ 400 £ million£ 300 200 200 0 100

2011 2012 2013 2014 2015 2016 2017

ZDPs Convertibles

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 Loan notes Bank facility (drawn) Bank facility (undrawn) Loan notes Bank facility (drawn) Bank facility (undrawn)

Source: Numis Securities Investment Companies Research Source: Numis Securities Investment Companies Research

Table 9. LPEs – Summary of Debt by Type £m % net assets Bank facility Bank facility Loan Bank facility Bank facility Loan (drawn) (undrawn) notes ZDPs Convertibles (drawn) (undrawn) notes ZDPs Convertibles Direct 3i Group 275.0 325.0 1,485.7 - - 10 11 52 - - Better Capital ------Candover Inv. - - 154.3 - - - - 84 - - Dunedin Enterprise ------Electra PE 169.0 16.0 - 52.7 101.0 21 2 - 6 12 HgCapital Trust - 40.0 - - - - 11 - - - JZ Capital Partners - - - 52.1 - - - - 14 - LMS Capital - 15.0 - - - - 6 - - - Oakley Capital Inv. ------SVG Capital 57.9 231.1 168.3 - 111.0 5 19 14 - 9 Fund of Funds Aberdeen PE ------Conversus Capital 0.6 209.9 - - - 0 17 - - - F&C PE 9.0 31.0 - 34.8 - 5 17 - 19 - Graphite Ent. - 60.0 - - - - 14 - - - HarbourVest 64.2 259.7 - - - 11 45 - - - JPMorgan PE 84.1 13.1 - 101.7 - 26 4 - 31 - NB PE - 161.9 - 34.1 - - 47 - 10 - Pantheon Int‟l Part. - 102.5 - - - - 12 - - - Princess PE - 69.6 - - - - 13 - - - Std Life Euro PE 49.6 70.4 - - - 13 18 - - - Source: Numis Securities Investment Companies Research

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September 2011

Conclusions on Fees and Financing Costs

Significant differences in In this report, we have sought to highlight differences in management fees, performance TERs and expenses fees and the costs of financing. The outcome is summarised in the chart below which ranks funds by their TER including finance costs, expressed as a proportion of shareholders‟ funds (excluding ZDPs/Convertibles).

We believe that LPE investors should be aware of these differences when evaluating funds, as there are substantial differences, ranging from just under 2% of net assets for Better Capital to 7% for JPMorgan PE (excluding performance related fees). Figure 13. TER and Finance Costs for LPEs based on Shareholders‟ Funds

7% 6% 5% 4% 3% 2% 1%

% Shareholders Funds % Shareholders

LMS

Better

Electra NBPE

Oakley

F&CPE

Dunedin Graphite

3i Group 3i

Pantheon

HgCapital

JZCapital Aberdeen

Candover

JPMorgan

Conversus

SVG Capital SVG PE Princess

Std Life Euro Life Std HarbourVest Direct Fund of Funds

Management fee / Staff costs Other Underlying funds Finance costs

Notes: Costs of underlying funds are estimated, other than for Conversus; Excludes carried interest / performance fees;. Underlying fund fees and Finance costs are projected based on current balance sheet; but mgmt fee/other on last results Does not include Princess PE rebate of 0.5% of NAV to clients with a holding of at least €1m Source: Numis Investment Companies Research As discussed earlier, it is far too simplistic just to favour one fund over another based on this ranking as it solely focuses on costs and makes no allowance for the returns from the assets. As a result, a fund which borrows to make an investment will be penalised with a higher cost ratio (particularly if management fees are also payable on the proceeds). The chart below looks at the same data based on invested assets which is arguably a fairer measure. Figure 14. TER and Finance Costs for LPEs based on Invested Assets

6% 5% 4% 3% 2% 1%

% Invested assets 0%

LMS

Better

Electra NBPE

Oakley

F&CPE

Dunedin Graphite

3i Group 3i

Pantheon

HgCapital

JZCapital Aberdeen

Candover

JPMorgan

Conversus

SVG Capital SVG PE Princess

Std Life Euro Life Std HarbourVest Direct Fund of Funds

Management fee / Staff costs Other Underlying funds Finance costs

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September 2011

We recognise that there are a number of other flaws in the analysis, notably:

No allowance is made for a) No allowance is made for performance incentive fees/carried interest (for differences in carried interest reasons discussed above), even though these are likely to form a significant part of a fund‟s expenses over the long term. For instance, Pantheon International Participations and Conversus Capital have broadly similar expenses under our analysis, but Conversus is expected to pay a significant incentive fee at the end of the year due to the three year rolling HWM.

Our finance costs reflect b) The analysis focuses on finance costs within the LPE structure, but makes no leverage at the company level, allowance for differences in leverage on a see through basis. Large buyout but not within the underlying portfolios will tend to have far greater underlying leverage than more diversified portfolio funds with a significant weighting to mid/small cap buyouts or growth capital/VC. For instance, JPMorgan PE argues that although its balance sheet is more leveraged than its peers, the leverage on the underlying portfolio is lower at just 1.9x net debt/EBITDA for the fund‟s largest buyout investments. This compares with leverage of 4-5x EBITDA for funds focused on larger buyouts. In the table below, we show details of leverage on the underlying portfolio where this information is available. Table 10. Underlying Leverage for LPE Portfolios Leverage multiple Net debt/EBITDA Details Date Direct 3i Group 4.3x / 2.4x 4.3x Buyout portfolio, 2.4x Growth Capital portfolio Mar-11 Better Capital Nil All deals to-date have been fully equity financed - Candover Investments 5.1x Top 10 of 5.1x (2009: 5.3x). Excl. Expro Int‟l, leverage falls to 3.6x (2009: 4.6x). Dec-10 Dunedin Enterprise 1.5x Within the Dunedin managed portfolio (1.9x net debt/EBITA) Oct-10 Electra PE 2.7x Portfolio, excluding funds Mar-11 HgCapital Trust 3.3x Top 20 buyout investments Jun-11 JZ Capital Partners 1.1x Senior debt to ebitda for Microcap portfolio - LMS Capital 0.4x Third-party debt at 0.4 x EBITDA. Dec-10 Oakley Capital Inv. Not disclosed - SVG Capital 4.7x Top 10 investments, representing almost 90% of portfolio Jun-11 Fund of Funds Aberdeen PE Not disclosed - Conversus Capital Not disclosed - F&C Private Equity – Ord 3.2x Top 50 companies, representing 43% of NAV Jun-11 Graphite Enterprise 3.6x Top 30 companies, 40% of portfolio Jul-11 HarbourVest Global PE 2.9x 39 companies representing 30% of total buyout value Jan-11 JPMorgan PE 1.9x Top 34 buyout investments, representing 30% of portfolio Oct-12 NB Private Equity 4.9x 50 largest buyout investments Jun-11 Pantheon Int‟l Part. 3.2x / 4.2x Small-Mid / Large-Mega for 50 largest buyout funds and direct investments Dec-10 Princess PE 4.4x Top 30 portfolio companies Jun-11 Standard Life European PE 4-5x Median leverage multiples for the top 30 underlying companies Mar-11 Source: Numis Securities Investment Companies Research Analysis is static, whereas c) The analysis provides a static picture, whereas fee structures and balance balance sheets and fee sheets change over time (e.g. SVG Capital‟s fees to PIV will fall sharply from structures change over time September 2012). In general, we believe that our historic TER figures are likely to overstate current expenses because asset values have risen and many of the costs are fixed.

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Calculation of cost ratios is d) There are inconsistencies in the methodology due to the availability of data. inconsistent due to For instance, the TER (excluding underlying funds) is based on the last availability of data financial year (expressed as a proportion of average shareholders‟ funds), whereas our estimates of charges on underlying funds and finance costs are based on the current balance sheet (expressed as a proportion of current shareholders‟ funds). The reason for this is that detailed fee data for several funds is only available in the Annual Report and so we use historic data for all funds to be consistent. In contrast, we feel that it is misleading to base finance costs on the last financial year as there are often significant changes in the balance sheet. In relation to underlying fees, this is purely our estimate and so it seems to make sense to use the latest available information.

Comparison with TERs of Other Investment Companies

LPE fees are high relative to The table below shows that the TERs of LPEs are high in relation to other Investment other asset classes Companies. Furthermore, this comparison does not include the underlying fees for Fund of PE Funds (although the same is true for the listed Fund of Hedge fund sector). Figure 15. Investment Company TERs by Sector

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5

0.0

TER (% avg. shareholders' funds) shareholders' avg. (% TER

TMT

Japan

Mining

Europe

N.America

Infrastructure

Global Growth Global

Global Emg Mkts Global

UKGrowth Inc &

UK Mid/Small Cos UKMid/Small

Asia Pacific ex Jap ex Pacific Asia

Global Growth Inc & Global

HedgeFunds - FoF - FoF Equity Private

Property- Direct UK Private Equity - Direct Equity Private TER (excl. perf fees) Perf Fees

Note: chart is ordered by TERs excluding performance fees TERs are calculated on a market cap weighted basis Source: Numis Investment Companies Research

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September 2011

Are the Costs of LPEs Justified?

Purely a geared play on equity There is no simple answer to this question, as it clearly depends how the funds perform. markets? Unfortunately, the historic evidence for the universe as a whole is not encouraging. The chart below shows that the major listed Private Equity companies have barely outperformed the MSCI World since 1994. Moreover, it suggests that they are merely a geared play on equity markets. Not only are the underlying assets highly leveraged, but the volatility of shareholder returns is accentuated by movements in the discount/premium. Figure 16. Long Run Listed Private Equity Returns

600

500

400

300

200

100 Indexof TotalReturns in Sterling 0 1994 1996 1998 2000 2002 2004 2006 2008 2010

LPX Europe MSCI World

Note: the LPX Europe Index is available from Jan 1994 Source: Bloomberg, Thomson Reuters Datastream Wide dispersion of returns A counter-argument is that Private Equity is a specialist field where there is a huge between funds potential dispersion of returns relative to most asset classes. The following chart shows that HgCapital Trust has delivered NAV returns of 260% over the past decade, whereas 3i Group‟s NAV has fallen by around 40%. As a result, fund selection is crucial for investors. Figure 17. Listed Private Equity Funds:% Total Return over 10 Years

HgCapital Electra PE Graphite Enterprise Dunedin Enterprise F&C Private Equity Std Life Euro PE Pantheon Candover SVG Capital 3i Group

-100 -50 0 50 100 150 200 250 300 350 NAV Share Price

Source: Morningstar

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September 2011

Disappointing historic Investor returns from the LPE sector would look much better than a market cap performance often related to weighted index (such as the LPX 50) if they had avoided a few major disasters: balance sheet management - 3i Group in 2000 when it was traded like a TMT stock

- The overhyped EuroNext launches from 2005-08 such as KKR which sought to exploit the boom in “permanent capital”.

- The highly leveraged funds in 2008 (e.g. 3i, Candover and SVG Capital).

Of course, hindsight is a wonderful investment tool. Nevertheless, much of the sector‟s poor performance over the long term relates to balance sheet management, rather than underlying performance of the private equity portfolios. Now that balance sheets are managed more conservatively, the risks of suffering substantial dilution from rescue fund raisings or forced asset sales should be greatly reduced. Furthermore, portfolio disclosure is now far better than it was historically, and we believe that this makes it easier to assess a fund‟s potential risk/return.

Expenses can prove a Ultimately, fees in private equity are high relative to other asset classes reflecting the significant drag on long term specialist expertise that is required. A recent study from academic at HEC Paris/London returns Business School, that was sponsored by the BVCA, concluded that it was not possible to emulate the risk/return of private equity buyouts based on comparable public market investments. This study used information on 20 buyout funds pre-2001 that invested primarily in Europe (using data from Pantheon). It analysed investment in public market indices whereby the investment approach of buyout funds was mimicked through the timing of cash inflows and outflows net of fees, matching the investments by industry sector and/or taking into account the effect of additional leverage. On this basis, the PE fund return of 19.6% pa was considerably in excess of the equivalent return using equity indices of 8.1% pa.

We would not necessarily agree that the case is proven that Private Equity outperforms on a fee and risk adjusted basis. However, we believe that there are reasons to believe that private equity managed companies may be run more effectively (helped by being away from the spotlight of quarterly reporting). For instance, PE owned companies were particularly swift in reacting to the downturn in 2008/09 by cutting costs and making operational improvements.

Fund of PE funds offer There are inevitably additional costs for Funds of PE Funds, although these may be benefits of diversification, offset by diversification benefits, access, strategy allocation over time, and manager access and specialist evaluation. For secondary funds, there is also the ability to enhance returns through expertise pricing and this usually requires a deeper market knowledge. The differences in return between Funds of Funds are likely to be far smaller than between LPEs that have more concentrated portfolios of direct investments.

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Benefits of LPEs The fee structure of LPEs differs significantly from unquoted PE funds. There are typically some additional costs, such as the running expenses of a listed fund and finance costs to manage the balance sheet. However, we believe that there are also significant benefits:

 Investment size/access – For most private client investors and wealth managers, listed funds are the only realistic way to gain exposure to the leading private equity managers due to minimum investment sizes and restricted access.

Ability to alter exposure to PE  Trading liquidity – This may be patchy in the smaller LPEs, but the listed structure makes it far easier for investors to add or reduce exposure to private equity. The downside is that movements in the discount/premium increase volatility of an investor‟s valuation.

Significant improvements in  Transparency – The level of information provided to LPE investors has improved information provided by LPEs markedly in recent years, enabling investors to monitor the health of the portfolio and balance sheet more closely.

 Corporate governance – The presence of an independent Board gives investors additional comfort that the Managers are being monitored on an on-going basis. In most cases, shareholders even have the ability to replace the Board and/or managers if necessary (EuroNext listed funds such as Conversus Capital and HarbourVest Global PE are exceptions).

Administration of LP  Management of cash flows – There are significant administrative benefits from investments can be onerous holding LPEs rather than investing directly via LPs. For instance, it might require a full-time staff member to handle the cash flows requirements of a small portfolio of LP interests, and significant legal resource would also be required. Furthermore, there is no requirement for investors in LPEs to meet future commitments (which would force them to hold cash/liquid assets to meet the liability). In our view, the IRRs released by unquoted PE funds are often flattered by the treatment of cash flows.

LPEs offer exposure to a  Diversification – It is not just the Fund of PE Funds that provide diversification. range of vintages The evergreen nature of LPEs means that funds such as HgCapital or Electra provide exposure across a range of vintages.

Leverage at the right time can  Leverage – this is been firmly out of favour since 2008. However, modest leverage enhance investor returns at the right time in the cycle to exploit investment opportunities can significantly enhance investor returns. At present, we believe that the balance sheets of the LPEs are in decent shape and managers/Boards are far more aware of the pitfalls of excessive leverage or over commitment strategies.

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Investment Companies 13 October 2011

September 2011

We believe it is an attractive We believe that it is useful to understand the difference in fees charged by LPEs, but time to invest in listed PE fees alone should not be the key investment criteria given the nature of the asset class. funds The key is to find funds where the drag from expenses is not a major handicap to delivering attractive returns. This involves an assessment of numerous factors including investment strategy, management expertise/track record and diversification/risk. Furthermore, we believe that there is significant value in the LPE sector at present, with discounts considerably wider than in the secondary PE market. In the short term, NAVs are likely to be impacted by lower multiples in public markets, and the outlook for earnings and realisations has deteriorated in recent months. Even so, we feel that this is an attractive time to invest in the listed PE sector based on current valuations, the strength of management and the health of balance sheets. Table 11. LPE Last Published NAVs, Valuation and Next News Flow NAV Last Publ. Current % Premium (+)/ Next Currency Frequency NAV Date Price Discount (-) News Flow Date Year end Direct 3i Group GBp 6M 351 31-Mar 196.6 (44) Interims 10-Nov 31-Mar Better Capital GBp 3M 110.96 30-Sep 112.0 1 Q3 NAV January 31-Mar Candover Investments GBp 6M 839 30-Jun 433.0 (48) IMS November 31-Dec Dunedin Enterprise GBp 3M 525 30-Jun 282.3 (46) Q3 NAV November 31-Dec Electra PE GBp 3M (unquoteds 6M) 2,206.0 30-Jun 1395.0 (37) Finals December 30-Sep HgCapital Trust GBp M (unquoteds 6M) 1,115.7 30-Sep 990.0 (11) Pre-close December 31-Dec JZ Capital Partners GBp M (unquoteds 3M) 545.3 31-Jul 323.0 (41) Monthly NAV October 28-Feb LMS Capital GBp 3M (unquoteds 6M) 93.0 30-Jun 61.4 (34) Trading update January 31-Dec Oakley Capital Inv. GBp 6M 180.0 30-Jun 137.0 (24) Finals April 31-Dec SVG Capital GBp 3M 393.9 30-Jun 201.6 (49) Q3 NAV 03-Nov 31-Dec Fund of Funds Aberdeen PE GBp M 98.9 31-Aug 55.0 (44) Monthly NAV October 31-Mar Conversus Capital USD M 29.44 31-Aug 20.3 (31) Monthly NAV 24-Oct 31-Dec F&C PE GBp 3M 243.2 30-Jun 153.5 (37) IMS November 31-Dec Graphite Enterprise GBp 3M 580.2 31-Jul 374.0 (36) Q3 NAV December 31-Jan HarbourVest Global PE USD M 11.05 31-Aug 7.4 (33) Monthly NAV October 31-Jan JPMorgan PE USD M 1.33 31-Jul 0.8 (38) Monthly NAV October 30-Jun NB PE USD M 10.55 30-Sep 7.2 (31) Monthly NAV October 31-Dec Pantheon Int‟l Part. GBp 3M 1,104.1 30-Jun 613.0 (44) 30 Sept NAV November 30-Jun Princess PE EUR M 8.92 31-Aug 5.8 (35) Monthly NAV October 31-Dec Standard Life Euro PE GBp 3M 239.4 30-Jun 132.5 (45) 30 June NAV 05-Dec 30-Sep Current share price as at 11 October 2011 Source: Numis Securities Investment Companies Research

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Appendix I – LPEs: Summary of Underlying TER Data

Table 12. Underlying TER Data - Fees and Assets (local currency – millions) Name Currency Management fee Other expenses Underlying funds Total Mgmt & Finance costs Total Year-end (estimated by Numis) Underlying Fees (projected by Numis) Direct 3i Group GBP 47.2 66.8 - 114.0 74.1 188.1 31-Mar-11 Better Capital GBP 2.7 0.6 - 3.3 0.0 3.3 31-Mar-11 Candover Investments GBP 5.0 1.7 - 6.7 4.8 11.5 31-Dec-10 Dunedin Enterprise GBP 2.7 0.6 1.0 4.3 0.0 4.3 31-Dec-10 Electra PE GBP 14.7 3.1 3.4 21.1 15.7 36.8 30-Sep-10 HgCapital Trust GBP 7.1 1.6 - 8.6 0.4 9.1 31-Dec-10 JZ Capital Partners USD 8.7 2.1 - 10.8 6.5 17.3 28-Feb-11 LMS Capital GBP 5.3 1.1 - 6.3 0.2 6.6 31-Dec-10 Oakley Capital Inv. GBP 3.6 0.7 - 4.2 0.0 4.2 31-Dec-10 SVG Capital GBP (2.7) 2.5 35.2 35.0 33.2 68.2 31-Dec-10 Fund of Funds Aberdeen PE USD 2.8 0.9 2.8 6.5 0.0 68.2 31-Mar-11 Conversus Capital USD 17.4 12.7 20.7 50.8 2.5 104.1 31-Dec-10 F&C PE GBP 1.7 0.7 3.6 6.0 3.8 15.8 31-Dec-10 Graphite Enterprise GBP 5.5 1.2 5.4 12.1 1.8 25.9 31-Jan-11 HarbourVest Global PE USD 14.6 2.9 14.8 32.3 3.3 68.0 31-Jan-11 JPMorgan PE USD 6.7 3.7 8.2 18.6 15.0 52.1 30-Jun-10 NB PE USD 7.8 4.2 9.4 21.4 4.9 47.8 31-Dec-10 Pantheon Int‟l Part. GBP 8.8 1.1 12.0 22.0 1.1 45.0 30-Jun-11 Princess PE EUR 13.4 1.7 7.2 22.3 2.1 46.6 31-Dec-10 Standard Life Euro PE GBP 2.4 0.6 7.6 10.6 2.4 23.5 30-Sep-10 Source: Numis Securities Investment Companies Research

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Table 13. Underlying TER Data - Fees and Assets (%) % Shareholders Funds % Invested Assets % Invested Portfolio & Commitments Mgmt Other Underlying Finance Management Other Underlying Finance Management Other Underlying Finance Name fee expenses funds costs Total fee expenses funds costs Total fee expenses funds costs Total Direct 3i Group 1.5 2.1 - 2.6 6.1 1.3 1.8 - 2.2 5.3 0.9 1.3 - 1.8 4.0 Better Capital 1.4 0.3 - 0.0 1.8 4.7 1.1 - 0.0 5.8 4.6 1.1 - 0.0 5.7 Candover Investments 2.5 0.3 - 2.6 5.1 1.6 0.5 - 2.0 4.1 1.3 0.5 - 1.9 3.7 Dunedin Enterprise 1.9 0.5 0.6 0.0 3.1 2.7 0.7 0.8 0.0 4.1 1.4 0.3 0.5 0.0 2.2 Electra PE 2.2 0.5 0.4 1.9 5.0 2.2 0.5 0.4 2.0 5.1 1.9 0.4 1.8 4.1 HgCapital Trust 2.4 0.5 - 0.1 3.1 3.5 0.8 - 0.2 4.4 1.6 0.4 - 0.1 2.0 JZ Capital Partners 1.7 0.4 - 1.1 3.2 1.9 0.5 - 1.3 3.7 2.0 0.5 - 1.3 3.7 LMS Capital 2.2 0.5 - 0.1 2.8 2.2 0.5 - 0.1 2.8 1.8 0.4 - 0.1 2.3 Oakley Capital Inv. 1.8 0.3 - 0.0 2.1 3.2 0.6 - 0.0 3.7 1.4 0.3 - 0.0 1.6 SVG Capital (0.3) 0.3 3.0 2.8 5.7 (0.3) 0.2 2.3 2.2 4.5 (0.2) 0.2 2.1 2.0 4.0 Fund of Funds Aberdeen PE 1.5 0.5 1.5 0.0 3.5 2.3 0.8 2.3 0.0 5.4 1.7 0.6 1.3 0.0 3.6 Conversus Capital 1.0 0.7 1.1 0.1 2.9 0.9 0.7 1.2 0.1 2.9 0.7 0.5 0.9 0.1 2.2 F&C PE 1.0 0.4 2.0 2.1 5.5 0.9 0.4 1.6 1.7 4.6 0.6 0.2 1.2 1.2 3.2 Graphite Enterprise 1.5 0.3 1.2 0.4 3.5 1.9 0.4 1.5 0.5 4.3 1.1 0.2 1.1 0.4 2.7 HarbourVest Global PE 1.9 0.4 1.6 0.4 4.3 1.8 0.4 1.5 0.3 3.9 1.0 0.2 1.0 0.2 2.5 JPMorgan PE 1.5 0.8 1.6 2.9 6.9 1.1 0.6 1.1 2.0 4.8 0.9 0.5 1.0 1.7 4.1 NB PE 1.6 0.9 1.8 0.9 5.2 1.4 0.8 1.8 0.9 4.9 1.1 0.6 1.1 0.6 3.4 Pantheon Int‟l Part. 1.3 0.2 1.4 0.1 3.0 1.1 0.1 1.5 0.1 2.9 0.8 0.1 1.1 0.1 2.2 Princess PE 2.4 0.3 1.2 0.3 4.2 2.4 0.3 1.2 0.4 4.3 1.7 0.2 1.0 0.3 3.1 Standard Life Euro PE 0.8 0.2 1.9 0.6 3.6 0.7 0.2 1.8 0.5 3.2 0.5 0.1 1.3 0.4 2.3 Note: Management fee & Other Expenses based on last Annual Report and expressed as % of average shareholders' funds over the financial year. Fees on underlying funds and finance costs are estimated by Numis based on the current fees/balance sheet and expressed as % of current shareholders’ funds Source: Numis Securities Investment Companies Research

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Appendix II – LPEs Balance Sheet Summary

Table 14. Commitments and Cash Resources Value (m) Portfolio Value (m) % of net assets Portfolio Exposure Uncalled Cash/ Unutilised Uncovered Uncalled Cash/ Uncovered Fund Date Currency Investments Net assets (% net assets) Commitments Debt ^ Commitments Commitments Unutilised Debt Commitments Direct 3i Group # 31-Aug GBP 3,333 2,867 116 845 1,803 - 29 63 - Better Capital 30-Sep GBP 201 229 87 17 28 - 7 12 - Candover Investments 30-Jun GBP 234 183 128 13 112 - 7 61 - Dunedin Enterprise 30-Jun GBP 131 158 83 73 28 45 46 18 28 Electra PE 30-Jun GBP 788 814 97 103 323 - 13 40 - HgCapital Trust 31-Aug GBP 276 368 75 258 132 126 70 36 34 JZ Capital Partners 28-Feb USD 494 581 85 0 172 - 0 30 - LMS Capital 30-Jun GBP 224 252 89 28 45 - 11 18 - Oakley Capital Inv. 30-Jun GBP 142 231 61 172 87 85 75 38 37 SVG Capital 30-Jun GBP 1,501 1,187 126 188 247 - 16 21 - Fund of Funds Aberdeen PE 31-Mar 124 189 66 90 65 26 48 34 14 Conversus Capital 31-Aug USD 1,770 1,902 93 487 471 16 26 25 1 F&C PE 30-Jun GBP 223 183 122 88 34 54 48 19 29 Graphite Enterprise 31-Jul GBP 359 435 83 153 136 17 35 31 4 HarbourVest Global PE 31-Aug USD 1,003 914 110 457 412 45 50 45 5 JPMorgan PE 12-Sep USD 739 508 146 119 59 61 23 12 12 NB PE 30-Sep USD 524 525 100 326 319 7 62 61 1 Pantheon Int‟l Part. 30-Jun GBP 816 834 98 243 146 97 29 18 12 Princess PE 31-Aug EUR 586 623 94 154 113 41 25 18 7 Standard Life Euro PE 30-Jun GBP 436 392 111 145 75 70 37 19 18 # 3i Group estimated based on pre-close information and our NAV estimate of 300p Source: Numis Securities Investment Companies Research

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Appendix III – LPEs Summary of Mandates

Table 15. Summary of Listed Private Equity Funds

Fund Listing Description Notes Direct 3i Group London SE Buy-outs/growth capital (mainly pan-European), debt & infrastructure Merged Buyout and Growth teams, acquired debt team from Mizuho Better Capital London SE UK turnarounds (£5-42m equity) Moved from AIM to main list of LSE in June 2010 Candover Investments London SE Pan-European mid/large buy-outs Realisation strategy adopted in August 2010. Management team moved to Arle following MBO Dunedin Enterprise London SE UK small/mid buy-outs & European buyout funds Gradual increase in weighting of fund of funds Electra PE London SE UK & European mid-market buy-outs Issued £47.5m 6.5% ZDP in 2009 and £100m 5% Convertible 2017 in Dec 10 HgCapital Trust London SE Pan-European mid market buy-outs (EV £50-500m) Commitment to Hg funds investing in European buyouts, Renewables and small TMT buyouts JZ Capital Partners London SE US micro cap stocks LMS Capital London SE Shift in strategy to direct investments (selling quoteds and funds) Concert party (incl. Robert Rayne, the Chairman) seeking break-up of company Oakley Capital Inv. AIM UK/European buyouts with EV £20-150m and TMT focus Invests primarily via commitments to Oakley Capital LPs SVG Capital London SE Fund of Permira private equity funds (mainly European buy-outs) Commitment to offer shareholders the choice of reinvestment or a return of capital before new commitments are made to third party funds Fund of Funds Aberdeen PE London SE Fund of private equity funds (global focus) Formerly Bramdean Alternative, Aberdeen AM took over management in Nov-2009 Conversus Capital EuroNext Fund of private equity funds (global focus) Realisation strategy adopted from August 2011 F&C Private Equity – Ord London SE Fund of private equity funds (global focus) Issued £30m 8.75% ZDP in 2009 Graphite Enterprise London SE 20% UK mid-market buy-outs and 80% private equity funds Invests in direct PE via commitment to Graphite Capital funds HarbourVest Global PE EuroNext, SFM Private equity funds (mostly primary, but also secondary funds & direct) Concentrated shareholder register, offer put option to buyers in 2010 at $5.75 per share for $40m JPMorgan PE London SE Fund of private equity funds (global with focus on secondaries) Issued $94m at 30% discount in mid-2009, issued three tranches of ZDP NB Private Equity EuroNext, SFM Fund of global private equity LPs Issued £33m 7.3% ZDP in 2009, ongoing policy to return 50% of net realisation proceeds and focus on direct and yield oriented investments Pantheon Int‟l Part. London SE Fund of private equity funds (secondary bias) Share capital split into Ordinary & redeemable shares Princess PE London SE, Frankfurt SE Private equity funds (mostly primary, but also secondary funds & direct) Changing mandate to focus on direct investments. Dividend of 5-8% NAV Standard Life European PE London SE Fund of private equity funds (European buy-outs) - Source: Numis Securities Investment Companies Research

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Appendix IV – Fund of Funds Portfolio Comparisons

The table below provides a summary of the key portfolio characteristics of the LPE Fund of Funds. This helps to differentiate funds in terms of their investment focus, portfolio maturity and geography. Table 16. Portfolio Comparisons for LPE Fund of Funds Investment Debt/ Real Other/ Type Buyout VC/Growth Special Sits Estate Infrastructure Unclassified Date Aberdeen PE 96% - 4% - - Apr-11 Conversus Capital 73% 15% 6% - - 6% Aug-11 F&C PE 64% 7% 16% - - 13% Dec-10 Graphite Enterprise 98% - - - 2% - Jul-11 HarbourVest Global PE 62% 33% 5% - - - Aug-11 JP Morgan PE 55% 10% 23% 9% 3% - Jul-11 NB PE 53% 9% 38% - - Sep-11 Pantheon Int‟l Part. 64% 30% 6% - - Jun-11 Princess PE 67% 15% 18% - - - Aug-11 Standard Life Euro PE 99% 1% - - - - Mar-11 Average Maturity 2011 2010 2009 2008 2007 Earlier Years (Est) Date Aberdeen PE ------Not disclosed Conversus Capital 4% 8% 4% 7% 16% 61% 6.5 Jun-11 F&C PE 0% 0% 0% 21% 19% 60% 5.3 Dec-10 Graphite Enterprise 6% 15% 2% 14% 29% 34% 4.0 Jul-11 HarbourVest Global PE 0% 8% 2% 10% 17% 63% 5.8 Mar-11 JP Morgan PE 0% 8% 5% 15% 19% 53% 4.8 Dec-10 NB PE 10% 13% 9% 25% 28% 15% 3.0 Sep-11 Pantheon Int‟l Part. 0% 0% 0% 1% 23% 76% 6.7 Jun-11 Princess PE 4% 10% 8% 15% 13% 50% 4.3 Dec-10 Standard Life Euro PE 8% 5% 15% 31% 22% 19% 4.1 Jun-11 Direct/ Primary Secondary Co-invest Date Aberdeen PE 82% 18% - Mar-11 Conversus Capital 94% n/a 6% Aug-11 F&C PE 84% % 14% Dec-10 Graphite Enterprise * 73% n/a 27% Jul-11 HarbourVest Global PE 55% 23% 22% Aug-11 JP Morgan PE 16% 68% 16% Jun-11 NB PE 72% 3% 25% Sep-11 Pantheon Int‟l Part. 61% 37% 2% Dec-10 Princess PE 76% 3% 21% Aug-11 Standard Life Euro PE 90% 10% - Mar-11 North Asia / Other / Geography America UK Europe Emg Mkts Global Date Aberdeen PE 40% - 16% 41% - Jun-11 Conversus Capital 83% - 13% 3% 1% Aug-11 F&C PE 6% 32% 55% 1% 6% Sep-11 HarbourVest Global PE 12% 42% 44% - 2% Jul-11 Graphite Enterprise 64% - 28% 5% 3% Aug-11 JP Morgan PE 34% - 41% 21% 4% Jun-11 NB PE 77% - 19% 4% - Sep-11 Pantheon Int‟l Part. 52% - 37% 11% - Jun-11 Princess PE 54% - 35% 11% - Aug-11 Standard Life Euro PE 19% 25% 56% - - Mar-11 * 17% invested in Graphite funds included under Direct investment Source: Numis Securities Investment Companies Research

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Investment Companies 13 October 2011

Appendix V – Share Price Performance of LPEs

Figure 18. 2011 YtD Share Price Returns in £ Figure 19. Three Year Share Price Total Return in £

40% 150% 30% 20% 100% 10% 0% 50% -10% 0% -20% -30% -50% -40% -50%

3i Group Candover Aberdeen PE LPX Europe JPMorgan PE PE Electra CapitalJZ MSCI World CapitalOakley Share All FTSE Std Life Euro PE Better Capital NB PE Dunedin Ent. PE Princess Pantheon Int'l SVG Capital HgCapital Conversus F&C PE Graphite Ent. HarbourVest LMS Capital -100%

Candover Capital SVG PE JPMorgan Group 3i HarbourVest Capital JZ PE F&C Capital LMS Int'l Pantheon Ent. Dunedin Conversus Europe LPX PE Euro Life Std PE Princess PE Electra Ent. Graphite World MSCI HgCapital Share All FTSE PE NB Capital Oakley

Source: Morningstar to 12-Oct-11 Source: Morningstar to 12-Oct-11

Figure 20. Five Year Share Price Total Return in £ Figure 21. Ten Year Share Price Total Return in £

80% 400% 60% 40% 300% 20% 0% 200% -20% 100% -40% -60% 0% -80% -100%

Candover SVG Capital 3i Group Capital JZ Int'l Pantheon Ent. Dunedin LPX Europe PE Std Life Euro Capital LMS PE JPMorgan PE F&C Ent.Graphite AllFTSE Share Electra PE World MSCI HgCapital -100%

3i Group SVG Capital Candover Capital JZ Int'l Pantheon World MSCI LPX Europe PEStd Life Euro Ent.Dunedin AllFTSE Share PE F&C Graphite Ent. Electra PE HgCapital

Source: Morningstar to 12-Oct-11 Source: Morningstar to 12-Oct-11

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Table 17. LPE Share Price Total Returns in Sterling

Annual Share Price Returns in Sterling Cumulative Share Price Total Returns in Sterling % Total Return Rank % Total Return Rank „11 Ytd 2010 2009 2008 2007 2006 „11 Ytd 2010 2009 2008 2007 2006 3m 6m 1 yr 3 yr 5 yr 10 yr 3m 6m 1 yr 3 yr 5 yr 10 yr Direct 3i Group -37.0 17.3 67.7 -72.1 -5.1 15.3 20 15 4 18 11 7 -27.2 -21.3 -29.5 -31.6 -66.1 -52.4 20 19 19 16 11 11 Better Capital -4.3 4.6 - - - - 12 17 - - - - -7.2 -7.2 -2.7 - - - 4 8 15 - - - Candover Investments -34.5 59.3 -49.7 -52.3 -1.5 18.6 19 5 18 9 10 4 -24.3 -29.2 -38.2 -72.8 -75.4 -27.4 19 20 20 19 13 9 Dunedin Enterprise -3.2 13.3 38.9 -48.2 -0.1 -6.2 10 16 10 8 9 11 -19.4 -12.2 -0.6 14.7 -25.7 53.1 15 10 14 9 8 5 Electra PE -14.6 38.6 112.9 -63.6 9.6 32.6 16 10 1 15 5 1 -17.1 -16.5 -2.9 41.8 7.7 121.4 13 12 16 5 2 2 HgCapital Trust 1.8 22.7 30.8 -12.1 8.9 27.2 6 13 11 3 6 2 -9.6 -9.6 17.3 54.5 68.9 332.7 5 9 6 3 1 1 JZ Capital Partners -11.3 61.4 3.4 -52.4 -20.2 -7.3 15 4 14 10 14 12 -13.1 -19.2 7.2 -14.6 -43.6 -16.4 10 16 12 13 10 8 LMS Capital 36.1 -13.5 14.3 -33.6 -5.8 1 19 13 4 12 - 0.4 0.4 18.4 12.4 -13.7 - 1 3 5 11 6 - Oakley Capital Inv. -5.8 53.2 49.6 -37.4 14 6 7 5 - - -13.0 -4.9 7.9 132.2 - - 9 6 11 1 - - SVG Capital -0.9 66.0 42.7 -88.2 -8.5 16.9 7 2 8 19 13 6 -20.3 -17.5 14.1 -46.0 -73.8 -33.5 17 15 8 18 12 10 Fund of Funds Aberdeen PE -21.1 34.6 18.9 -52.7 - - 18 11 12 11 - - -19.9 -20.2 -17.5 -16.6 - - 16 17 17 15 - - Conversus Capital 14.9 64.8 -3.5 -37.7 - - 5 3 17 6 - - -10.0 2.4 22.3 15.4 - - 6 2 3 8 - - F&C Private Equity – Ord 19.4 22.0 41.7 -59.3 16.7 17.8 4 14 9 12 3 5 -11.7 -4.1 21.0 7.6 -0.8 60.8 7 5 4 12 4 4 Graphite Enterprise 27.5 -2.3 65.8 -59.8 24.7 7.2 3 18 5 13 1 9 -5.2 0.1 28.3 45.3 4.2 108.6 2 4 2 4 3 3 HarbourVest Global PE 27.7 24.9 -54.3 28.1 - - 2 12 19 1 - - -6.7 9.0 42.4 -15.5 - - 3 1 1 14 - - JPMorgan PE -18.3 -13.8 -3.0 4.1 15.4 1.3 17 20 16 2 4 10 -22.3 -20.9 -25.6 -36.2 -13.3 - 18 18 18 17 5 - NB Private Equity -3.5 40.5 91.6 -62.5 - - 11 9 2 14 - - -15.7 -13.1 14.1 58.0 - - 12 11 8 2 - - Pantheon Int‟l Part. -1.8 47.1 77.1 -71.4 2.7 8.1 8 7 3 17 8 8 -14.6 -17.4 0.6 13.2 -26.0 18.1 11 14 13 10 9 7 Princess PE -1.9 82.1 -0.3 -47.9 17.2 - 9 1 15 7 2 - -11.9 -6.8 14.7 39.4 - - 8 7 7 6 - - Standard Life Euro PE -5.0 40.9 52.0 -69.2 6.8 26.6 13 8 6 16 7 3 -18.7 -16.7 12.5 22.0 -24.6 50.3 14 13 10 7 7 6 Indices FTSE All Share -5.7 14.5 30.1 -29.9 5.3 16.8 -7.2 -7.4 -0.8 55.7 7.1 60.4 MSCI World -6.7 15.9 16.4 -17.4 7.7 5.8 -8.7 -7.7 0.1 51.5 13.4 42.0 Data as at 12 October 2011 Source: Morningstar, Bloomberg, Datastream, Numis Securities Investment Companies Research

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Table 18. LPE NAV Total Returns in Sterling

NAV Total Returns by Year in Sterling % Total Return Rank 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 Direct 3i Group 22.5 -41.8 -50.8 19.4 12.5 3 18 18 8 10 Better Capital 3.5 - - - - 19 - - - - Candover Investments -21.6 1.2 -47.3 41.8 21.1 20 5 17 1 5 Dunedin Enterprise 22.4 4.9 -21.4 7.0 14.9 4 3 16 13 8 Electra PE 19.2 -1.2 -12.2 31.0 31.6 8 7 14 2 1 HgCapital Trust 19.7 3.7 0.5 29.1 21.2 7 4 9 4 4 JZ Capital Partners 27.6 -59.0 19.5 -4.4 -0.7 2 19 2 14 12 LMS Capital 7.1 -5.6 -11.9 12.2 - 16 10 13 12 - Oakley Capital Inv. 19.2 30.6 9.1 - - 9 1 5 - - SVG Capital 41.7 -36.0 -60.9 13.1 20.9 1 17 19 11 6 Fund of Funds Aberdeen PE 7.9 -17.5 0.4 - - 15 13 10 - - Conversus Capital 21.6 0.4 1.8 - - 5 6 8 - - F&C Private Equity 11.7 -6.7 -4.5 30.2 26.6 14 11 11 3 3 Graphite Enterprise 5.7 5.0 -11.8 15.7 14.9 17 2 12 9 8 HarbourVest Global PE 16.4 -2.9 5.4 - - 11 9 7 - - JPMorgan PE 4.8 -33.4 40.1 14.6 17.8 18 16 1 10 7 NB Private Equity 18.4 -1.9 9.5 - - 10 8 4 - - Pantheon Int‟l Part. 15.9 -25.0 7.0 26.9 7.8 12 15 6 6 11 Princess PE 14.2 -18.4 16.4 21.9 - 13 14 3 7 - Standard Life Euro PE 21.6 -16.9 -14.3 27.7 26.7 6 12 15 5 2 Indices 3 18 18 8 10 FTSE All Share -8.5 14.5 30.1 -29.9 5.3 19 - - - - MSCI World -8.6 15.9 16.4 -17.4 7.7 20 5 17 1 5 Note: NAV returns for 2011 YTD are not shown as these are not comparable due to infrequent NAV reporting by LPEs Source: Morningstar, Bloomberg, Datastream, Numis Securities Investment Companies Research

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Appendix VI – Summary of Management Fee Details

Direct LPEs

3i Group Salary, bonuses, share 3i is self managed with no external management fee. All employees receive a base schemes and co-investment salary and are eligible for a performance-related bonus. Where appropriate, employees are eligible to participate in 3i share schemes. Investment executives may also participate in co-investment plans and carried interest schemes, which allow executives to share directly in any future profits on investments.

3i‟s co-investment and carried interest plans provide long-term incentives for senior executives other than the Chief Executive and Finance Director (although Michael Queen has retained certain interests acquired prior to his appointment as Chief Executive). Long-term incentive arrangements during the year for the Chief Executive and Finance Director consisted of share options and Performance Share awards under the 3i Group Discretionary Share Plan. The combination of all share-based awards should not have a fair value of more than 2.5 times salary in any year.

CEO remuneration of £1.3m in During the financial year to 31 March 2011, Michael Queen was granted share-based last financial year awards with a fair value of 2.5 times salary and the Finance Director, Julia Wilson, was granted share-based awards with a fair value of 1.275 times salary. During FY 2011, Michael Queen‟s base salary was £550,000, with total remuneration of £1.3m (versus £1.98m in the prior year). Julia Wilson‟s base salary is £400,000 and her total remuneration was £802,000.

Options may normally be exercised from the third until the tenth anniversaries of grant and Performance Shares normally vest on the third anniversary of grant. Vesting is subject to an appropriate performance condition, calculated over a three-year period.

Better Capital Management Fee: The General Partner‟s Share of the profits, paid quarterly in advance, is calculated as follows: Blended fee basis (i) Until the end of the Investment Period: 2% pa on the first £100m of Placing Proceeds and 1% pa on the remaining amount in excess of £100m. We estimate that the blended rate is 1.48% based on funds raised.

(ii) From the end of the Investment Period: 2% pa of the first £100m of the cumulative acquisition costs of investments which have not been realised and 1% pa on the remainder.

50:50 catch-up above hurdle Performance Fee: The Special Limited Partner (SLP) is entitled to receive a share of return of 35% from launch the profits of Better Capital Fund based on 20% of gains subject to the NAV plus distributions to shareholders exceeding 135% of the placing proceeds. There is a 50:50 catch-up arrangement, whereby returns above the hurdle are shared between the SLP and the Company until the SLP has received 20% of all gains (the split then reverts to 20:80 on further gains).

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Deal fees offset against Deal fees and Directors‟ fees: The General Partner is entitled to accept and retain any management fee directors‟ fees. All transaction fees will be retained by the recipient and credited against, and so reduce, the General Partner‟s Share. Notwithstanding the retention of the transaction fees, if any broken deal costs exceed the aggregate transaction fees in any accounting period, then the amount of such excess shall be set off against and reduce the General Partner‟s Share for that accounting period.

Candover Investments Moved to external The fund was formerly self-managed, but moved to an external management contract management contract, but with Arle Capital in December 2010 following the adoption of a realisation strategy. retained own CEO However, the fund still employs a CEO, Malcolm Fallen. His remuneration package included a base salary of £410,000 at the start of 2011 plus 20% pension contribution and a discretionary performance related bonus capped at 100% of salary (the maximum bonus was awarded in 2010). In the light of the change in strategy this year, he has reduced his commitment to three days per week, with a pro-rata reduction in his remuneration.

Options granted to CEO are In September 2009, on joining Candover, Malcolm Fallen was granted a nil cost option out of the money over 325,000 shares. The option will be exercisable shortly following the announcement of the preliminary results for the financial year ending 31st December 2012 and will remain exercisable for 10 years, subject to the satisfaction of the performance conditions and Malcolm Fallen being an employee or Director of the Company at that time. The performance condition is based on total shareholder return using the average share price during the ten dealing days immediately following announcement of results for the 2012 Year (including dividends and distributions from that date). If the absolute shareholder return is at least equal to £8, then 20% of the options are exercisable, with a straight-line basis to £12, when 100% are exercisable. If fully exercised, the options would have a value of £3.9m, but at the current price of 465p, they are well out of the money (the price at the date of grant was 473.5p). Fee of 1.5% of invested Management Fee: The fees payable under the new arrangement are broadly capital plus commitment equivalent to 1.5% of the aggregate of the book value of the investments and outstanding co-investment commitments (excluding the value of the Company‟s holdings in the carried interest), payable in advance on a bi-annual basis.

Incentive fees on earlier Performance Fees: The managers still participate in the carried interest arrangements investments and asset strip for the Candover 2001 and 2005 Funds (as does Candover Investments), although the 2005 Fund is well below the required hurdle. The managers are also incentivised on the performance of the asset strip acquired in December 2010 by Pantheon and Arle‟s management.

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Investment Companies 13 October 2011

Dunedin Enterprise Management Fee: Under an agreement, approved by shareholders in May 2008, the management fees are:

- 1.5% on the value of investments (excluding investments via Dunedin managed funds) plus 0.5% on undrawn commitments to third party funds.

- 0.5% on cash balances not committed to funds through the Fund of Funds Limited Partnership

Pays same fees as other - Investments in Dunedin managed funds pay the same fees as third party investors investors in Dunedin (believed to be 2% p.a. on committed capital during the investment period). A managed funds management fee of £1.6m was paid in respect these funds in 2010, representing 59% of the total investment management fee of £2.7m.

Performance Fee: A Manager‟s Incentive Scheme was introduced from 1 May 1999 whereby qualifying directors and investment executives of Dunedin are entitled to purchase 7.5% of the equity shares in each of the directly held investments. This scheme was replaced since the Company began investing in Dunedin Buyout Funds and executives of the Managers have been entitled to participate in a carried interest scheme via the Funds (which we believe to be based on 20% of realised gains subject to a hurdle of 8% with catch-up). Additionally, within Dunedin Buyout Fund II LP the economic interest of the Manager is aligned with that of the limited partner investors by co-investing in this fund.

Electra Private Equity Base fee of 1.5% of Management Fee: Electra Partners receives an annual payment known as the „„priority investment portfolio profit share‟‟ equal to 1.5% on the gross value of Electra‟s investment portfolio including cash. The priority profit share is payable quarterly and is calculated on the valuation of investments at the quarter end. Electra Partners will also be paid such further fees as are required to carry out duties which are in addition to managing and administering Electra‟s assets.

Performance Fee:

18% performance fee on Direct Investments – Carried interest of 18% of net profits (which means profits direct investments, calculated remaining after deduction of the related priority profit share of 1.5%) is charged on three using three year pool year investment pools (the current pool runs from 1 October 2009 to 30 September 2012), subject to a hurdle of 8% pa compounded annually. The members of Electra Partners are also required to invest, on a pari passu basis with Electra, the equivalent of 1% of the cost of each Direct Investment.

9% performance fee on fund Fund Investments - Carried interest is calculated on the same basis, except that the investments manager is eligible for a lower proportion of 9% of net profits

Prior to April 2006, there was a co-investment scheme such that 8% of profits realised on unquoted investments were allocated to former and current executives of EPL on a deal-by-deal basis. Electra Partners is also be entitled to receive a 10% carried interest on net profits (profits after the deduction of the related priority profit share of 1.5%) of the pre-April 2006 portfolio subject to Electra receiving back aggregate cash equal to the opening value of £160m at 31 March 2006 plus a performance hurdle of 15% pa (compounded annually).

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Investment Companies 13 October 2011

Deal Fees: Electra Partners is entitled to retain monitoring fees and directors‟ fees which may be generated on Electra‟s investments. All transaction fees must first be applied to repay abort costs on uncompleted transactions from the current financial year and any abort costs in excess of transaction fees from the prior financial year (if any). Any transaction fees in excess of such abort costs will be divided equally between Electra and Electra Partners.

HgCapital Trust Management Fee:

Fee of 1.75% on commitment Hg6: The Trust pays a priority profit share in respect of its commitment to invest to Hg6 alongside HgCapital‟s buyout fund, HgCapital 6. This share is the same as those payable by all institutional investors in the fund. An amount of 1.75% pa is payable on the commitment during the investment period of the fund, which is expected to last for between four and five years. The amount will then reduce to 1.5% pa calculated on the basis of the original cost of the assets, less the original cost of any assets which have been realised or written off.

Earlier Investments: The Trust pays a priority profit share of 1.5% pa on the current value of its pre-HgCapital 6 private equity portfolio, excluding investments in other collective investment funds and investments made alongside HgCapital 6.

Performance Fee:

 Hg6: For the Trust‟s investment alongside HgCapital 6, the incentive scheme is identical to that which applies to all other investors in HgCapital 6. Under this arrangement, HgCapital receives 20% of aggregate profits after the repayment to the Trust of its invested capital payable once investors have received a preferred return thereon of 8% pa. No priority profit share or carried interest will apply to any investment alongside HgCapital 6 in excess of the Trust‟s pro rata commitment.

Carried interest based on NAV  Earlier Investments: The incentive scheme introduced in May 2003 remains in prior to Hg6 place for the Trust‟s investments other than those made alongside HgCapital 6. Under this scheme, the Manager is entitled to a carried interest of 20% of the excess annual growth in average NAV over an 8% preferred return, based on a three-year rolling average NAV, calculated half-yearly and aggregated with any dividends declared by the Trust in respect of that financial year.

JZ Capital Partners Management Fee: The base management fee is 1.5% pa of the average total assets under management, payable quarterly in arrears.

Performance Fee: The incentive fee has two parts:

Part of incentive fee based on Net investment income: 20% of such income, payable quarterly in arrears provided income that the net investment income for the quarter exceeds 2% of the average of the net asset value of the Company for that quarter and the preceding quarter (8% annualised). The fee has a full catch-up arrangement.

Net realised capital gains: 20% of the realised capital gains of the Company for each financial year less all realised capital losses on Investments for the year, subject to a high watermark agreement.

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Investment Companies 13 October 2011

LMS Capital CEO targets expense ration of The company is self-managed and compensates its executive directors and senior c.2% pa management through: base salary, payable in cash; benefits-in-kind; bonus; long-term incentives; and carried interest. The CEO, Glenn Payne, manages expenses with the aim of keeping costs below 2% pa based on anticipated capital to be deployed on a five year view.

In 2010, the basic salary of Glenn Payne was £250,000, with total remuneration of £590,0000, including a bonus of £300,000. This compares with total remuneration of £638,000 paid to Robert Rayne in an executive role the previous year. The basic salary of Anthony Sweet was £198,000, with total remuneration of £453,000. Glenn Payne‟s salary increased to £280,000 for 2011, while Anthony Sweet‟s was increased to £215,000.

Fees expected to change The Board of LMS Capital has recently announced plans for the fund to adopt a under realisation strategy realisation strategy after pressure from a Concert Party including Robert Rayne, the Chairman, which holds a stake of around 35%. Assuming that these proposals are implemented, new management arrangements are expected to be agreed, with the aim of incentivising the existing manager to maximise the realisation value for shareholders. However, no details are currently available.

 Annual bonuses: are based upon achievement of targets set by the Committee, having regard to the Company‟s performance and individual achievement of operational goals. The bonus target is 100% assuming a good market and the achievement of the targets.

 Share-based incentives: The Committee made awards under the Performance Share Plan post the 2009 results and no further awards were made in 2010.

 Carried Interest: For 2009 and previous pools, carried interest is payable of up to 20% in respect of pre-tax net capital gains on investments, excluding third party fund investments, after a preferred return to the Company of 6% pa. For 2010 and future pools, the hurdle has been increased to 8% pa.

 Performance Share Plan: An annual award of performance shares (in the form of nil cost options) of up to 150% of the participant‟s basic salary, if no grant is made to that person under the Executive Share Option Plan in that year. The awards vest from three years subject to share price and NAV performance (full details are provided in the company's accounts). Awards were be made in 2011 to Mr Payne (100% of basic salary) and Mr Sweet (67% of basic salary). In addition, an award was made to Mr Rayne in 2011 based on 100% of his salary as an executive director during 2010. No further awards under the Plan will be made to Mr Rayne.

 Deferred Share Bonus Plan: This Plan was established as an inducement to recruitment for key executives of the Company and participants may receive only one grant. No more than 3% of the shares in issue may be awarded under this Plan, and in any ten year period the number of shares issued under this Plan, the Executive Share Option Plan and the Performance Share Plan together may not exceed 5% of the shares in issue. The rules permit an award up to a normal maximum of 0.5% of the shares in issue, vesting over three years, subject to the NAV return exceeding the Retail Prices Index by an average of at least 3% pa. Awards in the form of nil-cost options have been made as follows: 1.5m Glenn Payne, 100,000 Anthony Sweet

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Investment Companies 13 October 2011

 Executive Share Option Plan: Share options may be granted to executive directors and other executives within the Company. The maximum value of a grant in any one calendar year is three times the individual‟s basic salary, provided the participant does not receive an award under the Performance Share Plan in that year. Options are normally exercisable between three and ten years following the grant, subject to the performance condition being satisfied (based on NAV returns from 3-8% pa in excess of the RPI). There are no outstanding awards of options under this Plan and options granted in April 2008 have lapsed as the performance conditions were not satisfied.

Oakley Capital Investments Fees on underlying LP of 2% Management Fee: The Manager does not receive a management fee in respect of of commitments funds committed or invested in Limited Partnership vehicles managed by the Manager (fees are paid by the underlying funds). The Manager receives a management fee of 2% pa on co-investments, paid monthly in arrears. In addition, it receives 1% pa on cash (excluding capital committed to the Limited Partnership, but including the proceeds of any realisations). The fees on the underlying Oakley LPs are 2% pa based on commitments during the five year investment period, and thereafter based on invested capital adjusted for realisations.

Hard hurdle of 8% pa on co- Performance Fee: The company receives 20% of returns over and above an 8% pa investments, whereas catch- hurdle rate on any monies invested as a co-investment (i.e. a hard hurdle). Any co- up applies to investments via investment will be treated as a segregated pool of investments. If the Manager does not LP exceed the hurdle rate on any given co-investment that co-investment shall be included in the next calculation on a co-investment so that the hurdle rate is measured across both co-investments. No previous payments of performance fee will be affected if any co-investment does not reach the hurdle rate of the return. For investments via the underlying LPs there is carried interest payable of 20% of realised gains subject to a hurdle of 8% pa, with catch-up.

SVG Capital Fee of 0.5% assets to wholly SVG Capital itself has no employees but uses the services of its wholly-owned owned manager subsidiary, SVGA, to provide certain advisory and administrative services in return for a fee of 0.5% pa of gross assets.

Basic salaries: Lynn Fordham, the CEO, currently receives a salary of £350,000 pa.

Annual bonus: The normal maximum annual bonus for an executive Director has been set at 200% of salary. Lynn Fordham was awarded a bonus of £455,000 in respect of the year to December 2010, resulting in total remuneration of £865,000 for the year.

Long-term incentives:

Lynn Fordham and selected employees of the SVG Group are eligible to participate in the Performance Share Plan (“PSP”). During FY 2010, Lynn Fordham was awarded 563,900 performance shares. The PSP enables awards of conditional free shares (or nil or nominal cost options) to be made. Award levels are determined by reference to the level of salary and bonus earned in the previous year as this provides a link to individual performance. The maximum that can be awarded in any financial year is 200% of base salary and bonus.

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Investment Companies 13 October 2011

The awards are subject to performance conditions being met. For 2009 and 2010 awards, these were based on growth in the undiluted NAV per share over a four-year period (vesting requires a return of 7-15% pa) and the total shareholder return over a three-year period (vesting requires a return of 10-20% pa), with each determining the vesting of 50% of the award. 9.1m performance shares were in issue at 31 December 2010, including 3.15m issued in 2009 at and 4.38m in 2010.

The PSP replaced the 2001 Executive Share Option Plan following the 2007 AGM. However, whilst the Committee does not intend to make further grants under the ESOP it has been retained for use in exceptional circumstances such as for the recruitment and retention of senior staff or to reward exceptional performance. As at 30 June 2011, 2,081,560 options to subscribe for ordinary shares were outstanding with exercise prices from 334.5p to 569.5p.

Fund of PE Funds

Aberdeen Private Equity Management Fee: 1.5% of the NAV of the Company (before deduction of any performance fee), paid monthly in arrears.

Performance Fee: 10% based on the total increase in the NAV at the end of each performance year (ending 31 March each year). For a performance fee to be paid, the Manager must achieve returns in excess of 8% (subject to a high watermark).

Conversus Capital Management Fee: Of this fee, one-third is paid quarterly in cash in arrears (“cash management fee”), and two-thirds earned in the form of a contingent profits interest in the Investment Partnership. The contingent profits interest is paid quarterly, in arrears, to the extent there has been sufficient appreciation in Conversus‟ NAV.

25% cut in fees following Originally, these fees were 1.0% pa of non-cash assets and 0.5% pa of undrawn adoption of realisation commitments. From July 2009 to July 2011, Conversus AM (CAM) agreed to irrevocably strategy waive its right to 30% of the contingent profits interest (equivalent to a 20% reduction in its overall fee, or a total of $4.355m in 2010). This was briefly reinstated when the fund resumed its investment programme. However, from 1 September 2011, the managers agreed to reduce the aggregate management fees by 25% to an effective rate of 0.75% reflecting the adoption of a realisation strategy. In addition, Conversus Capital will proactively work to reduce future operating expenses to a level commensurate with the new strategy.

High personnel expenses of Personnel expenses includes compensation and benefits for Conversus Capital‟s $6.27m in 2010 employees as well as employee costs reimbursed to CAM for administrative personnel under a services agreement. The fund is unusual in employing direct staff (including a Finance Director and Head of Investor Relations), as well as being the sole assets managed by CAM under an external management agreement. Personnel expenses were high in 2010 ($6.272m vs $4.761m in 2009) due to higher phantom equity expense, reflecting grants linked to the company‟s share price. These include administration costs utilising CAM staff, as well as staff employed directly by Conversus Capital.

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Investment Companies 13 October 2011

3 year rolling fee and HWM Performance Fee: Performance fees are paid based on increases in NAV over a rolling three year period. The 10% performance fee is subject to a 7% pa preferred return, compounded annually, and a rolling three year high water mark, with full catch-up provisions. Performance fees are calculated quarterly over the relevant period and paid quarterly in arrears, to the extent earned.

Significant fee expected to be No performance fees were earned during the quarter or year ended 31 December 2010 earned at end of 2011 as the NAV had not sufficiently increased over the preceding three year period subject to the applicable high watermark. Assuming no change in NAV in 2011, it is expected that performance fees will be earned in the fourth quarter of 2011.

F&C Private Equity Base fee of 0.9% of assets Management Fee: 0.9% pa of the relevant assets of the Ordinary Pool, payable quarterly in arrears (0.7% pa for assets of the Restricted Voting Pool). „Relevant‟ assets are the net assets of the pool plus long-term borrowings undertaken for the purpose of investment, excluding the value of investments in any fund managed by F&C. The manager also receives a secretarial and administrative fee (£115,000 in 2010), which is subject to increases in line with the Consumer Price Index.

Performance Fee: F&C is entitled to an incentive fee of 10% of gains if the internal rate of return (IRR) per Ordinary Share over the performance period exceeds 8% pa. The IRR takes account of all distributions other than share buy-backs. The performance period commenced on 1 August 2006 and continues until 30 June in any one of the years 2010 to 2013 (to be determined by F&C).

Graphite Enterprise A new fee agreement was approved by shareholders in 2007.

Management Fees

Investment via Graphite Funds: Graphite Enterprise (GPE) has commitments to a number of vehicles managed by Graphite Capital focusing on UK mid-market buy-outs. Adjusting for secondary purchases/sales, the commitments are £40m to Graphite Capital Partners VI (Graphite VI) and £42.8m to Graphite VII, a fund with total commitments of £475m. In addition, GPE made a commitment of £10m to the Top Up Fund raised in conjunction with Graphite VII, which had total initial commitments of £100m, as well as a £6m commitment to the Graphite Top Up Fund Plus. The Top Up Funds invest alongside Graphite VII to take up the excess in transactions that would be too large for Graphite VII to invest in on its own.

Fees on 2% on Graphite fund Fees charged to GPE on vehicles managed by Graphite Capital are at the same level commitments as those paid by third party investors. In respect of Graphite VI and VII, there are annual management charges of 2.0%, calculated by reference to total commitments for the first five years, and thereafter by reference to the cost of unrealised investments. Fees on the Top Up Funds are 1.0% pa of drawn and invested capital, with no fees on commitments. Other Investments: The management fee is 1.5% of the value of invested assets and 0.5% of outstanding commitments, in both cases excluding funds managed by Graphite Capital. There is no fee on cash and near-cash assets.

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Investment Companies 13 October 2011

Incentive fees of 10% on Performance Fees: Graphite VI and Graphite VII have incentive arrangements under individual investments which executives of Graphite Capital are entitled to 10% of the total gross income and capital gains from individual investments that achieve at least an 8% pa compound return.

For Fund investments, the incentive arrangement was similar up to 2007 when shareholders approved a change to the timing of the return of capital via the incentive scheme. Previously they received no cash until the Threshold had been paid to the Company. Now, the cost of each investment made by the Co-investors is returned at the same time as the Company‟s cost of investment. After cost has been returned to both parties, the Co-investors receive no further proceeds until the Threshold has been paid to the Company. Thereafter, the Co-investors are entitled to 10% of the gross income and capital gains, less the amount they had already received. The Board believes that one of the main advantages of the incentive arrangements is that the Co-investors make a material financial contribution to the Company‟s investments. If a direct investment is successfully realised, the Co-investors typically receive an incentive payment after three or four years. However, as funds have considerably longer lives, the Co-investors are typically required to make significant payments for between six and eight years before they begin to receive any proceeds from successful investments. The Board believed this period was too long for the incentive arrangements to be effective.

HarbourVest Private Equity Management fees and carried HarbourVest Advisers LP is reimbursed for costs and expenses in connection with the interest charged by management and operation of the company. During the year ended 31 January 2011, underlying fund reimbursements for services provided by the Investment Manager were $1.23m. The Investment Manager does not charge HVPE management fees or performance fees other than with respect to parallel investments (of which there were none at 31 January 2011).

As an investor in HarbourVest funds, HVPE is charged the same management fees on committed capital and is subject to the same performance allocations as other investors in those funds. These fees are included in the change in NAV for HVPE‟s holdings in the HarbourVest funds. However, HVPE also shows these as direct expenses in order to provide a transparent view of operating costs. For the financial year ended 31 January 2011, management fees totalled $14.6 million, or a rate of 101 basis points on average Private Equity Exposure (NAV of Investments plus Total Unfunded Commitments).

JPMorgan Private Equity Management Fee: 1.0% pa of total assets, payable monthly in arrears.

Hard hurdle of 8% pa Performance Fee: The Manager is entitled to a performance fee of 7.5% of the aggregate NAV return (Equity Shares and ZDP Shares) each financial year in excess of a hard hurdle of 8% pa, subject to a high watermark. JPEL also has agreed performance related incentives relating to its investments in China Media Enterprises and Macquarie Private Capital Trust.

Administration Fees: The Administrator, HSBC Management (Guernsey), is entitled to an annual fee in respect of administration and company secretarial services calculated on the Total Assets of the Company of 0.125% on the first $100m, 0.1% on the next $50m, 0.075% on the next $50m and 0.05% on the balance subject to a minimum of $125,000. The fee is payable monthly in arrears.

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Investment Companies 13 October 2011

NB Private Equity Management Fee: 1.5% pa of the net asset value of the private equity and opportunistic investments (excluding any investment for which the Investment Manager is separately compensated), calculated at the end of each calendar quarter.

Carried interest of 7.5% Performance Fee: The Special Limited Partner is entitled to a carried interest of 7.5% subject to 7.5% return of the increase in net assets resulting from operations for a fiscal year in the event that the IRR, based on NAV, exceeds 7.5%. Losses in any year are carried forward to be included in the calculations for future periods.

Pantheon International Participations Fee on value of invested Management Fee: A monthly management fee of 1.5% pa on the value of investment assets and commitments assets up to £150m and 1% pa in excess of £150m. There is also a monthly commitment fee of 0.5% pa on the aggregate amount committed (up to a maximum amount equal to the total value of the company‟s investment assets).

New performance fee from Performance Fee: A new performance incentive was agreed from the start of 2007, 2007, but now below HWM which involved a rebasing of the high watermark (discussed earlier in this report). A performance fee is payable over the 12 months to 30 June each year of 5% of the amount by which the NAV at the end of the period exceeds 110% of the applicable “high-water mark”, i.e. the NAV at the end of the previous calculation period in respect of which a performance fee was payable, compounded annually at 10% for each subsequent completed calculation period up to the start of the calculation period for which the fee is being calculated. The performance fee is calculated so as to ignore the effect on performance of any performance fee payable in respect of the period for which the fee is being calculated.

The value of investments and outstanding commitments relating to Pantheon Funds are excluded in calculating the monthly management fee and the commitment fee. In addition, the Manager has agreed that the total fees (including performance fees) payable by Pantheon Funds to members of the Pantheon group and attributable to the Company‟s investments in Pantheon Funds shall be less than the total fees (excluding the performance fee) that the Company would have been charged under the Management Agreement had it invested directly in all of the underlying investments of the relevant Pantheon Funds instead of through the relevant Pantheon Funds.

Princess Private Equity Management Fee: 1.5% pa of the higher of NAV or the value of assets plus unfunded commitments, plus an additional 0.25% pa in respect of secondary investments and 0.5% pa in respect of direct investments. The management fee is paid quarterly.

Rebate of 0.5% for investors As detailed in the prospectus, investors in Princess PE with a holding valued at over holding over €1m €1m (based on the NAV) are eligible for a rebate of 0.5% pa of the company‟s NAV from the investment manager, Partners Group. This rebate is paid semi-annually based on the NAV at 30 June and 31 December each year. We understand that over half of the share capital by value currently receives this rebate. A redirection of the investment focus of Princess PE towards direct investments should have a meaningful impact on the fund‟s expense ratio over time. Princess PE no longer makes new primary fund commitments and the existing commitments are expected to be fully drawn over the next 2-3 years.

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Investment Companies 13 October 2011

Incentive fee depends on Performance Fee: There is no incentive fee on primary fund investments. There is a investment type 10% incentive fee per secondary investment and a 15% incentive fee per direct investment, subject in each case to a 8% pa preferred return (with catch-up).

Standard Life European Private Equity Management Fee: 0.8% pa of net assets (with no fee on undrawn commitments).

A new performance fee has Performance Fee: The Board of Standard Life European Private Equity is proposing a been proposed new manager incentive scheme. The new performance period will run for five years from 1 October 2011, with an incentive fee of 10% of the NAV growth in excess of a compounded hurdle rate of 8% pa (with no catch-up). Shareholders will vote to approve proposals at the AGM in early 2012. The basic management fee is low relative to the peers at 0.8% of net assets.

The previous incentive scheme ran for two five year periods to September 2011. Standard Life Investments and individual members of the Manager‟s investment team were allotted founder shares on the Company‟s launch in May 2001. Subject to the performance of the Company measured over two periods from 2001-2006 and from 2006-2011, the founder shares were convertible into a maximum of 10% of the ordinary share capital of the Company as enlarged by conversion.

No awards were made in relation to the second performance period to September 2011. In order for the founder B shares to convert, the fund needed to achieve an NAV return of at least a 10% p.a. return.

The first performance period, relating to the conversion of the founder A shares, came to an end on 30 September 2006 and resulted in 4,854,979 founder A shares becoming convertible at any time up to 31 December 2013 into an equal number of ordinary shares. During the year to 30 September 2010, 223,021 founder A shares were converted into ordinary shares. As at 3 December 2010, there were 3,596,981 founder A shares capable of conversion into ordinary shares, representing 2.2% of the Company‟s fully diluted ordinary share capital.

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Investment Companies 13 October 2011

Regulatory Notice & Disclaimer Market Making The following disclosures are addressed to US-based recipients. As at the date of this research report, Numis and/or one or more of its affiliates is making a market in 3i Group, Better Capital, Candover Investments, Dunedin Enterprise, Electra Private Equity, HgCapital Trust, SVG Capital, Conversus Capital, Graphite Analyst Certification Enterprise, HarbourVest Global Private Equity, JPMorgan Private Equity, NB Private The research analyst who prepared this research report was Charles Cade. The analyst Equity, Pantheon International Participations, Princess Private Equity and Standard Life hereby certifies that all of the views expressed herein accurately reflect the analyst’s European Private Equity. personal views about any and all of the subject securities and/or issuers at the date of original publication of this document. 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