The Incredible Shrinking GP / 12

PRIVCAP The Monthly Magazine of Privcap.com DIGEST/ February 2013 Special Report: The Incredible Shrinking GP / 12 In This Issue: Fundraising with Bono / 4 What to Watch in 2013 / 7 KKR Looks to the Future / 16 Fired Up: Latin American Energy / 22 Lessons Learned: BlackRock & PE / 25 2 / Contents In This Issue Up Front Quotable Privcap LLC 04 A roundup of market intelligence shared on Privcap.com Snow’s Notes David Snow LP appetite for direct investing is good news for Co-founder and CEO 05 accomplished deal pros. By David Snow Gil Torren Co-founder and President The Big Question 07 The experts weigh in on news and topics that shape the Content private capital world Takeaway Matthew Malone Barry Miller, head of private equity for the New York City Editorial Director 09 Employee Retirement System (NYCERS) and a former GP, Emily Hebner on what he looks for in a GP Media Manager Deal Story: Dunkin’ Brands Design 10 Thomas H. Lee co-president Scott Sperling on the firm’s profitable exit from the iconic franchise Miguel Buckemeyer Deal Story: Egyptian Refining Company Art Director Karim Sadek of Citadel Capital talks about closing a deal Vasheena Doughty 11 amid recession and revolution Production Contributors Features The Incredible Shrinking GP Tom Stein 12 A Privcap special report illustrating the consequences of smaller funds and lower fees Contacts KKR Looks to the Future Scott Nuttall, head of global capital and asset manage- Editorial 16 ment, reveals the thinking behind KKR’s expansion beyond David Snow / [email protected] PE and explains how to invest in a complex world (646) 233.4558 Matthew Malone / [email protected] The Healthcare Opportunity (646) 801.2337 19 Investing amid the uncertainty of the U.S. healthcare Sponsorships & Sales system Gill Torren / [email protected] Latin America’s High-Wattage Future (646) 233.4559 Two investing veterans give a tour of the Latin American For subscriptions, please call 855-PRIVCAP 22 energy opportunity—where it is, and how to profit from it or email [email protected] Lessons Learned: Blackrock & PE About Privcap Digest 25 Blackrock’s Russ Steenberg says private equity is a “simple” business at heart Privcap Digest is a monthly publication exclusively for Privcap Must See subscribers. It offers in-depth features and edited summaries Privcap’s upcoming programming schedule of the most recent and important thought-leadership from 26 Privcap.com. The Privcap editorial team has extensive experience reporting on the global alternative investment industry. From Our Sponsors Expert Q&A For inquiries about the Digest, please contact Matt Malone at Jennifer Cho of MVision Private Equity Advisers [email protected]. 27 Tammy Hill of McGladrey Copyright © 2013 by Privcap LLC Philip Bass of Ernst & Young All rights reserved. No part of this publication may be reproduced, distributed, or transmitted Interview transcripts in this issue have been edited for clarity and length. in any form or by any means, including photocopying, recording, or other electronic or mechani- cal methods, without the prior written permission of the Privcap LLC. For permission requests, contact Gill Torren at [email protected]. Privcap Digest / February 2013 / 2 Welcome to Privcap Digest We hope you enjoy this complimentary copy of the debut issue of Privcap Digest—a monthly digital magazine created exclusively for private capital market professionals. Future issues of the Digest will be available only to Privcap subscribers—one of the many benefits of a Privcap.com subscription. Privcap, the premier channel for thought-leadership in private capital, is best known for its high-quality video programming. The Digest is a print distillation of the commentaries and conversations that Privcap delivers every month via online video. In addition to presenting over- views of thought-leadership from our website, the Digest will also deliver special reports on critical aspects of the private capital industry. You’ll find the first in this issue: “The Incredible Shrinking GP,” a case study in what hap- pens to a GP when its current fund is smaller—and less profitable—than the last. Anyone seeking to prosper through the next cycle needs to understand firm microeconomics and the challenging reality of shrinking fee-based income. Market observers have long argued that GPs should use management fees to pay for peanut-butter-and-jelly sandwiches and save the caviar feast for carried interest. As this special report illustrates, fees of all kinds are indeed in shorter supply these days, forcing many firms to be as efficient as they expect their own portfolio companies to be. The Digest can be printed or read on your tablet or computer, reflecting our commit- ment to providing our content in every convenient format, allowing you to watch, listen to, or read Privcap’s exclusive market intelligence from top industry decision-makers on your own terms. I hope you enjoy our first edition —we’ve worked hard to elegantly present the best insights in private capital. We welcome your feedback on how we can make it even better. Best regards, David Snow Co-founder & CEO, Privcap [email protected] Privcap Digest / February 2013 / 3 4 / Market Intelligence Quotable/ A roundup of market intelligence shared on Privcap.com We found that when you bring a You often get asked the question You won’t be surprised to hear new CEO into a company, you lose by GPs, ‘What should we do to be that people would get their PPM at least six months as they get acquaint- able to raise money?’ Well, it’s ‘Make autographed.” ed with the people. They change out good returns.’” Kevin Albert, Pantheon Ventures, from people. And we found that that added an Frank Angella, Grove Street Advisors, from “Fundraising with Bono” ) Link element of risk to the investments.” “The New World of Private Equity” ) Link Carl Thoma, Thoma Bravo, from “The Changing Face of PE” ) Link Private equity was a four-letter I know as an LP, I always hated The best place to be next year is word back in the late ‘90s, in terms when GPs went above my head, infrastructure, no question about of the energy space… If I walked into which is something that a lot of GPs do, it. California’s just going to fall into a CEO or CFO’s office and said ‘I’m a even unintentionally.” the water unless there are some major private equity guy,’ they’d show me the Sheryl Schwartz, Perseus, from “From LP to infrastructure projects.” door pretty quickly.” GP: Lessons Learned” ) Link Len Tannenbaum, Fifth Street Finance, from Dan Revers, Arclight, from “Energy’s Big “Outlook 2013: Where to Invest (and What to Moment” ) Link Avoid)” ) Link Professionals from the following firms and organizations recently appeared on Privcap: On Camera TPG • The Carlyle Group • Pantheon Ventures • Vestar Capital Partners • Quaker Partners • RRE Ventures • Perseus • Actis Development Partners International • Hunstman Gay Global Capital • Saratoga Partners • MidOcean Partners • Grove Street Advisors Privcap Digest / February 2013 / 4 5 / Commentary Snow’s Notes Up with PE People Even as the population of private equity firms shrinks, the demand for experienced direct investors will remain strong recently spoke with a veteran fundraiser some major milestones have been met. Think of who shared some market intel that fits it as an “indentured” general partner. an important human-capital trend: ris- The sovereign wealth fund’s move reflects ing demand for individuals with proven a simple reality: Investors want more private skills as “direct” private equity investors, equity, but they want an improved version of it. even as the sprawling population of pri- They want more of what makes the asset class so vate equity firms is being culled. attractive and less of what makes it seem expen- Market According to my fundraising source, an un- sive and opaque. Some believe that the solution analysis by named sovereign wealth fund is currently looking lies in direct investing. Privcap CEO to hire a team of in-house investors and intends It’s an alluring premise. But direct investing David Snow to put a substantial amount of capital behind done right requires dedicated staff with high- them. The fund is seeking a more efficient way ly specialized skills. A typical LP spends most of to satisfy an increasingly common hunger among its time evaluating hundreds of GPs per year and the limited partner community—to make in- doesn’t also have the time, resources, and exper- vestments directly. By circumventing the general tise to quickly decide whether to commit $100 partner, the thinking goes, the LP can circumvent million in equity to, say, a German pet-food dis- the fees and carry that comes along with them. tributor. To put together its team, the fund has careful- Direct investing, in other words, is a full-time ly studied the individual track records of profes- job. That’s partly what created the GP-LP model in sionals within major private equity firms with an the first place. eye toward poaching the most talented. The fund What kind of experience does a sought-after is approaching them with the idea of creating its direct investment professional have? Serious, single-LP team—and adding additional induce- through-the-crucible, round-trip-deal experience. ments to seal the deal. Since many investment They have sourced and modeled deals, structured professionals are wary of a platform with a sin- financing, overseen operating progress, and most gle source of capital, this sovereign wealth fund importantly, consummated a profitable exit. is considering allowing its in-house GPs to raise The emerging indentured GP model means external capital after some time has passed and such talent will continue to be in high demand, even as many of the firms they’ve traditionally worked for fight to raise every penny.

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