THE GuiDE To THE GuiDE To FunD oF FunDs FunD oF FunDs MAnAGERs MAnAGERs

Third Edition Third Edition

Practical intelligence on vital trends and strategies Practical intelligence on vital trends and strategies

Edited by Edited by Kelly DePonte Kelly DePonte Probitas Partners Probitas Partners

Fund of Funds.indb 1 09/12/2011 17:04:27 Fund of Funds.indb 1 09/12/2011 17:04:27 Published in December 2011 by Published in December 2011 by PEi PEi second Floor second Floor sycamore House sycamore House sycamore street sycamore street London EC1Y 0sG London EC1Y 0sG united Kingdom united Kingdom

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Fund of Funds.indb 2 09/12/2011 17:04:27 Fund of Funds.indb 2 09/12/2011 17:04:27 Contents Contents

Figures and tables vii Figures and tables vii

About the editor ix About the editor ix

Introduction from the editor xi Introduction from the editor xi

Section I: In-depth chapters Section I: In-depth chapters

1 Funds of funds – a brief history 3 1 Funds of funds – a brief history 3 By Kelly DePonte, Probitas Partners By Kelly DePonte, Probitas Partners Definition and rationale 3 Definition and rationale 3 At the creation: separate accounts 4 At the creation: separate accounts 4 The late 1990s explosion: new funds and new structures 5 The late 1990s explosion: new funds and new structures 5 The last decade 6 The last decade 6 Summary 10 Summary 10

2 Why invest via a fund of funds? 13 2 Why invest via a fund of funds? 13 By Stewart Hay, Richard Chapman and By Stewart Hay, Richard Chapman and Andrzej Plichta, SL Capital Partners LLP Andrzej Plichta, SL Capital Partners LLP Why invest in funds of funds? 14 Why invest in funds of funds? 14 Where does fund of funds investing fit into the private equity Where does fund of funds investing fit into the private equity investment landscape? 16 investment landscape? 16 What is a fund of funds? 17 What is a fund of funds? 17 Attractions of a fund of funds 18 Attractions of a fund of funds 18 Why is the cash-flow profile of a fund of funds important? 19 Why is the cash-flow profile of a fund of funds important? 19 What should investors look for in a private equity fund of funds manager? 20 What should investors look for in a private equity fund of funds manager? 20

3 Private equity fund of funds investment strategy 23 3 Private equity fund of funds investment strategy 23 By Hanneke Smits and Kathy Wanner,Adams Street Partners By Hanneke Smits and Kathy Wanner,Adams Street Partners Introduction 23 Introduction 23 Investment strategy and process 23 Investment strategy and process 23 Organisational stability 30 Organisational stability 30 Conclusion 30 Conclusion 30

4 Legal issues on structuring a private equity fund of funds 33 4 Legal issues on structuring a private equity fund of funds 33 By Solomon Wifa, O’Melveny & Myers LLP By Solomon Wifa, O’Melveny & Myers LLP Introduction 33 Introduction 33

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Considerations that influence the choice of a fund of funds structure 33 Considerations that influence the choice of a fund of funds structure 33 Common fund of funds structures 34 Common fund of funds structures 34 Regulatory issues 38 Regulatory issues 38 Principal terms and conditions 40 Principal terms and conditions 40 Common US tax and regulatory issues 41 Common US tax and regulatory issues 41

5 The growing importance of new and next generation 5 The growing importance of new and next generation managers in private equity 47 managers in private equity 47 By Kelvin Liu, Invesco Private Capital By Kelvin Liu, Invesco Private Capital Introduction 47 Introduction 47 Historical strategy of PE investing 47 Historical strategy of PE investing 47 Transformation of the PE industry demands new approach 48 Transformation of the PE industry demands new approach 48 Seeking alpha through new and next generation managers 51 Seeking alpha through new and next generation managers 51 The art of selecting new and next generation managers 52 The art of selecting new and next generation managers 52 Conclusion 52 Conclusion 52

6 Private equity separate account investment vehicles 55 6 Private equity separate account investment vehicles 55 By Kelly DePonte, Probitas Partners By Kelly DePonte, Probitas Partners Introduction 55 Introduction 55 Evolution of outsourced investing 56 Evolution of outsourced investing 56 The return of separate accounts 57 The return of separate accounts 57 Focused separate accounts versus allocated separate accounts 59 Focused separate accounts versus allocated separate accounts 59 Key issues for investors 60 Key issues for investors 60 Summary 60 Summary 60

7 Co-investments in funds of funds and separate accounts 63 7 Co-investments in funds of funds and separate accounts 63 By Brian Gallagher,Twin Bridge Capital Partners By Brian Gallagher,Twin Bridge Capital Partners Background 63 Background 63 History of the co-investment process 63 History of the co-investment process 63 Current state of co-investment 63 Current state of co-investment 63 Benefits to the LP 64 Benefits to the LP 64 Benefits to the equity sponsor 65 Benefits to the equity sponsor 65 The co-investment process 65 The co-investment process 65 Sourcing 66 Sourcing 66 Myths about co-investing 68 Myths about co-investing 68 Success factors in co-investing 69 Success factors in co-investing 69 The future of co-investing 69 The future of co-investing 69

8 Regional focus: developments in Asian emerging markets 71 8 Regional focus: developments in Asian emerging markets 71 By Veronica John and E. Brooke Whitaker, Serasi Capital By Veronica John and E. Brooke Whitaker, Serasi Capital Current global trends pose challenges for funds of funds, but not in Asia 71 Current global trends pose challenges for funds of funds, but not in Asia 71 Asia – investors must allocate 72 Asia – investors must allocate 72 Asia-focused fund of funds landscape 73 Asia-focused fund of funds landscape 73 Why do investors prefer the fund of funds route to going direct in Asia? 75 Why do investors prefer the fund of funds route to going direct in Asia? 75 Similarities and differences between Asia-focused funds of funds and Similarities and differences between Asia-focused funds of funds and the rest of the industry 76 the rest of the industry 76 Understanding the different private equity models deployed 77 Understanding the different private equity models deployed 77

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What are the prospects for Asian Funds? 78 What are the prospects for Asian Funds? 78 Conclusion 79 Conclusion 79

Section II: From the Private Equity International archive Section II: From the Private Equity International archive

Private Equity International coverage on funds of funds 83 Private Equity International coverage on funds of funds 83 Standing out from the crowd 83 Standing out from the crowd 83 Don’t be a JAFOF 87 Don’t be a JAFOF 87 Survival of the fittest 89 Survival of the fittest 89 Same rules, different concerns 92 Same rules, different concerns 92 Private equity is going bespoke 95 Private equity is going bespoke 95 Albert: LPs will flock to established FoFs 98 Albert: LPs will flock to established FoFs 98 News analysis: The FoF phenomenon 100 News analysis: The FoF phenomenon 100

Section III: The survey Section III: The survey

Current trends in the fund of funds market: A survey Current trends in the fund of funds market: A survey of practitioners 105 of practitioners 105 Profile of respondents 105 Profile of respondents 105 Sectors and geographies of interest 108 Sectors and geographies of interest 108 Secondaries and co-investments 114 Secondaries and co-investments 114 Terms and conditions 114 Terms and conditions 114 Greatest fears 115 Greatest fears 115 Summary 116 Summary 116

Section IV: The directory Section IV: The directory

A comprehensive directory of fund of funds practitioners A comprehensive directory of fund of funds practitioners and advisers 121 and advisers 121

About PEI 216 About PEI 216

v v

Fund of Funds.indb 5 09/12/2011 17:04:28 Fund of Funds.indb 5 09/12/2011 17:04:28 Figures and tables Figures and tables

Figures Figure 1.1: Global commitments to funds of funds 5 Figures Figure 1.1: Global commitments to funds of funds 5

Figure 2.1: Pooled IRR for European buyouts, as at December 31, 2010 14 Figure 2.1: Pooled IRR for European buyouts, as at December 31, 2010 14

Figure 2.2: Structure of a fund of funds 18 Figure 2.2: Structure of a fund of funds 18

Figure 2.3: Example cash-flow of a fund of funds 19 Figure 2.3: Example cash-flow of a fund of funds 19

Figure 3.1: Market assessment methodology 26 Figure 3.1: Market assessment methodology 26

Figure 3.2: Subclass assessment by market 27 Figure 3.2: Subclass assessment by market 27

Figure 5.1: US venture capital industry – assets under management 48 Figure 5.1: US venture capital industry – assets under management 48

Figure 5.2: US buyout & mezzanine industry – assets under management 49 Figure 5.2: US buyout & mezzanine industry – assets under management 49

Figure 5.3: Average debt/EBITDA–large-cap US leveraged buyouts 49 Figure 5.3: Average debt/EBITDA–large-cap US leveraged buyouts 49

Figure 6.1: Global private equity raised per annum (1991–2011) 56 Figure 6.1: Global private equity raised per annum (1991–2011) 56

Figure 7.1: Sample net cash-flow by year – traditional funds of funds versus Figure 7.1: Sample net cash-flow by year – traditional funds of funds versus fund of funds with co-investment 64 fund of funds with co-investment 64

Figure 7.2: The co-investment process 66 Figure 7.2: The co-investment process 66

Survey figures Figure 1: Location of firms’ headquarters 106 Survey figures Figure 1: Location of firms’ headquarters 106

Figure 2: Number of years active in private equity investing 106 Figure 2: Number of years active in private equity investing 106

Figure 3: Strategies offered by funds of funds 107 Figure 3: Strategies offered by funds of funds 107

Figure 4: Targeted amount of private equity allocations across all funds Figure 4: Targeted amount of private equity allocations across all funds for 2012 (in US Dollars) 107 for 2012 (in US Dollars) 107

Figure 5: Target sectors for investment for 2012 108 Figure 5: Target sectors for investment for 2012 108

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Fund of Funds.indb 7 09/12/2011 17:04:28 Fund of Funds.indb 7 09/12/2011 17:04:28 Figures and tables Figures and tables

Figure 6: Target sectors for investment in 2012 – Figure 6: Target sectors for investment in 2012 – North American respondents only 109 North American respondents only 109

Figure 7: Most attractive geographical focus for 2012 110 Figure 7: Most attractive geographical focus for 2012 110

Figure 8: Most attractive European investment regions for Figure 8: Most attractive European investment regions for European-focused funds 110 European-focused funds 110

Figure 9: Most attractive markets in Asia 111 Figure 9: Most attractive markets in Asia 111

Figure 10: Most attractive strategies/sectors in the US mid-market 111 Figure 10: Most attractive strategies/sectors in the US mid-market 111

Figure 11: Most attractive sectors/stages in venture capital 112 Figure 11: Most attractive sectors/stages in venture capital 112

Figure 12: Most attractive emerging markets 113 Figure 12: Most attractive emerging markets 113

Figure 13: Approach to secondary markets 113 Figure 13: Approach to secondary markets 113

Figure 14: Directs and co-investments activity 114 Figure 14: Directs and co-investments activity 114

Figure 15: Attitude to the ILPA Private Equity Principles 115 Figure 15: Attitude to the ILPA Private Equity Principles 115

Figure 16: The most important issues regarding terms/structures of a fund 115 Figure 16: The most important issues regarding terms/structures of a fund 115

Figure 17: Fund of funds managers’ greatest fears about the current Figure 17: Fund of funds managers’ greatest fears about the current private equity market 116 private equity market 116

Tables Table 1.1: Ten largest private fund of funds vehicles, 2011 7 Tables Table 1.1: Ten largest private fund of funds vehicles, 2011 7

Table 1.2: The five largest publicly traded fund of funds vehicles, 2011 8 Table 1.2: The five largest publicly traded fund of funds vehicles, 2011 8

Table 1.3: Private equity and funds of funds: a timeline 10 Table 1.3: Private equity and funds of funds: a timeline 10

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Fund of Funds.indb 8 09/12/2011 17:04:28 Fund of Funds.indb 8 09/12/2011 17:04:28 About the editor About the editor

Kelly DePonte is the head of research and due diligence at Probitas Partners, a leading Kelly DePonte is the head of research and due diligence at Probitas Partners, a leading global provider of integrated, alternative investment solutions including fund placement global provider of integrated, alternative investment solutions including fund placement and portfolio management services. Kelly is based in the firm’s San Francisco office and and portfolio management services. Kelly is based in the firm’s San Francisco office and has over 30 years experience in the industry.Before joining Probitas Partners, Kelly was has over 30 years experience in the industry.Before joining Probitas Partners, Kelly was chief operating officer and a managing director at Pacific Corporate Group,aprivate chief operating officer and a managing director at Pacific Corporate Group,aprivate equity consultancy firm, where he also directed the partnership investment programme. equity consultancy firm, where he also directed the partnership investment programme. Before that he spent several years with First Interstate Bank where he most recently Before that he spent several years with First Interstate Bank where he most recently oversaw its private equity activity and interest rate swap activity.Kelly is also a member of oversaw its private equity activity and interest rate swap activity.Kelly is also a member of the Editorial Advisory Board of PEI’s quarterly journal The Review of Private Equity.Kelly the Editorial Advisory Board of PEI’s quarterly journal The Review of Private Equity.Kelly received an MBA from UCLA and a BA in Communications from Stanford University. received an MBA from UCLA and a BA in Communications from Stanford University.

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Fund of Funds.indb 9 09/12/2011 17:04:28 Fund of Funds.indb 9 09/12/2011 17:04:28 Introduction from the editor Introduction from the editor

When the second edition of AGuide to Private Equity Fund of Funds Managers was When the second edition of AGuide to Private Equity Fund of Funds Managers was published in early 2008 we were unknowingly at the beginning of the Great Financial published in early 2008 we were unknowingly at the beginning of the Great Financial Crisis (GFC). That crisis dramatically affected the private equity industry and the fund of Crisis (GFC). That crisis dramatically affected the private equity industry and the fund of funds market as well. It accelerated changes that have led to an increased set of targeted funds market as well. It accelerated changes that have led to an increased set of targeted product offerings and separate account vehicles taking their place alongside the well- product offerings and separate account vehicles taking their place alongside the well- established globally diversified funds that originally started out in the market. established globally diversified funds that originally started out in the market.

While the fundamentals of funds of funds have not radically changed, the market While the fundamentals of funds of funds have not radically changed, the market has become more complex and in the coming months the industry will also have to has become more complex and in the coming months the industry will also have to comprehend the raft of regulatory changes emanating from Europe and the US, and comprehend the raft of regulatory changes emanating from Europe and the US, and assess the impact it might have. The new market dynamics are reflected in this third assess the impact it might have. The new market dynamics are reflected in this third edition of the guide, which includes an entirely new chapter on the growing importance edition of the guide, which includes an entirely new chapter on the growing importance of new and next generation managers in addition to a number of fully revised and of new and next generation managers in addition to a number of fully revised and updated chapters from the previous edition. It also includes a new survey of fund of updated chapters from the previous edition. It also includes a new survey of fund of funds managers, which analyses current trends in the market and highlights the market funds managers, which analyses current trends in the market and highlights the market segments, investment strategies and geographic areas that are of most interest to segments, investment strategies and geographic areas that are of most interest to practitioners as well as the challenges they face in doing their business. There is also a practitioners as well as the challenges they face in doing their business. There is also a comprehensive directory containing the profiles of over 190 fund of funds managers. comprehensive directory containing the profiles of over 190 fund of funds managers.

We have been fortunate to attract a group of distinguished industry practitioners to author We have been fortunate to attract a group of distinguished industry practitioners to author the chapters of this book. Most of the material here has been written by individuals who the chapters of this book. Most of the material here has been written by individuals who have devoted their spare time, in spite of busy professional schedules, to share their have devoted their spare time, in spite of busy professional schedules, to share their knowledge of the market. This book would not be possible without their contributions knowledge of the market. This book would not be possible without their contributions and the editors wish to express their profound thanks to all the authors. and the editors wish to express their profound thanks to all the authors.

Kelly DePonte Kelly DePonte

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Fund of Funds.indb 11 09/12/2011 17:04:29 Fund of Funds.indb 11 09/12/2011 17:04:29 1 Funds of funds – a brief history 1 Funds of funds – a brief history By Kelly DePonte, Probitas Partners By Kelly DePonte, Probitas Partners

Funds of funds are such a fixture on the current private equity landscape that it is difficult Funds of funds are such a fixture on the current private equity landscape that it is difficult to remember they are a fairly recent phenomenon. Though institutional private equity to remember they are a fairly recent phenomenon. Though institutional private equity vehicles trace their roots back to the 1940s (see the timeline in Table 1.3), the private vehicles trace their roots back to the 1940s (see the timeline in Table 1.3), the private equity market remained too shallow to support funds of funds vehicles until the 1970s. equity market remained too shallow to support funds of funds vehicles until the 1970s. Large investment vehicles are creatures of the last 12 years, and this period of growth Large investment vehicles are creatures of the last 12 years, and this period of growth has seen a tremendous amount of change and a proliferation of strategies to deal with has seen a tremendous amount of change and a proliferation of strategies to deal with that change. that change.

Definition and Even with an investment product as ubiquitous as a fund of funds, it is useful to go back to Definition and Even with an investment product as ubiquitous as a fund of funds, it is useful to go back to rationale first principles and define exactly what is meant by a fund of funds vehicle. According to rationale first principles and define exactly what is meant by a fund of funds vehicle. According to VCExperts.com, a fund of funds is: VCExperts.com, a fund of funds is:

“A fund set up to distribute investments among a selection of private equity fund “A fund set up to distribute investments among a selection of private equity fund managers, who in turn invest the capital directly.Fund of funds are specialist private managers, who in turn invest the capital directly.Fund of funds are specialist private equity investors and have existing relationships with firms. They may be able to provide equity investors and have existing relationships with firms. They may be able to provide investors with a route to investing in particular funds that would otherwise be closed investors with a route to investing in particular funds that would otherwise be closed to them. Investing in funds of funds can also help spread the risk of investing in private to them. Investing in funds of funds can also help spread the risk of investing in private equity because they invest the capital in a variety of funds.”1 equity because they invest the capital in a variety of funds.”1

The key reasons investors look to funds of funds are embedded in that definition: The key reasons investors look to funds of funds are embedded in that definition:

• Specialist expertise. The due diligence process for investing in private equity funds is • Specialist expertise. The due diligence process for investing in private equity funds is both complex and arcane. (Private Equity International publishes a book entitled The both complex and arcane. (Private Equity International publishes a book entitled The Guide to Private Equity Fund Investment Due Diligence,which details the complexities Guide to Private Equity Fund Investment Due Diligence,which details the complexities of fund manager selection.) Successful fund of funds managers have developed proven of fund manager selection.) Successful fund of funds managers have developed proven expertise in fund selection – expertise that is difficult for smaller investors or new market expertise in fund selection – expertise that is difficult for smaller investors or new market entrants to replicate quickly. entrants to replicate quickly. • Access. Successful fund of funds managers have relationships with primary managers • Access. Successful fund of funds managers have relationships with primary managers who have been successful in the past, and who may be difficult for new investors to who have been successful in the past, and who may be difficult for new investors to access, especially in the venture capital market. access, especially in the venture capital market. • Diversification. Given that many private equity funds have minimum commitments of $5 • Diversification. Given that many private equity funds have minimum commitments of $5 million to $25 million, it is often difficult for small investors to build diversified portfolios million to $25 million, it is often difficult for small investors to build diversified portfolios that offer protection in what is a volatile asset class. The vast majority of funds of funds that offer protection in what is a volatile asset class. The vast majority of funds of funds are multi-manager vehicles that offer smaller investors managed diversification. are multi-manager vehicles that offer smaller investors managed diversification.

1 VCExperts.com at: http://vcexperts.com/encyclopedia/glossary/227 1 VCExperts.com at: http://vcexperts.com/encyclopedia/glossary/227 3 3

Fund of Funds.indb 3 09/12/2011 17:04:29 Fund of Funds.indb 3 09/12/2011 17:04:29 section i: in-depth chapters section i: in-depth chapters

At the creation: The first fund of funds was formed in the 1970s as the number of primary fund offerings At the creation: The first fund of funds was formed in the 1970s as the number of primary fund offerings separate increased, and fund selection became more of an issue. However,the fund of funds market separate increased, and fund selection became more of an issue. However,the fund of funds market accounts as a whole did not become significant until the 1990s when the primary market significantly accounts as a whole did not become significant until the 1990s when the primary market significantly expanded (see Figure 1.1). What is more difficult to track, however,are separate accounts. expanded (see Figure 1.1). What is more difficult to track, however,are separate accounts. Commitments to separate accounts are not consistently included in these numbers, and Commitments to separate accounts are not consistently included in these numbers, and separate accounts themselves were more prevalent early on in the market. separate accounts themselves were more prevalent early on in the market.

Aseparate account is an agreement between a professional third-party manager and an Aseparate account is an agreement between a professional third-party manager and an institutional investor crafted to a specific investment mandate. It can be documented by institutional investor crafted to a specific investment mandate. It can be documented by a simple contract between the parties for a fixed duration, or it can take the form of a fully a simple contract between the parties for a fixed duration, or it can take the form of a fully structured fund of funds vehicle that has a single investor.Even when structured as a formal structured fund of funds vehicle that has a single investor.Even when structured as a formal fund of funds, there is little information publicly available on separate accounts as they are fund of funds, there is little information publicly available on separate accounts as they are agreements only between the two parties and generally include confidentiality provisions. agreements only between the two parties and generally include confidentiality provisions.

Many of the first fund of funds providers, including Adams Street (previously Brinson) and Many of the first fund of funds providers, including Adams Street (previously Brinson) and HarbourVest, actively provided separate accounts to large institutional investors early in HarbourVest, actively provided separate accounts to large institutional investors early in their careers. For these large investors, separate accounts were a way to tap into third-party their careers. For these large investors, separate accounts were a way to tap into third-party expertise and leverage internal staffat a point where private equity was just beginning to expertise and leverage internal staffat a point where private equity was just beginning to develop as a market – experienced professionals with a background in fund due diligence develop as a market – experienced professionals with a background in fund due diligence were very rare.For the separate account providers, relationships with large institutional were very rare.For the separate account providers, relationships with large institutional investors allowed them to quickly increase assets under management, even though the investors allowed them to quickly increase assets under management, even though the fees on separate accounts were usually lower than those on a multi-party fund of funds fees on separate accounts were usually lower than those on a multi-party fund of funds because of the pricing power that large investors commanded. It was just this pricing because of the pricing power that large investors commanded. It was just this pricing dynamic – combined with an increase in private equity investments by a number of new dynamic – combined with an increase in private equity investments by a number of new market entrants – that led to a decline in the use of separate accounts and the beginnings market entrants – that led to a decline in the use of separate accounts and the beginnings of an increase both in the number of funds of funds and the amount of money committed of an increase both in the number of funds of funds and the amount of money committed to them in the early 1990s. to them in the early 1990s.

This was growth from an admittedly small base – it wasn’t until 1995 that more than a billion This was growth from an admittedly small base – it wasn’t until 1995 that more than a billion dollars was raised for funds of funds in a single year,and it wasn’t until 1997 that more than dollars was raised for funds of funds in a single year,and it wasn’t until 1997 that more than $5 billion was raised. $5 billion was raised.

The expansion of multi-investor funds of funds provided several advantages to fund The expansion of multi-investor funds of funds provided several advantages to fund managers: managers:

• Pricing.With multi-investor funds of funds, negotiating power shifted from the investor • Pricing.With multi-investor funds of funds, negotiating power shifted from the investor to the fund manager.The wholesale discounts available to large investors were not to the fund manager.The wholesale discounts available to large investors were not usually available on multi-investor funds. usually available on multi-investor funds. • Assetsundermanagement.Bytappingintoanumberofsmallerinvestorssimultaneously, • Assetsundermanagement.Bytappingintoanumberofsmallerinvestorssimultaneously, fund managers were able to build more quickly their base of assets under management. fund managers were able to build more quickly their base of assets under management. When combined with the better pricing margin, this led to increased profitability. When combined with the better pricing margin, this led to increased profitability. • Efficiency. For a fund of funds manager,managing a large pool of money with a single • Efficiency. For a fund of funds manager,managing a large pool of money with a single investment mandate is more efficient than managing multiple, uniquely designed investment mandate is more efficient than managing multiple, uniquely designed separate accounts at the same time. With a single global mandate, a fund of funds separate accounts at the same time. With a single global mandate, a fund of funds manager can deploy more capital into fewer funds, minimising time spent on due manager can deploy more capital into fewer funds, minimising time spent on due diligence, making larger commitments with each individual underlying fund and diligence, making larger commitments with each individual underlying fund and developing stronger relationships with general partners (GP) during the process. developing stronger relationships with general partners (GP) during the process.

4 4

Fund of Funds.indb 4 09/12/2011 17:04:29 Fund of Funds.indb 4 09/12/2011 17:04:29 2 Why invest via a fund of funds? 2 Why invest via a fund of funds? By Stewart Hay, Richard Chapman and Andrzej Plichta, By Stewart Hay, Richard Chapman and Andrzej Plichta, SL Capital Partners LLP SL Capital Partners LLP

For an investor seeking diversification across a variety of asset classes, private equity For an investor seeking diversification across a variety of asset classes, private equity may only represent 2 to 5 percent of an investment portfolio.However,with returns from may only represent 2 to 5 percent of an investment portfolio.However,with returns from private equity potentially in the 13 to 18 percent range1,this asset class has the potential to private equity potentially in the 13 to 18 percent range1,this asset class has the potential to represent a significant portion of the outperformance of an overall investment portfolio. represent a significant portion of the outperformance of an overall investment portfolio.

Typical investors include pension schemes, sovereign wealth funds, foundations and Typical investors include pension schemes, sovereign wealth funds, foundations and endowments, financial institutions, family offices and high net worth individuals. In the US, endowments, financial institutions, family offices and high net worth individuals. In the US, where acceptance of the asset class is greater,some investors, generally foundations and where acceptance of the asset class is greater,some investors, generally foundations and endowments, now have exposure levels to alternative assets that account for a significant endowments, now have exposure levels to alternative assets that account for a significant portion of their portfolios. For example, the Washington State Investment Board (that is the portion of their portfolios. For example, the Washington State Investment Board (that is the pension scheme for the state of Washington) in the US specifically targets private equity as pension scheme for the state of Washington) in the US specifically targets private equity as 25 percent of their portfolio while the average allocation to private equity of pension plans 25 percent of their portfolio while the average allocation to private equity of pension plans stands at 5.5 percent.2 stands at 5.5 percent.2

As you might expect though, it is not quite as straightforward as simply making an As you might expect though, it is not quite as straightforward as simply making an allocation to the asset class then sitting back and making high returns. There is a much allocation to the asset class then sitting back and making high returns. There is a much wider dispersion of returns between the best managers and average managers in private wider dispersion of returns between the best managers and average managers in private equity than is seen in other asset classes.3 equity than is seen in other asset classes.3

Data from Thomson ONE is very instructive in this regard. Figure 2.1 shows return Data from Thomson ONE is very instructive in this regard. Figure 2.1 shows return information for European buyout managers over various time periods. Focusing on the information for European buyout managers over various time periods. Focusing on the ten-year internal rates of return, we see that the median return over this period was 9.1 ten-year internal rates of return, we see that the median return over this period was 9.1 percent, while the top-quartile break point was 19.4 percent, an outperformance of 10.3 percent, while the top-quartile break point was 19.4 percent, an outperformance of 10.3 percent over the median, illustrating the crucial importance of selecting top-quartile percent over the median, illustrating the crucial importance of selecting top-quartile managers. This point is highlighted even more by the bottom-quartile benchmark of -14.4 managers. This point is highlighted even more by the bottom-quartile benchmark of -14.4 percent over the same ten-year horizon, a huge 23.5 percent below the median (return percent over the same ten-year horizon, a huge 23.5 percent below the median (return numbers in the US market are similar to these). numbers in the US market are similar to these).

These statistics drive home the point that unlike the situation in publicly traded securities, These statistics drive home the point that unlike the situation in publicly traded securities, where sector allocation can drive returns, manager selection is absolutely critical to the where sector allocation can drive returns, manager selection is absolutely critical to the success of any private equity investment strategy. success of any private equity investment strategy.

1 Thomson ONE state that the pooled average ten year buyout return for top-quartile funds in Europe is 1 Thomson ONE state that the pooled average ten year buyout return for top-quartile funds in Europe is 19.4 percent. Afund of funds would expect to be able to use its expertise to exceed the pooled median IRR 19.4 percent. Afund of funds would expect to be able to use its expertise to exceed the pooled median IRR for all funds in this category of 9.1 percent. for all funds in this category of 9.1 percent. 2 Preqin, (February 2011), Public Pension Plans and Alternative Assets. 2 Preqin, (February 2011), Public Pension Plans and Alternative Assets. 3 Thomson ONE (to December 31, 2010, sourced October 31, 2011). 3 Thomson ONE (to December 31, 2010, sourced October 31, 2011). 13 13

Fund of Funds.indb 13 09/12/2011 17:04:31 Fund of Funds.indb 13 09/12/2011 17:04:31 section i: in-depth chapters section i: in-depth chapters

Figure 2.1: Pooled iRR for European buyouts, as at December 31, 2010 Figure 2.1: Pooled iRR for European buyouts, as at December 31, 2010

40 40

Top quartile Top quartile 30 30 All buyouts All buyouts 20 20 Bottom quartile Bottom quartile

(%) 10 (%) 10 IRR IRR

0 0 oled oled Po Po -10 -10

-20 -20 5 years 10 years 15 years 5 years 10 years 15 years

Source: Thomson ONE, as at December 31, 2010 (sourced at October 3, 2011). Source: Thomson ONE, as at December 31, 2010 (sourced at October 3, 2011).

An additional attraction that private equity can offer besides the potential for high An additional attraction that private equity can offer besides the potential for high returns is the significant diversification benefits.4 Anumber of studies have shown that returns is the significant diversification benefits.4 Anumber of studies have shown that historically long-term private equity returns have not been correlated closely with returns historically long-term private equity returns have not been correlated closely with returns from traditional asset classes. This means private equity can help to smooth out the return from traditional asset classes. This means private equity can help to smooth out the return of a balanced portfolio.Furthermore, it provides greater access to the real economy of a balanced portfolio.Furthermore, it provides greater access to the real economy than the stock markets where diversification is often limited to larger firms in the more than the stock markets where diversification is often limited to larger firms in the more established industries. established industries.

Why invest in When choosing to invest directly into private equity deals or funds there are many diverse Why invest in When choosing to invest directly into private equity deals or funds there are many diverse funds of funds? capabilities and resources required in order to be able to successfully participate. Afew of funds of funds? capabilities and resources required in order to be able to successfully participate. Afew of these are summarised below. these are summarised below.

Skills The skills required to invest in private equity are significantly different from those Skills The skills required to invest in private equity are significantly different from those needed to invest in the listed markets. The lack of a public marketplace means needed to invest in the listed markets. The lack of a public marketplace means purchases must be privately negotiated with the seller of the company.As the company purchases must be privately negotiated with the seller of the company.As the company is privately held, there is generally limited information available from resources such is privately held, there is generally limited information available from resources such as the internet, Reuters and Bloomberg. As such, the only way to find out information as the internet, Reuters and Bloomberg. As such, the only way to find out information about private companies is to go out and visit them, review all available internal and about private companies is to go out and visit them, review all available internal and external information and meet with the management of that company.Investing external information and meet with the management of that company.Investing in private equity is certainly not something that can be done sitting behind a desk. in private equity is certainly not something that can be done sitting behind a desk.

As a result, to make such an informed decision and generate the highest returns, the As a result, to make such an informed decision and generate the highest returns, the process of investing in private equity is far more labour-intensive than investing in listed process of investing in private equity is far more labour-intensive than investing in listed

4 Faulds, Graeme, (2002), An Exploration of the Issues Involved in Making an Allocation to Private Equity. 4 Faulds, Graeme, (2002), An Exploration of the Issues Involved in Making an Allocation to Private Equity. 14 14

Fund of Funds.indb 14 09/12/2011 17:04:31 Fund of Funds.indb 14 09/12/2011 17:04:31 The growing importance of new and next The growing importance of new and next 5 generation managers in private equity 5 generation managers in private equity

By Kelvin Liu, Invesco Private Capital By Kelvin Liu, Invesco Private Capital

Introduction Over the last decade, there has been growing interest among institutional investors Introduction Over the last decade, there has been growing interest among institutional investors in committing to private equity funds managed by new and next generation (N&NG) in committing to private equity funds managed by new and next generation (N&NG) managers where fund managers are raising their first, second or third institutional managers where fund managers are raising their first, second or third institutional quality fund. Large public institutions, such as California Public Employees’ Retirement quality fund. Large public institutions, such as California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), have set System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), have set up and continue to support programmes dedicated to identifying these rising stars of up and continue to support programmes dedicated to identifying these rising stars of the future. This exemplifies the perspective of some of the most sophisticated investors the future. This exemplifies the perspective of some of the most sophisticated investors that the traditional way of investing only in proven managers may not be adequate. that the traditional way of investing only in proven managers may not be adequate. Without continual rejuvenation of their private equity (PE) programme, institutional Without continual rejuvenation of their private equity (PE) programme, institutional investors may miss capturing the most promising private equity returns going forward. investors may miss capturing the most promising private equity returns going forward. Consequently,many institutional investors increasingly believe that building a core Consequently,many institutional investors increasingly believe that building a core portfolio of premier established names and supplementing it with a group of promising portfolio of premier established names and supplementing it with a group of promising N&NG managers is likely to be an effective portfolio construction strategy,adding N&NG managers is likely to be an effective portfolio construction strategy,adding diversification and opportunistic elements with the potential to strengthen risk-adjusted diversification and opportunistic elements with the potential to strengthen risk-adjusted returns over the long run. returns over the long run.

However,the organisational structure of many financial institutions, both large and small, However,the organisational structure of many financial institutions, both large and small, may constrain their ability to address these opportunities effectively.Large institutions may constrain their ability to address these opportunities effectively.Large institutions often find it difficult to commit the necessary resources to consider smaller commitments, often find it difficult to commit the necessary resources to consider smaller commitments, maintain the enhanced monitoring required and conduct the specialised diligence to maintain the enhanced monitoring required and conduct the specialised diligence to identify the truly deserving N&NG managers. On the other hand, smaller institutions identify the truly deserving N&NG managers. On the other hand, smaller institutions lack both the internal resources and the capital needed to achieve a well-diversified lack both the internal resources and the capital needed to achieve a well-diversified programme to mitigate risk. This is where funds of funds and separate account managers programme to mitigate risk. This is where funds of funds and separate account managers are able to play an important role in helping institutional investors achieve their return are able to play an important role in helping institutional investors achieve their return objectives by providing dedicated resources and expertise to create a well-diversified objectives by providing dedicated resources and expertise to create a well-diversified portfolio of promising N&NG managers. Indeed, over the last decade, several funds of portfolio of promising N&NG managers. Indeed, over the last decade, several funds of funds and separate account managers have offered specialised products to address this funds and separate account managers have offered specialised products to address this market specifically. market specifically.

Historical Historically,institutional investors often sought solace through investing with brand Historical Historically,institutional investors often sought solace through investing with brand strategy of PE name PE managers that could tout top-quartile track records. Investors would continue strategy of PE name PE managers that could tout top-quartile track records. Investors would continue investing to back them, fund after fund, or risk losing access to their later funds. Agency Theory investing to back them, fund after fund, or risk losing access to their later funds. Agency Theory might have played a role in this Buy-IBM mentality.This strategy might have worked well might have played a role in this Buy-IBM mentality.This strategy might have worked well for some investors in the early and mid-1990s when the universe of PE managers was for some investors in the early and mid-1990s when the universe of PE managers was small and there were only a handful of firms with proven track records. However,while small and there were only a handful of firms with proven track records. However,while we agree that some high-quality fund managers have developed a set of distinctive we agree that some high-quality fund managers have developed a set of distinctive

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capabilities1 and reputations, the general application of this rule may not be effective in capabilities1 and reputations, the general application of this rule may not be effective in capturing the best PE returns going forward, especially given the changes and gradual capturing the best PE returns going forward, especially given the changes and gradual maturing of the PE industry over the last decade. maturing of the PE industry over the last decade.

Transformation The static strategy of solely backing brand name funds may no longer fully capture the Transformation The static strategy of solely backing brand name funds may no longer fully capture the of the PE strongest risk-adjusted returns due to the transformation of the industry that has taken place of the PE strongest risk-adjusted returns due to the transformation of the industry that has taken place industry over the last decade. Venture capital saw its assets under management (AUM) grow over four- industry over the last decade. Venture capital saw its assets under management (AUM) grow over four- demands new fold from under $45 billion in 1996 to $187 billion by 2006.2 With such rapid capital injection, demands new fold from under $45 billion in 1996 to $187 billion by 2006.2 With such rapid capital injection, approach individual venture funds grew larger in size and raised capital at a faster pace, while many approach individual venture funds grew larger in size and raised capital at a faster pace, while many expanded into strategies in which they had little or no domain expertise. expanded into strategies in which they had little or no domain expertise.

Figure 5.1: us venture capital industry – assets under management Figure 5.1: us venture capital industry – assets under management

200 200

150 150

100 100 billion billion $ $

50 50

0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Years Years Source: Thomson Reuters. Invested vs. Uninvested Capital and Cash-Flow Summary Reports, venture Source: Thomson Reuters. Invested vs. Uninvested Capital and Cash-Flow Summary Reports, venture only, as of December 31, 2010. only, as of December 31, 2010.

Thebuyout industry has also experienced explosive growth. Theindustry’sAUM Thebuyout industry has also experienced explosive growth. Theindustry’sAUM increased by a similar magnitude from $113 billion in 1996 to over $600 billion in increased by a similar magnitude from $113 billion in 1996 to over $600 billion in 2006.3 In fact, the rapid growth of the industry did not abate until the onset of the 2006.3 In fact, the rapid growth of the industry did not abate until the onset of the 2008 credit crisis. With cheap and readily available credit, buyout funds not only 2008 credit crisis. With cheap and readily available credit, buyout funds not only grew larger in size, they also leveraged their portfolio companies to unprecedented grew larger in size, they also leveraged their portfolio companies to unprecedented levels. The average debt-to-EBITDA(earnings before interest, taxes, depreciation and levels. The average debt-to-EBITDA(earnings before interest, taxes, depreciation and amortisation) ratio peaked at 6.2x in 2007.4 This growth in leverage was reversed twice amortisation) ratio peaked at 6.2x in 2007.4 This growth in leverage was reversed twice

1 BCG & IESE Business School. (February 2008). The Advantage of Persistence. 1 BCG & IESE Business School. (February 2008). The Advantage of Persistence. 2 Thomson Reuters. Invested vs. Uninvested Capital and Cash-Flow Summary Reports, venture only,as at 2 Thomson Reuters. Invested vs. Uninvested Capital and Cash-Flow Summary Reports, venture only,as at December 31, 2010. December 31, 2010. 3 Thomson Reuters. Invested vs. Uninvested Capital and Cash-Flow Summary Reports, buyouts and other 3 Thomson Reuters. Invested vs. Uninvested Capital and Cash-Flow Summary Reports, buyouts and other private equity only, as at December 31, 2010. private equity only, as at December 31, 2010. 4 S&P Leverage Lending Review 4 Q10. (2010). Large-Cap buyouts are companies with EBITDA >$50m. 4 S&P Leverage Lending Review 4 Q10. (2010). Large-Cap buyouts are companies with EBITDA >$50m. 48 48

Fund of Funds.indb 48 09/12/2011 17:04:39 Fund of Funds.indb 48 09/12/2011 17:04:39 Co-investments in funds of funds and Co-investments in funds of funds and 7 separate accounts 7 separate accounts

By Brian Gallagher,Twin Bridge Capital Partners By Brian Gallagher,Twin Bridge Capital Partners

Background Co-investing in private equity has been around for years, but it has only recently become Background Co-investing in private equity has been around for years, but it has only recently become a truly mainstream form of investing. There are many reasons for this evolution. Most a truly mainstream form of investing. There are many reasons for this evolution. Most importantly,investors have come to realise that there are significant quantitative and importantly,investors have come to realise that there are significant quantitative and qualitative benefits to co-investing. General partners (GP) have also learned that co- qualitative benefits to co-investing. General partners (GP) have also learned that co- investing has numerous benefits for their investment programmes. The mutual benefits investing has numerous benefits for their investment programmes. The mutual benefits that can be achieved through co-investing are well recognised. As a result, limited partners that can be achieved through co-investing are well recognised. As a result, limited partners (LP) are, in increasing numbers, formalising co-investment programmes. (LP) are, in increasing numbers, formalising co-investment programmes.

Co-investing can be carried out in all areas of alternative investments including hedge Co-investing can be carried out in all areas of alternative investments including hedge funds, venture capital, mezzanine and buyout investments. Equity co-investment in buyout funds, venture capital, mezzanine and buyout investments. Equity co-investment in buyout deals is the largest and most recognised segment and the focus of this discussion. The deals is the largest and most recognised segment and the focus of this discussion. The concepts and examples illustrated here, however,can be applied to any type of co- concepts and examples illustrated here, however,can be applied to any type of co- investment regardless of whether the co-investments are done through a fund of funds investment regardless of whether the co-investments are done through a fund of funds vehicle or an institutional separate account. vehicle or an institutional separate account.

History of co- Co-investment has been around for nearly as long as the buyout industry itself. The History of co- Co-investment has been around for nearly as long as the buyout industry itself. The investment practice became more prevalent during the mid-to-late 1990s as institutional investors investment practice became more prevalent during the mid-to-late 1990s as institutional investors sought additional ways to deploy capital and GPsbegan to see LPsashelpful in sought additional ways to deploy capital and GPsbegan to see LPsashelpful in executing larger transactions. Initially,it was common for equity sponsors to charge executing larger transactions. Initially,it was common for equity sponsors to charge a reduced carried interest on co-investments. As the co-investment industry matured, a reduced carried interest on co-investments. As the co-investment industry matured, GPs began to view co-investment investors as true partners. Deals were increasingly GPs began to view co-investment investors as true partners. Deals were increasingly done with no management fee and no carried interest whereas today LPs generally done with no management fee and no carried interest whereas today LPs generally expect, and often require, co-investments to be executed without a management fee expect, and often require, co-investments to be executed without a management fee and carried interest. and carried interest.

Current state of Co-investingisnowamainstreamandacceptedcomponentof today’sprivateequityindustry. Current state of Co-investingisnowamainstreamandacceptedcomponentof today’sprivateequityindustry. co-investment During fundraising, GPs are routinely asked by interested LPs to address the likelihood of co-investment During fundraising, GPs are routinely asked by interested LPs to address the likelihood of co-investment in their next fund. While some GPs look at co-investment as a requirement co-investment in their next fund. While some GPs look at co-investment as a requirement to entice certain LPs into a fund commitment, the practice has evolved into an important to entice certain LPs into a fund commitment, the practice has evolved into an important part of the business model for most equity sponsors, offering a wide range of benefits to part of the business model for most equity sponsors, offering a wide range of benefits to both the LP and the sponsor.It is important to note that while many LPs clamour for co- both the LP and the sponsor.It is important to note that while many LPs clamour for co- investment opportunities, a significant percentage of these LPs do not have the staffing or investment opportunities, a significant percentage of these LPs do not have the staffing or infrastructure to respond to and commit to co-investment opportunities in a timely manner. infrastructure to respond to and commit to co-investment opportunities in a timely manner. LPs who effectively structure their organisations to execute on a co-investment programme LPs who effectively structure their organisations to execute on a co-investment programme find themselves at a competitive advantage for access to these benefits. find themselves at a competitive advantage for access to these benefits.

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Benefits to the LP Substantial quantitative benefits accrue to co-investing LPs. These benefits are attributable Benefits to the LP Substantial quantitative benefits accrue to co-investing LPs. These benefits are attributable Quantitative to the positive cash-flow characteristics associated with today’s co-investment deals, Quantitative to the positive cash-flow characteristics associated with today’s co-investment deals, benefits including improved net return and accelerated capital deployment. Since co-investing is benefits including improved net return and accelerated capital deployment. Since co-investing is done either free of a management fee and carried interest, or at substantially reduced done either free of a management fee and carried interest, or at substantially reduced rates, the LP will, by definition, improve its net investment returns relative to a programme rates, the LP will, by definition, improve its net investment returns relative to a programme that invests exclusively in funds. that invests exclusively in funds.

The improvement in net returns for an active co-investor can be as much as 300 basis points The improvement in net returns for an active co-investor can be as much as 300 basis points or more as compared to a standard fund investing programme. By actively co-investing, an or more as compared to a standard fund investing programme. By actively co-investing, an LP can deploy capital with quality sponsors at an accelerated rate, which reduces the J-Curve LP can deploy capital with quality sponsors at an accelerated rate, which reduces the J-Curve effect associated with its private equity investing. Athoughtful and well-constructed co- effect associated with its private equity investing. Athoughtful and well-constructed co- investment portfolio can also allow the institutional investor to diversify further its portfolio investment portfolio can also allow the institutional investor to diversify further its portfolio and increase exposure to sectors that the co-investor prefers. and increase exposure to sectors that the co-investor prefers.

For many active co-investing LPs, co-investments typically comprise 25 percent or more For many active co-investing LPs, co-investments typically comprise 25 percent or more of their overall private equity exposure. Clearly,the quantitative benefits experienced by of their overall private equity exposure. Clearly,the quantitative benefits experienced by the LP depend on the size of its co-investment portfolio.Figure 7.1 highlights the primary the LP depend on the size of its co-investment portfolio.Figure 7.1 highlights the primary quantitative benefits associated with a significant co-investment programme. quantitative benefits associated with a significant co-investment programme.

Qualitative benefits In addition to the superior quantitative benefits for an LP,the qualitative characteristics Qualitative benefits In addition to the superior quantitative benefits for an LP,the qualitative characteristics associated with co-investing yield ongoing returns to the relationship between the LP associated with co-investing yield ongoing returns to the relationship between the LP and the equity sponsor.Co-investments allow the investor to develop close relationships and the equity sponsor.Co-investments allow the investor to develop close relationships with senior equity sponsor professionals. This allows the investor to obtain a first-hand with senior equity sponsor professionals. This allows the investor to obtain a first-hand

Figure 7.1: sample net cash-flow by year – traditional funds of funds versus funds of Figure 7.1: sample net cash-flow by year – traditional funds of funds versus funds of funds with co-investment funds with co-investment

120 120 Funds of funds Funds of funds 100 100 Funds of funds with co-investment Funds of funds with co-investment 80 80 60 60 40 40

millions 20 millions 20

US$ 0 US$ 0 -20 -20 -40 -40 -60 -60 -80 -80 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Years Years Source: Twin Bridge Capital Partners. Source: Twin Bridge Capital Partners.

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Fund of Funds.indb 64 09/12/2011 17:04:43 Fund of Funds.indb 64 09/12/2011 17:04:43 Current trends in the fund of funds Current trends in the fund of funds market: A survey of practitioners market: A survey of practitioners

By Kelly DePonte, Probitas Partners By Kelly DePonte, Probitas Partners

Historically,funds of funds have offered convenient access to the private equity market, Historically,funds of funds have offered convenient access to the private equity market, typically for smaller or more inexperienced investors wanting to observe the private typically for smaller or more inexperienced investors wanting to observe the private equity market before developing their own investment programmes. The defining equity market before developing their own investment programmes. The defining characteristics of funds of funds – diversification and access – are therefore aligned with characteristics of funds of funds – diversification and access – are therefore aligned with the multi-faceted purposes of a range of players with different investment needs. the multi-faceted purposes of a range of players with different investment needs.

Generalised diversification is no longer the name of the game as niche funds of funds Generalised diversification is no longer the name of the game as niche funds of funds have emerged to challenge the larger,established fund of funds managers. They are have emerged to challenge the larger,established fund of funds managers. They are also tailoring programmes to more specific investor interests. These more targeted, niche also tailoring programmes to more specific investor interests. These more targeted, niche funds of funds have cropped up in conjunction with increased separate account activity. funds of funds have cropped up in conjunction with increased separate account activity. Although it is impossible to adequately track the amount of funds being diverted from Although it is impossible to adequately track the amount of funds being diverted from funds of funds to separate accounts and to measure a substitution effect, the important funds of funds to separate accounts and to measure a substitution effect, the important point to note is that the audiences for niche funds of funds and separate accounts are point to note is that the audiences for niche funds of funds and separate accounts are substantially different – in terms of overall size, interest, and experience of the investor. substantially different – in terms of overall size, interest, and experience of the investor. While fund of funds managers with deep know-how and broad-based relationships may While fund of funds managers with deep know-how and broad-based relationships may find it relatively easy to address both funds of funds and separateaccounts through their find it relatively easy to address both funds of funds and separateaccounts through their intermediary role, focused separate accounts do pose challenges for them – for example intermediary role, focused separate accounts do pose challenges for them – for example when dealing with limited investment opportunities, time, or simply differences in scale. when dealing with limited investment opportunities, time, or simply differences in scale.

This new trend of specialised funds of funds is easily illustrated by the wide range This new trend of specialised funds of funds is easily illustrated by the wide range of targeted investment mandates of the funds of funds currently in market, including of targeted investment mandates of the funds of funds currently in market, including distressed, Asia, emerging markets, Latin America, emerging Europe, venture capital, distressed, Asia, emerging markets, Latin America, emerging Europe, venture capital, and debt. and debt.

In order to understand better how fund of funds managers perceive the market and the In order to understand better how fund of funds managers perceive the market and the issues that are important to them, we conducted an online survey of practitioners during issues that are important to them, we conducted an online survey of practitioners during the first half of October, 2011. the first half of October, 2011.

Profile of In order to put the responses to the survey in proper context, the first few questions are Profile of In order to put the responses to the survey in proper context, the first few questions are respondents designed to build a profile of the respondents. respondents designed to build a profile of the respondents.

Over 35 survey responses were received –75 percent of the respondents are from Over 35 survey responses were received –75 percent of the respondents are from organisations headquartered in Western Europe or North America, the two most organisations headquartered in Western Europe or North America, the two most developed private equity markets. However,there is also a significant number of developed private equity markets. However,there is also a significant number of responses from more emerging markets, led by Asia, a market where a number of funds responses from more emerging markets, led by Asia, a market where a number of funds of funds have been launched over the last five to six years (see Figure 1). of funds have been launched over the last five to six years (see Figure 1).

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Figure 1: Location of firms’ headquarters Figure 1: Location of firms’ headquarters Middle East Middle East Australia 2.9% Australia 2.9% 5.7% 5.7%

Asia Asia 14.3% 14.3%

Western Europe Western Europe 51.4% 51.4%

North America North America 25.7% 25.7%

Most of the survey respondents are from well-established managers –nearly two-thirds Most of the survey respondents are from well-established managers –nearly two-thirds have been active in the market for ten years or more. There are no responses from new have been active in the market for ten years or more. There are no responses from new managers (that is, those that have only been active for two years or less), but in the managers (that is, those that have only been active for two years or less), but in the difficult fundraising environment that has existed since the great financial crisis, relatively difficult fundraising environment that has existed since the great financial crisis, relatively few new groups have been established (see Figure 2). few new groups have been established (see Figure 2).

Figure 3 highlights the different types of strategies offered by respondent firms. It Figure 3 highlights the different types of strategies offered by respondent firms. It is obvious from a quick review of the percentages in the strategies that a number of is obvious from a quick review of the percentages in the strategies that a number of firms provide funds of funds with different strategies while many of these firms provide firms provide funds of funds with different strategies while many of these firms provide

Figure 2: number of years active in private equity investing Figure 2: number of years active in private equity investing

Between 2 years and 5 years Between 2 years and 5 years 11.1% 11.1% More than 15 years More than 15 years 27.8% 27.8%

Between Between 5 years and 10 years 5 years and 10 years 25.0% 25.0%

Between Between 10 years and 15 years 10 years and 15 years 36.1% 36.1% *Less than 2 years 0% *Less than 2 years 0%

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Fund of Funds.indb 106 09/12/2011 17:04:49 Fund of Funds.indb 106 09/12/2011 17:04:49 A comprehensive directory of fund of funds practitioners and advisers A comprehensive directory of fund of funds practitioners and advisers

123 Venture 123 Venture

Assets under Assets under 41 boulevard des 123 Venture provides advisory, consulting and fund of funds 41 boulevard des 123 Venture provides advisory, consulting and fund of funds management: management: Capucines services mainly to private clients and family offices, but also to Capucines services mainly to private clients and family offices, but also to €375 million €375 million Paris institutional clients. It manages several funds of funds including: Paris institutional clients. It manages several funds of funds including: F-75002 123 Explorer (a diversified European fund of funds established in F-75002 123 Explorer (a diversified European fund of funds established in France Year first invested in 2001), 123 Expansion funds, 123 Multinova funds and ‘white label’ France Year first invested in 2001), 123 Expansion funds, 123 Multinova funds and ‘white label’ private equity: 2001 funds for Private Banks. private equity: 2001 funds for Private Banks. Tel: 33 1 4926 9800 Tel: 33 1 4926 9800 www.123venture.com/ Approx number of www.123venture.com/ Approx number of en funds committed to: 15 en funds committed to: 15 [email protected] [email protected] Contacts Regional allocation Fund type allocation Contacts Regional allocation Fund type allocation Mr. Eric Philippon North America  Gereralist  Mr. Eric Philippon North America  Gereralist  Partner Western Europe  Buyout/later-stage  Partner Western Europe  Buyout/later-stage  philippon@123venture. Central & Eastern Europe Mid-market philippon@123venture. Central & Eastern Europe Mid-market com com Middle East / Africa Venture  Middle East / Africa Venture  Asia Pacific  Mezzanine/subordinated debt Asia Pacific  Mezzanine/subordinated debt Mr. Olivier Goy Mr. Olivier Goy Founder and Latin America Turnaround/distressed  Founder and Latin America Turnaround/distressed  Chief Executive Officer Secondaries Chief Executive Officer Secondaries [email protected] Infrastructure [email protected] Infrastructure Other  Other  investment opportunities investment opportunities Secondary directs First-time funds Secondary directs First-time funds Directs  Shariah-compliant funds Directs  Shariah-compliant funds Co-invests  Sec’dry sale of commitments Co-invests  Sec’dry sale of commitments

57 Stars 57 Stars

Assets under Assets under 616 H Street N.W. 57 Stars is an asset management firm focusing on private equity 616 H Street N.W. 57 Stars is an asset management firm focusing on private equity management: management: Suite 450 investments in emerging markets. The firm manages a couple of Suite 450 investments in emerging markets. The firm manages a couple of $1 billion $1 billion Washington DC captive fund of funds vehicles for the New York State Common Washington DC captive fund of funds vehicles for the New York State Common 20001 Retirement Fund (NYSCRF) and the California Public Employees’ 20001 Retirement Fund (NYSCRF) and the California Public Employees’ United States of America Year first invested in Retirement System (CalPERS). In September 2011, the firm’s United States of America Year first invested in Retirement System (CalPERS). In September 2011, the firm’s private equity: 2007 new Latin American focused fund of funds, the 57 Stars Latin private equity: 2007 new Latin American focused fund of funds, the 57 Stars Latin Tel: 1 202 824 1600 American Opportunity Fund, announced its first investment. The Tel: 1 202 824 1600 American Opportunity Fund, announced its first investment. The www.57stars.net Approx number of fund committed capital to Pátria Investimento’s P2 Brasil Private www.57stars.net Approx number of fund committed capital to Pátria Investimento’s P2 Brasil Private [email protected] funds committed to: Infrastructure Fund II, which invests in Brazilian infrastructure projects. [email protected] funds committed to: Infrastructure Fund II, which invests in Brazilian infrastructure projects.

Contacts Regional allocation Fund type allocation Contacts Regional allocation Fund type allocation Mr. Steve Cowan North America Gereralist Mr. Steve Cowan North America Gereralist Managing Director Western Europe Buyout/later-stage  Managing Director Western Europe Buyout/later-stage  Washington DC Central & Eastern Europe  Mid-market Washington DC Central & Eastern Europe  Mid-market Tel: 1202 629 5733 Tel: 1202 629 5733 Middle East / Africa  Venture  Middle East / Africa  Venture  [email protected] [email protected] Asia Pacific  Mezzanine/subordinated debt  Asia Pacific  Mezzanine/subordinated debt  Mr. Bernard McGuire, Jr. Latin America  Turnaround/distressed  Mr. Bernard McGuire, Jr. Latin America  Turnaround/distressed  Managing Director Secondaries Managing Director Secondaries Washington DC Infrastructure Washington DC Infrastructure [email protected] Other  [email protected] Other  investment opportunities investment opportunities Secondary directs First-time funds Secondary directs First-time funds Directs  Shariah-compliant funds Directs  Shariah-compliant funds Co-invests  Sec’dry sale of commitments Co-invests  Sec’dry sale of commitments

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Fund of Funds.indb 121 09/12/2011 17:04:53 Fund of Funds.indb 121 09/12/2011 17:04:53 section iV: The directory section iV: The directory

747 Capital 747 Capital

747 Third Avenue Assets under 747 Capital is a New York-based fund of funds manager focused 747 Third Avenue Assets under 747 Capital is a New York-based fund of funds manager focused 22nd Floor management: on the small-cap end of the US private equity market. The firm was 22nd Floor management: on the small-cap end of the US private equity market. The firm was New York $130 million established in 2001. 747 Capital provides family offices and other New York $130 million established in 2001. 747 Capital provides family offices and other NY institutional investors with diversified access to top tier US small- NY institutional investors with diversified access to top tier US small- 10017 Year first invested in cap private equity funds, secondaries, and direct co-investments 10017 Year first invested in cap private equity funds, secondaries, and direct co-investments United States of America private equity: 2000 through the firm’s funds of funds, separate accounts, and LP- United States of America private equity: 2000 through the firm’s funds of funds, separate accounts, and LP- specific mandates. specific mandates. Tel: 1 212 747 7474 Tel: 1 212 747 7474 Approx number of Approx number of www.747capital.com www.747capital.com funds committed to: 35 funds committed to: 35 [email protected] [email protected] Contacts Regional allocation Fund type allocation Contacts Regional allocation Fund type allocation Mr. Gijs F. J. van Thiel North America  Gereralist  Mr. Gijs F. J. van Thiel North America  Gereralist  Managing Partner Western Europe Buyout/later-stage  Managing Partner Western Europe Buyout/later-stage  New York Central & Eastern Europe Mid-market New York Central & Eastern Europe Mid-market [email protected] [email protected] Middle East / Africa Venture Middle East / Africa Venture Asia Pacific Mezzanine/subordinated debt Asia Pacific Mezzanine/subordinated debt Mr. Marc J. M. der Mr. Marc J. M. der Kinderen Latin America Turnaround/distressed  Kinderen Latin America Turnaround/distressed  Managing Partner Secondaries  Managing Partner Secondaries  New York Infrastructure New York Infrastructure [email protected] Other  [email protected] Other  investment opportunities investment opportunities Secondary directs  First-time funds  Secondary directs  First-time funds  Directs  Shariah-compliant funds Directs  Shariah-compliant funds Co-invests  Sec’dry sale of commitments Co-invests  Sec’dry sale of commitments

Abbott Capital Management Abbott Capital Management

1211 Avenue of the Assets under AbbottCapital Management (ACM) is an independent investment 1211 Avenue of the Assets under AbbottCapital Management (ACM) is an independent investment Americas management: adviser focused exclusively on private equity.Itoperates mainly as a Americas management: adviser focused exclusively on private equity.Itoperates mainly as a Suite 4300 $8 billion fund of funds manager,predominantly investing in US and Western Suite 4300 $8 billion fund of funds manager,predominantly investing in US and Western New York European vehicles. In addition to its fund of funds products, Abbott New York European vehicles. In addition to its fund of funds products, Abbott NY Year first invested in Capital Management offers separateaccount management services NY Year first invested in Capital Management offers separateaccount management services 10036-8701 private equity: in select cases. AbbottCapital is focused exclusively on investing in 10036-8701 private equity: in select cases. AbbottCapital is focused exclusively on investing in United States of America private equity funds including venturecapital, buyouts and special United States of America private equity funds including venturecapital, buyouts and special situations funds, and making investments in professionally managed situations funds, and making investments in professionally managed Tel: 1 212 757 2700 Approx number of partnerships. Abbott manages 6 funds of funds vehicles. Tel: 1 212 757 2700 Approx number of partnerships. Abbott manages 6 funds of funds vehicles. www.abbottcapital.com funds committed to: www.abbottcapital.com funds committed to: [email protected] [email protected] Contacts Regional allocation Fund type allocation Contacts Regional allocation Fund type allocation Mr. Charles H. van Horne North America  Gereralist Mr. Charles H. van Horne North America  Gereralist Managing Director Western Europe  Buyout/later-stage  Managing Director Western Europe  Buyout/later-stage  Marketing and Client Central & Eastern Europe  Mid-market Marketing and Client Central & Eastern Europe  Mid-market Services Services Middle East / Africa Venture Middle East / Africa Venture New York   New York   cvanhorne@ Asia Pacific  Mezzanine/subordinated debt cvanhorne@ Asia Pacific  Mezzanine/subordinated debt abbottcapital.com Latin America  Turnaround/distressed abbottcapital.com Latin America  Turnaround/distressed Secondaries Secondaries Infrastructure Infrastructure Other  Other  investment opportunities investment opportunities Secondary directs First-time funds Secondary directs First-time funds Directs Shariah-compliant funds Directs Shariah-compliant funds Co-invests Sec’dry sale of commitments Co-invests Sec’dry sale of commitments

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