Publicly Traded Private Equity Vehicles: a Different Kind of Model by Adam Goldman, Red Rocks Capital LLC

Publicly traded private equity vehicles: A different kind of model By Adam Goldman, Red Rocks Capital LLC Accessing private equity: an overview Over the past several decades, investors in private equity have typically accessed the asset class through a limited partnership interest. In doing this, investors have faced a number of significant challenges: ͻ Access to the asset class as a whole is limited. Not everyone can invest in private equity due to the qualified investor rules. ͻ Access to the best private equity managers within the asset class is difficult, and in some cases practically impossible. Unless you are a large institutional investor with an ongoing commitment to the asset class, the best private equity managers are quite selective in who they allow to invest with them. ͻ Large capital commitments to the asset class are required. High investment minimums make it difficult for all but the wealthiest individuals or family offices to play alongside large institutional investors. ͻ Development of a long-term relationship with the best private equity managers. This takes time and along with it comes the implicit expectation that the investor will invest in multiple fund offerings from the manager over time. ͻ Unpredictable drawdown schedules are normal. While the investment cycle of a traditional limited partnership may have an invest-up period of 3-5 years, when and how much the private equity fund calls at any given time is less than predictable. ͻ The J-curve effect can skew the value of an investor’s long term objective to the asset class in the early part of a private equity fund commitment. ͻ Manager selection takes time and effort, and is costly. Significant research and due diligence is required to choose the right private equity fund(s) in which to invest now and in the future. ͻ Diversification within the asset class is not a simple exercise. Without intensive manager research as to style, strategy, geography, industry, stage of investment and vintage year diversification, an investor is making a bet instead of effectively managing their risk. ͻ Transparency continues to be a bigger and bigger expectation. Most limited partnerships are blind pools of capital with limited transparency. ͻ Valuation methodologies are non-standard, making it difficult to compare one private equity manager/fund to another. Issues revolve around timing (quarterly, semi-annual, yearly), stated metrics (if any) and the consistency of their application (from quarter to quarter and year to year) in reports. ͻ Private equity limited partnership interests are very illiquid. 25188 Genesee Trail Road, Suite 250, Golden, CO 80401 Web: www.redrockscapital.com Phone: 303-679-8252 Fax: 303-679-8251 While a limited partnership interest may have been the means by which investors have accessed private equity in the past, today there are over 200 private equity vehicles that trade on recognised financial exchanges throughout the world giving investors access to the asset class on a fully liquid basis, mitigating a number of the above mentioned challenges. This form of private equity is commonly referred to as listed private equity. What is listed private equity? Listed private equity companies are publicly traded vehicles that invest capital in privately held businesses. The model and structure can be similar to those of traditional limited partnership-based private equity funds, except that listed private equity companies are publicly traded in the open market. Hence, listed private equity is a different approach to accessing the same asset class: ͻ Listed private equity is an ownership interest in a set of investments that are traded in the open market on recognised financial exchanges every day. These ownership interests are no different than what a limited partner (LP) in a traditional private equity partnership might hold; investments in a set of private businesses with the objective of maximising total return at the end of an investment period. ͻ Listed private equity vehicles are structured as common equity (or shares), units in investment trusts or units in publicly traded limited partnership interests. ͻ Listed private equity vehicles typically take the form of direct private equity investments, fund of fund private equity investments (both primary and secondary fund interests, along with their future funding commitments) or an interest in the management company that oversees various investment funds/business units. Listed private equity vehicles can also be some combination of the above, or a hybrid. ͻ Listed private equity is a permanent pool of capital. Once raised, the capital of a listed private equity vehicle is recycled from one deal to the next. This represents a significant difference in the business model for a private equity manager. In most traditional limited partnership-based funds the LPs’ capital is called and invested once in a deal or business, although under special circumstances, especially in the distressed sector, a certain degree of capital recycling is allowed for a limited period of time. When that business achieves liquidity, the LPs receive their capital back from that deal, the investment basis along with any gains or losses. In a listed private equity vehicle, when an investment achieves liquidity, the listed private equity vehicle receives the proceeds from the liquidity event (basis plus any gains or losses). The manager of the listed private equity vehicle then decides what to do with that capital. They can reinvest it in another deal, retain it as cash for future deal or send it back to the shareholders of the listed private equity vehicle in the form of a dividend. The decision is solely the fund manager’s. More often than not, the manager of the listed private equity vehicle retains the majority of the capital to reinvest in the next set of deals. ͻ Investors can purchase shares in a listed private equity vehicle at any point in time, thereby giving them the flexibility to invest when they see fit, not necessarily when the private equity firm is raising a fund or calling down a commitment. 25188 Genesee Trail Road, Suite 250, Golden, CO 80401 Web: www.redrockscapital.com Phone: 303-679-8252 Fax: 303-679-8251 ͻ A listed private equity company may also offer traditional limited partnership-based funds that they manage alongside the listed private equity vehicle. In this instance, the private equity company is investing both the listed private equity vehicle’s capital along with the limited partnership-based fund’s capital in the same deals or businesses, at the same time, on the same terms, thereby leveraging the deal flow, due diligence and ongoing work of the private equity managers for the benefit of both vehicles. ͻ Listed private equity vehicles can be structured to focus on senior loans, mezzanine debt or secured/unsecured debt investments. In some cases, a private equity manager may have a listed private equity vehicle that focuses on the debt side of the capital structure along with a traditional limited partnership-based fund(s) that invests in the equity side of a deal. The listed private equity vehicle may invest in the senior loan, mezzanine debt or secured/unsecured debt in a deal while the traditional limited partnership-based fund(s) invests in the equity side of the same deal. By purchasing a share or unit in a listed private equity vehicle, an investor gains direct exposure to the asset class, instantaneously, with a fairly well-defined portfolio of existing private investments. The vehicle comes with daily liquidity (it trades on a recognised financial exchange, not through the secondary market) and strikes a daily valuation (the price at which a buyer and seller are willing to consummate a transaction for that security on that given day). The investor also gains portfolio-level transparency, thereby seeing what businesses the private equity manager has invested in, how those businesses are doing, what the cost basis of those investments are, what valuation methodology is being used, how those investments are valued from quarter to quarter (write-ups and write-downs), and when a liquidity event occurs, how the investment performed. Because listed private equity vehicles typically have a fairly well-defined portfolio of existing private investments that are diverse and reasonably well seasoned, the investor is able to minimise the J-curve effect. Also, because listed private equity vehicles are continuously making investments, with no pre-set investment or liquidation period, vintage year risk tends to be dampened (Figure 1). Figure 1: Comparison of private equity vehicles 25188 Genesee Trail Road, Suite 250, Golden, CO 80401 Web: www.redrockscapital.com Phone: 303-679-8252 Fax: 303-679-8251 Not all listed private equity vehicles are structured the same While there are many variations on the listed private equity model, the vehicles can be broken down into four general categories: 1. Direct listed private equity investment companies 2. Listed private equity fund of funds 3. Listed private equity management companies 4. Hybrids Direct listed private equity investment companies Direct listed private equity investment companies, such as Ratos AB (STO:RATO B), make direct investments in private businesses solely from their balance sheet, or side by side with the private equity limited partnership(s) that the private equity manager also manages, such as HgCapital Trust plc (LON:HGT). An investor in a direct listed private equity investment company knows exactly what they own, right down to each of the businesses that the listed private equity vehicle holds along with how they’re being valued. These are the most transparent listed private equity vehicles. They are fairly straightforward to analyse and hence to understand. Listed private equity fund of funds This contrasts with listed private equity fund of funds vehicles that commit capital to other non- listed private equity funds, both on a primary and secondary fund basis.

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