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Contents 2008 Preqin Global Private Equity Review

Section One: The 2008 Preqin Global Private 5 Section Three: Fundraising Review 27 Equity Review “Has the Credit Crunch Affected Private Equity 28 Note from the Editor 6 Fundraising?” - Tim Friedman, Preqin “May You Live In Interesting Times” - Mark 6 “Fundraising Conditions from a Fund Manager’s 30 O’Hare, Preqin Perspective” - Natasha Hartrup, Preqin “Keynote Address” - Mounir Guen, MVision 8 How has the Private Equity industry evolved in 34 terms of Fundraising? Section Two: Overview of the Private Equity 11 Overview of Fundraising Market in 2007 36 Industry Overview of Current Private Equity Fundraising 39 Assets, Employment and Management Fees 12 Market Growth Prospects for Private Equity 16 Fundraising Review by Region: 42 “Communicating With a Wider Audience” - 18 • US 42 Douglas Lowenstein, Private Equity Council • Europe 43 “It was the Best of Times, It was the Worst of 19 • Asia and Rest of World 44 Times” - Marc St. John, CVC Capital Partners Fundraising Review by Fund Type: 45 “Opportunities in the Lower Mid-Market” - Vineet 20 • Buyout 45 Pruthi, Lincolnshire Management • Venture 47 “Challenges and Opportunities Ahead” - Simon 21 • Real Estate 49 Walker, BVCA • Fund of Funds 52 “Real Estate Methods of Exposure” - Tomas 22 Otterud & Jon Lekander, Aberdeen Property • Mezzanine Funds 54 Investors • Distressed Debt Funds 55 “Energy Funds: A Growing Market” - John E. 23 • Infrastructure 56 Buehler Jr, Energy Investors Funds • Natural Resources 57 “Fund of Funds: An Evolving Asset Class” - 24 • Secondaries 58 Charles Soulignac, Fondinvest Capital • Other Fund Types 59 “Private Equity In South Africa – Emerging Market 26 or Emerged?” - Thierry Dalais, Metier

Section 4: General Partners 60 Section 7: Investors 118 Largest Active GPs by Fund Type 61 “What makes a good LP?” - Mr. X, Head of 119 Largest Active GPs by Region 67 Fundraising at Leading Buyout Firm Short Proﬁ les for 25 Prominent General Partners 70 “LPs Treading Carefully” - Barometer Results, 121 Coller Capital Key Stats and Facts: 77 Interview - John Hattersley, South Yorkshire 123 • Buyout 77 Pension Authority • Venture 78 Overview of Limited Partner Universe By Type 124 • Real Estate 79 and Region • Fund of Funds 80 Make-Up of Investors in Recently Closed Funds 130 • Mezzanine Funds 81 Preqin LP Survey Results 135 • Distressed Debt Funds 82 League Tables for Biggest Investors by Type and 139 • Infrastructure 83 Region • Natural Resources 84 Top 25 Investors to Watch in 2008 144 • Secondaries 85 Real Estate Investors 150

Section 5: Deals 86 Section 8: Secondaries 153 Overview of Recent Activity, Key Stats, Trends 87 “Secondaries: An Evolving Market” - Mr. X, 154 and Notable Deals: Watson Wyatt • Global Buyout 87 Attitudes towards the Secondary Market, Preqin 155 • US Venture 92 Secondaries Survey Results • European Venture 96 A Sample of the Largest Secondary Transactions 158 in 2007

Section 6: Performance 99 Section 9: LP Advisors 161 “Bringing Transparency to the Performance of 100 Private Equity” - Etienne Paresys, Preqin Overview of Advisor Industry 162 Examination of Private Equity Performance, 101 Prominent LP Advisors: Tables and Stats 167 Overall and by Type Risk vs. Return in Private Equity 106 Section 10: Placement Agents 169 Benchmark Performance Figures, Overall and by 108 Overview of Placement Agent Use 170 Type Proﬁ le of the Placement Agent Industry 174 “Private Equity in a Portfolio Context” - Michel 112 Preqin Placement Agent Survey Results 178 Degosciu, LPX Switzerland League Tables for Placement Agents 181 Private Equity Horizon Performance vs. Public 114 Indexes Section 11: Law Firms 183 Private Equity Returns for Pension Funds 115 League Tables for Law Firms 184 Cash Flows in Private Equity 116

Section 12: Orderform 186 Order Form For Preqin Products 187

As its name implies, the private equity industry is often a diffi cult asset class to research and fi nd information on. Even the most experienced of professionals working within the industry can fi nd gaining a decent perspective on developments affecting the asset class to be a challenging task.

At Private Equity Intelligence we have always focused on unlocking some of the doors to the world of private equity. Our teams of dedicated analysts are continually working on updating and adding new information on all aspects of private equity: performance, deals, investors, fund terms, fundraising and more. Our online databases and our printed publications are the leading sources of information on private equity in the world, and are relied upon by thousands of professionals every day.

The 2008 Preqin Private Equity Review is the ﬁ rst publication of its type: a complete, accessible overview of the private equity industry featuring our industry-leading data and packed full of insightful commentary, both from our experienced team of in-house analysts, and also from some of the most inﬂ uential names in private equity today.

This year’s Review is intended for use as both an insightful overview on recent events affecting the industry, and also as a reference book which can be used for a multitude of different purposes throughout the year. It serves as an excellent introduction and overview of the industry for those wishing to learn more about this growing asset class, as well as providing the detailed stats and identifying the key trends that prove invaluable to private equity professionals.

We hope that you enjoy your copy of the 2008 Preqin Private Equity Review, and as always we welcome any feedback, comments and suggestions that you may have.

Tim Friedman, Editor

May You Live in Interesting Times Mark O’Hare, Preqin

So goes the ancient Chinese curse. Well, record of creating value over the long expectations will now start to come into the past twelve months have been nothing term, and through different business line with reality, opening the door for if not interesting for fi nancial markets, environments, good and bad. Take a more deals. especially private equity. Penning these lines look at the savviest and most successful on January 22nd 2008, three ‘interesting’ institutional investors worldwide, and • Finally, private equity isn’t so much an features predominate: you’ll see a roll call of major LPs in asset class as a loose agglomeration private equity funds. Preqin surveyed of 77,000 entrepreneurs worldwide (our • Adverse Publicity: private equity has LP opinions again in December 2007, estimate of total employment in the endured a torrid time in the press on both and the answer came through loud and industry.) Its ability to innovate and fi nd sides of the Atlantic over the past year. clear – LPs may have become slightly new solutions to business opportunities is Inspired primarily by fear and envy, the more cautious after the credit crunch quite remarkable. asset class has come under closer public (who wouldn’t?), but their basic objective scrutiny than ever before, with calls for of increasing (52%) or maintaining (48%) The most profi table fund vintages to invest greater regulation or at the very least a their allocations to private equity remains in have often been those where the in-going tougher taxation environment. fi rmly in place. investments have been made in challenging times. 2008 may well be one of these. But • Credit Crunch: after two years of • Fuelled by its success in creating value, even that misses the key point: the most increasingly favourable lending private equity has grown tremendously successful investors in private equity have conditions, to the point where there was over the past few years, passing a been those with a consistent long-term widespread recognition among private landmark $2.0 trillion in assets under strategy, investing over a long period. At equity circles that lending terms were management in mid-2007, and raising heart nothing has changed: private equity unrealistically benign and unsustainable, just over $500 billion of new funds will continue to grow, and will continue to the credit crunch fi nally arrived in mid- in the process. Impressive as this is, deliver net returns well in excess of those 2007. Deal volumes shrank in the second private equity is still a rounding error, available in the public markets. half, and while the mid-market is open for compared with global stock markets with business again, things remain frozen at capitalization of $60 trillion private equity What about the adverse publicity, and the top of the market. amounts to around 3%. The potential its impact on the industry’s ability to do to grow further is enormous: we’re business? Two things have changed. First • Stock Market Declines: already dubbed predicting a $5 trillion industry over the is the nature of the private equity story: ‘Black Monday’, January 21st saw next fi ve to seven years. ten years ago it was all about venture, declines of between 4% and 6% for most easy to communicate – “these businesses indices worldwide, the worst declines • Lending conditions in early 2007 were didn’t exist before, they do now, thanks to since 9-11. Only the US, spared by the unsustainably benign, make no mistake. venture investment.” Venture is still vital MLK Day Holiday, escaped. Taken over But everyone in private equity knew today, but more of the focus is on buyouts. January 2008 to date, the S&P 500, that – and most GPs were telling their Equally valuable to the economy at large, Nikkei 225 and FTSE Eurofi rst are all off LPs not to expect things to roll on but a more subtle argument to make in between 10% and 15%. unchanged. Two factors guarantee that terms of the benefi ts. Second is the radar the credit markets will come back (not to screen: with $2 trillion AUM and household So where does this leave private equity? April 2007 conditions, but to something names increasingly under private equity What are the medium to longer term more like normality) – fi rst, the huge ownership, the industry is now well and prospects for the asset class, and what volume of yield-hungry money looking for truly in the public eye. The need for better lessons can be drawn by LPs and GPs investment opportunities, and second, communication with a wide constituency is alike? private equity’s historically low default accepted, the key test for the industry will rates. be its ability to fi nesse this: transparency In rude health. Many commentators have where it is needed and benefi cial, whilst been ready to ‘call the top’ of the private • As we have been travelling around maintaining the ability to manage and add equity market for at least a couple of years over the past few months, meeting with value to portfolio companies. now (almost reminds you of the old joke investors and talking at conferences, a about economists – they have successfully consistent theme has emerged: pricing The Preqin 2008 Private Equity Review is predicted fi ve out of the last two recessions), expectations. Deals are there to be done, our attempt to document the global industry, but we beg to differ: and debt is available (for smaller and its performance in adding value for investors medium-sized deals anyway), but sellers’ and others, and the prospects for future • Whichever way you look at it, private price expectations have been a barrier. growth. We hope you will fi nd it of interest. equity is a great model for owning The silver lining of the current stock businesses, with a tremendous track market correction is that these pricing

Keynote Address Mounir Guen, MVision

The private equity industry has been growing rapidly over recent years, with fundraising growing consistently and new investors continuing to make their fi rst foray into an asset class that has been providing excellent returns. However, recent events in the credit markets, and negative stories in the press have cast a shadow of doubt over the industry. Is the future still bright for the private equity industry? What changes can we expect to see in the market in 2008? For answers we turn to Mounir Guen, Founder and CEO of MVision Private Equity Advisers, a leading private equity placement agent fi rm, with 40 professionals operating out of offi ces in New York, London and Asia-Pacifi c.

Preqin: How does MVision see 2008 demonstrate a good track record. With Preqin: So fundraising is not going to and beyond for fundraising? so many successful managers out there, suffer as a result of the credit crunch? the GPs that have previously failed to MG: In general the fundraising market perform as well as their peers are the MG: The thing is that the private equity has been positive over the course ones that will struggle to raise capital in industry is still an emerging, growing of 2007, and going into 2008 we are 2008. asset class. Sometimes we tend to think going to be seeing a continuation in that it is established because some of the the increase of interest in mid-market Preqin: Will the credit crunch impact players have now been around for twenty focused funds, which have been growing on private equity fundraising? years or so, but the fact of the matter is in favour amongst investors. We are that private equity still accounts for a tiny seeing that funds raising up to €5 billion MG: Well the credit crunch is an proportion of the global economy, and in Europe and $1-2 billion in the US have interesting topic, and the impact that that proportion is destined to increase been raising with no problems. Emerging it might have on fundraising relates over time. The group of investors that are markets funds are also doing well, and to the way in which it might affect the participating in the asset class has grown we expect to see this continuing into performance of GPs. We are not going enormously, and is continuing to do so, 2008. Investors are particularly keen to see the performance of mid-market and the pool of money available to the on fi nding local and regional heroes – players affected by the credit crunch, but industry is getting larger and larger. We country specifi c funds are going to be it could make a difference to the deals are always seeing new big US pension popular in 2008 also. conducted by the mega-buyout houses. plans entering the market for the fi rst With the ease of fi nancing now no longer time, for example, and sovereign wealth Preqin: What about Mega Funds? Are there, the difference between those funds, and foreign investors. On top investors still as keen as they have managers focusing on the mid-market of this, existing investors are generally been recently? and those on the mega deals is going to happy with their investments, and are become more pronounced. at the least looking to maintain their MG: You have to look at mega funds on current allocations to private equity, with a relative scale. Although fund managers The most obvious impact is going to many investors looking to increase their may want to raise, say a $30 billion fund, be on public to private deals, with the exposure, and virtually no-one halting and are only able to raise $25 billion in managers engaging in these types of their private equity programs. With all the current environment, this should still deals fi nding conditions considerably this money fl owing into private equity, be viewed as doing well, even though harder after the credit crunch. The other fundraising is bound to continue at a they have failed to hit their target on an impact is going to be on profi tability, with strong rate for the foreseeable future. absolute scale. the profi t margins being hit as sellers are unable to get the same kind of multiples Preqin: How is the role of the Preqin: Are there any areas within the on their investments that they have placement agent evolving as new LPs industry that you feel might struggle previously enjoyed. Again though, you enter the market and the funds on in terms of fundraising in 2008? have to look at this on a relative scale – if offer proliferate? a GP can now only sell at say a multiple MG: I think that when you look at the of 3.8x instead of 4.5x then they have MG: With the industry growing at such returns that funds have been giving to still performed excellently. As a result a rapid rate, we are going to see more their investors, the managers who are the credit crunch might have some small and more business for placement going to struggle in 2008 are going to effect on investor attitudes, but not much. agents in the coming year. With so many be those managers that are unable to new investors out there, and with so

Overview of Fundraising Market in 2007

With data taken from our Funds in Market database, the most comprehensive source of fundraising information available today

Since 2004 the private equity industry Fundraising by Type 126 funds raising an aggregate $79bn has experienced a boom in fundraising over the course of the year. Venture unparalleled by any other period during Buyout funds again accounted for the funds were the most prevalent in terms the lifetime of the asset class. After largest slice of capital in the private of the number of funds closed, with 218 reaching a low ebb in 2003, private equity industry, with 165 funds achieving vehicles raising an aggregate $56bn, equity fundraising has grown every year, a fi nal close over the course of the $4bn up on last year’s fi gures. with 2006 fi gures marking the fi rst time year raising an aggregate $209bn. that the industry exceeded $500bn raised This represents a slight drop in terms Fund of funds remain a popular fund type in one year. Our latest fi gures indicate of aggregate capital from last year’s with 90 vehicles achieving fi nal closes that 2007 is going to be another record- fi gures, when $233bn was raised by raising an aggregate $36bn. This does breaking year for the industry, with an 200 vehicles. The credit crunch certainly however represent a slight decrease aggregate $502bn being raised by a seems to have affected fundraising for from 2006, when an aggregate $43bn total of 721 funds achieving fi nal closes buyout funds, with a signifi cant 62% of was raised. over the course of the year. Although this all capital being raised in 2007 coming falls just short of 2006’s total of $516bn, in the fi rst half of the year, and only 38% The number of distressed debt funds has we are confi dent that as additional in the latter half. More details on buyout continued to grow in 2007, and a total of information continues to trickle in, the fundraising and fundraising for each fund $35bn was raised by 19 funds achieving total for 2007 will rise enough to ensure individually can be found later in this a fi nal close over the course of the year, another record year. section. almost the times as much capital as was raised in 2006. Real estate funds raised the second largest amount of capital overall, with

Fig. 3.7 & 3.8:

2007 Fundraising by Fund Type 2007 Fundraising by Fund Regional Focus

Fig. 4.10:

Largest General Partners: Europe (All) Total Fund Raised last Estimated Available Capital GP Rank Firm Name 10 years ($bn) ($bn) (as of Jan 08) Headquarters 1 Apax Partners 30.9 5.6 UK 2 Permira 29.0 11.3 UK 3 CVC Capital Partners 25.1 7.5 UK 4 Cinven 19.6 5.7 UK 5 BC Partners 17.4 6.0 UK 6 3i 16.9 5.8 UK 7 EQT 16.6 6.0 Sweden 8 AXA Private Equity 15.7 8.9 France 9 Barclays Private Equity 11.8 3.4 UK 10 Bridgepoint 11.6 3.6 UK 13 Doughty Hanson & Co 11.1 3.8 UK 11 Terra Firma Capital Partners 10.8 7.4 UK 12 Candover Partners 10.8 1.8 UK 13 Charterhouse Capital Partners 10.6 2.6 UK 14 Pantheon Ventures 10.3 3.5 UK

Fig. 4.11:

Largest General Partners: UK Total Fund Raised last Estimated Available Capital Rank Firm Name 10 years ($bn) ($bn) (as of Jan 08) 1 Apax Partners 30.9 5.6 2 Permira 29.0 11.3 3 CVC Capital Partners 25.1 7.5 4 Cinven 19.6 5.7 5 BC Partners 17.4 6.0 6 3i 16.9 5.8 7 Barclays Private Equity 11.8 3.4 8 Bridgepoint 11.6 3.6 13 Doughty Hanson & Co 11.1 3.8 9 Terra Firma Capital Partners 10.8 7.4 10 Candover Partners 10.8 1.8 11 Charterhouse Capital Partners 10.6 2.6 12 Pantheon Ventures 10.3 3.5 14 Intermediate Capital Group 8.3 2.4 15 Coller Capital 8.3 3.8

Fig. 5.3 & 5.4:

Number and Value of Deals by Quarter Number and Value of Deals by Value Bands Number and Value of Deals Number and Value

Source: Dealogic Source: Dealogic

2007. The buyout operations valued buyout industry slowed signifi cantly as but there were actually no such deals between $500 million to more than $10 a result of the diffi culties in the lending in Q4 2007, possible because no large billion are represent around 80% of market from the third quarter of 2007. buyout operation could negotiate the the value of the deals and 13% of the The most affected deal sizes were the necessary level of debt leverage. number of deals. A total of 80% of the large and mega-large transactions. number of the total deals were through Buyouts valued between $1 and $10 Before the credit crunch, it appears that buyouts valued at less than $500 million, billion saw their number of deals shrink most buyout areas were growing at fast representing 12% of the aggregate value. from 53 in Q2 2007 to around 25 in the pace. The only exception is for buyouts third and last quarter of 2007. smaller than $100 million, which appears Fig 5.3 shows the buyout activity by to be a declining area being slowly value bands for each quarter of 2006 There are typically only a few deals replaced by larger deals. In 2008, buyout and 2007. This clearly illustrates that the valued at over $10 billion in each quarter activity will be somewhat dependent upon conditions in the lending market, but many managers remain confi dent Fig. 5.5: about being able to secure attractive fi nancing and achieve good returns for their investors.

Quarterly Number of Deals by Value Bands In 2007, the telecommunications industry was the biggest sector for buyout deals, with a total of 91 deals occurring with an aggregate value of $124 billion, representing 17% of the overall deal value. Other popular industries include, ﬁ nance with 131 deals valued at $70 billion, utility and energy with aggregate deal value reaching $58 billion, and retail with $55 billion.

Aside from telecommunications, these industries are mature and traditional

Number of Deals sectors, and still provide the main focus for the buyout industry. Healthcare, a sector possibly more associated with the venture industry, lies in ﬁ fth place with deal value of $45 billion. Computer and electronics was ranked as the seventh place sector in term of value, but was the largest in terms of number, with 307 deals.

Private Equity Returns for Pension Funds

Pension plans are amongst the most important investors in private equity worldwide – Preqin’s Investor Intelligence database of LP proﬁ les lists no fewer than 452 public sector pension funds that are important investors in private equity, and a further 463 corporate pension plan investors. Between them over 950 pension plans have over $500 billion committed to private equity, making them amongst the most important providers of capital to the asset class.

The average pension fund has an net performance for pension funds being These results are an impressive allocation of approximately 4.3% of less attractive? demonstration that private equity has its total AUM to private equity, in itself delivered superior returns for these a signiﬁ cant proportion, but even this Preqin reviewed the annual report and pension funds, but the skeptic might understates the importance of private accounts for 108 separate public pension argue that private equity should be equity to these pension funds: the 20 funds spread across the US, Canada, delivering superior returns, given its largest public pension plan investors in UK and Europe to compare the returns “high risk-high return” investment private equity have a total investment from their private equity investments with role in the pension fund’s portfolio. in private equity of approximately $173 those of the rest of their portfolios. These In order to address this we looked billion, equivalent to 8.8% of their pension plans had combined AUM of also at consistency of private equity’s combined AUM. $3.9 trillion, and are amongst the most outperformance. Fig. 6.26 below shows important investors in private equity. the results: private equity out-performed So, how well has private equity Given the long-term and illiquid nature of the pension plan’s other investments in performed for these pension funds? private equity investments, we compared no fewer than 82% of cases, taken across net returns over a range of time horizons the full range of time horizons between Taken on the level of individual private – 1, 2, 5 and 10 years. one and 10 years. In other words, private equity funds, the evidence shows that equity has proved to be a consistent and private equity has performed well relative The results are show in Fig. 6.25 below, ultimately low risk investment for these to listed equities (please see section 6 which demonstrates that these public pension funds. of the Review, page 114), but how does pension plans have enjoyed signiﬁ cantly this result translate to the actual portfolio higher returns from their investments in The conclusions appear to be fairly clear returns experienced by pension funds? private equity than they have across the and robust: private equity has delivered Will the good performance also show rest of their investment portfolios – with a superior returns for public pension through for the private equity portfolio as margin of between 4% and 9% p.a. over funds on a very consistent basis. Small a whole, or could there be reasons (e.g. all time horizons surveyed, between one wonder that the overwhelming trend is for adverse fund selection) for the aggregate and 10 years. increased allocations to the asset class.

Fig. 6.25 & 6.26:

Public Pension Plan Median Returns - PE vs. Total Consistency of Private Equity’s Out-Performance vs. Investment Portfolio Other Investments Median return (%) the overall investment portfolio % of Pension Plans where PE has out-performed

Top 25 Investors to Watch in 2008 Private Equity Intelligence currently has proﬁ les for over 3,800 LPs from around the world in the Investor Intelligence online database, all with different preferences and with different sized private equity programs. Selecting the most interesting 25 investors from such an overwhelming source of investor information is a near-impossible task, and these following short proﬁ les represent just some of the more interesting and active investors that we have in our database. For more information on our investor related products, including in-print publications, online databases, and bespoke fundraising support consultancy projects, please visit our website at www.preqin.com, or contact us at [email protected] US Investors

California Public Employees’ Retirement System Public Pension Fund Location: US Currently Committed to PE: 6.1% Total Assets (bn): USD 250.4 Target Allocation to PE: 10% About: California Public Employees’ Retirement System (CalPERS) is the world’s biggest investor in private equity and in December 2007 it increased its target allocation to private equity to 10%. The US-based public pension fund makes its private equity investments through its Alternative Investment Management Program (AIM) and hopes to reach this target over the next three years. It is particularly keen to gain increased exposure to Asia, and more speciﬁ cally the Indian private equity market. CalPERS also plans to create a pilot program for infrastructure investments by creating an infrastructure portfolio that may be as large as $2.5 billion. $1.5 billion of this new portfolio is likely to be allocated to new fund commitments. These new commitments will be in addition to its existing infrastructure investments in both its AIM and Real Estate programs. The new program is expected to be granted permanent status by the investment committee in June 2008.

Maine Public Employees Retirement System Public Pension Fund Location: US Currently Committed to PE: 0% Total Assets (bn): USD 11.5 About: Maine Public Employees Retirement System (MainePERS) is considering making its maiden investments in alternative assets, including private equity. It is in the process of deciding on whether it should hire a consultant to advise on possible allocations to private equity, hedge funds and infrastructure and is aiming to come to a decision by mid-2008.

Memorial Sloan-Kettering Cancer Center Endowment Plan Location: US Currently Committed to PE: 11.6% Total Assets (bn): USD 3.0 Target Allocation to PE: 25% About: Memorial Sloan-Kettering Cancer Center (MSKCC) believes that the outlook for private equity in 2008 is favourable and because of this it is set to continue investing heavily in the asset class as it aims to reach its 25% target allocation. MSKCC is in the process of hiring a new chief investment ofﬁ cer, and the new appointment will oversee the endowment’s six proposed new fund investments over the next twelve months. Historically, it has predominantly invested in US-based venture and buyout funds, as well as secondaries and fund of funds vehicles.

LPs Treading Carefully Coller Capital

Coller Capital’s latest Barometer survey, conducted after last summer’s credit market crunch, gives some fascinating insights into the market’s evolution. While LPs see the credit crunch as likely to have a dampening effect on private equity returns, their enthusiasm for the asset class appears to be undiminished, and continued long-term growth appears likely. The venture segment in particular looks set to continue its improving trend. But LPs also have a clear message for European governments: not enough is being done to support the growth of the European venture capital industry.

For private equity in the last few years, draw down less money in the next 12 So where does this combination of the only way was Up: larger deals; faster months – but deals will still get done. growth and fi ne-tuning leave us? Over investment; quicker cash back; better the next three years, almost two thirds of returns; higher allocations. Then, over Return expectations are down, too – the investors intend to change the balance the summer, the world changed. Coller proportion of all investors expecting net of their portfolios in favour of buyouts, Capital’s regular Global Private Equity returns of 16%+ from their private equity and one third in favour of venture. Barometer took investors’ temperature portfolios has fallen over the last year Since balanced growth in a private during the autumn as the credit crunch from 47% to 39%. equity portfolio tilts it naturally towards began to bite – and as LPs and GPs buyouts (because average commitments braced themselves for a bumpier ride But the credit crunch has not dented to buyout funds are larger), the fact ahead. investors’ belief in private equity’s that over a third of LPs are planning to fundamental ability to create value. re-balance their portfolios in favour of The buyout boom is over – at least Indeed, LPs’ medium-term plans provide venture capital is interesting. according to institutional investors in a ringing endorsement of the asset class: private equity. The majority of the world’s fully 96% of them plan to increase their Part of the reason for this increased LPs think the credit crunch is more than commitments over the next three years. interest in venture is that investors a blip in private equity’s long bull run; and believe the prospects for venture capital North American LPs – US institutions Faced with a less benign environment, in the developed world are improving: mainly – are even more downbeat: three the question investors are asking is not two thirds of LPs now expect net 3-5 year quarters think the boom is over. whether to put more money into private returns of 16%+ from North American equity, but how. venture. Even for European venture, the Why should US investors be more ‘problem child’ of the private equity world, pessimistic than other LPs? Half the Understanding the answer to this long-term hopes are improving: despite respondents to the latest Barometer question is complicated by the fact that having only modest return expectations (Coller Capital’s twice-yearly LP survey) private equity investors are a disparate from their existing European venture are expecting North America to be hit bunch, not only in terms of size, location investments, half of European LPs hardest by the next downturn in the and type of institution, but in their length believe the sector will be as attractive as private equity cycle – and it is US LPs of experience of the asset class: around North American venture within fi ve years. that are most exposed to their own half of the LP population has been (North American investors, it should be domestic market, of course. investing in private equity for less than noted, are more sceptical.) ten years – the life of a typical private Concerns that the American economy is equity fund. There is more at work here, though, faltering are compounded by the fact that than the renaissance or rehabilitation of the US is the world’s most competitive The largest or most experienced venture capital. The way in which LPs private equity market and therefore institutions may now be fi ne-tuning their are re-balancing their portfolios also most sensitive to changes in market exposure to the asset class – pruning refl ects changed perceptions of the risk- conditions. For non-US institutions, there their GP rosters and, in a few cases, return trade-off: a belief that investing in is the added consideration of investing in reducing their allocations – but most effi ciency improvements, which account a currency that may continue to weaken. private equity investors are still growing for a good part of the return in leveraged their portfolios: over three quarters have buyouts, will be relatively less rewarding On the other hand, the ending of a plans to increase their number of GP than investing in growth – at least in boom does not necessarily imply a bust. relationships. comparison with the last few years. Certainly, deal-making is expected to be harder – half of investors expect GPs to

Fig. 7.18 & 7.19:

Have investors’ private equity fund investments lived What returns do investors expect from their up to expectations? private equity portfolios?

towards private equity, new funds will The evidence would suggest that What returns do investors expect from be approached with caution’, and a managers currently raising new vehicles their private equity portfolios? European bank stated that current should take extra care in emphasising market conditions had led to them how they intend to deal with credit Figure 7.19 shows investors’ being ‘more reluctant and careful’ when conditions when marketing funds to a expectations from their private equity investing. more apprehensive investor community. returns in comparison with public markets. It is immediately obvious from Amongst those investors that were Have investors’ private equity fund the graph that investors expect private intending to change their strategies, investments lived up to expectations? equity to exceed the public markets, with there was one consistent theme: mega only 5% of investors expecting returns to funds. A US based public pension plan Perhaps unsurprisingly when the future match public markets, and no investors with a signifi cant private equity allocation private equity allocation results are expecting their private equity portfolio to will be ‘more conservative towards mega- considered, the majority of investors underperform this benchmark. buyout funds’, although the institution have been satisfi ed with the returns is still positive towards the asset class from their private equity portfolios. A signifi cant 32% of investors expect generally, and is planning to increase As Fig. 7.18 shows, 74% of investors returns in the range of up to 2% above its allocation. A US endowment plan polled are satisfi ed with the returns public markets, and 46% of all investors is going even further, stating that they from their private equity portfolios, with expect returns to exceed the public will be ‘staying away from the mega 24% going further than this, stating markets by between 2.1% and 4%. A buyout funds and generally being more that results had actually exceeded their total of 17% of investors fall into the most selective’. expectations. Only 2% of investors felt ambitious category of expecting returns that their investments had fallen short of to exceed 4.1%. Although those investors that are expectations. changing their allocations as a result In terms of average expectations, of the credit crunch are in the minority, Public pension plans, private pension the results indicate that the average the results do indicate that investors are plans, and asset managers were institutional investor expects returns starting to view mega-buyout funds less most satisfi ed with their private equity of 3.3% above public markets. Family favourably than has been the case in portfolio returns, with 33% stating that offi ces, endowments and foundations recent years, and certainly that investors returns had exceeded expectations. The collectively were most ambitious, are being more cautious than they might least enthusiastic group of investors with average expectations of public have been before the credit crunch when were family offi ces, endowments and markets +3.7%, followed by public selecting new investments. This more foundations, with only 12% of these pension plans, private pension plans cautious approach has manifested itself investors having found that returns and asset managers, which collectively in the build up of funds on the road to exceeded expectations. This is possibly had an average returns expectation new record levels, as this more cautious due to the higher expectations that of public markets + 3.5%. A group approach taken by investors has investors of these types have of their comprising banks, insurance companies lengthened the fundraising process for portfolio when compared to other more and corporate investors were most managers beyond initial projections. conservative investor types. conservative with their expectations from their private equity portfolio, expecting returns at just 2.2% over public markets.

Fig. 8.5 & 8.6:

Make up of Advisor Universe by Firm Location What service do Advisors Offer?

from 6% to 9% of total assets. It is not to private equity and the USD 24 billion choose a discretionary contract, just large institutional investors with Texas Public Employees’ Retirement meaning that the advisor makes all sizeable assets under management System (ERS) which appointed Altius investment decisions and reports on the that are increasing their allocations to Associates as its fi rst non-discretionary performance of the investment portfolio private equity. The USD 325 million St. private equity advisor. ERS selected to the investor. Olaf College Endowment increased Altius ahead of Hamilton Lane which was its allocation to private equity from 9% also considered for the mandate. We analysed the proportion of advisors to 15%, and is advised by Hammond offering discretionary and non- Associates. With the wide variety of types of discretionary services. From Fig. 8.6 we institutions currently investing in private can see that 40.6% of advisory fi rms offer Another trend in recent years has been equity, it is no surprise that these their clients both discretionary and non- an increase in the number of institutions investors have differing needs and discretionary contracts depending upon issuing RFPs for managers to operate a investment objectives. It is essential for the preferences of the investor. A further mandate for the institution in question, advisors to respond to these needs, as 37.5% of advisors just offer discretionary sometimes for the control of a whole well as to provide a service that takes services. Although only 21.9% of private equity portfolio, and other times into account the level of experience advisors focus solely on providing non- for specifi c fund types and regions within each investor possesses, from investors discretionary services, this category a wider private equity portfolio. This trend entering the asset class for the fi rst includes some of the largest fi rms has been especially prevalent amongst time and establishing private equity operating in the industry; Cambridge public pension plans both in the US and programmes to experienced investors Associates, Pension Consulting Alliance, the UK. Advisors have two different roles with mature portfolios seeking new Watson Wyatt Investment Consulting to play here. One is that the manager strategies or simply the next step. For and Hewitt Investment Group have who is successful in applying for control example, Rockefeller Brothers Fund, a all, since their inceptions, focused of the mandate essentially becomes foundation with assets now nearing $1 exclusively providing their clients with an advisor for the investor in question, billion, has recently appointed Investure non-discretionary services. with the investor effectively outsourcing to oversee all of its investments, investment decisions to the successful including private equity. Non-discretionary contracts can provide manager who will usually have full investors with essential support and discretion over any future investments Advisors provide contracts on either advice on investments, while still allowing made. Another role for advisors here is a discretionary or a non-discretionary the investor to retain overall control of in evaluating the managers applying for basis. Each provides advisors with their investments, appealing for more control of the mandate on behalf of the a different level of responsibility for experienced LPs. However, the extent to client. investments. Some investors opt for which non-discretionary management of non-discretionary services whereby investment portfolios can lead to confl ict Recent examples of investors issuing they retain some form of control over between investors and their advisors is RFPs include the £30 million Somerset their investment portfolio and still make often debated, as investors retain the County Council Pension Fund which the ultimate decision on whether to right to veto any potential investments issued an RFP for a fund of funds proceed with each potential investment put forward to them by their advisors. manager to handle its maiden allocation recommended by the advisor. Others Ultimately, the advisor cannot prevent

industry. Fig. 9.2: Inﬂ uence of Firm History

With fundraising becoming ever more Effect of Firm Experience on Placement Agent Use competitive, it is easy to assume that it is mostly managers that lack in experience that will look to placement agents to assist them in their fundraising efforts. However, placement agent use is by no means limited to emerging teams, with some of the most experienced managers still utilising a placement agent, as can be seen in Fig. 9.2.

In fact, 29% of fi rst-time fund managers employ a placement agent for their fundraising effort. Though placement agents selectively represent funds and will only promote funds they believe will be successful, it is clear that placement agents provide important support for fundraising to almost a third of all emerging managers. Though a signifi cant 71% of fund managers that successfully closed their fi rst fund in be successful, as a poor investment a placement agent in 2006 and on the 2007 raised capital themselves, this is may lead to the loss of various investor 33% of managers reported in 2005, perhaps more indicative of the fact that a relationships, which is perhaps a evidence for the continued growth of the large proportion of emerging managers further encouragement to an institution placement agent industry and for the were unable to afford the fees than that considering investment in a fund. increasingly essential part placement they did not want the assistance of an agencies play in the private equity agency. Use of placement agents fundraising market. It is not only managers raising their fi rst 2007 has seen the continued growth of However, despite the signifi cant fund that look to placement agents for the placement agent industry, with an proportion of fund managers that have assistance in fundraising. A quarter of increasing number of fund managers used placement agents to aid them in fund managers raising their second now employing the services of a their fundraising over the past year, through to their ninth fund employ the placement agency in their fundraising it must not be forgotten that of the services of a placement agent. Though effort, again refl ective of the more managers we spoke to, 55% successfully these managers are more experienced, diffi cult environment fund managers fi nd closed their funds having secured all it is a refl ection of the diffi cult fundraising themselves in when looking to secure commitments themselves. environment that a considerable commitments to their funds. proportion still uses third party help to Which fi rms are using placement raise funds. Over 2007, 625 funds reached a fi nal agents? close, and we have identifi ed 147 funds Perhaps surprisingly, 14% of the most for which a placement agent was used The use of placement agents has experienced managers that wound to raise part or all of the total capital continued to grow over the past few up their fundraising for at least their pledged to the fund, equating to 24% of years, and various factors can be seen to tenth fund in 2007 used a placement all closed funds. However, as shown in increase the likelihood of a fund manager agent to help to secure commitments Fig. 9.1, 45% of all fund managers that employing a placement agent, including to their fund. Though it is less likely that closed a fund in 2007 that we contacted fi rm experience, fund strategy and fund managers of this level of experience directly ourselves, informed us that they location. We have analysed the types will use a placement agent, owing to used a placement agent to raise part or of fund manager that are most likely to managers becoming more established all of the capital for their fund, revealing use third party fundraising services using and maintaining relationships with a that the true extent of placement agent data collected over the course of 2007 core group of investors, a considerable use by fund managers is higher than is from our contact with fund managers. percentage of these funds still employ suggested by the data overall. This is Though our data is not conclusive, it placement agents. This, however, can a considerable increase on the 40% of can reveal various trends in the market be explained by the trend for many fund fund managers that told us they used and provide an accurate profi le of the managers to utilise placement agents specifi cally to raise a certain percentage

The 2008 Preqin Global Private Equity Review is the most comprehensive review of the private equity industry ever undertaken, and is a must have for anyone involved in private equity, or looking to learn more about this growing asset class.

Intended for use as both a vital source of information about the current market, and also as an information-packed reference guide, this year’s edition includes:

• Interviews and articles from the most important people in the industry today, including GPs, investors, placement agents and more. • Detailed analysis on every aspect of the industry with a review of 2007, and predictions for the coming year. • Comprehensive source of stats on private equity - including fundraising, performance, deals, GPs, investors, placement agents, advisors, law ﬁ rms... • Numerous reference guides for different aspects of the industry - Who is the biggest? Where are the centres of activity? How much has been raised? Where is the capital going? Who is investing? What are the biggest deals? What is the outlook for the industry? • Results of questionnaires with different groups on the state of the industry - what do LPs really think about private equity? What effect has the credit crunch had? What is going to happen to the industry in coming years? • Plus much more... ------ ------2008 Preqin Global Private Equity Review Order Form - Please complete and return via fax, email or post

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