Leonard Green & Partners' Cost to Lps Per Investment Staff Is Higher

April 2016 A Report by UNITE HERE Michael Pineschi [email protected] 916.390.0261

Leonard Green & Partners’ cost to LPs per investment staff is higher relative to peers

Management fee per capita raises questions about alignment of interest

Leonard Green & Partners’ management fee per investment staff appears to be higher than that of peers with similarly sized Assets Under Management (AUM) in the North American private equity buyout space.1

The Institutional Limited Partner Association’s (ILPA) Private Equity Principles state “GP wealth creation from excessive management, transaction or other fees and income sources, reduces alignment of interest.”2

Preqin reported the mean investment period management fee rate for buyout funds in the 2014/2015 vintage as 1.82%.3 Assuming a 1.82% fee rate, the average management fee per investment staff among 34 of Leonard Green’s peers is $3.8 million.4

According to Leonard Green & Partners’ 2016 ADV brochure, the management fee during the investment period for funds is 1.5%.5 Given an AUM of $14 billion and a 1.5% management fee, Leonard Green’s management fee per capita is $7.3 million, substantially higher than peers despite a relatively lower management fee rate.6

Management fees per investment staff. Calculation for LGP and 34 buyout firms with similar AUM. 7

Fees per investment sta (LGP 1.5% - others industry average of 1.82%) $8,000,000

$7,000,000

$6,000,000

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$- Alignment of Interest Management fees ostensibly allow managers to cover the basic operating costs of the firm.8 However, leading management consulting firm McKinsey & Company notes that management fees are often a major source of income for managers.9 The ILPA principles say alignment of interest between LPs and GPs is best achieved when wealth creation for the general partner is primarily derived from carried interest, returns from substantial equity commitments, and after LP return requirements are met.10

Preqin’s 1H 2016 survey of limited partners found that 64% of them identified management fees as an area where fund terms needed improvement.11 Leonard Green & Partners’ new fund Leonard Green is nearing close on Green Equity Investors VII (GEI VII) – an $8.5 billion fund with $9.1 billion hard cap.12 GEI VII is approximately 31% larger than GEI VI, which closed at $6.25 billion.13 As of March 2016, Leonard Green & Partners had an investment staff of 29, or a per capita fee of $7.3 million per investment staff.

If the dry powder raised for GEI VII were added to Leonard Green’s AUM without an increase in investment staff, the fees per capita would jump to $12 million per investment staff, assuming a fee rate of 1.5%.14

Leonard Green may expand its investment staff to manage GEI VII. Even if the size of the investment staff doubled from 29 to 58 professionals, the AUM + dry powder management fees would be $6 million per investment staff, remaining above the sampled peers.15 Questions: •• How might Leonard Green address alignment of interest concerns? •• How does Leonard Green disclose what portions of GP wealth creation are generated through management fees?

2 Appendix I – Leonard Green and peer group comparison: investment staff, 2016 AUM, AUM per investment staff, and management fee per investment staff (assuming buyout average of 1.82% for peers and 1.5% for LGP)

Fees per staff: Employees AUM Per LGP 1.5% - Peers Fund Manager (Investment) AUM 2016 Investment Staff 1.82% Leonard Green & Partners 29 $14,056,700,000 $484,713,793 $7,270,707 AVERAGE OF 34 Peers 55 $9,771,453,083 $212,202,740 $3,794,074 Kelso & Company 29 $9,557,138,891 $329,556,513 $5,997,929 Madison Dearborn Partners 46 $14,804,366,992 $321,834,065 $5,857,380 GI Partners 37 $10,646,896,992 $287,753,973 $5,237,122 Onex Corporation 49 $13,751,000,000 $280,632,653 $5,107,514 Lindsay Goldberg 30 $8,342,658,460 $278,088,615 $5,061,213 Crestview Partners 25 $6,770,255,310 $270,810,212 $4,928,746 The Jordan Company 26 $6,908,427,851 $265,708,764 $4,835,899 Clayton Dubilier & Rice 60 $15,492,183,713 $258,203,062 $4,699,296 Avista Capital Partners 24 $5,939,928,831 $247,497,035 $4,504,446 Providence Equity Partners 68 $16,812,353,087 $247,240,487 $4,499,777 American Securities 52 $12,327,661,614 $237,070,416 $4,314,682 New Mountain Capital 45 $10,654,339,886 $236,763,109 $4,309,089 CCMP Capital Advisors 27 $6,342,896,198 $234,922,081 $4,275,582 Vista Equity Partners 73 $16,905,416,095 $231,581,042 $4,214,775 BDT Capital Partners 50 $11,578,697,217 $231,573,944 $4,214,646 Golden Gate Capital 46 $10,642,305,678 $231,354,471 $4,210,651 Thoma Bravo 40 $8,740,700,000 $218,517,500 $3,977,019 Stone Point Capital 50 $10,812,496,304 $216,249,926 $3,935,749 GTCR 39 $8,251,441,000 $211,575,410 $3,850,672 Francisco Partners 38 $7,964,772,081 $209,599,265 $3,814,707 ABRY Partners 35 $7,170,943,543 $204,884,101 $3,728,891 Siguler Guff 53 $10,161,894,718 $191,733,863 $3,489,556 Roark Capital Group 39 $7,083,658,193 $181,632,261 $3,305,707 Berkshire Partners 57 $10,034,453,895 $176,043,051 $3,203,984 TA Associates 83 $14,383,747,445 $173,298,162 $3,154,027 Technology Crossover Ventures 46 $7,555,090,096 $164,241,089 $2,989,188 Court Square Capital Partners 31 $5,045,040,086 $162,743,229 $2,961,927 TowerBrook Capital Partners 47 $7,510,459,267 $159,797,006 $2,908,306 Welsh, Carson, Anderson & Stowe 50 $7,684,492,201 $153,689,844 $2,797,155 KSL Capital Partners 35 $5,230,640,000 $149,446,857 $2,719,933 AEA Investors 61 $8,908,872,315 $146,047,087 $2,658,057 Riverside Company 82 $5,473,916,216 $66,755,076 $1,214,942 H.I.G. Capital 286 $16,966,315,676 $59,322,782 $1,079,675 Platinum Equity 112 $5,786,234,909 $51,662,812 $940,263

3 Endnotes

1 Leonard Green & Partners compared to 34 peers with similar AUM (ranging from $5 billion to $17 billion) active in the North American buyout space, sourced from Preqin. Leonard Green’s 2016 AUM is $14.1 billion, per the ADV. 2 ILPA. Private Equity Principles. Version 2.0 January 2011. Page 4. 3 Preqin. “Infrastructure Spotlight.” November 2015. 4 Fees per investment staff are calculated by dividing the assets under management of the firm by the number of investment staff, then multiplied by the industry average investment period fee for private equity 1.82% (according to Preqin. “Infrastructure Spotlight”. November 2015) The average of all 34 peers is $3.8 million per investment staff. 5 Leonard Green & Partners. March 2016 ADV brochure. Page 4. 6 Leonard Green’s fees per capita number was calculated using the 1.5% investment period management fee for Leonard Green funds. March 2016 Leonard Green & Partners ADV brochure. Page 4. 7 AUM and investment staff numbers were accessed from “Part 1A; Item 5” in 2016 ADV filings available at theIn - vestment Adviser Public Disclosure website. Accessed April 2016. Total AUM and investment staff information was gathered for the 34 firms with similar AUM to Leonard Green & Partners who are part of the North American buyout space, (firms with an AUM ranging from $5 – 17 billion based on the most current ADV). AUM was divided by the number of investment staff, then multiplied by the average management fee to calculate the management fee per capita. Management fees per investment staff are a tool limited partners can use to compare similar funds. Average buyout fund investment period fees for 2014/2015 vintage funds is 1.82% according to Preqin. “Infra- structure Spotlight”. November 2015. The management fee for Leonard Green funds is 1.5%, as reported by thee March 2016 Leonard Green & Partners ADV brochure. This number was used for Leonard Green’s calculation. 8 McKinsey & Company. “Private equity: Changing perceptions and new realities”. April, 2014. 9 McKinsey & Company. “Private equity: Changing perceptions and new realities”. April, 2014. 10 ILPA. Private Equity Principles. Version 2.0. January 2011. Page 4. 11 Preqin Investor Outlook Alternative assets 1H 2016, page 16. 12 PE HUB. “Leonard Green raises target, sets $9.1 bln hard cap on Fund VII”. January 20, 2016. 13 Reuters. “Leonard Green & Partners Closes $6.25 Billion Private Equity Fund”. May 30, 2012. 14 According to Leonard Green’s 2016 ADV, Leonard Green’s current AUM is $14.1 billion and LGP GEI VII has a $9.1 billion hard cap. Total assets would be $23.2 billion if GEI VII’s hard-cap is included. $23.2 billion divided by current investment staff would mean an AUM per investment staff of $800 million. The $800 million multiplied by the investment period management fee of 1.5% from the LGP 2016 ADV brochure would mean $12 million in management fees per investment staff. 15 LGP’s $14.1 billion AUM plus GEI VII’s $9.1 billion in dry powder would bring the total AUM to $23.2 billion. $23.2 billion divided by a hypothetical 58 investment staff equals an AUM per capita of $399 million. The $399 million per capita multiplied by LGP’s average 1.5% fee would equal $6 million in fees per staff.