The Co-Investment Era

Premium Content Exclusively for Privcap Subscribers PRIVCAP In-depth Analysis From Privcap.com REPORTS/ Q2 2014

The Co-investment Era

WITH DEEP MARKET ANALYSIS AND BEST PRACTICES FROM:

AlpInvest GoldPoint Partners Cohesive Capital Neuberger Berman Fisher Lynch Twin Bridge Plus: ● Top 20 LP Co-investors JLL Partners ● Co-investment Fees Explained The Riverside Company ● New Jersey & Wyoming Separate Vestar Capital Accounts Compared Private Advisors Goodwin Procter On Privcap.c0m Videos in This Report This special report includes the following new video programs. Watch them at Privcap.com Riding the Co-investment Wave Why has demand for co-investment surged in recent years, and how should GPs and LPs structure deals to their advantage? With panelists from Private Advisors, AlpInvest Partners, and Twin Bridge Capital Partners.

Digging for the Perfect Deal Experts from Private Advisors, AlpInvest Partners, and Twin Bridge Capital Partners tell Privcap how they source co-investments, what they look for in a deal, and the actions and attributes that are deal breakers.

Navigating the Allocation Process Co-investment experts from Private Advisors, AlpInvest Partners, and Twin Bridge Capital tell Privcap about the dos and don’ts of the allocation process. Paul Levy, JLL Partners On Camera Two IR Pros Tell How LP Co-investments Get Done Investor-relations experts from The Riverside Company and Vestar discuss how LP interest in co-investmentment has increased and how deals are structured. COMING SOON on Privcap Allocating LP Investments Allocation of co-investment opportunities involves transparency and building Pensions and Private Equity relationships with LPs, say IR experts from Vestar Capital Partners and The Adveq’s Sven Liden tells Privcap about his Riverside Company. recent research in partnership with the London Business School, which examines Finding the Right Co-investment Partner what influences pension fund allocations Tom Haubenstricker of GoldPoint Partners discusses the firm’s evolution from in-house investor for New York Life to a stand-alone co-investment power- have on private equity. house. Managing the Information Exchange The Craft of the Co-investment Panelists from MatlinPatterson, Gen II, JLL Partners’ Paul Levy tells Privcap about how the firm crafts its co-invest- and Castle Harlan discuss the wants and ments and how the process worked on its recent $2.65B investment deal for needs of communication between LPs and pharmaceutical group Patheon, now called DPx. GPs. Top Tip for Co-investors: Don’t Embarrass the Lead Sponsor Being an excellent partner means doing your homework, saying no quickly, UPCOMING REPORTS and being credible in front of a seller, say experts from Cohesive Capital and Neuberger Berman. Q2 Energy Adding Value as a Co-investor Examples of partners bringing due diligence and intelligence expertise to the deal-making process. With experts from Cohesive Capital and Neuberger Ber- Q3 man. Deal Flow How Two States Got Into Co-investing The evolution of direct investing now involves two state pension funds. Brett Q4 Fisher of Fisher Lynch Capital talks about the firm’s partnership with Oregon PE Performance & Portfolio and Washington.

The Fine Print: Negotiating a Co-Invest Partnership David Watson of Goodwin Procter explains the current trends and legal issues surrounding deal terms. On Privcap.com

In Case You Missed It... Must-see thought leadership from Privcap.com

Colombia’s Growing Appetite for PE Are Monitoring Fees Actually In Troubled Times, Ramping Up IR Francisco Jose Arboleda of HarbourVest Dividends? In the wake of the financial crisis, The Partners talks about the growth of The IRS is looking at whether moni- Blackstone Group increased its IR staff and Colombia’s private equity industry and its toring fees paid to private equity spon- the granularity of information it reports talent. sors should be treated as dividends and to LPs, says the firm’s Matthew Pedley. not fees for service. A change might not be good news for PE taxpayers, say experts from New Mountain Capital and McGladrey.

PE’s Influences in Colombia An “Infant” Industry Grows Accuracy: Challenging but Alejandro Rodriguez of PineBridge In- MAS Equity Partners and ColCapital’s Imperative vestments discusses the appetite for pri- Patricio D’Apice tells Privcap about the Providing accurate information to LPs has vate equity from the country’s pension rapid evolution of the Colombian PE mar- never been more important or challeng- funds, and their challenges in building ket since its formal start in 2005. ing, given the huge demands from inves- a portfolio. tors and increased complexity of running a PE firm, say pros from MatlinPatterson, Castle Harlan, and Gen II Fund Services.

About Privcap Special Reports Privcap Special Reports are exclusively for subscribers to Privcap, the definitive channel for thought leadership in private capital. Each month Privcap focuses on a critical theme and produces a “bundle” of thought-leadership content in multiple formats—a digital report, video interviews and panel discussions, and audio programs. We capture the market intelligence of leading authorities, whose expertise forms the core of each report. Privcap Special Reports help market participants better understand opportunities and practices in private capital, as well as gain deep insights into the people with whom they may become long-term investment partners. PRIVCAP SPECIAL REPORTS 19

In This Issue 2 Commentary 0 38 05 Privcap CEO David Snow on the new normal of investors wanting PE in their portfolio, but on their own terms.

The Co-investment Bandwagon 06 Institutional investors have paid more attention to direct investing since Fisher Lynch Capital began the practice with Oregon and Washington’s pension funds, says Brett Fisher.

Achieving Balance in LP Co-investing 08 Panelists from Private Advisors, AlpInvest Partners, and Twin Bridge Capital Partners discuss the different ways they deploy capital directly into deals. 08

Co-investment: In Depth 13 • The Top 20 LPs: a list of those with the strongest appetite for direct and co-investment. • Allocation Policies: how distribution of deals to LPs is handled. • Fee Breaks, Deconstructed: how do you quantify the benefit of co-investment for an LP’s PE portfolio? 13 • The Research on Returns: three performance analyses of co-investing, compared. • Separate Account Case Studies: three case studies of PE separate account programs that provide benefits to LPs. PRIVCAP SPECIAL REPORTS Jll Founder: The Craft of the Co-investment Privcap Media 32 Co-investing gives JLL Partners access to capital for large deals while building their portfolio David Snow Co-founder and CEO companies, says the firm’s Paul Levy. Gill Torren Co-founder and President Matthew Malone Editorial Director Getting the Partnership Right Content 34 Goodwin Procter’s David Watson on trends in the co-investment market. Zoe Hughes Editor, PrivcapRE Ainslie Chandler Senior Journalist Choosing the Right Co-invest Partner Andrea Heisinger Associate Editor 36 Kathleen O’Donnell Media Coordinator Tom Haubenstricker of GoldPoint Partners on what qualities GPs and LPs consider the most Cameron Faulkner Media Coordinator important in forming a solid investing partnership. Design Cecilia Salama Design Coordinator Managing a Rising Tide of Direct Investments 38 Contributors LP demand for co-investing has climbed, leading to a need for deal and allocation policies, say Judy Kuan IR experts from The Riverside Company and Vestar Capital Partners. Contacts Don’t Embarrass the Lead Sponsor Editorial David Snow / 40 Direct investment experts from Cohesive Capital Partners and Neuberger Berman share tales [email protected] / 646.233.4558 from the trenches and tips on adding value. Matthew Malone / [email protected] / 203.554.7261 From the Archives 42 Related content from Privcap.com Sponsorships & Sales Gill Torren / [email protected] / 646.233.4559 From Our Sponsors For subscriptions, please call 855-PRIVCAP Thought leadership from our sponsor: EY or email [email protected] Copyright © 2014 by Privcap LLC Interviews in this report have been edited for length and clarity. Co-investment / Snow’s Notes

The New Era of Co-invest Sophisticated investors want more private equity, but on their own terms. How are GPs managing the transition?

he private equity world is entering a payment” vehicle. During the investment period, “new normal,” one characterized by the equity for each deal comes only partly from the a more complex and flexible flow of fund. The rest is sourced strategically and in an in- investor capital into specific deal op- creasingly sophisticated pass-the-hat exercise in portunities. The result? The best GPs which each potential capital provider determines will continue to control the best op- how much “extra” they want of that particular in- portunities, but their control of the capital itself vestment. will be less lucrative. Market GPs will typically go first to their own LPs for cap- analysis by The point of private equity was never about fund ital as a reward for investing in the fund. Ideal- Privcap CEO management; rather, it’s about the investment of ly these LPs, either with in-house co-invest teams capital into private businesses with an eye toward or relying on specialist advisers, perform due dili- David Snow increasing the value of that capital. The fund, typ- gence on each opportunity and give a quick yes or ically a limited partnership, became the dominant no. In some cases, GPs will set up a “sidecar” vehi- format for getting private equity done because it cle for LPs who can’t possibly vet each deal them- was the format that worked best for the parties selves. The sidecar automatically co-invests in all involved. Indeed, blind-pool, commingled limited deals on a low-fee basis. For larger relationships, a partnerships have many advantages: they clearly GP may operate a separate account in which the GP delineate who’s in charge of the deals; they grant does the co-invest picking and choosing on behalf the GPs guaranteed capital to draw down as oppor- of the LP. tunities arise; they lock in all capital partners for 10 years or more to allow focus on long-term value Where necessary and strategic, GPs may also look creation and let passive investors have experienced beyond their own LP networks to co-investment private equity deal-doers allocate on their behalf. specialist vehicles, as well as to investors who are But the limited partnership ancien régime is being not in the current fund but with whom the GP gradually overthrown by a more complex network would like to do business. of capital providers who have higher expectations and greater sophistication. They form the van- Funds and fundraising will always be a huge part of guard of what I’ll call “the new era of co-invest.” the market, but the role of the fund as a placeholder for future co-invest opportunities is already clear- One can sense a new private equity market emerg- ly established among the largest LPs. This has im- ing in which the general partner raises a fund and plications not only for the way capital gets formed locks in the participation of a population of capi- but for the economic support of GP entities. Fees tal partners but the fund is somewhat of a “down from funds will serve to support the investment program of GP teams, but the full sum of capital in private equity deals will no longer pay the same “The limited partnership ancien régime fixed “toll” to the GP. As such, GPs will need to rely on fund fees for nothing but lean protein, and use is being gradually overthrown by a more the carry for the champagne. ■ complex network of capital providers L Follow David Snow on Twitter @SnowsNotes who have higher expectations and greater sophistication.” Privcap Special Report • Co-investment | Q2 2014 / 5 Co-investment / Pension Funds

Click to watch this video at privcap.com The Co-investment Bandwagon

Institutional investors haven’t historically paid much attention to co-investment. Brett Fisher of Fisher Lynch Capital explains how that changed in 2003 when the firm partnered with Oregon and Washington’s pension funds.

Privcap: Your firm advises institutional investors on PE, and co-investment has become an important part of both your business and the asset class. How did co-investment start in 2003, when you were founded, and how has it evolved?

Fisher: The genesis was from work we’d done with the Government of Singapore Investment Corpo- ration [now GIC Private Limited], a big sovereign wealth fund. It had a meaningful co-investment practice, which is profitable for the organization.

When we set up Fisher Lynch, part of the idea was to bring co-investing to a wider audience. It’s something that we thought made sense from the beginning but not enough LPs were taking advantage of. It’s interesting because today co-investing is so popular, you would think it would happen in an instant. But back in ’03, just after the Iraq war and the recession, things were slower and LPs were more careful. Eventually we found Oregon and Washington and set up a partnership with them to co-invest on their behalf. Our first fund for co-investing was $500 million, which started investing in Bio 2006. Oregon and Washington are basically the sole LPs in that fund. They’re also in our second fund Brett Fisher is a managing director at Fisher Lynch Capital. Previously, he was of $1 billion, which started investing in 2011. These a senior VP of the private equity arm of the Government of Singapore Invest- state pensions are our biggest clients. ment Corporation, director of corporate development at AirTouch Communi- cations, a VP at Genstar Investment Corp., and worked at Marakon Associates. What are other signs you see that LPs have a He received degrees from Stanford Graduate School of Business and Yale different mindset now than they did in 2003? University. Fisher: In the early days, I remember, there would be two to four LPs that the GPs could call in any given fund that had a co-investment capability. Then

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Brett Fisher, Fisher Lynch Capital and Privcap CEO David Snow people in the industry began to understand how profitable it was, because of the lower fees and the “In the early days, I remember, there window into the GP’s deal selection and execution processes that you don’t get as a regular LP. would be two to four LPs that the GPs

How much time is the investment staff of each could call in any given fund that had a organization spending embedded in your organization? co-investment capability. Then people in

Fisher: With Oregon and Washington, we have the industry began to understand how two meetings a year where we take a full dive into the portfolio. We also have monthly calls with staff profitable it was.” members at those institutions who are assigned to cover us on a day-to-day basis, to make sure they’re -Brett Fisher, Fisher Lynch Capital aware of all our deal flow, and we exchange information about GPs that might be coming into the portfolio. that they’re being offered a co-investment. They’d call or email the states, which would quickly turn that around and ask for the deal to be sent to Do they have veto rights on a deal? Fisher Lynch. After that happens once or twice for any given GP, they start working directly with us. Fisher: Generally, no. If the deal comes from a GP that’s in their fund portfolio, then the deci- A comment I’ve heard frequently from advocates for pensions not sion-making is all with Fisher Lynch. We mutually doing co-investing themselves is that it can be politically embarrass- decided that was the right way to set it up in order ing to have shares in a private company that goes to zero. I would to have an efficient time schedule for evaluating assume that having something take place in your partnership is a less co-investments. visible reminder of a deal going sideways.

When there’s a direct deal opportunity from a GP Fisher: Absolutely. There is insulation from headline or career risk. In most in the Oregon or Washington portfolio, how does of the partnerships they invest in, there are 15 to 30 different investments, it get to you? and it’s the success of that program on which the LP should be evaluat- ed. A lot of GPs have had investments go to zero—and if, every time that Fisher: In the early years of the program, GPs want- happened, somebody on the LP side got in trouble, there would be a lot of ed to make sure Oregon and Washington know LPs in trouble.■ Privcap Special Report • Co-investment | Q2 2014 / 7 Co-investment / Expert Panel Achieving Balance in LP Co-investing Co-investment is an increasingly important private equity tool. Three specialists discuss how they deploy capital directly into deals.

Participants

Chris Stringer Partner Private Advisors

Richard Dunne Principal AlpInvest Partners

Brian Gallagher Partner Stringer Gallagher Twin Bridge Capital Partners

Dunne

Bios

Chris Stringer is head of PE investments at Private Advisors. He was previously a vice president at Jefferson Capital Partners. He received degrees from Florida State University and the University of Virginia Darden School of Business.

Richard Dunne is responsible for sourcing, executing, and monitoring North American equity transactions. Prior to joining AlpInvest, he was in the financial institutions group at Citigroup Global Markets. He received a bachelor’s degree from Boston College.

Brian Gallagher co-founded Twin Bridge. Previously, he was responsible for U.S. PE investments at UIB Capital, and was a partner at PPM America Capital Partners. He received degrees from the University of Notre Dame and Northwestern University. He is a CFA and a certified public accountant. . CONTINUES ON NEXT PAGE

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about $1.5 billion. We invest exclusively in mid- Video 1 � dle-market buyout funds in North America. So one asset class, one geography. Unlike a lot of our peers, we manage structured separate accounts, and we Co-investment Structures put funds and co-investments into the same vehicle. And it’s about a two-third, one-third split right now. Privcap: I’d love to hear your perspectives on how to structure the right co-investment. Let’s You mentioned that now about one-third of the start with brief descriptions of the various capital you put to work is in direct situations. platforms the three of you have built, starting How did your co-investing evolve from the in- with Chris. ception of your firm?

Chris Stringer, Private Advisors: We manage $5.3 Gallagher: It can vary. Right now purchase prices billion in assets. We focus on hedge funds and are quite high, so co-investment deal flow is not private equity investments, specifically on behalf of robust. We invest with sponsors—my colleagues endowment foundations, pension funds, etc. We fo- do as well—that are experienced, and they know cus on growth equity—buyout and turnaround-ori- when prices are too high and you have to underin- ented investors operating in the lower end of the vest. And there were times post-crisis where there middle market in North America. What do I mean was some interesting deal flow, and it was a great by that? Sub-$150-million enterprise value, typi- time to put money to work. You try to overinvest in cally funds of $750 million and below. We’ve made the down markets. You can’t market-time, and we over 90 fund investments since the late ’90s since know that. we were founded in that target market, and that’s exactly where we co-invest. We offer our co-invest- There are some obvious reasons to co-invest. There ments through distinct funds. And we invest in 15 are the economics. There’s the minimization of the to 25 companies over a three-year period on behalf J curve, which is meaningful. But we ascribe a lot of investors. of value to the qualitative benefits. When you can work with a sponsor and see how they source, struc- Rich, how have you structured your co-invest- ture, manage, and position for exiting a deal, it’s ment platform? invaluable information when you’re getting ready to do the re-up decision. So the qualitative should Richard Dunne, AlpInvest Partners: AlpInvest never be underestimated. A lot of people are getting is a global funds-to-funds manager dedicated into co-investment under the guise that it’s embed- completely to private equity. We’re essentially the ded deal flow and it’s easy. It’s not easy. You have to private equity fund-to-funds platform of the The think through how you’re building your portfolio. Carlyle Group, and we operate on an independent You have to mine exceptional deal flow. You’ve got basis. to work with the best sponsors. It’s a relationship business, and you can screw up a relationship pretty We serve on behalf of mostly large pension funds quickly if you can’t get there in time, move in lock- from our client base. Our former owners are still our step with the sponsor. primary source of capital, but over the last few years we’ve been successful in bringing some new inves- Co-investment has evolved and matured a lot in the tors to our programs, particularly with the second- last five years. LPs want it. GPs need to provide it. It’s aries fund, and then also on the broader platform. a constant topic on the fundraising trail. And in co-investment, the way we go to market is our business is really defined by product. We’ve got Chris and Rich, do you agree that having a co-in- a very large primary funds program, a team of about vestment platform allows you to also be better 25 professionals who are investing on that platform primary fund investors? globally, a similar-sized team in secondary investments and then in co-investments. Dunne: Certainly. It’s been a big help to our due diligence process, particularly because, in a lot of the Brian, can you talk about the platform you’ve cases where we’re co-investing, we’re taking some built at Twin Bridge? sort of role at the board level. Not only are we seeing the full deal-making process as it relates to the GP, Brian Gallagher, Twin Bridge Capital: We manage the kind of work they do in due diligence, the focus . CONTINUES ON NEXT PAGE

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“This industry’s gotten mature and competitive. It’s not easy to make money on the buy. You make most of your money over the term of owning that investment.” -Brian Gallagher, Twin Bridge Capital Partners they have, and also what sort of discipline they on the primary side of business. So we are looking have when pricing a transaction at the end of the for actively sector-and strategy-focused manag- day—but then, once a transaction’s closed, we’re ers who can build better businesses, buy from a there to see their role in creating value and driving founder/owner, from a family, and systematically strategy. improve a business. And that’s what the marketing spin is during the fundraise process. You Is it the case that many GPs are noticeably get into co-investment deal flow, and can get different once you get into the actual deal with underneath how specialized they are, how they them? approach these management teams, can they systematically recycle them and improve these Dunne: You see a clear difference between how businesses? It’s tremendous information flow. large buyout GPs operate versus middle-market We, in fact, entered the co-investment business GPs. That makes sense for the types of businesses directly for the information flow, ahead of trying that they’re running. The large buyout side is to actually offer a marketable product. It was an buying companies that are more mature in their idea of getting information edge and augmenting growth profile. Chances are, if you’re striking a returns a little bit. deal, you’re buying a company that you believe to be undermanaged, so there’s more to do from Gallagher: This industry’s gotten mature and an operational perspective and getting involved competitive. It’s not easy to make money on the in some of the key functions of the company. In buy. You make most of your money over the term the middle market, it’s usually you’re partnering of owning that investment. And we spend a lot with a management team and trying to help of time with our sponsors at inception: “What them take their company to the next level, and are your plans with this business?” And then we so it’s a softer level of interaction. But both have see how they measure against that original plan. their role. Deals don’t always go the way you think they will, and sponsors will sometimes give a CEO who Stringer: I agree. Our portfolio is lower-end-mar- doesn’t seem to be performing, two years when ket- and midmarket-focused, and we’re assem- they should give him or her two quarters. Being bling a collection of specialists for our investors able to make the quick decisive action is impor- . CONTINUES ON NEXT PAGE Privcap Special Report • Co-investment | Q2 2014 / 10 Co-investment / Expert Panel

tant for driving value. Where things have fallen end of the middle market in North America— down is where people� convince themselves that growth equity, buyout, and turnarounds. this is going to get better. Private equity is such that you have a limited time frame in which to We’re on the advisory board in over 90 percent drive value. of the funds there. We have a systematic calling effort with our existing relationships, to be top Video 2 of mind for co-investment flow. Aside from that, we cover a 900-to-1,000 fund-manager universe, and we live and breathe the lower end of the middle market. We do see a lot of opportunities Deal Flow and GP Relations for co-investment with hedge fund managers or with managers, where they’re looking to build Rich, how important is deal flow to the co-in- a relationship with private advisors ahead of a vestment process, and how has AlpInvest built a fundraise. substantial deal flow? We look at quality of sponsor first and foremost Dunne: Generating deal flow, and really widen- when we underwrite a co-investment. Number ing your funnel, is a critical component of our two, we’re underwriting the fundamentals of the program and our success. We work in a number of “What we do direct deal. And number three, we look for the fit ways. Primarily, we source transactions through to improve of the sponsor. GPs that we have a primary fund relationship our position is with. On top of that, we then are extremely proac- participate in What are some initial reasons for giving a quick tive with the GPs that we’re invested with, and in transactions no to an opportunity? some cases in joint meetings with other groups before they’re in the firm in trying to find new GP relationships announced. Stringer: Fit with sponsor is an easy no. If we see a and see if we can develop those relationships Getting retail consumer group show us a healthcare-ori- through either a secondary or a co-investment, involved in a ented deal, we’re going to say no quickly. There are prior to getting into a primary fund relationship deal at the first other reasons around valuation, around the deal, with them. management to the point made earlier: the deal’s significantly meeting, or larger than the typical deal a sponsor’s used to Brian, how does it work at Twin Bridge? right when the doing, we’re worried about adverse selection, and GP gets the we may say no fairly quickly in that scenario. Gallagher: We invest on the co-investment side information only with sponsors that we’re invested with on memo on a Dunne: One of the first things we do is go through the primary side. We spend a lot of time mon- transaction— a full analysis of GP qualification in a transaction, itoring and mining what are the best GP rela- it really making sure the GP has the track record and skills tionships in the middle-market buyout space in helps you to necessary to effect the investment thesis and the North America. The most important criterion to secure better deal. Then also valuation: We’ve seen a lot of deals success in co-investing is quality of sponsor. So allocations.” that have just been overpriced relative to how we want to make sure that when we’re investing companies in the space have traded in the past. in a co-investment, it’s a sponsor we know ex- Richard Dunne, We think long and hard about getting engaged ceedingly well and have fully underwritten. Once AlpInvest in transactions. We try and understand the GP’s you underwrite that sponsor, then it’s a constant angle, really, across the board. There’s always ep- dialogue. And that constant interaction is what isodic reasons why [we say no]. If our portfolio is unearths interesting deal flow, and you can get on concentrated at the level we’re comfortable with the front lines some interesting opportunities. in a given space, then seeing that next healthcare deal would be a pass for us. Chris, how does deal flow work at Private Advi- sors? Gallagher: Feel of sponsor matters a great deal. Portfolio construction matters an awful lot. And Stringer: We co-invest with managers whose any co-investor has to be thoughtful on how primary funds we’ve been in and also with those they’re constructing their portfolio. You need to where we haven’t invested in their primary fund, be diversified across time, industry, geography, and it’s about a 60 percent, 40 percent split. The deal type, etc. Sponsors putting a lot of debt on majority of what we do is with our underlying a deal and using lenders who are not relation- primary fund managers. We’ve invested 90 funds ship-driven gives us discomfort. historically in a tight part of the market, lower Privcap Special Report • Co-investment | Q2 2014 / 11 Co-investment / Expert Panel

Are the side letters that are popping up now, granting Video 3 guaranteed access to a certain level of co-investing, bad for co-investing because it might give greater muscle to an LP that shouldn’t have it? The Tricky Allocation Game Gallagher: We don’t see many side letters seeking out co-in- Brian, as a longtime co-investor, have you witnessed any vestment, because most of the sponsors will say I’m giving it to particularly good allocation methods used by GPs? everybody. Side letters still exist, but most GPs—and even most LPs—are trying to get away from that process, because it can Gallagher: There are policies that people are starting to consume a lot of time, money, and effort with attorneys. Early put in place. The key is you need to have co-investors who in a fundraise or to get a first close, there can be some things are responsive, and the GP needs to have flexibility in how done through side letters. they allocate, because ultimately they’re trying to put capital together to get the deal closed, and they need LPs who What are your views on GPs offering co-investment to LPs can get across the finish line. who are not currently their LPs?

AlpInvest has shown a lot of co-investment opportuni- Gallagher: On the part of most sponsors, there’s more than ties. Do you have a view on allocation policies? sufficient demand among their LP base. The corollary to that � would be, a sponsor of a $500 million fund has a deal that Dunne: Some GPs have gone to every LP in their fund requires $110 million of equity; they want to hold $50 million. and allocated transactions on a prorate basis. To us, that Instead of going to their LPs, they will go to another sponsor doesn’t work very well. Many of the LPs can’t respond to and share the deal. the deadlines, and aren’t interested in co-investment to begin with. What we do to improve our position is partic- Dunne: From a commercial perspective, you’re trying to be a ipate in transactions before they’re announced. Getting good and flexible partner to your GPs. If they’re toward the end involved in a deal at the first management meeting, or of the life of a fund and see the need to bring in new investors right when the GP gets the information memo on a trans- or potential new investors to help the next fundraise along, action—it really helps you to secure better allocations. you can put up a fight. But you’re not going to win, and it’s not going to benefit you or the GP or the relationship. Stringer: The ideal allocation policy is at the GP’s discretion, and that’s what it says in their limited-partnership Stringer: I’ve seen third parties come in where they can do agreement. We write small checks and raise small co-in- something unique like backstop a syndicate ahead of a sell- vestment funds. We get disappointed when the lenders down to the LPs to give the GP certainty—but it’s rare. And offer more leverage, the check size shrinks at the end of it’s only in the situations where you’re at risk for a potential the deal and we’re only there as a co-investor, and we get failed next fundraise and you need to broaden your LP base. It’s cut out of the situation. where we as co-investors then worry about quality of sponsor, in those situations. ■ I’m glad you mentioned LPs gaming the system. Will that create more situations where you have LPs clamoring to be part of a co-investment, making the allocation process more difficult for a GP to show discretion?

Gallagher: There are a lot of co-investors who say they want to do deals but can’t get there in time. If you are a good and serious co-investor, you should be able to move in lockstep with the sponsor from time zero. We always get in on the ground floor. We do diligence alongside the sponsor. If one of us has an issue with the deal, we’ll pull out and usually they’ll pull out, because we’re seeing things the same way. We want to be adaptive, because capital structures, circumstances, and purchase prices change. The way you distinguish yourself as a co-investor is to be timely, responsive, flexible, adaptable. There are certain rights that we need, legal and otherwise, but they’re fair and reasonable, and our sponsors understand that. Some co-investors do, and that’s to their detriment long-term.

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Co-investment In-depth Comprehensive research on the changing dynamics of the GP-LP relationship, including:

• Up-and-Coming Co-investors The Top 20 • Allocation Policies Examined Co-investing LPs • The Inside Scoop on Fee Breaks • Is Co-investing Worth It? A research review • Case Studies: Separate Accounts

PrivcapPrivcap Special Co-Investment Report • Co-investment Report / May| Q2 20142014 // 131 Co-investment Report 2014 Privcap The Top 20 LPs Privcap shines a light on the LPs with the strongest appetite for direct and co-investment

hese days, GPs raising new funds know that they can we note a large presence of sovereign wealth funds, taking six pretty safely assume at least half of their LPs (by number; of the top 10 spots. We estimate that more than 70 percent of likely more by capital commitments) will want access to co-investment capital resides in Asia and the Middle East. Tco-investments. Both Coller Capital and Probitas Partners have e U.S. is represented primarily by the California and released survey data in recent months, pointing to LPs’ ever- New York public pension systems. We also uncover a couple of growing appetite for co-investments. To highlight the biggest relative newcomers to the private equity asset class, including players in the co-investment world, we present the inaugural the Hong Kong Monetary Authority and South Africa’s GEPF. As Privcap Top 20 Co-investors League Table. ese big leaguers in- well as looking at the players who dominate the sector, we take clude the largest LPs with known co-investment activities. ey a look at the potential up-and-comers in the realm of private are the stewards of more than $5.5T of total assets. ese players equity co-investing: the largest LPs who are investing in PE but have more than $150B in existing and potential co-investment not yet in co-investments, and notable LPs who have announced portfolios, according to Privcap calculations. Not surprisingly, that they are expanding their co-investment activities.

THE TOP / By The Numbers Ranking Name Country Total Assets (US$B) Est. PE Allocation (%) Est. Co-invest Allocation (as % of PE)

1 ADIA UAE 627.0 8 25 2 CIC China 575.2 16 43 3 SAFE China 567.9 5 10 4 KIA Kuwait 386.0 14 2 5 ABP Netherlands 372.9 5 25 6 NPS South Korea 368.5 3 4 7 HKMA China 326.7 2 Opportunistic 8 GIC Singapore 285.0 11 Undisclosed 9 CalPERS U.S. 281.7 11 Up to 50 10 CPPIB Canada 188.9 19 13 11 CalSTRS U.S. 180.8 13 6 12 PFZW Netherlands 177.3 6 25 13 EPF Malaysia 175.7 2 20 14 Temasek Singapore 173.3 27 90 15 QIA Qatar 170.0 Undisclosed Undisclosed 16 NYSCRF U.S. 150.1 9 5 17 NYCRS U.S. 143.9 6 Varies by underlying plan 18 FRS U.S. 140.0 6 8 19 OTPP Canada 130.8 9 50 20 GEPF South Africa 125.0 5 80 Runners Up: 21 TRS U.S. 124 11 20 22 ATP Denmark 110 9 5

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The Top 20 Largest LP and Co-investment Programs In-depth (Top 20 with PE Co-invest, by Total AUM)

1 Abu Dhabi Investment Authority (ADIA) $575B currently. Its internal investment sta is 443 globally, according to its 2012 annual report; the number of dedicated PE/ direct investment team members was not disclosed. With the • Investor Type: Sovereign wealth fund planned retirement of Gao Xiqing, who has served as president of • HQ: UAE CIC since its founding in 2007, his successor Li Keping was recruited • Total Assets: $627B as CIO in 2011 and recently appointed vice chairman and president • Estimated PE Allocation: 8 percent in February 2014. Gao and Li previously worked together at the Chi- • Estimated Co-investment Allocation: 25 percent of PE allocation nese state pension fund—the National Social Security Fund (“NSSF”). Notable investments include a separate account with J.C. Flowers Commentary: Our estimate of co-investment allocation is based to co-invest in distressed fi nancial institutions during the fi nancial on ADIA’s use of external managers for 75 percent of its assets in crisis, as well as direct investments in South Africa-based Shanduka 2012. ADIA typically co-invests alongside GP relationships, includ- Group in 2011 and the U.K.’s Thames Water Utilities in 2012. ing as a strategic investor alongside Apollo following the 2007 purchase of 10 percent of Apollo’s management company. The SWF continues to grow its internal PE investment team, including the 3 State Administration of Foreign Exchange (SAFE) recruitment of professionals with co-investment experience. The hiring of Pascal Heberling as senior portfolio manager of principal investments in February 2014 is an example; Heberling was previ- • Investor Type: Sovereign wealth fund ously a partner at U.K.-based buyout shop Cinven Limited where • HQ: China he had worked for 12 years. ADIA as yet to fi ll the CIO position • Total Assets: $569B following Jim Kester’s departure in mid-2013. • Estimated PE Allocation: 5 percent • Estimated Co-investment Allocation: 10 percent of PE allocation

2 China Investment Corporation (CIC) Commentary: SAFE holds approximately 10 percent of its total assets in direct investments outside of China. The key regulator of China’s foreign reserves began investing in PE during the ﬁ nancial • Investor Type: Sovereign wealth fund crisis. Notably, it made a $2.5B fund commitment to the 2008-vin- • HQ: China tage TPG buyout fund that invested in Washington Mutual; SAFE • Total Assets: $575B also reportedly co-invested a large (undisclosed) sum alongside TPG • Estimated PE Allocation: 16 percent into the collapsed U.S. lender. SAFE’s CIO Zhu Changhong report- • Estimated Co-investment Allocation: edly left the organization in January 2014; he had joined SAFE in 43 percent of PE allocation 2010 having previously served as a hedge fund manager at PIMCO for ten years. The reason for Zhu’s departure has not been disclosed, Commentary: Our estimate of co-investment allocation is based and SAFE has not announced his replacement. on CIC’s use of external managers to manage 57 percent of its assets. Established in 2007 to manage a portion of China’s foreign exchange reserves, CIC’s AUM grew from $200B when founded to . CONTINUES ON NEXT PAGE

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The Top 20 In-depth

4 Kuwait Investment Authority (KIA) 6 National Pension Service of Korea (NPS)

• Investor Type: Sovereign wealth fund • Investor Type: Public pension fund • HQ: Kuwait • HQ: South Korea • Total Assets: $386B • Total Assets: $368B • Estimated PE Allocation: 14 percent (estimate) • Estimated PE Allocation: 3 percent • Estimated Co-investment Allocation: 2 percent • Estimated Co-investment Allocation: 4 percent of PE allocation

Commentary: Since its founding in 1953, KIA has been respon- Commentary: NPS was created in 1988 to manage South Korea’s sible for managing Kuwait’s oil revenues. KIA’s PE allocation is not equivalent of a social security fund. In its early years, NPS invested disclosed, but we estimate it to be roughly half of KIA’s 28 percent in more conservative asset classes. In 2002-2003, NPS fi rst began exposure to alternatives. The fund is a recent entrant into co-invest- investing in VC/PE, and in 2006, it launched its overseas investments, and the PE allocation estimate is based on a $1B co-investment team. NPS has made e orts to increase its direct/co-investing ment program managed through its PE advisor StepStone Global, activities in recent years, including through a co-investment according to market sources. partnership with Standard Life Investments Private Equity, and also by committing KRW400B to a foreign M&A fund along with other Korean LPs. The pension fund also recently co-invested in Colonial Pipeline Company alongside U.S. mega-buyout fi rm KKR. NPS is 5 Stichting Pensioenfonds ABP (ABP) / targeting to reach 11.3 percent allocation to alternatives in 2014, APG Asset Management (APG) including increases to its PE allocation. NPS has expanded its global footprint, opening its New York and London o ces in 2011 and 2012, respectively. • Investor Type: Public pension fund • HQ: Netherlands 7 Hong Kong Monetary Authority (HKMA) • Total Assets: $373B • Estimated PE Allocation: 5 percent • Estimated Co-investment Allocation: • Investor Type: Sovereign wealth fund 25-30 percent of PE allocation • HQ: Hong Kong • Total Assets: $327B Commentary: ABP, the Dutch public pension fund for government • Estimated PE Allocation: 6 percent of long-term growth o cials and education employees, historically has been managed portfolio (LTGP), or 2 percent of total assets internally. In 1999, ABP and Dutch healthcare/social worker pension • Estimated Co-investment Allocation: Opportunistic PGGM (now PFZW) formed the predecessor to AlpInvest to increase their PE exposures including co-investment. In 2007, a new pension law mandated Dutch pensions to hand over their asset manage- Commentary: HKMA’s PE investments through funds and co- ment to independent fi rms, thus the creation of APG Asset Man- investments began in 2009 and are managed in the LTGP, which agement. Since 2008, APG has managed ABP and has added fi ve is capped at one-third of total assets. The purpose of the LTGP is other pension plans to its client list. In 2012, APG began building own to preserve the purchasing power of the fund over time. The other in-house PE team, including direct investment talent, and launched two-thirds of HKMA assets are housed in the backing portfolio, investment activities during 2013. It has opened a New York which is invested in highly liquid U.S. dollar-denominated securities. o ce with investment professionals focused on fund and direct Though newer to PE, HKMA has aggressively pursued the build-out investments. of its exposure to this asset class as a long-term infl ation-protection measure. HKMA uses external fund managers to manage all of its equity portfolios and other specialized assets, including PE.

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The Top 20 In-depth

8 GIC (formerly Government of Singapore 10 Canada Pension Plan Investment Board (CPPIB) Investment Corporation)

• Investor Type: Public pension fund • Investor Type: Sovereign wealth fund • HQ: Canada • HQ: Singapore • Total Assets: $189B • Estimated Total Assets: $285B • Estimated PE Allocation: 19 percent • PE Allocation: up to 15 percent (including infrastructure) • Estimated Co-investment Allocation: 13 percent of PE allocation • Estimated Co-investment Allocation: Undisclosed

Commentary: GIC was incorporated in 1981 and, its website Commentary: CPPIB can invest $100M to $500M per deal for co- states, has the mission of generating “a reasonable risk-adjust ed investments, and $200M to $1B per deal for direct investments. There rate above global infl ation over a 20-year investment horizon,” are two divisions that manage CPPIB’s PE allocations: 1) Fund/Sec- and thus preserve Singapore’s foreign reserves. In contrast to its ondaries/Co-invest and 2) Principal Investments. The former division more aggressive cousin Temasek, GIC’s direct investment program focuses on fund and direct investments involving CPPIB’s GP relation- is focused on taking minority equity positions as well as providing ships and is sta ed with 32 professionals. The latter division—with 68 mezzanine fi nancing in buyouts. GIC’s co-investment allocation is investment professionals —operates as an independent principal in- not disclosed. vestment arm for natural resources, direct private equity, and private debt investments. ClearChannel, Avaya, Dollar General, TXU, Neiman Marcus Group, Asurion, NXP, and Nielsen are all examples of direct 9 California Public Employees’ Retirement System PE investments made through CPPIB’s Principal Investments division. (CalPERS) The co-investments alongside GPs are small and fewer, including Brickman, Coway, Service Repair Solutions, and Alibaba Group (the exception to the smaller size generalization). • Investor Type: Public pension fund • HQ: United States 11 California State Teachers’ Retirement System • Total Assets: $282B (CalSTRS) • Estimated PE Allocation: 11 percent • Estimated Co-investment Allocation: Up to 50 percent of PE allocation • Investor Type: Public pension fund • HQ: United States Commentary: The largest public pension plan in the U.S., CalPERS • Total Assets: $180.8B has invested in private equity since 1990. Historically, CalPERS has • Estimated PE Allocation: 13 percent relied on investment advisors and funds-of-funds to access and • Estimated Co-investment Allocation: 6 percent of PE allocation manage its PE portfolio. After severing ties with long-time PE advisor Pacifi c Corporate Group in 2010, it has taken on a more active Commentary: CalSTRS has a 13 percent allocation to private equity, role. In addition to rebalancing and restructuring its PE portfolio with actual allocation at 11.8 percent as of Feb. 28, 2014. The pen- via secondary sales throughout 2011 and 2012, CalPERS has also sion’s portfolio includes more than 50 co-investments, representing expanded the scope of its PE investing to include more co-invest- about 6 percent of its $21B of PE assets under management. The ment alongside GPs and direct investing. (See Up-and-Coming LPs public pension accesses co-investments through its GP relation- section on page 23). ships, and its co-investment policy requires a positive recommendation by both CalSTRS internal sta and a third-party advisor/ fi duciary. CalSTRS’ historical co-investment expo sure has included commitments to co-investment sidecars managed by Bain Capital, CVC Capital, and other notable GPs. In 2012, CalSTRS announced it intended to pursue more separate accounts and co-investments. . CONTINUES ON NEXT PAGE

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The Top 20 In-depth

12 Stichting Pensioenfonds Zorg en Welzijn (PFZW; 14 Temasek formerly PGGM)

• Investor Type: Sovereign wealth fund • Investor Type: Public pension fund • HQ: Singapore • HQ: Netherlands • Total Assets: $173B • Total Assets: $177B • Estimated PE Allocation: 27 percent (exposure to unlisted assets) • Estimated PE Allocation: 6 percent • Estimated Co-investment Allocation: 90 percent of PE allocation • Estimated Co-investment Allocation: Commentary: In contrast to its larger cousin GIC, Temasek focuses 25-30 percent of PE allocation a larger proportion of its PE portfolio on lead or control inves- Commentary: The Dutch healthcare/social worker pension, which tor stakes, directly in its portfolio companies rather than through is the country’s second largest, has a similar history to ABP/ fund managers. Our co-investment allocation estimate is based on APG described previously. Its predecessor was formed in 1969. Temasek having less than 10 percent of its overall portfolio invested In 2008, the same regulatory forces that caused the structural in third party-managed funds. As expected, Temasek has a much changes with ABP/APG resulted in the separation of duties be- higher risk-return proﬁ le than Singapore’s GIC and Central Provi- tween PFZW—which is a non-proﬁ t foundation—and PGGM — dent Fund, with investments made since March 2003 generating which manages PFZW’s investment portfolio. The PE portfolio was 20 percent annualized returns over the last 10 years. In compari- historically managed by AlpInvest, which has invested PFZW’s son, GIC’s 10-year annualized nominal returns—albeit on its entire capital in PE funds, secondaries, and co-investments. The AlpInvest portfolio and not just recent investments—were 8.8 percent; CPF’s contract will continue to 2015. However, PGGM has been building target returns are in the low single digits. its own in-house PE and infrastructure teams. 15 Qatar Investment Authority (QIA)

13 Employees Provident Fund (EPF) • Investor Type: Sovereign wealth fund • HQ: Qatar • Investor Type: Public pension fund • Total Assets: $170B • HQ: Malaysia • Estimated PE Allocation: unknown • Total Assets: $176B • Estimated Co-investment Allocation: Undisclosed • Estimated PE Allocation: 2 percent • Estimated Co-investment Allocation: 20 percent of PE allocation Commentary: Founded in 2005, QIA’s mission is to strengthen Qatar’s economy by diversifying into asset classes outside of natural Commentary: Malaysia’s EPF manages a compulsory savings resources. It has since grown to more than 110 investment and retirement plan for the nation’s private sector workers. EPF professionals. Although public data on QIA’s PE and co-investment has publicly stated that plans to increase its PE allocation, though activities are di cult to ﬁ nd, QIA is known as being an active no new targets have been set. The fund has a particular interest investor in PE funds and co-investments. Its PE allocation and co- in ASEAN and China opportunities, with local deals comprising investment allocation are not publicly disclosed. about 20 percent of its PE portfolio. For example, in 2013, EPF co- invested alongside Johor Corporation and CVC Capital Partners to privatize QSR Brands Bhd and KFC Holdings Malaysia Bhd.

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The Top 20 In-depth

16 New York State Common Retirement Fund 18 Florida Retirement System Pension Plan (FRS) (NYSCRF)

• Investor type: Public pension fund • Investor type: Public pension fund • HQ: United States • HQ: United States • Total Assets: $140B • Total Assets: $150B • Estimated PE Allocation: 6 percent • Estimated PE Allocation: 9 percent • Estimated Co-investment Allocation: 8 percent of PE allocation • Estimated Co-investment Allocation: 5 percent of PE allocation Commentary: The FRS is managed by the State Board of Admin- Commentary: NYSCRF states that it opportunistically invests in istration (SBA) of Florida. Its historical co-investments have been co-investments, which we interpret to mean zero to 10 percent of through commitments to Lexington’s co-investment vehicles. The its PE allocation. Its co-investment portfolio includes a $250M sepa- market value of these commitments totaled about $650M as of rate account with emerging managers-focused private equity ﬁ rm mid-2013. The prior two Lexington co-investment vehicles were Farol Asset Management to make in-state investments. The NY essentially two-LP separate accounts, with SBA and New York State state pension experienced some interruption to its PE investment Teachers’ Retirement System (NYSTRS) providing the committed program in the late 2000’s, but it appears to have recommenced capital. In addition, SBA committed $500M to Lexington’s third its strategy. co-investment vehicle in 2013, which closed on $1.6B.

17 New York City Retirement Systems (NYCRS)

• Investor type: Public pension fund • HQ: United States • Total Assets: $144B • Estimated PE Allocation: 6 percent • Estimated Co-investment Allocation: Varies by underlying plan

Commentary: NYC has fi ve separate public pension plans, each with its own investment board, policies, portfolios, and advisors. The fi ve plans include the New York City Employees’ Retirement System (NYCERS); the Teachers’ Retirement System of the City of New York (TRS), the New York City Police Pension Fund Subchapter 2 (POLICE); New York City Fire Department Pension Fund Subchap- ter Two (FIRE); and the New York City Board of Education Retire- ment System (BERS). The NYC Comptroller serves as the custodian and investment advisor to the boards of these fi ve pension funds. Most of the PE exposure is through the three larger plans—TRS, NYCERS, and POLICE, with NYCERS having close to 8 percent of its assets invested in PE. For the most part, the co-investment exposure for all fi ve plans is through sidecar vehicles or co-investment funds-of-funds.

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The Top 20 In-depth

19 Ontario Teachers’ Pension Plan (OTPP) Runners up:

• Investor type: Public pension fund • HQ: Canada 21. Teacher Retirement System of Texas (TRS) • Total Assets: $130.8B • Investor type: Public pension fund • Estimated PE Allocation: 9.4 percent • HQ: United States • Estimated Co-investment Allocation: 50 percent of PE allocation • Total Assets: $124B • Estimated PE Allocation: 11 percent Commentary: OTPP’s private equity portfolio is managed by • Estimated Co-investment Allocation: Teachers’ Private Capital, which was launched in 1991. Since then, 20 percent of PE allocation (target) TPC has grown to a team of 40+ investment professionals and invested in more than 300 direct and fund investments. As of Dec. 22. ATP Livslang Pension (ATP) 31, 2012, the pension had CA$12B allocated to private equity. TPC has • Investor type: Public pension fund a greater focus on direct and co-investments than most LPs its size, • HQ: Denmark with approximately half of its historical PE investments allocated to • Total Assets: $110Bå direct • Estimated PE Allocation: 9 percent or co-investments. • Estimated Co-investment Allocation: 5 percent of PE allocation 20 Government Employees Pension Fund (GEPF)

• Investor type: Public pension fund • HQ: South Africa • Total Assets: $125B • Estimated PE Allocation: 5 percent • Estimated Co-investment Allocation: 80 percent of PE allocation

Commentary: The largest pension plan in Africa, GEPF manages retirement assets on behalf of all public employees in South Africa. GEPF only recently added unlisted investments (including PE) to its investment strategy in 2012. For this bucket, the South African pension fund has a 15 percent aggregate allocation to PE, property, and developmental investments, of which we estimate one-third is focused on PE. GEPF is focused on direct investments, co-investments, and fund investments, with 80 percent of its PE allocation managed through directs and co-investments.

Methodology: Ranking based on total assets, as provided in Tower Watson Top 300 Pensions Report 2013, the Sovereign Wealth Fund Institute website, or LP website. Only LPs with known PE co-investment exposure are included on this league table. Sources: LP websites, Tower Watson, Sovereign Wealth Fund Institute, news reports.

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Up-and-Coming LPs A number of notable LPs are taking the plunge into co-investments for the ﬁ rst time or are signiﬁ cantly expanding their commitment to the asset class

Hong Kong Monetary Authority, #7 model for private equity advisor rela- cluding a period when it had an (China; ~$327B total assets): tionships and funds-of-funds. In 2013, internally managed co-investment pro- the pension fund also broadened its gram from 1986 to 2003. However, its HKMA’s private equity allocation is co-investment policy. Co-investments are $10B-plus exposure to PE has not in- housed within the inﬂ ation-mitigating now allowed up to the amount commit- cluded co-investments apart from cer- long-term growth portfolio. Launched ted to fund manager, essentially allowing tain in-state investment programs and a in 2009, HKMA’s PE investment activi- CalPERS to invest up to 50 percent of its relationship with Northwestern Mutu- ties focus on the energy, healthcare, and PE portfolio through co-investments. al Capital that was discontinued in 2011. telecommunications sectors. Due to the CalPERS is actively recruiting for its PE is is changing, according to reports in specialized expertise required for invest- co-investment/direct-investment team. 2013 that the Madison, Wis.–based pen- ing in these sectors, HKMA uses external sion fund was seeking to build a co-in- managers and deploys its private equity vestment program. In early 2013, SWIB allocation through fund investments and also began recruiting an experienced in- co-investments. As of the end of 2012, PE British Columbia Investment vestment professional who would be “re- comprised approximately $6B or 2 percent Management Corporation, unranked sponsible for establishing, building and of the overall portfolio. Co-investments (Canada; ~$93B total assets): manag ing an internal private equity co- are not separately disclosed but appear investment program” at SWIB. SWIB’s in- to be skewed toward private equity real BCIMC plans to commit CAD$1.2B to vestment policy permits co-investments estate investments. As HKMA builds out PE annually, as well as expand its existing but does not permit direct investments its PE investment e orts, we view it as co-investment activity. The organization where SWIB is the lead investor. likely that the organization will also seek has been investing in PE since 1995, with a to increase its co-investment activity. 4.5 percent target allocation to the asset class. Its historical co-investment activities North Carolina Retirement Systems, have included making commitments to co- unranked investment funds managed by HarbourVest (US; ~$83B total assets): California Public Employees’ Retire- and Adams Street, as well as direct investment System, #9 ments (heavily weighted toward energy and THE NCRS Investment Manage- (U.S.; ~ $282B total assets): infrastructure). ment Division manages assets of several NC public pension plans, including the CALPERS has opportunistically Teachers’ and State Employees’ Retire- embraced co-investments. Including un- ment System, the Consolidated Judicial funded commitments, CalPERS has more State of Wisconsin Investment Board, Retirement System, the Firemen’s and than $51B exposure to private equity. In unranked Rescue Workers’ Pension Fund, the Local recent years, the U.S.’s largest pension (US; ~$86B total assets): Governmental Employees’ Retirement fund has made several changes, includ- System, the Legislative Retirement ing selling non-core assets through SWIB has a long track record of PE in- System, and the North Carolina National secondary transactions and changing its vesting, spanning several decades, in- Guard Pension Fund. NCRS ﬁ rst received . CONTINUES ON NEXT PAGE

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Up-and-Coming LPs

legislative approval to invest in PE in TOP THREE than 20 transactions. Going forward, USS 1989, accumulating about $3B of PE NAV plans to invest at least $1B annually in PE and another $2.5B+ of unfunded com- and private debt co-investments, with a mitments, and it has co-invested locally minimum investment size of $60M. through the North Carolina Innovtion $327B Fund. However, the plan has yet to HKMA total assets launch a full-fl edged co-investment program. Such a program has been on the Alaska Permanent Fund Corporation, plan’s agenda for discussion throughout unranked 2013 and has slid into the 2014 initiatives. $282B (U.S., ~$50B total assets): CAlPERS total assets APFC has a 12 percent allocation to private markets (encom-passing PE, pri- Ohio Public Employees Retirement vate credit, and infrastructure), including System, unranked a 6 percent allocation to private equity. (US; ~$80B total assets): e sovereign wealth fund only received $93B permission to invest in PE in 2004, and OPERS, with its $7B of PE NAV (not BCIMC total assets in the past couple of years it has made a including unfunded commitments), has strong push into co-investing for both its stated that it plans to continue building PE and infrastructure investments. Last out its co-investment program. e plan year, APFC announced its intent to in- is permitted to invest up to the greater of vest $450M in co-investments during the 1 percent of private equity market value 2014 fi scal year, through both third-party or $75M per co-investment. OPERS also managed co-investment funds ($250M) committed $350M to Lexington Capital and internal co-investment decisions Group’s third co-investment fund last alongside existing fund investments (up year. to $200M). To implement its internal co-investment strategy, APFC also sought to hire a senior portfolio manager who would “have responsibility for evaluating Virginia Retirement System, unranked existing and prospective private market (U.S., ~$60B total assets): fund investments and developing the fund’s Private Equity Co-Investment VRS was seeking to hire a senior-level Universities Superannuation Scheme, program.” APFC announced at the outset professional to head its co-investment unranked of this year that it had hired Stephen activities last year, and Richard Wiltshire (U.K., ~$58B total assets): Moseley to fi ll this position. Moseley joined the pension fund’s investment previously managed co-investment for team soon afterwards. Wiltshire comes THE USS has a 10 percent allocation Pacifi c Corporate Group and PCG spinout from a direct-investment background, to PE and has set goals of investing $1B StepStone Group. having most recently been at neighbor- per year and reaching a balance of 50 ing middle-market buyout fi rm Quad-C percent funds/50 percent direct invest- Management. VRS has a hefty 12 percent ments. Its current PE portfolio has ap- new target allocation for PE. Most of the proximately $5B of NAV ($10B including pension fund’s historical investments in unfunded commitments). e plan fi rst private equity have been through limited made a concerted e ort to pursue PE co- partnerships. investments in 2008. As of the end of last year, USS had co-invested $200M in more

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The Abstainers Privcap looks at the four largest LPs—by total plan size—with active private equity programs but no disclosed active co-investment programs

National Social Security Fund State Teachers Retirement $177B System of Ohio $70B CHINA; total assets U.S.; total assets

DESPITE having a 10 percent target allocation to the ALTHOUGH Ohio’s public pension plan for its educators private equity asset class, NSSF does not have direct or co- includes a hefty 7 percent allocation to private equity, the investments. e only assets that NSSF’s charter allows it to plan prefers to make investments directly into funds and invest in directly are bank deposits and government bonds. does not appear to engage in co-investments. Its mandate includes backing local private equity funds, and NSSF-backed funds to date include the China-Belgium Direct Equity Investment Fund formed in 2002 to invest in Chinese SMEs and managed by Fortis-Haitong Securities. NSSF has also backed notable local RMB funds, including those managed by CDH and Hony Capital.

Pension Fund Association $118B BT Group $60B JAPAN; total assets UNITED KINGDOM; total assets

PFA is the largest public pension fund in Japan that does THE pension plan of the British communications behemoth invest in private equity, with a 0.2 percent allocation to the has a 3 percent allocation to private equity. BT’s allocation asset class and no co-investments to date. As an aside, there is invested in commingled funds of funds managed by have been calls for PFA’s larger brethren—Government Hermes GPE. Although some portion of Hermes’ funds-of- Pension Investment, with $1.3T in total assets, and Local funds may have co-investment exposure, BT Group itself Government O cials, with $201B in total assets— does not have its own co-investment activities, nor does to diversify into higher risk-return asset classes. However, it appear to have direct control of its underlying exposure GPI and LGO continue to hold primarily public debt and through Hermes. equity securities.

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Allocation Policies Not all ﬁ rms abide by a co-investment allocation policy. And those that do have distinct ways of determining allocations. We look at how various models work, which ones o er the best terms for LPs, and policy gray areas.

P demand for co-investments continues to “ e GP should not invest in opportunities that are grow, with the latest data from Probitas Part- appropriate for the fund through other investment ners1 showing that 70 percent of LPs take part vehicles unless such investment is made on a pro-rata Lin direct or co-investments. Of those, roughly half basis under pre-disclosed co-investment agreements co-invest opportunistically; the others have active established prior to the close of the fund.” internal co-investment programs. It’s possible that some GPs won’t follow recom- Such high demand presents a challenge for GPs: mended guidelines and will fail to adhere to a co-in- doing right by their LP co-investing partners and vestment allocation policy to guide their decisions. those who invest in vanilla PE funds. To add to the Luckily those instances are limited to GPs that aren’t pressure, regulatory authorities are keeping an eye considered “institutional-quality.” Private equity on potential confl icts and violations of fi duciary duty. fi rms that are registered investment advisors are e SEC has specifi cally highlighted its concerns required to create and maintain compliance manuals about fee allocations for co-investing vehicles, the that delineate their policies and procedures for co- in- potential confl icts surrounding preferential terms vestments.3 Nonetheless, gray areas abound. in side letters, and the allocation of investment In the following tables, we present fi ve common opportunities.2 approaches to allocating co-investments and evaluate e ILPA Private Equity Principles, in the updated their pros and cons, for the perspective on an LP. In 2011 version, also weigh in on mitigating each case, a clear trade-o exists between e ciency/ potential confl icts for GPs o ering co-investments: transparency and satisfying infl uential LPs. Which Policy is Best? Sidecar approaches typically outsource co-investing function to GPs, at the expense of LP fl exibility

Approach Co-investment Sidecar: Co-investment Sidecar: Follow-on Co-investment Sidecar: Fund-Speciﬁ c Fund-Agnostic Fund-Speciﬁ c Examples • THL Co-investment Fund • CVC European Equity Partners • Denham Oil & Gas Co-investment • DRI Capital II Tandem Funds Fund • BCP V-AC • KKR Private Equity Fund (acquired • TPG Strategic Partners Interim Fund, • Encap VIII by KKR & Co.) L.P. (raising)

How It Works Overfl ow by deal: the main fund Overfl ow by deal: sidecar invests Overfl ow by fund or sub-strategy: receives its desired allocation for in excess allocation of one or more deployed when main fund has deployed each deal; excess allocation goes to main funds its capital for a particular strategy or all the sidecar vehicle of the funds’ strategy; provides a bridge between the current main fund and the next fund

Decision-making Typically utilized at GP’s discretion, although in some cases LPs may be able to opt out of speciﬁ c deals

1Probitas Private Equity Survey Trends 2014 2http://www.sec.gov/News/Speech/Detail/Speech/1365171490386#.UxD-qfRdU7Q . 3http://www.pepperlaw.com/pdfs/PHWhitePaper_PrivateEquityCo_Investments_FINAL.pdf CONTINUES ON NEXT PAGE

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Allocation Policy, Pros and Cons A look at ﬁ ve common approaches to doling out co-investments, and the trade-o s that must be made to maintain transparency and satisfy LPs

PROS CONS

Co-investment • Very clear allocation among co-investors; set • Typically charge management fee, albeit usually on Sidecar: at time of fund formation drawn capital (rather than committed capital) Fund-Specifi c • Typically a discount on carried interest and • GP typically has a larger commitment to the main potentially higher hurdle rate fund vehicle than to the sidecar(s) • Provides greater fl exibility • Allows GP to circumvent hard caps on fund size and • GP discretion over the amount to invest pursue larger deals from the main fund versus the overfl ow • Depending on terms, sidecar may pay GP carry fund; however, since the GP is rewarded for before main fund reaches hurdle, creating confl ict of the overfl ow fund’s performance, interests interest are aligned • Administered and monitored by GP

Co-investment • Can support older deals where the fund • Similar to fund-specifi c sidecars, but with Sidecar: vehicle has run out of capital for follow-ons some added complexities in that co-investments may Fund-Agnostic • Greater vintage-year diversifi cation within be spread across multiple funds with di erent sets of the sidecar LPs—and thus, di ering interests • Administered and monitored by GP • Creates complexities for attracting LPs seeking co- investment rights in new funds • Sidecar may pay GP carry before main fund reaches hurdle, creating confl ict of interest

Follow-on • Greater visibility on strategy to be pursued • Typically charge management fee and carry, albeit Co-investment if sub-strategy specifi c usually on drawn—and not committed—capital Sidecar: • Administered and monitored by GP • GP typically has a larger GP commitment to the main Fund-Specifi c • Strategy-specifi c sidecars allow GP to pursue fund vehicle than the follow-on fund, and thus less attractive opportunities without exceeding alignment of interest (e.g., use of follow-on fund to concentration limits initially set for main fund resuscitate underperforming main fund investments)

Deal-by-Deal • Transparent policy • Some LPs may have an information advantage and Co-investing • Allows all LPs to access co-investment thus are able to move faster; LPs without info may According to • Typically reduced or no fee/no carry not move quickly enough to meet deadline Pro-Rata • LPs typically are responsible for the administrative Allocation Policy aspects of the co-investment(s)

Deal-by-Deal • May help GP with fundraising and attracting • Smaller LPs may lose out on co-investing in Co-investing anchor/ﬁ rst-close LPs most attractive deals According to • Typically reduced or no fee & carry • May create complexities with Most Favored Side Letters • Typically requested by LPs with better Nation clauses co-investment capabilities • LPs typically are responsible for the administrative aspects of the co-investment(s)

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Fee Breaks,Deconstructed As more LPs jump on the co-investing bandwagon, the question arises: how do you quantify the beneﬁ t of direct investments for an LP’s private equity portfolio?

handful of studies have taken a look at historical performance for private equity Key Observations: fund investing versus PE direct/co-investing. However, these studies are typi- • A portfolio that invests cally plagued by survivorship bias, as well as the evolution in economics for both only in funds will achieve a fundsA and co-investments throughout the last three decades. net annualized return that is To keep things simple, yet useful, Privcap has calculated the structural impact of co- nearly 300 bps lower than a investment allocations on a PE portfolio. Among the assumptions we make are that the portfolio that splits its alloca- funds and no-fee co-investments have the exact same gross returns, so deal selection is not tions evenly between funds at issue. In fact, we note in our key observations below that the fee savings from co-invest- and co-investments. The latter scenario results in a fee ing provide LPs with a substantial margin of error when selecting co-investment deals. savings of almost 60 percent However, we do not take into account the costs of accessing co-investments, be it by invest- in dollar terms. ing in an internal team or hiring a funds-of-funds or PE advisor. • A co-investment-only portfolio has a 515 bps advantage The analysis below is based on the following assumptions: on an annualized basis over a funds-only portfolio, and is not • $100M aggregate portfolio size subject to fees or carry. • Underlying portfolio companies of both funds and co-investments generate returns of 2.0x gross TVPI • Fund economics: 2 percent p.a. management fee, 20 percent carried interest, 8 percent hurdle rate, • Based on our assumptions, a 5-year investment term co-investments-only portfolio • Co-investment economics: No fee, no carry (and thus no hurdle rate), 5-year investment term can underperform the same investments in a funds-only structure by more than 20 Estimated Performance and Fees Based on Fund vs. Co-investment Allocations percent cash-on-cash and still achieve the same net IRR. Portfolio construction Net IRR Net TVPI Mgmt Carry Estimated di erential vs. (%) (x) Fee ($M) fund investing only • In a portfolio of 50 per- ($M) cent funds - 50 percent co-investment/directs, the 100% Fund investing 9.7 1.6 11.60 26.67 Annualized Return Fees co-investment/directs can (+bps) (%) underperform the funds’ 80% Fund investing 11.0 1.7 9.28 19.16 129 -26 performance by 24 percent 20% Co-investing cash-on-cash and the overall 50% Fund investing 12.7 1.8 5.80 9.88 295 -59 performance of the portfolio 50% Co-investing would be equiv alent to that of 100% Co-investing 14.9 2.0 - - 515 a funds-only portfolio.

Notes: Model is not based on any actual portfolio, fund, or co-investment. Assumptions are based on what Privcap believes to be market terms for funds and co-investments. The same capital deployment and return schedule is used for funds and co-investments. Assumed Returns are for underlying portfolio companies on a gross basis, prior to the impact of fees. Net returns do not incorporate additional fees to advisory ﬁ rms or funds-of-funds who may be managing these portfolios. Management fees are charged on committed capital (funds portion only) during the commitment period, and on net invested capital (funds portion only, calculated as invested capital less returned capital) and do not consider the impact of fee o sets and would likely be reduced by such o sets. A European-style waterfall is assumed with 100 percent GP catch-up. Assumes no recycling or fund-level leverage.

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Research Roundup: Co-investment Empirical research into the role of co-investing in an institutional portfolio is scarce. Here are summaries of three important projects to date.

Analysis by: AlpInvest INSEAD, Harvard University, NBER State of Wisconsin Investment Board1

Title “The Virtue of Co-Investments,” by AlpInvest “The Disintermediation of Financial “Private Equity Co-Investments: Partners Markets: Direct Investing in Private Eq- Historical Performance and Strategy uity,” by Lily Fang, Victoria Ivashina, Opportunities,” by John Drake, Managing and Joshua Lerner Analyst – Private Equity at SWIB Date February 2014 January 2014 (draft) 2013

Background This white paper targeted at LPs examines the The paper focuses on the cost/beneﬁ t of The paper is not available to the public and outperformance of co-investments in AlpInvest’s disintermediation in the PE industry result- was used internally to make the case for an portfolio and presents the prerequisites for suc- ing from LP direct investing internally-managed co-investment program cessful co-investment programs at SWIB

Co-investment • Superior deal selection • Fee savings (higher net returns) • Fee savings Driver(s) • Fee savings • Greater control over deal selection and • Shorter J curve risk exposures • Control of investment pace • Reduces principal-agent problem by • Rebalances portfolios & builds diversiﬁ cation aligning LP-GP interests

Data Set • Co-investment data: AlpInvest’s • 391 direct PE investments by 7 large • 231 co-investments from existing SWIB co-investments (15% of opportunities) between institutional investors over 20 years general partners 1997 and 2012 (1991-2011) • Benchmark 1: 3,755 transactions, including all • LPs were undisclosed but included large portfolio companies acquired by buyout funds university, corporate, and government- managed by 102 GPs where AlpInvest is an LP a liated entities based in North America, • Benchmark 2: 1,840 transactions undertaken by Europe, and Asia, with larger-than-aver- 61 GPs from whom co-investments were sourced age PE exposures

Assumptions & • Includes investments made from 2001 to 2011 • Cash ﬂ ows and valuations of the 391 di- • Undisclosed Methodology • Weight of investments in declined-deals port- rect investments through Q2 or Q3 of 2011 folio is determined by the potential investment • Takes into account the LPs’ internal amount per invitation costs of co-investing (e.g., sta ng, legal costs) Returns • AlpInvest co-investment portfolio: 1.6x gross • On average, IRRs of co-investments • “The average co-investment outperformed TVPI in 138 deals are more than 8% lower than the overall the fund it came from 72% of the time and • Realized: 2.2x gross TVPI in 61 deals fund performance; the di erence for TV/ only underperformed 17% of the time and met • Declined co-investments: 1.2x gross TVPI in 105 PI was not economically or statistically or exceeded top-quartile fund returns in deals signiﬁ cant every period reviewed” • Realized: 1.1x gross TVPI in 33 deals • Early co-investments more frequently outperformed fund investments In later years, fund managers o ered co- investments in larger transactions during market peaks. Information advantage may have disappeared with more industry competition

Verdict Co-investments can outperform fund invest- Co-investments underperform fund Co-investments have a positive impact ments, but only if scale and superior deal selec- investments over time, despite fee on PE portfolios tion skills are present discounts, due to adverse selection and underperformance of larger deals

1 http://www.pionline.com/article/20130613/ONLINE/130619924/wisconsin-investment-board-plans-in-house-private-equity-co-investments

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Separate Account Case Studies The e ectiveness of separate accounts has been in question as LPs have taken up the practice, with some value when structured appropriately.

n recent years, questions have been raised about the e ec- THE FIRST TWO CASE STUDIES involve tiveness and alignment of interests for separate accounts. the State of Wyoming’s recent expansion of Large LPs have structured sizable separate accounts with its private equity exposure through separate Ilarge publicly listed asset managers, including Texas Teachers’ accounts. As background, the State of Wyo- $3B separate accounts with Apollo and KKR and New Jersey’s ming has approximately $16B in its portfolio $1.5B package of commingled fund commitments and oppor- CASE of permanent funds; recently Wyoming’s tunistic separate accounts with Blackstone. State Loan and Investment Board (SLIB) In the case of Texas Teachers’ separate accounts, which were STUDIES / approved investing up to 5 percent of the meant to invest in a mix of opportunistic investments and the #1 & 2 $11B equities portfolio in unlisted securities. managers’ commingled fund products, much of the capital has Overview The State of Wyoming has been investing in been committed to the commingled fund products at regular eco- private equity since 2003 and, until recently, nomics, with fee breaks only kicking in through special recycling had committed an aggregate of $260M to provisions that allow Texas Teachers to reinvest distributions the asset class. The State of Wyoming is for lower fees. e benefi ts of such special recycling provisions advised by R.V. Kuhns and Associates (RVK) provide little assistance in mitigating the J curve at the beginning and historically accessed private equity of the investment period—one of the reasons why fee breaks are through just two GPs: Cheyenne Capital desired—and only make an impact if recycling is required. ($250M commitment from Wyoming) and However, separate accounts can provide value to LPs when Colorado-based Access Venture Partners structured appropriately. Here, we highlight three case studies ($10M commitment). The assets managed by of PE separate-account programs that appear to do exactly what the State of Wyoming are distinct from the such programs were set up to do: provide additional resources $6.5B in assets managed by the Wyoming and expertise to the LP, utilize the deal fl ow from both the LP Retirement System. and the adviser, and create customized portfolios and econom- The State of Wyoming began contemplat- ics that the LP would otherwise not be able to have in a coming diversifi cation of its PE exposure in 2011. mingled structure. While it considered expanding its exposure to PE through funds of funds or direct investment into PE funds, RVK recommended the use of a discretionary separate-account Case Study Summary Snapshot structure for the following reasons: • Greater portfolio customization and lower fees than investing in fund-of-funds Case Study 1 Case Study 2 Case Study 3 • Fewer resources (investing and administra- LP State of Wyoming State of Wyoming State of New tive) required than direct fund investing Jersey Later that year, Wyoming sought pro- Separate Account Hamilton Lane Neuberger Berman BlackRock posals for one or more new private equity Manager discretionary separate accounts. The speci- Mandate Size $200M $200M $800M (including fi ed parameters included managers with at follow-on least $2B of AUM, exhibited strong historical commitments) performance, and met Wyoming’s minimum Mandate Start 2013 2013 2005 qualifi cations. Nineteen fi rms responded. Status Investing Investing Investing . CONTINUES ON NEXT PAGE

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Separate Account Case Studies

he original recommendation from the state treasurer to SLIB was to select two managers to each manage a $250M separate account. e state received board approval in 2013 to commit $600M to PE over the next three to ﬁ ve years. Hamilton Lane Advisors (HLA) was awarded a $200M discretionary separate account with the State of Wyoming, as Twas New York-based Neuberger Berman (NB). e additional $200M will be managed by another ﬁ rm to be selected by Wyo- ming and its advisor, with existing GP Cheyenne Capital in the running.

Case Study #1 Detailed Analysis: Wyoming-HLA Separate Account

HLA BACKGROUND: • Waterfall: American-style HLA is a private equity investment ﬁ rm founded in 1991. Headquar- tered in Bala Cynwyd, Pa., and with 10 additional o ces globally, CO INVESTMENTS: HLA has $141B of assets under advisement and $28B of discretion- • Management fee: 0.45 percent p.a. on committed capital al- ary assets under management. The ﬁ rm’s four main business lines located to fund investments include separate accounts, specialized strategies (encompassing • Carried interest: 10 percent of proceeds after return of princi- funds-of-funds, secondary funds, co-investment funds, and Taft- pal, above 8 percent annually compounded hurdle rate Hartley funds), advisory relationships (non-discretionary), and fund • Waterfall: American-style administration (i.e., monitoring and reporting). SECONDARIES: MANDATE OBJECTIVE: • Management fee: 1 percent p.a. on committed capital al- “To provide diversity in private equity investments over types of located to secondary investments (0.85 percent or 0.75 percent if investments and vintage years” the portion of the committed amount exceeds $50M or $100M, respectively); decrease by 10 percent each year after the Mandate Size: $200M investment period GP Commitment: $2M or 1.0 percent • Carried interest: 12.5 percent of proceeds after return of Mandate Start Date: July 1, 2013 capital, above 8 percent annually compounded hurdle rate Length of Mandate: 10.5-year term + two 1-year extensions with • Waterfall: European-style LP consent Length of Investment Period: 4.5 years, ending Dec. 31, 2017 EXPENSES: The State of Wyoming is responsible for all costs and expenses in- INVESTMENT STRATEGY: curred in connection with the purchase, holding, sale, or exchange Guidelines for investment to be determined annually with input of securities. from the Wyoming state treasurer’s o ce. Required to invest in a mix of fund investments, secondary investments, and co-in- MOST FAVORED NATIONS STATUS: vestments. Notably, capital from the separate account may be al- To the extent the mandate makes commitments to HLA’s located to other HLA-managed products, in which case the terms commingled fund products (which also may make co-investments of those products would prevail. and secondary investments), the State of Wyoming will receive MFN provision where no other investor in such fund product with ECONOMICS: a commitment amount that is the same or less than the mandate’s Distinct fee structures for each of the following commitment to that product shall receive more favorable terms investment categories: than the mandate with respect to fees and liquidity in such product. • Funds: • Management fee: 1 percent p.a. on committed capital allocat- NO CAUSE TERMINATION FEE: ed to co-investments during the investment period; thereafter, The State of Wyoming would be responsible for paying HLA up 1 percent p.a. on invested capital to two years’ worth of management fees, depending on how far • Carried interest: 10 percent of proceeds after return of princi- along into the investment period the mandate is at the time of pal, above 8 percent annually compounded hurdle rate termination. . CONTINUES ON NEXT PAGE

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Separate Account Case Studies

Case Study #2 Detailed Analysis: Wyoming-NB Separate Account

NB BACKGROUND: ECONOMICS: NB has approximately $242B of AUM, including $21B of AUM Notably more LP-friendly than HLA’s separate account, with managed by its alternative-investments team (NB Alternatives) commingled economics for fund investments, co-investments, as of Dec. 31, 2013. NB Alternatives is also responsible for select- and secondary investments ing private debt, healthcare royalties, equity co-investments, and • Management fee: $720,000 (0.36 percent of committed fund investments for Euronext Amsterdam—and the London capital) p.a. for 8.5 years + $100,000 (0.05 percent of committed Stock Exchange—listed NB Private Equity Partners Limited ( a capital) p.a. for the last two years of the mandate term Lehman Brothers Private Equity Partners Limited). Since the early • Carried interest: 1980s, NB’s 200-person dedicated PE team (NB Private Equity) has • Funds: 5 percent of proceeds grown to manage more than $20B of commitments to primary, • Co-investments and secondaries: 10 percent of proceeds secondary, and direct PE investments, and commits more than $1B • Waterfall: American-style to these strategies annually. Headquartered in New York, • Hurdle rate: 8 percent annualized return NB Private Equity also has four o ces globally. Much of the NB •Waterfall: American-style Private Equity team was previously part of Lehman Brothers’ Private Fund Investments Group (PFIG). EXPENSES: Same as HLA separate account MANDATE OBJECTIVE: Most Favored Nations Status: Does not explicitly extend to any Same as HLA separate account commitments that may be made to other NB-managed products. Mandate Size: Also $200M No Cause Termination Fee: More aggressive than HLA’s separate GP Commitment: $1M or 0.5 percent account; State of Wyoming would owe a lump-sum payment Mandate Start Date: July 1, 2013 equal to the entire remaining amount of management fees that Length of Mandate: Same as HLA separate account would have been paid to NB through the end of the mandate Length of Investment Period: Same as HLA separate account (Dec. 31, 2023). Investment Strategy: Same as HLA separate account

THE THIRD CASE STUDY focuses on the evolving sepa- infrastructure funds-of-funds business in 2012. In addition rate account relationship between BlackRock and the to its funds-of-funds products, BPEP has actively pursued New Jersey Division of Investment (NJDOI). separate-account mandates for large LPs, including the BlackRock was founded in 1988, and has grown to ones with NJDOI. CASE manage $4.3T of fi rmwide AUM. The fi rm’s private equity NJDOI is notable for having aggressively struck STUDY/ fund-of-funds and direct co-investment activities were separate-account arrangements with several #3 originally launched in 1999 as part of the Merrill Lynch fund-of-funds and direct PE fund managers in recent Overview Investment Managers platform. Subsequently, Black- years, led by Christine Pastore (co-head of alternative Rock acquired MLIM in October 2006, and the group investments and head of private equity) and now was renamed BlackRock Private Equity Partners (BPEP). spearheaded by Timothy Walsh following Pastore’s As of Sept. 30, 2013, BPEP had approximately $16.8B of departure in 2013 to become head of IR at tech-buyout total PE commitments under management, including fi rm Vista Equity Partners. NJDOI’s private equity assets taken on from the acquisition of Swiss Re’s PE and consultant Strategic Investment Solutions (SIS) is also

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Separate Account Case Studies

involved in the due diligence of proposed separate-ac- large amount of unfunded capital ($310M out of $400M count commitments. in total commitments) in SONJ II and SONJ Sidecar. The BPEP’s relationship with the New Jersey plan dates renegotiated terms of the consolidated vehicle provides a back to 2005, when the ﬁ rst separate account—SONJ useful perspective of how to structure separate accounts Private Opportunities—was formed to pursue PE co- for a more mature pool of capital. CASE investment opportunities sourced by NJDOI and BPEP. A year following the restructuring, NJDOI elected STUDY/ Successor separate accounts SONJ Sidecar and SONJ to commit another $400M to SONJ II, in large part to #3 Private Opportunities II were created in 2007 and 2008, maintain NJDOI’s co-investment capabilities. At the time Overview each with $200M of committed capital. the decision was made, the existing SONJ II investments Due to signiﬁ cant changes in the deal environment had a 14.9 percent net IRR and 1.25x MOIC. The additional soon after their creation, SONJ Sidecar and SONJ II’s $400M of committed capital is structured with even capital deployment was stunted. In 2011, NJDOI consoli- better terms for NJDOI than the restructured terms. dated those two separate accounts into a single vehicle The original and revised terms of SONJ II and SONJ to adjust the strategy and more e ciently manage the Sidecar are shown in the detailed analysis below:

Case Study #3 Detailed Analysis: Wyoming-NB Separate Account

ORIGINAL TERMS REVISED TERMS

SONJ II SONJ II Post-Restructuring • $200M of committed capital • $400M of committed capital • Make direct or indirect investments in operating companies and • 1 percent GP commitment other business organizations; >50 percent in North America and • Variable management fee, not to exceed 0.85 percent p.a. >80 percent in buyouts • Permitted transactions include direct or indirect investments, • Co-investments to be sourced through NJDOI’s own GP re- buying secondary LP interests (>30 percent committed), and lationships, GP relationships from BPEP’s other clients, and GPs primary commitments to VC funds una liated with NJOI and BPEP • The state had veto right on all investments • The state had veto right on all investments • 8 percent hurdle rate • 8 percent hurdle rate • 10 percent carry on direct investments and secondary funds • 10 percent carried interest • Zero percent carried interest on primary funds

SONJ SIDECAR ADD ON COMMITMENT TERMS • $200M of committed capital • SONJ II Add-on Commitment • Make direct or indirect investments alongside SONJ II in • $400M of additional committed capital for $800M total vehicle operating companies and other business organizations requiring size larger co-investments, as well as in secondary funds (deﬁ ned as • 2 percent GP commitment being at least 40 percent committed to investments) • 0.25 percent p.a. management fee on VC funds • The state had approval right for all investments • 0.75 percent p.a. management fee on co-investments/ • 8 percent hurdle rate secondaries/etc. • 10 percent carried interest • 100 percent fee o set • 8 percent hurdle across all investments • European-style waterfall • No-fault divorce clause

Privcap Special Report • Co-investment | Q2 2014 / 31 Privcap Co-Investment Report / May 2014 / 4 Co-investment / GP Policy

Click to watch this video at privcap.com Co-investing, Building Relationships Co-investment gives JLL Partners access to capital to do big deals while building their portfolio, says the firm’s Paul Levy. It also gives LPs a view of how JLL works, pushing the firm to scrutinize its decision making.

them as a black box to pay down debt. Consequent- ly, we’ve needed equity at times to keep the capitali- zation conservative but have the money to build the business. So we needed capital that was larger than the amount committed in our fund.

We like the idea of developing a closer relationship with our LPs. The LPs like it, too, for a couple of reasons. The primary reason is that when they invest with us as co-investors, they’re not paying fees. Overall, it can bring down significantly their overall fees in the JLL relationship. They like that.

Number two, they love working closely with us, because they work with people up and down the ladder in the organization. They see how we work, think about things, talk to them, and the kind of analytics that we do.

In the past three years, JLL has offered about $680 million of co-investment to its limited partners across two funds. That’s been something that they’ve liked—and fortunately, all of those deals Bio have gone well.

Paul Levy is managing director at JLL Partners, which he founded in 1988. He Let’s talk about one recent deal, Patheon (now is a former managing director of Drexel Burnham Lambert, CEO of Yves Saint DPx Holdings BV). Discuss the capital required Laurent in New York, VP of administration and general counsel at Quality Care for that deal and how the allocation was spread Inc., and an attorney at Stroock & Stroock & Lavan LLP. He received degree among your limited partners. from Lehigh University and the University of Pennsylvania Law School. Levy: JLL, in order to have 51 percent of the business, Privcap: How does JLL approach co-investment had to come up with $500 million of equity. We had opportunities with its LPs? $50 million from Fund V, $200 million from Fund VI, $100 million from JLL individuals and management, Levy: We’re a middle-market firm, and our fund and then $150 million co-investment. And the $100 is about $1 billion in size. Over the years, we’ve had million from management and JLL individuals a number of large opportunities. We’ve also had a served a specific purpose in a deal that had cross- predisposition to build our companies, not just run fund activity—to show an alignment of interest. . CONTINUES ON NEXT PAGE

Privcap Special Report • Co-investment | Q2 2014 / 32 Co-investment / GP Policy

The traditional GP role is making decisions on People are impressed by that. behalf of your investors, but in this case you’re actually reselling a deal that you’ve already We put together a comprehensive presentation decided upon for yourself. How does your firm on the company: a financial model on what we handle that? thought we could do with the company and the time frame in which we thought we could do it. We Levy: We had a team of five people working on the presented that to a host of people that we knew had deal, one of whom was really leading the charge on interest. We had existing LPs who have expressed the financing, so that took the burden off some of interest; we had non-LPs with whom we have the other people. We have one guy who’s devoted worked; we had prospective LPs who have said they fully to capital markets, and he really gets in there like co-investment and [it would] give them a taste and rolls up his sleeves. It was part of the process, of working with us—which is another reason why and it’s not all bad to be challenged and to have to co-investment could be a good marketing tool. So sell the concept. You learn a lot about what you’re we went out to them. It wasn’t that big a group. We doing by having to think about what you’re present- tell people in the co-investment process, “Do us a ing to a third party. They ask a lot of good questions, real favor—if it’s a ‘no,’ tell us quickly.” and that’s terrific.■

mes

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NEW FRONTIERS INDistributions: Disappointing? / 07 Return of the Commingled Fund / 09 CAPITAL FORMATIONDebt Funds Rising / 13 Townsend Group Data / 17 Is Berkshire Hathaway PE’s Future?/ 05 ‘Liquid Alternatives’: PE For The Masses/ 10 Tapping Deﬁned Contribution Plans/ 23 The Story Behind The JOBS Act / 25

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PrivcapRE Special Report • Fundraising | Q1 2014 / 1 For more information, visit www.privcapmedia.com

Privcap Special Report • Co-investment | Q2 2014 / 33 Co-investment / Legal Click to watch this video at privcap.com Getting the Partnership Right A fund formation lawyer says that solid co-investing begins when the LP agreement is being negotiated

know how to do it.” That doesn’t have to mean making the investment decision, he notes. “It might be a programmatic structure where they go into every deal or almost every deal,” he says.

Finding 2

Key negotiating points tend to come down to economics and control

Investors are focused on how much they need to pay to make a co-investment, but that tends to be decided when the investor initially puts money into a fund. This means investors play hard- ball when they are coming into a fund, negotiating on fees and carry. “I don’t think you could actually say there’s a market for fees and carry,” Watson says, “but there certainly are a range of alternatives. We see sometimes there’s actually no fee and carry. Sometimes they’ll come in with as much as half of the fees and carry you’d pay in Bio the fund.”

David Watson is managing Watson is a partner in Goodwin Procter’s business law department and chair of its private investment funds practice. He also Finding 3 participates in the firm’s capital markets, real estate capital markets, and private equity/venture capital practices. He holds degrees from the University of Maine and Harvard Law School. Bigger LPs and first closers get top access to deals

Private equity co-investment usually involves the establishment of a long-term partner- “When you think about co-investment, it usu- ship - the co-investment itself - that is governed by another long-term partnership, the ally goes to the larger investors as an incentive LP agreement. Making sure that all parties agree on the way co-investments work when for them to come into the fund, and it also some- negotiating the main fund terms is essential, says David Watson, a fund formation attorney times will go to the smaller investors as a first with Goodwin Procter. closer,” Watson says. Waiving fees for a period or discounts are also popular enticements to get LPs into a fundfigure out the reimbursement end of Finding 1 the equation—and here again, the government plays a heavyweight role. Neff pointed out that the federal government now provides 45 cents More groups are developing an in-house capacity to out of every healthcare dollar spent—and predicts manage co-investment that spending is very difficult.

“For years investors have said they always want to co-invest, but they “Our experience has been that you’re pushed actually haven’t been doing a lot of it. Now we’re seeing more of them . CONTINUES ON NEXT PAGE interested in it,” Watson says. “The key is having people in-house that Privcap Special Report • Co-investment | Q2 2014 / 34 Co-investment / Legal

“From the perspective of the investor that’s coming into the fund, into the co-investment, they want to know that they’re being offered, on a fair basis, the things that come up.”–David Watson, Goodwin Procter

into the consulting world, maybe with former administrators, et cetera, to give you a sense of what it was like when they were there,” he said. “But it’s a new game, and I’m not sure that an- ybody’s crystal ball, in terms of the next two or three years on the federal level, is going to be

PE fund managers who have registered under the Investment Advisors Act are required to have an investment allocation policy, which has intensi- fied pressure on managers to introduce clear rules.

Finding 5

Investors are focusing on GP co- investment allocation policies

In the past five or six years, investors have started calling on their GPs to implement co-investment policies, hoping to stop them from cherry-picking the best opportunities. “From the perspective of the investor that’s coming into the fund, into the co-investment, they want to know that they’re being offered, on a fair basis, the things that come up,” he says. “But more importantly, from the investors in the fund, they want to know ‘I’m getting all the deals in accordance with the fund document— you’re only offering the excess.’ ”

PE fund managers who have registered under the Investment Advisors Act are required to have an investment allocation policy, which has intensi- fied pressure on managers to introduce clear rules.

Finding 6

It’s nearly impossible to develop a policy to cover all situations

“You can come up with a policy, for example, that rotates opportunities among those who have capital available for it. You can come up with a policy that says only the excess goes to certain investors. There’s all kinds of ways to do that, but inevitably there’s something [else] that comes up along the way,” Watson says. He notes that there is usually an ability to get approval from investors, or a sub- set of investors, to do investments that lie outside ■ the manager’s policies. Privcap Special Report • Co-investment | Q2 2014 / 35 Co-investment / Relationships

Click to watch this video at privcap.com Choosing the Right Co-invest Partner Tom Haubenstricker of GoldPoint Partners discusses what qualities GPs and LPs consider the most important in forming a solid investing partnership

Haubenstricker: We hear from many GPs, and it’s a very common thread in their comments, that there is a lot of interest expressed in co-investment, much more so than actually gets executed upon. And I think that there are really three things that you need to have in place, and they’re kind of inter- related, if you’re going to be successful and really committed to the co-investment business. First, you really need a strategy. You need to have a strategy Bio that matches your resources and capital as well. But how are you going to go about this business? How Tom Haubenstricker is CEO and co-founder of GoldPoint Partners. He is are you going to source the opportunities? How are responsible for the day-to-day management of the firm and its investment ac- you going to select the opportunities you invest in? tivities, as well as managing the firm’s mezzanine business. Prior to the forma- And that leads to the second point, which is process. tion of GoldPoint, Haubenstricker joined New York Life, where he had various You have to have a process so that you can evaluate positions, including co-head of the private finance group. He received degrees the opportunities and approve the opportunities, re- from Michigan State University and The Wharton School of the University of ally, on a timely basis. And finally, you need a team Pennsylvania. to go ahead and execute on that process. And this is a deal business, so the deal flow is not consistent Privcap: There’s plenty of interest in the private or even. You have to decide how much activity you equity world in co-investment, but some would want to do in this area, and do you want to staff up say that it’s not necessarily matched by activity. to handle multiple deals at one point in time. What are some of the particular opportunities and challenges one faces when co-investing? So you talked about what the LPs need to do this well and to execute on these opportunities. . CONTINUES ON NEXT PAGE

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What are some of the challenges that are faced by LPs in marshaling their resources and putting this sort of organization in place? Are they better relying on some partners to help them?

Haubenstricker: It really comes down to the relationships that they have already, the amount of resources in terms of people they want to commit to it, and also the amount of capital they want to commit to it. Clearly, for those groups that are just starting out, they don’t have the same number of relationships or the same depth of relationships. “There is a lot And also, there are many different ways to approach of interest the market in many different parts of the market. expressed in There are the large-end transactions, where we saw co-investment, a lot of co-investment in the 2005–2007 period. much more so Then there’s the area where we’re more active than actually in, which is more middle market, upper middle gets executed market. And the dynamics in those two sectors are upon.” different. In the larger one, typically, those transactions were closed and underwritten by the private equity sponsors and then syndicated out almost Tom Haubenstricker, like a banking process to the investors. When I talk GoldPoint Partners about the middle-market aspect, often you have a situation where you’re working right alongside the private equity GP in each step of the way as they go through the bid process, win the bid, and go to close the transaction. So certainly two different approaches there. Also, you have some large players who are acting not as a sponsor but almost as a co-sponsor in some transactions.

Let’s talk about the GP piece here, starting from an LP’s perspective. So they’ve committed to co-investing. They’ve built the resources and strategy. What, to them, makes a good GP partner? What do GPs look for in an LP partner?

Haubenstricker: The insurance companies were early participants in the private equity sector. So that is a great starting point. In addition, certainly the large insurance companies have a lot of capital and have fairly large staffs of investment people. So you have nice ingredients there. In addition to that, many times they can be “patient” capital. They have very large portfolios, so they have the ability to meet their liquidity needs in other parts of the portfolio. And finally, they have had a very robust process in terms of valuing the opportunities, and that’s allowed them to let their investment people be very creative and seek out perhaps something that’s not traditional. So the ingredients were quite good in terms of being able to execute on co-investment opportunities; they had the relationships, they had the staff, and they had the ability to absorb the illiquidi- ty of those investments.■

Privcap Special Report • Co-investment | Q2 2014 / 37 Co-investment / Investor Relations Managing a Rising Tide of Direct Investments LP demand for co-investment has climbed in the past two years, say IR experts from The Riverside Company and Vestar Capital Partners, leading to the formulation of allocation and deal policies

Kenneth O’Keefe Erick Bronner Vestar Capital Partners Riverside

Bios Privcap: You both oversee investor relations. I’m interested in your perspective on co-investment Kenneth O’Keefe is managing director, COO, and head and how your firms are managing the increasing of investor relations at Vestar Capital. His previous posi- demand of LPs to be direct investors in deals tions include executive VP and CFO at Pyramid alongside GPs. Erick, can you talk about evidence Communications, CEO and president of AMFM, Inc., and you’ve seen that LPs are more interested in president and COO at Clear Channel Radio Group. He co-investing alongside Riverside than they used received a degree from Brown University. to be?

Erick Bronner is global head of fundraising and investor Erick Bronner, Riverside: I’ve been head of fund- relations at Riverside. Previously, he was founding part- raising at Riverside for more than two years. When ner at Mercury Capital Advisors, managing I first joined, we had a little bit of co-invest interest. director of the equity funds group and VP of the com- In the last 18 months, a number of investors who munications group at Merrill Lynch, and in communica- hadn’t co-invested all of a sudden put programs tions at Citicorp Securities. He received degrees together. Either they outsourced it to a third-par- from American University, Emory University, and Lehigh ty provider or hired a team to work in-house. Our University. co-investment activity has increased significantly, and we’ve adjusted to that. A large percentage of our LPs are interested in it in ways they weren’t a couple Videos: This article is based on a two-part panel years ago. session with Kenneth O’Keefe and Erick Bronner Ken, you’ve been doing this for a while. Can you talk about evidence that co-investing is at a ➊ Allocating LP Co-investments different level than it has been? ➋ Two IR Pros Tell How LP Co-investments Get Done Kenneth O’Keefe, Vestar Capital Partners: If you look at two of our more mature funds—the Vestar . CONTINUES ON NEXT PAGE

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which was a 2006 vintage we finished in 2011—statistically we had about 25 percent co-investment in Vestar IV and well over 50 percent in Vestar Five. Vestar VI, which is a relatively new fund, has three investments, two of which have co-invest participation.

Are they going as far as frequently calling each of you, or your deal partners, to remind them that they have an appetite to co-invest?

O’Keefe: It would not be unusual for LPs to have touched points with at least four or five other senior partners in our firm, and they have no problem picking up the phone to call them. Erick Bronner, Riverside; Kenneth O’Keefe, Vestar Capital Partners Bronner: Same here. We have a seven-person IR team to manage the co-investment process. But we’re getting increasing numbers of LPs indicating to let an LP look at what Vestar does—interact with the deal partners, with their ability to co-invest. A number of our LPs have the deal team, and see that process. When we send out co-investment just started programs, whether it’s a third party opportunities, we’ll normally put together 10, 15 pages with exhibits to give acting on their behalf or a team that they’ve hired them an executive summary. in-house. The deal is pretty much baked at that point; 99 percent of the time we’ve How are your firms structuring the co-invest- already committed the equity and concluded that this is an appropriate ment process? How do you interact with the co-invest opportunity. person who leads the deal, and the team on the LP side, to coordinate the dollars coming into the Bronner: I hear LPs say that integrity, transparency of the team, is impor- deal? tant. These investors requesting a co-investment opportunity are doubling down with us in a lot of cases. They have an LP commitment, but they’re Bronner: It’s important as an IR person that you also substantially increasing their exposure to us, and that’s a validation have a single point of contact who takes the infor- that the partnership is important to them. mation and identifies who on the deal team is the right person. The investor will come to us, we’ll put Has the process by which you reach out to your LPs for a specific together some kind of teaser that we’ll send to the opportunity evolved? Have there been lessons learned that led you to LP, and if there’s interest, we’ll call the deal team and refine the process by which you allocate? let them run with it. Bronner: When you have a co-investment opportunity, making sure you O’Keefe: Our LP base has exposure to many of the understand the landscape of your limited partners to make sure they’ve partners at the firm. As we invest in an opportunity been offered the investment is one lesson. A second thing is making sure and determine that co-invest is appropriate, we will you have a team whose focus is on identifying these folks and managing reach out proactively. Then we’ll introduce them that process. Third is being transparent with the investors about the good to the deal team that will take them through the and the bad you’re seeing in a deal so that, at the end of the process, they process. felt like they were treated fairly.

You both send out information when a co-in- Has there been any suggestion among your LP base or those who ad- vestment opportunity becomes available. What vise them that there should be clear policies written down? And if so, goes into that initial share or teaser? Is it literally is there a downside to being overly prescriptive about how an alloca- a paragraph that says, “Call me if you’re interest- tion might work for a specific deal? ed.”? Bronner: Our industry is moving to something that feels more thematic. O’Keefe: First of all, realize that any time we have an And because so many investors are looking at co-investment and you have interaction with an LP, that’s an opportunity for us. to have some kind of process, I’m seeing more requests to have something We raise funds every three to five years, and we view put in writing up front.■ the co-investment process as a unique opportunity

Privcap Special Report • Co-investment | Q2 2014 / 39 Co-investment / Expert Panel Don’t Embarrass the Lead Sponsor Direct investment experts from Cohesive Capital Partners and Neuberger Berman share tales from the trenches and tips on adding value

John Barber David Stonberg Cohesive Capital Neuberger Berman Partners

Bios Privcap: Let’s talk about the level of coordina- tion that needs to exist between your team and John Barber is the managing partner at Cohesive Cap- the GP doing the deal. How do you make sure it’s ital Partners. Previously, he was a managing partner at seamless and that you’re getting full transpar- Citi Private Equity and held positions at Salomon Smith ency? Barney, Kidder Peabody & Co., and Drexel Burnham Lambert. He received a degree from Tufts University. David Stonberg, Neuberger Berman:We have to make sure we’re selecting the best and most attrac- David Stonberg is a managing director and global co- tive risk-reward opportunities from the GP commu- head of PE co-investments at Neuberger Berman. He nity for our investors. has worked for Lehman Brothers and the M&A group at Lazard Freres. Stonberg holds degrees from the Stern A midmarket firm is going to do 10, 12 deals in a School of Business at NYU and The Wharton School. fund, maybe two or three a year. They haven’t done one in four or five months. They have one they’re really excited about, and they want to make sure they lock down that asset. They want a co-investor to work side by side with seamlessly, not slow them down. At the same time, we have to make sure we’re getting all the information we need to make the Videos: This article is based on a two-part panel right investment decision. session with John Barber and David Stonberg John Barber, Cohesive Capital: The cardinal sin in this business is to leave them at the altar. You can- ➊ Adding Value as a Co-investment not do that; it will get around and you will be dead. So we’re incredibly careful to make sure that we’re ➋ Don’t Embarrass the Lead Sponsor getting what we need, we’re telling them what we’re thinking. . CONTINUES ON NEXT PAGE

Privcap Special Report • Co-investment | Q2 2014 / 40 Co-investment / Investor Relations

In addition to leaving people at the altar, have you seen other LP co-investors who have made things more difficult in the due diligence process? What are the things that you’ve seen that are not recommended?

Stonberg: What we’ve heard from the GPs is that they want folks who have a desire and a bias to put capital to work in co-investment. Some want an opportunity to invest and co-invest, not with the intent of putting capital to work but to go behind the scenes and see the GP in action. A management team may say they’re only comfortable with you bringing two or three co-investors to meet them. If one of those persons never has an intention to get there, then they use up a valuable spot on behalf of John Barber, Cohesive Capital Partners; David Stonberg, Neuberger Berman the GP.

What is different in the way your teams do due Have either of you or your teams uncovered information during due diligence into a potential co-investment oppor- diligence that the GPs did not, and that shaped the outcome of the tunity versus some of the GP sponsors? investment?

Stonberg: We get the benefit of seeing the reports Stonberg: There was a one transaction; it was a distribution company. and the analysis that they’ve done. Then we get to Earnings had risen quite nicely over the last few years, and one of our kick the tires on the reports and the analysis and partners had owned a distribution business in this exact industry. What speak to their experts, if that’s what we want. he knew from owning it was that profitability was highly tied to commodity prices. As commodity prices rose, their profits rose. The lead GP wasn’t Barber: One of the things I learned at Citi was that aware of this. We brought it to their attention. They did their own due who you partner with is often as important as the diligence, came back to us a few days later, and said, “Thanks for the heads- deal. We want to see a good, stable private equity up—we’ve dropped out of the process.” They’ve since called us on a number firm. We want to know that in four years, if this deal of co-investments. is not doing well, there’s somebody out there working hard to get it back to 1X, because every dollar is The deal is pretty much baked at that point; 99 percent of the time we’ve a carry dollar. Most importantly, we want to make already committed the equity and concluded that this is an appropriate sure it’s a deal that firm should be doing. You don’t co-invest opportunity. ■ do a healthcare deal with an oil and gas firm.

So will you do a deal with a GP group that you haven’t known? Would you be willing to do due diligence and then consider the opportunity?

Stonberg: We’re opportunistic, but I don’t think we’ve ever done that. We really want to know who we’re partnering with. We’re passive. The lead PE firm wants to swap out the CEO four years from now—they can do that. We can call and scream at them as much as we want about a particular topic. They may choose to listen to us, and may choose not to.

Barber: We work hard to have relationships with a broad array of PE firms. I’d say we talk to 125 to 135 private equity firms on a regular basis. That has an element of making sure that you’re top of mind with them, but a lot of it is a form of diligence: What deals have they done?

Privcap Special Report • Co-investment | Q2 2014 / 41 Co-investment / Archives

�From the Archives Explore Privcap’s vault of recent videos forecasting 2014’s critical trends

FUNDRAISING & IR Latin American Energy: Two Case Studies How Much Does a Fundraising Cost? With panelists from Conduit Capital Partners and Rio Bravo Investimentos With panelists from Catalyst Investors, Blue Wolf Capital Partners and MVision SECTORS & STRATEGIES KKR and Its Capital Partners Profits, Impact and Energy Efficiency With Suzanne Donohoe of KKR With Silda Wall Spitzer and Carter Bales of NewWorld What is a “Liquid Alternative”? Capital Group With experts from KKR, Pantheon, and Morgan Stanley CFOs Navigate the Headwinds Wealth Management With Scott Zimmerman of EY From Defined Benefit to Defined Contribution Devices of Value: Baird Capital Backs Insightra Med- With George Pandaleon of Inland Institutional Capital ical Partners With Mike Liang of Baird Capital Trilantic: Fresh Powder, Flexible Approach Carve-Outs: Plan of Action With Charlie Ayres of Trilantic Capital Partners With experts from Grant Thornton, Sun Capital Partners, MIDDLE MARKET and Blue Wolf Capital Partners Deal Stories: Reinventing Frozen Food and Candy Operating Rock Stars vs. Window Dressing With panelists from McGladrey, Vestar Capital Partners, With Kevin Kester of Siguler Guff and Brynwood Partners Huron Capital: “Opportunistic” and Proud of It With Gretchen Perkins of Huron Capital Partners Human Capital is Central to Value Creation With Roberto Ferranti of Baird Capital When 100-Day Plans Go Wrong With experts from Grant Thornton, Baird Capital and Ridgemont Equity Partners The Carve-Out Specialists With Joshua Adams of OpenGate Capital

ENERGY Pine Brook’s Capital-Intensive Opportunities With Michael McMahon of Pine Brook

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Privcap Special Report • Co-investment | Q2 2014 / 42 Co-investment / Sponsored Content

Click to watch this Expert Q&A/ video at privcap.com with Philippe Leroy, Partner, Transaction Advisory Services, EY

Please contact Philippe Leroy at [email protected] • www.ey.com

Philippe Leroy, Partner

Transaction Advisory Services, EY email: [email protected] Web: www.ey.com

How does EY help a private equity backed port- Snapshot How is your team and its work additive to the folio company prepare for the exit process? sales process? Management has little time to manage a Experience: We know what to prepare, we know what’s business and a sales process simultaneously, Partner for EY’s going to be accepted or not accepted, and we so you want to ensure that you have consistent Transaction Advi- work closely with the investment bankers to help information. Consistent information will expedite sory Services team with the numbers. What you end up with is a the process, create competitive tension, and with over 15 years of story that is supported, anchored to numbers that really support the value story that will be mone- transaction experi- are believable and make sense, and this is the tized when you do a sale. ence. Philippe Leroy value of this preparation for sale.■ originally joined EY in How do you compile the information? 2002. It’s time that you should spend up front to reduce diligence time later. So it’s a lot of interviews with management, a lot of data compilation, and a lot of understanding the story. The time we spend is typically rewarding for the fund, as well as for management.

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