LACERS Los Angeles City Employees’ Retirement System
Report to Board of Administration
Agenda of: AUGUST 3, 2009
From: Daniel P. Gallagher, Chief Investment Officer ITEM: V−A
SUBJECT: NOTIFICATION OF UP TO $20 MILLION INVESTMENT IN HELLMAN & FRIEDMAN CAPITAL PARTNERS VII, L.P.
Recommendation:
That the Board receive and file this notice.
Discussion:
Attached is an investment abstract for Hellman & Friedman Capital Partners VII, L.P. (H&F VII) prepared by Hamilton Lane, LACERS’ traditional alternative investments consultant.
Background H&F VII (Fund) is projected to be a $7 billion, hard cap $10 billion, middle-market to large cap buyout fund focusing on a variety of industries, including financial services, media, software/data services, business services, healthcare, internet/digital media, and energy/industrials. Investments will be pursued both in the U.S. and Western Europe with a small percentage that can be invested in Eastern Europe, Asia and Australia. LACERS has invested $31 million in H&F Funds with $11 million in H&F V (vintage 2004), and $20 million in H&F VI (vintage 2007).
The General Partner (GP), founded in 1987 by Warren Hellman and Tully Friedman, has an experienced team. The majority of team members have worked and invested successfully together over many years and through several economic and private equity market cycles. H&F VII will be managed by senior partners Warren Hellman, Brian Powers, Philip Hammarskjold, Patrick Healy, and Thomas Steyer. The principals average over twenty-three years private equity experience and seventeen years tenure with the GP. They will be supported by thirty-one additional investment professionals and forty-one support staff. H&F is headquartered in San Francisco with additional offices in New York and London.
As of March 31, 2009, H&F’s prior funds had invested $11.7 billion among sixty-nine portfolio companies, realized $15.2 billion among fifty-one of those companies, earning a gross realized Internal Rate of Return (IRR) of 31.4% and a 1.9X capital multiple. These prior funds have approximately $7.4 billion of unrealized value of which 58% is for H&F VI. Based on benchmarks from Venture Economics the H&F Funds I through V have generated top quartile net returns, with Fund VI performance still too early to be meaningful.
Board Report 1 August 3, 2009 Strategy The GP will pursue an opportunistic investment strategy, and seek both control and non-control positions in portfolio companies that have competitive market strength among several factors: strong brand names; a loyal customer base; regulatory, capital, or scale barriers to entry; superior distribution systems; and, other business operations that are able to generate predictable revenue and earnings growth, high levels of cash flow, and strong operating management teams in place. The GP will focus on making large-scale investments, which should result in a portfolio oftwelve to fifteen companies with equity investments ranging from $300 million to $1.5 billion. No more than 10% of the commitments will be made in anyone company, and no more than 33% of the commitments will be invested outside of North America. The exit strategy will include sales to strategic buyers or financial sponsors, and initial public offerings. The GP will align its interest with the limited partners by committing $400 million (or 5.71 %) of the committed capitaL The GP does not outsource its fundraising or use placement agents.
Organizationat Issue During 2009, H&F anticipates completing its third generational transition for the firm. Warren Hellman will step down as Chairman to be replaced by Brian Powers. Philip Hammeraskjold will become CEO, and Patrick Healy will become Deputy CFO. However, the GP has successfully completed several prior transitions as the firm has invested across multiple economic cycles. The team appears positive, intact and content with the leadership transition. The Investment Committee will remain the same'.
Commitment Size Hamilton Lane has recommended a commitment of $20 million to Hellman & Friedman Capital Partners VII, L.P. As staff concurs, no Board action is required.
DPG:SG:ja
Attachments: 1) Hamilton Lane Final Investment Report 2) Discretion in a Box 3) Workforce Composition Report
Board Report 2 August 3, 2009 Final Investment Report
Hellman and Friedman Fund VII, L.P.
June 2009
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Firm Inception: 1987 Target Size: $10 billion Hard Cap: $10 billion Strategy: Large buyouts and growth equity Geography: U.S. (67%), Western Europe (28%), ROW (5%) opportunistically Team: 46 Investment Professionals, 41 Administrative, Legal and Support Staff Senior Partners: Warren Hellman, Brian Powers, Phillip Hammarskjold, Patrick Healy, Thomas Steyer Locations: San Francisco (headquarters), New York and London Equity Investments: $200 million to $600 million Industries: Financial Services, Media, Software/Data Services, Business Services, Healthcare, Internet/Digital Media and Energy/Industrials Prior Funds: 1988 - Hellman & Friedman Capital Partners I, LP ("Fund I") - $327 million 1991 - Hellman & Friedman Capital Partners II, LP ("Fund II") - $877 million 1995 - Hellman & Friedman Capital Partners III, LP ("Fund III") - $1.5 billion 2000 - Hellman & Friedman Capital Partners IV, LP ("Fund IV") - $2.2 billion 2004 - Hellman & Friedman Capital Partners V, LP ("Fund V") - $3.5 billion 2006 - Hellman & Friedman Capital Partners VI, LP ("Fund VI") - $8.0 billion Closing Schedule: Closing Schedule Schedule Date Amount ($MMs) 1st Close 2/13/2009 $5,700 2nd Close 2/27/2009 360 3rd Close 4/20/2009 250 4th Close 4/30/2009 150 Final Close - TBD TBD TBD Total 6.460 • The General Partner anticipates raising up to $7 billion in commitments for the Fund. Key Terms: Investment Term: 6 Years Fund Term: 10 years; subject to two one-year extensions at the approval of the Limited Partners Management Fee: Investment Period: 1.5% of committed capital Post-Investment Period: 0.75% of invested capital Fee Offset: 100% Carry / Hurdle: 20%/No Preferred GP Commitment: $400 million Key Man: If prior to the expiration of the Commitment Period, (i) if two of Brian M. Powers, Philip U. Hammarskjold and Patrick J. Healy or (ii) a number of the Designated Managing CONFIDENTIAL 3 of 12'1 Final Report - V.2 - 7/20/2009 Directors should die, withdraw, voluntarily declare bankruptcy, become permanently disabled or incompetent, or cease to devote substantially all of their business time to the affairs of the General Partner, the Partnership, its Portfolio Companies and their respective affiliates as set forth in "Time Commitment of the Managing Directors" such that the remaining Designated Managing Directors do not include a majority of the Designated Managing Directors, or [ii) the Managing Directors as of the commencement of the Partnership should cease to own or control 50% of the aggregate interests in the General Partner, then the General Partner will promptly notify the Limited Partners of such occurrence [a "Suspension Notice") and present a plan outlining its proposal for continuing the Partnership. For 90 days following the delivery of a Suspension Notice (the "Suspension Period"). Investment Highlights: • The General Partner has generated attractive returns • Disciplined investment approach • Cohesive and experienced team • Hellman & Friedman has fewer resources relative to its peers Recommendation: Based on the analysis in this report, Hamilton Lane recommends an investment of $20 million in the Fund. CONFIDENTIAL 4 of 12 Final Report - V.2 - 7/20/2009 Section 1 - INVESTMENT STRATEGY 1.1 ApPROACH • Equity investments in mid- to large cap companies in the U.S. and Western Europe • Broad industry focus • Target fundamentally sound businesses • Rigorous investment and monitoring process • High-level strategic and financial value-add • The General Partner will pursue control-oriented and strong minority investments in mid to large cap companies. Hellman & Friedman Capital Partners VII. lP Targeted Transaction Size Enterprise Value . -l l..--_._... _...-._---_._-----_.------_. Projected Fund VII Stage by Amount Invested Fund VI Control Profile by Amount Invested 10%-30% Ownership Interest (2Inv.) Control, 67% >50% Ownership Interest (7Inv.) CONFIDENTIAL 5 of 12 Final Report - V.2 - 7/20/2009 • As illustrated in the following charts, the Fund will primarily target investments in the U.S. and, to a lesser extent, Western Europe. The firm may also opportunistically pursue an investment outside of these regions (most likely in Eastern Europe, Asia or Australia). Projected Fund VII GeographIc Allocation by Amount Fund VI Geographic Allocation by Amount Invested Invested Western Europe 20% (1) Other includes Eastern Europe, Asia and Australia • While the General Partner does not have a pre-set industry allocation for the Fund, it invests across a broad spectrum of industries. The following chart outlines Hellman & Friedman's historical investments by industry sector. Prior Funds' Aggregate Industry Allocation by Amount Invested Media & Marketing, 25.0% 2 Other , 2.5% Bus. Services, 5.4% Healthcare, 7.2% Industrials, 9.5% Software & Info. Services, 21.2% (1) Includes investments in Funds I & II where no attribution information was provided. (2) Other includes Energy/Infrastructure and Food & Beverage. • The firm maintains a flexible approach and continually works to identify new industries and companies that meet its investment criteria. Before making an investment in a new industry, the Firm will generally study an industry for a significant period of time. CONFIDENTIAL 6 of 12 Final Report - V.2 - 7/20/2009 H Section 2 -GENERAL PARTNER 2.1 ORGANIZATION • The General Partner was founded by Warren Hellman and Tully Friedman in 1987. The General Partner has raised six private equity funds since inception and the firm is solely focused on private equity. • Hellman & Friedman is anticipating completing a management transition in 2009. as outlined below. •:. Warren Hellman will step down as Chairman and become Founder .:. Brian Powers will become Chairman .:. Philip Hammarskjold will become CEO .:. Patrick Healy will become Deputy CEO • It should be noted that the General Partner completed a similar transition several years ago when Mr. Hellman became Chairman and Mr. Powers assumed the CEO position. • The investment committee will remain unchanged from the prior fund and consists of Messrs. Hammarskjold. Hellman. Powers. Healy and steyer. Mr. Hammarskjold will chair the investment committee of the Fund. • The organization includes 89 professionals as outlined in the chart below. Hellman & Friedman Organization San Francisco Team New York Team London Team Total Managing Directors 9 3 3 15 Directors 5 2 8 Principals 3 3 1 7 Associates 8 4 4 16 General Counsel 2 0 1 3 Administrative/Back Office 22 4 4 30 Accounting 10 0 0 10 Total 59 15 15 89 • Two of the 15 Managing Directors, Frank Zarb and Thomas steyer, have only a partial time commitment to the Fund. Mr. Zarb dedicates the majority of his business time serving on various boards of directors while Mr. steyer is a Senior Managing Director and Co-Founder of the hedge fund Farallon Capital Partners, LLC. • The General Partner recently added Brad Henske, a Managing Director. to serve as the firm's Operating Partner. Mr. Henske allocates his time across the unrealized portfolio where he is needed. At any given time. he is able to work with two to four portfolio companies. He is currently spending the majority of his time working with the Goodman Global and Activant portfolio companies. CONFIDENTIAL 7 of 12 Final Report - V.2 - 7/20/2009 2.2 EXPERIENCE OF INVESTMENT PROFESSIONALS • Co~founded the,General Partner Harvard Business School ~ MBA • Lehman Brothers· Partner and Head of investment banking University of California. Berkeley - BA • Hellman. Ferri Investment Associates - General Partner • Matrix Partners - General Partner Brian Powers Chairman San Francisco 59 • John Fairfax Holdings, Ltd - Chairman Stanford University Law School- Teaching • Consolidated Press Holdings - Managing Director and CEO Fellowship • Pubishing &. Broadcasting Ltd - Chairman &. CEO University of Virginia Low School- JD • Valossis Communications - Chairman Yale University - BA • Jardine /IoAatheson Group· tv10naging Director and CEO • James Wolfensohn Inc. - Partner • The Ford Foundation - Director of Real Estate • Debevoise &. PUmpton -Lawyer Philip CEO San Francisco 43 • Midland and WIontagu Austratia, ltd. - Associate Harvard Business School- MBA Hammarskjold • Morgan Stanley - Financial Analyst Princeton University· BS in Engineering Patrick Healy Deputy CEO london, 41 • Consolidated Press Holdings· Assistant to CEO Harvard Business School - MBA England • James Wolfensohn Inc. - Financial Analyst Harvard University - BA Tom Steyer Managing San Francisco 51 • Faralion Capital Management· Currently serving as Senior Managing Director Stanford University - MBA Director • Goldman Sachs - Associate in risk arbitrage deportment Yale University - BA • Morgan Stanley - Employee in M&.A deportment Andy Ballard Managing San francisco 36 • Scin Capital- Principal Stanford University· MBA Director • Bain &. Company - Associate Consultant Harvard University - BA Stephen Duckett f\l\anoging london. 40 • Favonius Ventures ltd. - lVlanaging Director Harvard Business School- MBA Director England • ICG Europe ltd. - Managing Director Oxford University· MA • Apax Partners &. Company ltd. - Assistant Director • The MAC Group ltd.· Senior Associate Stefan Goetz Managing London, 37 • Goldman Sachs - Executive Director Kellagg Grad. School af Mgmt. - MM Director England • McKinsey &. Co" Inc. - Junior Associate Aachen University of Technology - ME • MIT - Visiting Scholar in the Research Lab of Electronics Ecole Centrale Paris - Diploma in Science and Engineering Jeffrey Goldstein Managing New York, NY 52 • The World Bank - CFO &. Managing Director Yale University - PhD Director • BR Wolfensohn - Co-Chairman and member of Bankers Trust Vassar College - BA • Princeton University - Research Economist and Lecturer London School of Economics • Securities Group - Consultant, Financial Advisor • U.S. Department of the Treasury - International Economist • Brookings Institution - Research Assistant Brad Henske I\Aanaging San Francisco 47 • Intuit. Inc - Senior Vice President. CFO &. General Manager The Whorton School- MBA Director • Synop.sys, Inc. - CFO Rice University - BS • Robert M. Bass Group - Partner • American Savings Bank - Executive Vice President • Bain &. Company - Vice President • First Manhattan Consulting Group - Vice President • Setpoint, Inc, - Systems Consultant Erik Ragatz Managing San Francisco 35 • Pacific Equity Partners - Vice President Stanford Business School- MBA Director • Bain Capital Partners - Associate Stanford University - BA • Bain &. Company· Associate Consultant ","len Th",pe Managing Son Francisco 37 • Bain Capital Partners - Manager Harvard Business School- MBA Director • Pacific Equity Partners - Vice President Stanford University - BA • Evelyn and Walter Haas, Jr. Fund - Assistant to the President David Tunnell Managing Son francisco 38 • Och-Ziff Capital f.Aonagement - Summer Associate Harvard Business School- MBA Director • Lazard Freres &. Co. - Financial Analyst Harvard College - AB Frank Zarb "-Aanoging 73 • Frank Zarb Associates - Chairman Hofstra University - PhD Director • Promotcry Financial Group - Chairman Hofstra University - MBA • National Associate of Securities Dealers - CEO Hofstra University - BS • Alexander &. Alexander Services· Chairman. CEO, &. President • The Travelers, Inc.· Vice Chairman &. Group Chief Executive • Smith Barney - CEO &. Chairman • Lazard Freres &. Co. - Senior Portner • U.S. Cabinet-level Energy Resources Council- Executive Director • Goodbody and Co. - Employee in Securities • Shearson Lehman Brothers - Executive Vice President, Chairman • Kraft Foods - Director • NY State Comptroller's t-Agmt. Review Commission - Co-Chairman • NYSE Nominating Committee - Chairman • Long Island Power Authority - Chairman CONFIDENTIAL 8 of 12 Final Report - V.2 - 7/20/2009 Section 3 -ApPENDICES 3.1 SUMMARY OF TERMS Term: Unless terminated sooner, the Partnership will have a term of ten years; from the date the General Partner activates the Partnership. At the General Partner's discretion and with the consent of a majority in interest of the Limited Partners, the term may be extended for two years to allow for the orderly termination of the Partnership. The Partnership is subject to earlier dissolution and termination upon the occurrence of certain events described in the Partnership Agreement. Minimum Inv.: The minimum capital commitment by a Limited Partner will be $10 million, although the Partnership may accept capital commitments of lesser amounts at the discretion of the General Partner GP Commitment: H&F professionals will make an aggregate capital commitment of at least $400 million to the Partnership and the Parallel Funds (as defined below). In addition, the General Partner may elect annually to co-invest an additional amount (measured as a percentage of the investment otherwise available to the Partnership and the Parallel Funds) in each Investment made by the Partnership during such fiscal year; provided, that the General Partner shall not decrease the level of its co investment from the level of the previous year. Management Fee: The Partnership will pay an annual management fee ("Management Fee") to an entity or entities designated by the General Partner (the "Management Company"), payable in quarterly installments in respect of each Limited Partner. The Management Fee with respect to a Limited Partner will equal (i) 1.50% per annum of such Limited Partner's total Commitment during the Commitment Period and (ii) as of the first fiscal quarter following the earlier of the end of the Commitment Period or the commencement of operations of a successor equity partnership with investment objectives substantially similar to those of the Partnership, 0.75% per annum of such Limited Partner's proportionate share of the cost of Investments then held by the Partnership. Limited Partners joining the Partnership at Subsequent Closings will contribute (from their Remaining Commitments) their allocable share of the Management Fee that otherwise would have been payable had all Limited Partners been admitted at the Initial Closing, plus additional amounts thereon at the prime rate plus 2% from the date such Management Fees would have been paid. Such contributions (other than such additional amounts) will , reduce these Limited ! Partners' Remaining Commitments. ,The Management Fee may be paid from drawdowns or out of i investment proceeds which, in each case, will reduce Remaining i Commitments. The Management Company may reduce the CONFIDENTIAL 9 of 12 Final Report - V.2 - 7/20/2009 J Distribution of Profits Distributions of proceeds from the sale or other disposition of Investments and Losses: generally will be made as follows: (i) the portion of the distribution representing the cost of the securities sold or otherwise disposed of will be distributed to all Partners in accordance with their actual capital contributions for such Investment; and (ii) the balance of the distribution, to the extent that it represents investment profits, will be made to the Partners in proportion to the allocations of such investment profits described in the Partnership Agreement. Notwithstanding the foregoing, the amount of carried interest distributable to the General Partner will be reduced to the extent that the aggregate distributions of carried interest to the General Partner would exceed 20% of the cumulative net realized investment profits of the Partnership. Investment profits in the form of interest or dividends and profits from the Partnership's temporary investments, net of related expenses and losses, will be distributed from time to time in the discretion of the General Partner in proportion to the allocations described above. The Partnership may deduct or withhold from any cash distribution any portion of such distribution to the extent of any reasonable reserves established by the General Partner for the Partnership's actual and contingent obligations, including reserves for Management Fees, partnership expenses or in connection with actual or potential Investments. Cash distributions otherwise due to a defaulting Partner are subject to offset against such defaulting Partner's obligations to the Partnership. Organizational The Partnership will bear all the organizational costs, fees and expenses Expenses: incurred by or on behalf of the General Partner or its affiliates in connection with the formation and organization of the Partnership and the General Partner, including legal and accounting fees and expenses incident thereto, up to a maximum amount of $4.0 million. Key-Man Provision: If prior to the expiration of the Commitment Period, Ii) if two of Brian M. , Powers, Philip U. Hammarskjold and Patrick J. Healy or (ii) a number of the Designated Managing Directors (as defined below) should die, withdraw, voluntarily declare bankruptcy, become permanently disabled or incompetent, or cease to devote substantially all of their business time to the affairs of the General Partner, the Partnership, its Portfolio Companies and their respective affiliates as set forth in "Time Commitment of the Managing Directors" such that the remaining Designated Managing Directors do not include a majority of the Designated Managing Directors, or (ii) the Managing Directors as of the commencement of the Partnership should cease to own or control 50% otJhe aggr~ggt~jQt~r~stsjQthec:;~n~rgIPartner, then the General, CONFIDENTIAL 10 of 12 Final Report - V.2 - 7/20/2009 Investment The Partnership will not: [i) without the consent of the Advisory Board, Limitations: invest over 20%of the Commitments in a single Portfolio Company; provided that in no event may more than 25% of the Commitments be invested in any single Portfolio Company, (ii) without the consent of the Advisory Board, invest over 40% of the Commitments in Portfolio Companies organized outside of the United States or Canada that do not have either their principal places of business in theUnited States or Canada or a majority of their sales or operations in the United States or Canada ("International Investments"); provided that in no event may more than 45% of the Commitments be invested in International Investments, fiii) invest more than 50% of the Commitments available for International Investments in Portfolio Companies that are organized, and have their principal places of business and a majority of their sales or operations outside of the Organization for Economic Co-operation and Development, as defined in the Partnership Agreement, fiv) permit more than 10% of the Commitments to be invested in securities purchased through the open market. as described in the Partnership Agreement, (v) invest directly in individual real property unrelated to an operating company, (vi) invest more than 10%of the Commitments in oil or gas reserves unrelated to an operating company and in companies whose primary business is the exploration for oil or gas reserves, (vii) invest in any other investment funds if the Limited Partners would incur an increase in management fees or carried interest, or (viii)without the consent of the Advisory Board invest in any entity if such entity's board of directors is formally opposed to such Investment. The Partnership may invest in or enter into short sales and other derivativE3<::9Qtr9c;t~()rip~trLJmE3QtsiLsLJchs91E3s,cootractsor instruments, CONFIDENTIAL 11 of 12 Final Report - V.2 - 7/20/2009 J r. _ I • ;:wld v,:, dAniLTON are bona fide hedging. financing or other investment transactions in connection with the acquisition. holding or disposition of Investments. CONFIDENTIAL 12 of 12 Final Report - V.2 - 7/20/2009 Discretion in a Box Role of Board Role of Staff Role of Hamilton Lane Strategy/Policy • Select alternative investments consultant. • With Hamilton Lane and PCA, develop • With staff and PCA, develop policies, • Approve asset class funding level. policies, procedures, gUidelines, allocation procedures, guidelines, allocation • Annually review, prOVide input, and adopt targets, ranges, assumptions for targets, ranges, assumptions for investment policies, procedures, guidelines, recommendation to the Board. recommendation to the Board. allocation targets, ranges, and other assumptions. Investment • Review investment analysis reports. • Refer investments to Hamilton Lane for • Conduct extensive analysis and due Selection • Interview and approve investments in new preliminary screening. diligence on investments. management groups of amounts greater • Conduct meetings with potential new • Recommend for Board approval than $20 million prior to investment. investments prior to recommending to the investments over $20 million for new • Interview and approve investments in Board, if practical. managers, or over $30 million in follow-on partnerships of amounts greater • In conjunction with Hamilton Lane, invest follow-on funds. than $30 million prior to investment. up to $20 million for new partnerships, and • With staff concurrence, approve up to $30 million for follow-on funds without investment of up to $20 million for new Board approval. If staff opposes, refer to partnerships, and up to $30 million in Board for decision. follow-on funds. • In conjunction with Hamilton Lane, make • Provide investment analysis report for recommendations to Board for approval for each new investment. investments over $20 million in new • Communicate with staff regarding partnerships, or over $30 million in follow- potential opportunities undergoing on funds. extensive analysis and due diligence. • Execute agreements. • Coordinate meetings between staff, Board. and general partner upon request. • Negotiate legal documents. Investment • Review quarterly, annual, and other periodic • Review quarterly, annual and other • Maintain regular contact with eXisting Monitoring monitoring reports. periodic monitoring reports prepared by managers in the portfolio to ascertain Hamilton Lane. significant events within the portfolio. • Conduct meetings with existing managers • Recommend amendments to staff for periodically. approval. • Attend annual partnership meetings when • Provide quarterly, annual, and other appropriate. periodic monitoring reports. • Fund capital calls and distributions. • Review Hamilton Lane's recommendations on amendments. • Execute amendments to agreements. Board Report 3 July 28, 2009 Vendor Hellman & Friedman LLC 1212108 Address One Maritime Plaza, 12th Floor San Francisco, CA 94111 Category Private Equity Firm TOTAL COMPOSITION OF WORK FORCE African Asian or Pacific American Indian Caucasian Total Percent (%) Gender American Hispanic Islander Alaskan Native (Non Hispanic) Employees Minority Male Female Occupation Full Time Full Time Full Time Full Time Full Time Full Time Full Time Full Time Officials & Managers 0 #DIV/O! Professionals I I 17 44 63 30.16% 43 19 Technicians 3 3 0.00% 2 I Sales Workers 0 #DIV/O! Office/Clerical 2 I 3 19 25 24.00% I 25 Semi-Skilled 0 #DIV/O! Unskilled 0 #DIV/O! Service Workers 0 #DIV/O! Other 0 #DIV/O! Total 3 2 20 0 66 91 27.47% 46 45