WURTS ASSOCIATES MEMORANDUM To: Fresno County Employees’ Retirement Association From: Wade Millen, Manager Research Group Date: June 13, 2007 Re: Private Equity Recommendations In connection with the Board of Trustees meeting in April 2007, Wurts & Associates has conducted due diligence on the most recent fund offerings for several of FCERA’s existing private equity general partner relationships including The Blackstone Group’s Blackstone Capital Partners V (Add- On fund), New Mountain Capital Group’s New Mountain Capital Partners III, and Warburg Pincus’ Private Equity Fund X. Recommendations: At the April 2007 Board of Trustees meeting, Wurts & Associates proposed a private equity commitment pace of approximately $190 million over the next five years in order to reach the plan’s target private equity allocation of 6%. A suggested initial investment pace to cover at least the first three vintage years is as follows: • Commit $15 million to New Mountain Partners III, L.P. (Vintage 2007) • Commit $20 million to Warburg Pincus Private Equity X, L.P. (Vintage 2007) • Commit $70 million to a broadly diversified private equity fund-of-funds offering (likely to have exposure to at least three vintage years) New Mountain: FCERA invested $25 million in New Mountain’s first fund offering New Mountain Partners I, L.P. (vintage 2000). We believe the significant depth of experience, the stability of the management team, continuation of their strong track record, ability to execute successfully in the middle market across economic cycles, proven ability to add value post-investment and advantage in identifying attractive “defensive growth” industries warrants consideration for reinvestment in Fund III. The minimum investment for the fund is $10 million. A firm and fund review is provided in appendix section I. Warburg Pincus: FCERA has invested $20 million in Warburg Pincus’ 1998 vintage fund (Warburg Private Equity Partners L.P.) as well as $25 million in Warburg Pincus Private Equity VIII, L.P. (vintage 2001). We believe the firm’s flexible and broadly diversified private/venture mandate, core competency in investing globally, significant private equity experience, depth in sector expertise, continuation of their strong track record and proven ability to add-value post- investment warrants consideration for reinvestment in Fund X. The minimum for the fund is $25 WURTS ASSOCIATES million; although, Warburg is willing to consider a $20 million commitment. A firm and fund review is provided in appendix section II. The Blackstone Group: Blackstone is a proven leader in investing in the large to “mega” buyout space, has exceptionally talented investment professionals and has provided consistent and very strong historical returns for limited partners. However, we have some concerns regarding the firm’s initial public offering / simultaneous sale of a portion of the management company to the People’s Republic of China as well as the larger end of the buyout market in general. We have questions as to whether a possible “dilution of focus” among key investment professionals might occur that could result in a misalignment of general partner and limited partner best interests. Regarding the larger end of the buyout space, while many factors such as access to debt, liquidity, favorable financing terms, deal pricing, massive capital flows, the level of risk aversion and economic profitability may be systematic to varying degrees across the private equity landscape, we do have concerns that the ability to do favorable deals on the “mega” end of the market and to exit these investments may be disproportionately impacted should there be a significant negative reversal in any of the factors indicated above. It is important to highlight that investors in the Add-On fund raise of BCP V are only eligible for investments made after investment (i.e. investors do not have exposure to existing investments in BCP V). Although, FCERA has historically benefited from exposure to this segment through BCP III (vintage 1997) and BCP IV (vintage 2002), we recommend passing on the additional capital raise of BCP V at this time. Below is a summary of the aforementioned recommended funds and terms for review: New Mountain Fund III Warburg Pincus Fund X Target Raise $3 billion (capped at $5 billion) $12 billion (capped at $15 billion) Focus Small / Middle Market Buyout Venture Capital / Growth Equity (60-70%) Buyout (30-40%) General Deal Size Range $100 million - $1 billion $100 million - $15 billion (Total Enterprise Value) Geography North America North America (60-70%) Europe (15-25%) Asia (15-20%) Investment Period 5 years following close 6 years following close Portfolio Companies 10 - 15 70 - 100 Investment Minimum $10 million $25 million Management Fee 1.75% through investment period, 1.5% through year 6, then tails down 1% post-investment period Carried Interest 20% of Net Profit 20% of Net Profit Preferred Return 8% per year No Transaction Fees 65/35 LP/GP Split No transaction fees charged to portfolio companies Fund Term 10 years 12 years GP Clawback Yes Yes Key Man Clause Yes Yes 2 WURTS ASSOCIATES APPENDIX SECTION I: New Mountain Capital Group, LLC New Mountain Capital Group, LLC was established in 1999 by co-founder Steven Klinsky. Mr. Klinsky was previously co-founder of Goldman Sachs & Co’s Leverage Buyout Group (1981- 1984) and later the most senior partner of Forstmann Little & Co. outside of the Forstmann family for a majority of the 1990’s. New Mountain’s first private equity fund, New Mountain Partners, L.P. began its investment period in January 2000 with a total capitalization of $770 million. New Mountain’s second private equity fund, the $1.55 billion New Mountain Partners II, L.P. began its investment period in January 2005. In January 2006, the firm launched a public equity fund managed by New Mountain Vantage Advisers and currently has over $1.0 billion of assets under management. Vantage is designed to apply New Mountain’s established strengths as an acquirer and builder of businesses toward non-control positions in the U.S. public equity markets. In total, New Mountain manages over $3.3 billion in assets. New Mountain Capital Group, LLC, is organizing New Mountain Partners III, L.P. to seek significant long-term capital appreciation through direct private equity and equity related investments. Fund III was formed in January 2007 and has a target capitalization of $3 billion. The fund intends to pursue the same “middle market” strategy and style that New Mountain has pursued with its predecessor funds. The fund will seek to invest in leveraged acquisitions, build- ups, recapitalizations, control restructurings, management buyouts, pre-public offering opportunities and growth equity transactions. The fund expects to target North American companies with enterprise values ranging from $100 million to $1 billion and will typically invest between $100 million and $500 million of equity per transaction. The fund will not participate in hostile investments. New Mountain’s investment strategy emphasizes growth and investor value added, rather than debt, as the correct way to generate exceptional returns. The firm chiefly pursues the highest quality growth companies in carefully selected industries and then works intensively with management to build the value of these companies. Their search process has emphasized defensive growth industries (i.e., sectors which can succeed in both robust and weak economic environments but which are also sufficiently large and growing to achieve high valuations and returns at exit). To date, the firm has developed particular skills in areas of post-secondary working adult education, health care, business services, federal IT services, transaction processing, media, software, financial services, logistics and consumer products. The fund expects to target a gross annual internal rate of return (“IRR”) for its investments of 30%. The investment professionals of the firm have committed over $100 million to all the firm’s investment activities to date and will commit a minimum of $50 million to New Mountain III. Firm founder, Steve Klinsky will commit at least $30 million of this amount. These commitments can be through the General Partner, through the fund or side-by-side with the fund. 3 WURTS ASSOCIATES New Mountain is led by twenty-six professionals, including fifteen senior professionals (10 managing directors and five senior advisors), plus eleven vice presidents and associates. The firm has approximately forty members in total including support staff. The firm has not lost any senior investment professionals since inception of the firm. All members of the firm participate, either formally or informally, in carry from New Mountain funds. In general, the fifteen senior professionals (managing directors and senior advisors) and four vice presidents are formal members of the general partner. In addition, all associates and support staff participate in “phantom carry” that allows them to earn significant income over and above their base pay and bonus. The General Partner of Fund III will be owned by New Mountain’s managing directors, senior advisors and vice-presidents. No outside entity or individual will have any ownership stake or economic interest in the General Partner of Fund III. The carried interest vests on an investment- by-investment basis over three years following that specific investment. Managing directors and staff share in the carry on all investments made by the fund and allocations are based on perceived