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? Even as the population of private equity firms shrinks, the demand for experienced direct investors will remain strong 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.