Premium Content Exclusively for Privcap Subscribers Only / www.privcap.com Q1 2014 PRIVCAP / SPECIAL REPORT Inside! The Privcap Liquid 100 p 13 NEW FRONTIERS IN CAPITAL FORMATION 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 Privcap Special Report • Capital Formation | Q1 2014 / 1 On Privcap.c0m Videos in This Report This special report includes the following new video On Camera programs. Watch them at Privcap.com Defined Contributions and Private Equity IN THIS REPORT Transparency and liquidity are needed if private equity is to tap the IMAGE defined contribution opportunity, says Michael Riak of Pantheon WIDTH: 2.0887 IN Ventures. HEIGHT: 2.2907 IN DB to DC: Inevitable, and Soon The shift from defined benefit to defined contribution pension plans in the U.S. will be a rapid domino effect, with the first movers making the move within two to three years, George Pandaleon of Inland Institutional Capital Partners argues. What’s a “Liquid Alternative”? Suzanne Donohoe, KKR A panel discussion with experts from Pantheon, KKR and Morgan Stanley on what a 40 Act Fund is, what’s driving the demand for liquid alternatives, and who’s buying them. Big Challenge, Big Opportunity A panel discussion with experts from Pantheon, KKR, and Morgan Stanley on types of liquid alternatives, regulatory and technical challenges, and what the future holds. COMING SOON on Privcap UPCOMING REPORTS KKR: LP Insights Suzanne Donohoe, who heads investor Q2 relations for KKR, describes the evolving needs of the firm’s institutional-investor Performance clients. Co-investment CFOs Navigate the Headwinds Scott Zimmerman of EY explains why pri- Energy vate equity firm CFOs are feeling bullish. Privcap Special Report • Capital Formation | Q1 2014 / 2 On Privcap.com In Case You Missed It... Must-see thought leadership from Privcap.com ICYMI IMAGE WIDTH: 2.3933 IN HEIGHT: 1.3333 IN Managing Music: KKR’s Investment How Bain Does Operating Partners Operating Rock Stars or Window in BMG Steven Barnes of Bain Capital describes Dressing? Philipp Freise of KKR shares details the evolution of the firm’s portfolio group, Kevin Kester of Siguler Guff describes his about its successful investment in which now has 70 operating executives approach to performing due diligence of a music-rights management business around the world. GP’s operational expertise. BMG. Co-Investing: Selection Skills How PE Operating Partners Are The Realities of Raising Capital Are Paramount Paid, Hired Experts from Catalyst Investors, Blue Peter Cornelius of AlpInvest explains how How are private equity firms structuring Wolf Capital Partners and MVision talk the firm chooses its co-investment op- compensation for operating partners? A about what happens behind the scenes of portunities, and how those investments discussion with two executive search ex- a fundraising in 2014. have consistently outperformed the deals perts from Korn Ferry. it turned down. 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 Report • Capital Formation | Q1 2014 / 3 PRIVCAP SPECIAL REPORTS In This Issue 2 0 13 1 Commentary 4 05 Privcap CEO David Snow questions whether Berkshire Hathaway is the top model for PE. DC’s Pension Evolution 07 U.S. pensions are making moves toward DC plans, and PE needs to be ready. By Ainslie Chandler. Turning PE Liquid 10 A panel discussion on challenges of making PE a more 26 liquid asset class, and coming innovations. 25 23 Top 100 Liquid Alternatives 13 A deep dive into the diverse business models of public and private entities inhabiting the PE space. The Golden Ticket PRIVCAP SPECIAL REPORTS 20 Real estate PE managers look to woo retail investors with various investment models. By Christopher O’Dea. Privcap Media David Snow Co-founder and CEO Gill Torren Co-founder and President Public Sector: The Move To DC Matthew Malone Editorial Director 23 George Pandaleon of Inland Institutional Capital says Content DC plans could quickly gain favor in the public sector. Zoe Hughes Editor, PrivcapRE Ainslie Chandler Senior Journalist Fighting for JOBS Andrea Heisinger Associate Editor 25 Rep. David Schweikert tells how he helped shape the Kathleen O’Donnell Media Coordinator JOBS Act and how PE will be affected. Cameron Faulkner Media Coordinator Design From the Archives Cecilia Salama Design Coordinator 28 Related content from Privcap.com Contributors Christopher O’Dea From Our Sponsors Contacts 29 A look at impact capital in emerging markets, from our Editorial sponsors at EY. David Snow / [email protected] / 646.233.4558 Matthew Malone / [email protected] / 203.554.7261 Sponsorships & Sales Gill Torren / [email protected] / 646.233.4559 For subscriptions, please call 855-PRIVCAP or email [email protected] Copyright © 2014 by Privcap LLC Interviews in this report have been edited for length and clarity. Privcap Special Report • Capital Formation | Q1 2014 / 4 CAPITAL FORMATION / COMMENTARY Is Warren Buffett the Future? Why Berkshire Hathaway may be the ultimate model for big private equity firms At a recent conference, TPG founder David Bonder- And yet, last year Berkshire Hathaway partnered man told an unsurprised audience that his firm with a Brazilian porn shop to sex up food gi- was “contemplating” going public, and added: “At ant Heinz. Buffett has taken pains to point out the end of the day, everybody will go public.” that while 3G Capital, the private equity firm led by Jorge Lemann, may eventually exit its stake in If Bonderman is right, what will the model for Heinz, Berkshire Hathaway is a forever owner of large private equity firms look like at the end of the company. the day? A lot like Berkshire Hathaway, the pub- licly traded investment behemoth whose value is The teaming of Berkshire’s balance sheet with 3G’s made up primarily by privately held companies. operational prowess offers an interesting view on the future of private equity, as well as highlights As the titans of private equity look for further the structural differences between the Berkshire growth, they are naturally moving toward the balance-sheet approach and the exit-driven private Market public markets, which offer access to permanent equity approach. Analysis by capital, huge pools of retail money and the pros- Privcap CEO pect of someday being free from the tyranny of Private equity’s history makes it difficult, but not fundraising and exits. impossible, to embrace a Buffett future. As Panthe- David Snow on Ventures’ Kevin Albert points out in a related Berkshire Hathaway as an alternative model for Privcap panel discussion, one must remember that private equity has been commented on before private equity should be defined by its core activi- by big-name GPs. In a 2009 BusinessWeek arti- ty, not by the mechanism used to accomplish that cle, Henry Kravis was quoted as saying that War- activity. The core activity of private equity is to in- ren Buffett “can make any kind of investment he vest in private companies and, hopefully, benefit as wants. and he never has to raise money.” Berk- the value of those companies grow. The process by shire Hathaway is “the perfect private equity mod- which that activity takes place has long been dom- el,” Kravis added. inated by limited partnerships, fundraising, capital calls, exits, distributions. But the mechanisms of The admiration is not mutual. For his part, Buf- the LP are certainly not the only way for investors fet regularly scoffs at private equity firms, and to participate in the growth of private companies. once described them as being analogous to “porn If you want to enjoy the growth of, say, the Burling- shops” that, ahem, buy paintings and “make the ton Northern Santa Fe railroad company, you may boobs a little bigger” and then sell them to “some simply buy shares in its owner, Berkshire Hatha- other guy. in a raincoat.” (Warren, that’s called a way. If you want liquidity, you don’t need to wait sponsor-to-sponsor transaction). for Buffett to sell Burlington and distribute your share of the proceeds. You only need to sell shares THE TEAMING OF BERKSHIRE’S BALANCE in Berkshire Hathaway. SHEET WITH 3G’S OPERATIONAL PROWESS The fact that Berkshire almost never sells assets is OFFERS AN INTERESTING FRAMEWORK its most important difference from a private equi- FOR THE FUTURE OF PRIVATE EQUITY. ty firm, which must eventually exit the collection “ Privcap“ Special Report • Capital Formation | Q1 2014 / 5 CAPITAL FORMATION / COMMENTARY of portfolio companies it has acquired. The way an Although Buffett would disagree, private equity’s investor gets liquidity from a limited partnership need to eventually exit isn’t necessarily a bad thing. is by waiting some 15 years to get all the principal If forces GPs to attempt to own companies during and profit back, or by entering into a complicated the “best years of their lives” and to work assidu- and time-consuming sale on the secondary mar- ously at improving the value during a defined pe- ket. Surely more and better options will be devel- riod of ownership. Each new fundraise forces a GP oped. team to prove its capabilities and allow investors to dig deeply into the track record and operations The growth of publicly-traded private equity will of the firm.