Premium Content Exclusively for Privcap Subscribers Only / www.privcap.com Q1 2014 PRIVCAP / SPECIAL REPORTS Performance The 2004 Vintage, 10 Years Out IRRs & Bad Management Co-investment with Siguler Gu, Cambridge Associates & StepStone Portfolio One-on-one with Protección, Colombia’s second-largest pension Performance Equity Zurich Alternative Sovereign Investor Institute &Ardian finish On Privcap.c0m Videos in This Report This special report includes the following new video On Camera programs. Watch them at Privcap.com What the Sovereign Wealth Funds Want Sovereign Investor Institute’s Scott Kalb says the $6 trillion SWF sector wants more than returns from its GPs. Tips for Selecting a Quality GP Manager Frank Brenninkmeyer of Performance Equity on what his firm seeks in a GP manager and its history with GM’s pension group. Creating a PE Portfolio Omar Rueda Galvis of Colombia’s ProtecciÓn talks about his group’s entry into the PE market, dealing with foreign and local GPs, and where their focus lies in 2014. Andrea Auerbach, Cambridge Associates An Insurance Group Wagers on More PE Ferdinand Seibert of Zurich Alternative Asset Management dis- cusses PE’s role in a portfolio, the effects of regulation, and how to differentiate GP operating skills. Ardian Is the New AXA Vladimir Colas of Ardian describes the firm’s move to indepen- dence, its European middle-market roots, and its approach to primary and co-investing. How’s the 2004 Vintage Looking? What do we know about the average performance of PE funds in the 2004 vintage? With experts from StepStone, Cambridge Associ- ates, and Siguler Guff. Fund-Management Mistakes That Shave Off IRR Points “Deal guys” don’t always consider performance optimization of their fund, making mistakes that shave off IRR points. With experts from Cambridge Associates, StepStone, and Siguler Guff. Adding Alpha Through Co-investing A deep dive into Siguler Guff’s co-investment platform—how it helped the firm add alpha to its portfolio. Experts from Cambridge Associates and StepStone weigh in. COMING SOON on Privcap UPCOMING REPORTS Colombia’s Growing Appetite for PE PE’s Influences in Colombia Q2 Francisco Jose Arboleda of HarbourVest Alejandro Rodriguez of PineBridge Invest- Co-investment Partners talks about private equity in ments speaks with Privcap about private Energy Colombia, and the growth of the industry equity’s impact in Colombia, the country’s and talent in the country. pensions, and local and regional offices. On Privcap.com In Case You Missed It... Must-see thought leadership from Privcap.com KKR and Its Capital Partners CFOs Navigate the Headwinds Forklift to the Future: Suzanne Donohoe, who leads investor Scott Zimmerman of EY discusses the KKR’s Investment in KION relations for KKR, describes the evolving results of a survey of PE firm CFOs. Johannes Huth of KKR describes the needs of the firm’s institutional Despite regulatory and business thesis behind the firm’s successful investors clients. challenges, these team members are investment in KION, a German maker optimistic about the futures of their of forklifts and other industrial trucks. firms as they gear up for growth. From Defined Benefit to How Much Does a Profits, Impact, and Defined Contribution Fundraising Cost? Energy Efficiency The shift from defined-benefit to Three PE leaders discuss how much a GP Carter Bales and former NY State first defined-contribution plans in the U.S. should expect to spend raising a fund. lady Silda Wall Spitzer discuss the is inevitable—and it’s happening faster With Gene Wolfson of Catalyst Investors, investment strategy of their firm, than expected, says George Pandaleon Adam Blumenthal of Blue Wolf Capital NewWorld Capital Group, which backs of Inland Institutional Capital Partners. Partners, and Mounir Guen of MVision. companies fighting energy waste. 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 19 07 SPECIAL REPORTS finish In This Issue 2 0 Commentary 05 The long-term view required of private equity inves- 1 tors has its challenges and rewards, says Privcap CEO 4 David Snow. What Colombia’s Second-Largest LP 07 Wants Omar Rueda Galvis of Colombia’s Proteccion discusses the genesis of their PE program and why they want to invest with fewer GPs. PE Performance 26 07 10 Panelists from Siguler Guff, Cambridge Associates, and StepStone Group on co-investment rewards and risk, performance of the 2004 vintage, and missteps that 19 can shave off IRR points. Also: a look at Brazil’s PE funds. ◆Making Co-investment Work ◆Maximizing IRR PRIVCAP SPECIAL REPORTS ◆The 2004 Vintage Plus: Brazil Funds Gaining Strength Privcap Media David Snow Co-founder and CEO Gill Torren Co-founder and President Four LPs Talk Portfolio Matthew Malone Editorial Director 17 Privcap contributing editor Tom Franco talks with Content thought leaders from the LP community about PE in the Ainslie Chandler Senior Journalist portfolio, and the future of the asset class. Andrea Heisinger Associate Editor Kathleen O’Donnell Media Coordinator ◆Ardian’s Independence Day, with Vladimir Colas Cameron Faulkner Media Coordinator of Ardian Design ◆A Global Insurance Group’s Bet on PE, with Ferdinand Cecilia Salama Design Coordinator Seibert of Zurich Alternative Contributors ◆Breaking Down GP Manager Selection, with Frank Tom Stein Brenninkmeyer of Performance Equity Contacts ◆What Sovereign Funds Want in a GP, with Scott Kalb Editorial of Sovereign Investor Institute David Snow / [email protected] / 646.233.4558 From the Archives Matthew Malone / 21 Related content from Privcap.com [email protected] / 203.554.7261 Sponsorships & Sales From Our Sponsors Gill Torren / 22 Thought leadership from our sponsor: [email protected] / 646.233.4559 Gen II 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. PE PERFORMANCE AND PORTFOLIO / COMMENTARY Low-Frequency Trading The private equity asset class is both blessed and challenged by its very long holding periods f the stock market has a millisecond prob- you put into a private equity investment and how lem, private equity has a problem measured many you’ve gotten back. In this report, three ex- in decades. perts—Andrea Auerbach of Cambridge Associates, Mike Elio of StepStone, and Kevin Kester of Sigul- Among its many revelations, Michael Lewis’ er Guff—examine the DPI of private equity funds new book, “Flash Boys,” highlights the mind-bog- launched in 2004. As of Cambridge’s last measure- gling complexity of a mature, traded, technolo- ment date, the 2004 vintage funds have an average gy-dependent asset class. The U. S. stock market DPI of 1.02. That’s well behind typical distributions has moved so far beyond its origins in human bar- from funds entering their second decade. We can, tering that it now has been taken over by comput- perhaps, blame the lag on the Great Recession, dur- ers that snatch value out of the market in between ing which exits were few. But as our gathered ex- millisecond trade matches. perts point out, private equity fundraising rose all the way through 2008. Therefore, a huge amount Compare this bewildering state of affairs to the less of private equity’s hoped-for outperformance re- mature, less traded, and technologically underpen- mains trapped in a collection of portfolio compa- Market etrated private equity market. People aren’t kid- nies of unprecedented aggregate size. As Elio puts Analysis by ding when they say private equity is a long-term it, “If all your gain is still tied up, we have so many CEO asset class. You could commit capital to a private assets to liquidate, it’s going to be difficult.” David Snow equity fund, raise your kids and send them off to college before getting back the full value of your Secondary “Flash Boys” investment in cash. Perhaps this is as it should It’s clear that new participants in the private eq- be—left to your own fickle decision-making over uity asset class, armed with decades of such per- that roughly 15-year time horizon, you might have formance data, should know what they’re signing stopped investing and missed the prime buying up for—GP relationships that will span well be- opportunity, desperately sold your best assets in yond the advertised 10-year life of the individu- mid-recession, or blown the whole allocation at al funds. Investors still concerned about liquidity the top of the market. should also note the increasing size and dexterity of the private equity secondaries market, in which Instead, you paid a GP to laboriously deploy the opportunities to trade in and out of partnerships capital over a four-or five-year period, and then re- are not quite at “Flash Boys” levels, but are signif- main long-term greedy in deciding when and how icantly more technologically advanced than even to exit those investments. Sell that struggling con- five years ago. sumer business in 2010 just because LPs were com- plaining about needing liquidity? No way. Better to Driving liquidity in the private equity market is the wait it out. That’s called control and optionality. If removal of what was one the main impediment to you need liquidity, sell off your stock portfolio.