A Guide to Private Equity Fund of Funds Managers



Funds of funds: a brief history Kelly DePonte, Partner, Probitas Partners Definition and rationale At the creation: separate accounts Multi-investor fund of funds The late 1990s explosion: new funds and new structures After the boom: capacity, access, sector vehicles, and a return to separate accounts? Summary Why invest via a fund of funds? Stewart Hay, Investment Director, Standard Life Investments (Private Equity) Ltd What is private equity? How has private equity performed historically? What is required to successfully invest in private equity? What are the different ways to invest in private equity? What is a fund of funds? Attractions of a fund of funds Perceived drawbacks of investing in a fund of funds What should investors look for in a private equity fund of funds manager?


Choosing your fund of funds: issues faced by investors when selecting a fund of funds product Dr. Stefan Hepp, CEO SCM Strategic Capital Management AG Reasons for investing in fund of funds Have return expectations been met? Further challenges: liquidity and flow of information How investors really choose funds of funds Issues faced when selecting a fund of funds product Due diligence – a detailed view Role of Advisors and Gatekeepers in the selection process Private equity fund of funds investment strategy Hanneke Smits and Oliver Gardey, Adams Street Partners


1 1 2 3 4 5 7

13 13 14 14 15 15 17 19

7 8 8 9 10 10 11 11

Introduction Investment strategy and process Top-down analysis Bottom-up analysis Pre-transaction qualities Post-transaction qualities Organisational stability Conclusion

19 19 19 21 22 22 23 23


Market Report

A Guide to Private Equity Fund of Funds Managers

Beyond traditional fund of funds benefits André Frei and Michael Studer, Partners Group Traditional benefits of funds of funds Relative value assessment The relative value assessment for regions and financing stages The relative value assessment for investment styles Conclusions Legal issues on structuring a private equity fund of funds Solomon Wifa, Counsel, O’Melveny & Myers LLP Introduction Considerations that influence the choice of a fund of funds structure Common fund of funds structures Regulatory issues Principal terms and conditions Specialist funds of funds Guy Fraser-Sampson, Founder and Managing Partner, Mowbray Capital LLP What exactly are we discussing? What are the issues to be considered? What are the economic constraints faced by a specialist fund of funds? How can a specialist firm position itself competitively? How does this mesh with the portfolio strategy of investors? What is a typical investment proposition? Issues specific to UK and other European pension funds The misrepresentation of European venture returns Conclusion


The fund of funds as an LP Private Equity International Five reasons to have a fund of funds as a LP ….. ….. and five reasons not to! The dynamics of the private equity fund of funds market Luba Nikulina, London Business School Market dynamics Value proposition and performance Terms and conditions Where will the golden opportunities lie? Ready to pass the baton? Ranking of FoF managers Summary of major findings Appendix Directory Appendixes Appendix One: Private Equity International on funds of funds Appendix Two: Private Equity Manager on funds of funds Appendix Three: About Private Equity International Appendix Four: About Private Equity International Research Publications Appendix Five: Index to directory entries


25 27 28 29 29

48 50



31 31 32 34 35 39

53 56 59 61 63 64 64 67 71 227

228 257 265 266 268

39 40 40 40 42 42 43 44 45


Market Report

A Guide to Private Equity Fund of Funds Managers

Chart One: Number of private equity funds raised
2000 1800 1600 1400 1200 1000 800 600 400 200 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fund of Funds Primary Funds

for a fixed duration, or it can take the form of a fully structured fund of funds vehicle that has a single investor. Even when structured as a formal fund of funds, there is little information publicly available on separate accounts as they are agreements only between the two parties and generally include confidentiality provisions. Many of the earliest fund of funds providers – including Adams Street (previously Brinson), Crossroads and HarbourVest – actively provided separate accounts to large institutional investors early in their careers. For these large investors, separate accounts were a way to tap into third party expertise and leverage internal staff at a point where private equity was just beginning to develop as a market; experienced professionals with a background in fund due diligence were very rare. For the separate account providers, relationships with large institutional investors allowed them to quickly increase assets under management – even though the fees on separate accounts were usually lower than those on a multi-party fund of funds because of the pricing power large investors commanded.

Source:Thomson Venture Economics


Multi-investor fund of funds
It was just this pricing dynamic – combined with an increase in private equity investments by a number of new market entrants – that led to a decline in the use of separate accounts and the beginnings of an increase in both the number of funds of funds and the amount of money committed to them in the early 1990s. This was growth from an admittedly small base; it wasn’t until 1992 that more than a billion dollars was raised for fund of funds in a single year (see Chart Two). Multi-investor funds of funds provided several advantages to fund managers: • Pricing With multi-investor funds of funds, negotiating power shifted from the investor to the fund manager. The ‘wholesale’ discounts available to large investors were not usually available on multi-investor funds. Assets under management By tapping into a number of smaller investors simultaneously, fund managers were able to more quickly build their base of assets under management.When combined with the better pricing margin available on a fund of funds vehicle, overall profitability grew.

Chart Two: Amount of private equity capital raised
350,000 Fund of Funds Primary Funds


250,000 U.S. $ millions





0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source:Thomson Venture Economics



Market Report

A Guide to Private Equity Fund of Funds Managers

How has private equity performed historically?
Venture Economics report that the average ten-year internal rate of return produced by buy-out and mezzanine managers in Europe has been 11% (based on a sample of 292 funds and calculated as at 30 September 2004). However, the top quartile managers have generated returns of 41% over the same period, illustrating the crucial importance of selecting more top quartile than median managers (see Chart One).

What is required to successfully invest in private equity?
There are many diverse capabilities and resources required in order to be able to successfully participate in the private equity asset class. The skills required to invest in private equity are significantly different from those needed for the listed markets. A few of the capabilities and resources that an institutional investor looking to commit to the asset class must possess are summarised below: Skills The lack of a public marketplace means purchases have to be privately negotiated with the seller of the company. As the company is privately held, there is generally limited information available from resources such as the Internet, Reuters and Bloomberg. As such, the only way to find out information about private companies is to go out and visit them, review all available internal and external information and meet with the management of that company. Investing in private equity is certainly not something that can be done sitting behind a desk. As a result, the process of investing in private equity is far more labourintensive than investing in listed markets or bonds and requires a number of sophisticated investment professionals with diverse skills, such as business strategy development, as well as accounting, tax and legal expertise. For an institution looking to invest in private equity this makes the process of selecting the best managers all the more difficult. The institution will have to ascertain that the manager(s) it is considering investing with have all the necessary skills in order to achieve top quartile returns. An institution used to picking managers for equities and fixed income portfolios may lack the necessary experience to be able to adequately gauge the skill set of a private equity fund manager in comparison to its peers. Access Top private equity fund managers can more or less select their investors by requiring ever-larger minimum commitments by new investors to their funds. Managers give priority to their existing investors and investors who

Chart One: Pooled IRR (%) for European buyouts at 30.09.2004

Top quartile 50

All buyouts

Bottom quartile

40.7 40

30 24.7
Pooled IRR %

20 7.8 5.2 1.0 0 -6.5 11.4






3 years Source:Venture Economics, 30/09/04

5 years

10 years

Choosing your fund of funds


Supporting this view, SCM Strategic Capital Management AG, in its yearly review of partnership terms and conditions, has consistently found that the provisions for corporate governance are often weaker in funds of funds as compared to direct partnerships. This in turn suggests that fund of funds partnership documentation have been less negotiated than has been the case with direct partnerships.

➤ Quality of the team and experience in all aspects of the proposed investment strategy ➤ Track record ➤ Economic terms

Due diligence – a detailed view
SCM Strategic Capital Management AG employs a detailed three-step due diligence process that is fundamentally the same regardless of whether the investment being considered is a commitment to a fund of funds or a direct investment partnership. However, there are differences between the two types of investments that translate into different issues to be addressed and resolved in each stage of the due diligence process. Initial review The ‘initial review’ consists of reviewing the fund’s offering materials, followed by initial conversations with placement agents or the vehicle’s management, if warranted. Work is assigned to and performed by SCM analysts. A standardised two-page fact sheet is prepared for each fund and circulated to the entire SCM investment team (consisting of all investment professionals) for discussion during its weekly meetings. Key elements that are reflected in the fact sheet include management, strategy, track record and key terms. All elements are entered into SCM’s database. Pre due diligence review If the investment team finds an opportunity attractive a more intensive review is pursued. Such ‘further review’ activities typically include: (i) An invitation to SCM’s offices for a manager presentation (typically 2 to 3 hours). (ii) Conference calls to address specific issues or questions identified by the investment team. (iii) The first phase of verifying the manager’s historical investment cash flows.This entails: a. Analysing the performance parameters of existing unrealised /realised investments; and b. Recreating the manager’s IRR and multiple assertions. In this context it is of particular importance to ascertain whether a fund of funds manager has access to top tier funds and whether that access

Issues faced when selecting a fund of funds product
When conducting a due diligence on a fund of funds one has to be clear about the purpose for investing in the product. Is one looking for a broadly diversified fund that will give access to multiple vehicles across stages and sectors? Alternatively, is a specialist product that has a narrower geographical or stage focus required? How many funds of funds that are expected to invest in broadly the same vintage years are going to be held? Based on such an initial description of the required characteristics of the product one can then establish a list of suitable vehicles in the market that fulfil the requirements with regard to proposed investment strategy. As the quality of any selection is a function of the quality of the underlying sample, it is important to have a comprehensive overview of the different management groups active in the fund of funds market. In addition to our clients’ direct partnership commitments, SCM is currently monitoring more than 18 funds of funds, which enables us to get an unbiased picture of the relative and absolute performance of various management teams. This information is valuable in deciding which vehicles to include in a shortlist of potential investments. It is equally important to be aware of the forward calendar, i.e. management teams that may not actually be in the market but plan to raise a new fund within a time frame that is relevant to a client’s investment program. Identifying potential funds as investment candidates is, however, just the beginning of the process. Next comes the due diligence that tries to establish facts that can support a positive investment decision.Among the most important criteria for the selection of a fund of funds manager are: ➤ Proven access to top tier funds ➤ Proven investment discipline


Market Report

A Guide to Private Equity Fund of Funds Managers

Chart One: Maturity of the World Private Equity Markets

Public market exits Enforceability of rights Accounting, tax & legal issues Disclosure & due diligence standards Extent of equity culture Extent of entrepreneurial culture Availability of attractive investment opportunities Availability of experienced investors Poor Fair Good Excellent

➯ ➡➡➡ ➡➡➡ ➡➡➡ ➡➡➡ ➡➡➡ ➡➡➡ ➡➡➡ ➡➡➡
a ric Af

➯ ➯ ➡➡➡➡➡ ➡ ➡➡➡➡➡ ➡➡➡➡➡ ➡➡➡➡➡ ➡➡➡➡➡ ➡ ➡➡➡ ➡ ➡➡➡ ➡➡➡➡➡
Developing Maturing
l ae ia Isr As ng pi elo pe ev ro D Eu g in rg ve on C ca fri hA ut So ica er Am tin La rn te es W pe ro Eu


exemplifies the impact of the public markets on the venture capital community. • Factors influencing the ability to invest, such as due diligence standards, accounting and tax issues and the enforceability of legal rights In many developing countries private equity investing remains extremely risky due to the lack of transparency in financial reporting or tax regulations. Furthermore, enforceability of legal rights continues to be a major barrier for private equity investment particularly in countries, which only recently adopted a free market or some form of capitalism.

pe ro Eu g gin er Em ia s gA a ric gin Af er th Em ou -S ex

S. U.

K. U.

The extent to which the market has accepted equity as a form of financing and investment Germany, for example, has been traditionally an economy with a strong debt financing culture rather than a developed equity culture. Entrepreneurs and family-run companies within the ‘Mittelstand’ sector (i.e. mid market sector) used to have cost efficient access to debt financing, which was typically offered by the ‘Hausbank’. In the past this cost efficient access to debt made it difficult for private equity firms to find attractive investment opportunities in Germany. However, due to the continuing banking consolidation and the global competition for capital it has become significantly more difficult for German banks to offer ‘cheap’ corporate debt financing to the Mittelstand.


Market Report

A Guide to Private Equity Fund of Funds Managers

refute the promise of superior returns. Performance data from FoFs (available from the websites of large US institutions due to Freedom of Information Act legislation) seem to indicate that major FoFs neither stand out as big winners nor as big losers 2. Portfolio diversification for the purpose of risk reduction No risk-averse long-term investor would pick only one fund in a subsegment (such as US venture capital, vintage 2004), but choosing all conceivable funds in a sector may circumvent top quartile returns (‘leveling’). To determine the ‘golden mean’, we have analysed more than 2000 private equity funds tracked by Thomson Venture Economics.We have performed a historical simulation to quantify the impact of portfolio size (in terms of number of funds) on the volatility of a FoF’s final performance.We selected a random fund portfolio over three consecutive vintage years3 and calculated the volatility of the final performance of such portfolios. Our analysis (see Chart One) shows that investors need approximately 15 funds for a life cycle of three years in a given sub-segment (e.g. US buyout) in order to diversify the unsystematic risk. Basically, one can more than halve the volatility of the final outcome with the appropriate diversification. Given the broad range of funds available, this number of funds can nowadays be chosen without compromising on returns. Many investors, however, lack the necessary size for appropriate diversification, and only FoFs will allow these investors to reduce manager specific risk in selected segments. Portfolio diversification for the purpose of return enhancement Seeking portfolio diversification for the purpose of enhancing returns may seem to be a contradiction for many investors, given that the principal reason for portfolio diversification is to reduce risk. However, the following pragmatic study illustrates that it is not. When we analyse the pooled average performance of US venture capital, vintage years 1990 to 1999, we observe that the pool of all funds (‘the most diversified portfolio for each vintage year’) outperformed the top quartile in fifty percent of all cases.This phenomenon occurs due to the significant right-skewness of private equity return distributions – returns that significantly exceed the median are more probable than returns that significantly undershoot the median. In fact, the pooled average outperforms the median return per vintage year on all US

Chart One: Volatility reduction
20 Volatility of Portfolio IRR (%)

15 Historic Simulation 10 Trendline 5

0 1 3 5 7 9 11 13 15 17 Number of Funds 19 21 23 25

The above illustration is based on a historical simulation using Thomson Venture Economics data for US buyout funds.The volatility of a FoF’s final performance can thus be significantly reduced.

private equity funds of vintages 1990 to 1999 on average by more then 700 bps! In other words, it is likely that the performance of a single fund is lower than the performance of a pool of funds. For an investor with a given return target, it is wise to diversify the portfolio to increase the probability that this return is actually achieved. Negotiating terms and establishing a professional reporting These are both further areas of expertise of a FoF manager. Negotiating terms is an element of value creation that is often not recognised by investors. FoF firms negotiate with private equity firms to ensure that terms are in line with industry standards. Thus, these intermediates are important ‘watchdogs’ to ensure proper downside protection and alignment of interest between limited partners (LPs) and general partners (GPs). Many GPs are even willing to accept more LP-friendly terms to get a renowned investor in their LP register, which should ultimately attract further investors.

We have compared the returns of FoFs to the pooled industry performance (as reported by Thomson Venture Economics). Limiting the number of vintages in a simulated multi-fund portfolio is necessary to realistically assess the risk of a traditional FoF portfolio.



Market Report

A Guide to Private Equity Fund of Funds Managers

"In the primary private equity market, FoFs represent from 10% to 15% of the total capital invested; 85% is coming from other sources. This is a strange equation for me. Fund of funds represent a perfect limited partner for direct managers.We are quiet, knowledgeable, don’t demand heavy reporting… I do not see why the share of fund of funds capital in the primary private equity market will not increase in the future." Many market participants see the potential for private equity FoFs to increase the proportion of total private equity fundraising accounted for by them. If funds of hedge funds control 35% of the hedge fund industry’s asset base1, there is a good case for funds of private equity funds to achieve a similar share. This will mean that the growth pace of the FoF industry can outstrip the growth rate of the underlying asset class in the near future. As far as the sources of capital are concerned, the major inflows are expected from small and medium-sized investors. "There is a ‘ceiling effect’ among large institutional investors that have already reached a steady state in their asset allocation to the private equity asset class. They have established relationships with certain FoF managers. Besides, they are becoming more sophisticated and may move into private equity directly. But they are not going to increase the share of FoF managers in their assets. Medium-sized institutions, in contrast, are increasing the share of their assets allocated to funds of funds. Small investors are poorly allocated to private equity all together. They are only starting to enter this niche of the market, and funds of funds managers are the only viable choice for them.They will stimulate growth in absolute terms." However, some respondents express concern about the overall level of optimism in the private equity market. "I have the feeling that this market [private equity] is being hyped right now. Just as everybody was interested in M&A six years ago, everybody is talking about private equity today. Every day there are several stories in the Financial Times about PE-backed deals. I am afraid that there might be a bubble in this market." If opinions were more or less unanimous regarding the growth of the FoF market in terms of capital under management, the picture is much more

Chart Two: Will the number of FoF managers increase in the near future?
Increase 36% Stay the same 39% Decrease 25%

diverse when respondents considered the likely number of players in the future (see Chart Two). Analysing the forecasted number of players by respondents’ assets under

Chart Three: Will the number of FoF managers increase in the near future? (analysed by respondents’ assets under management)
Increase 73% 70 60 50 40 30 21% 20 10 0 0% Small (<500M) Medium (<500-1,000M) Large (<1,000M) 14% 27% 19% 25% 64% Stay the same Decrease 56%


Ineichen, Alexander (2005) "The Critique of Pure Alpha" UBS Investment Research



Chart Eight: The quality and level of professionalism amongst FoF managers?
100 88% Placement Agents 80 Limited Partners

Chart Nine: How has the quality and level of professionalism amongst FoFs changed in the last three years?
60 59% 50 47% 40% 35% % 30 Limited Partners Placement Agents

60 % 40



34% 20

20 5% 0 Can differ significantly Can differ somewhat Likely to be the same 0 Has not changed much Higher than it was 6% 8% 10



Lower than it was

On the one hand, increased competition and the higher profile of the FoF industry can be seen to help attract high quality professionals. Competition and investors’ increasing competency force the top FoF managers improve their professional standards. On the other hand, those who feel that overall quality has fallen attribute it to the number of less capable entrants in the market and high human turnover. The sharp increase in the number of new players had led to dilution of professionalism and quality. A few limited partners have expressed concern that, as the industry matures, FoF managers may become more risk-averse. LPs argue that funds of funds should be at the forefront of identifying emerging primary fund managers. FoF managers’ core competency is expertise in the due diligence of primary funds, and ‘following the herd’ and investing in the managers with proven track records will defeat one of their main value propositions. "There is an increasing ‘process’ driven approach to fund of funds investing. I think that as a group they will be middle of the road performers as most have moved to a ‘follower’ role and are not as willing to be leaders on calculated bets."

Terms and conditions
The private equity FoF industry has borrowed from its underlying asset class the conceptual terms and conditions it uses to define the relationship with investors in its vehicles. However, the packages that FoF managers are able to negotiate with their limited partners are much more diverse than those of direct funds. What are expectations in the market with regards to the evolution of the terms and conditions enjoyed by the fund of funds industry? FoF managers themselves perceive the double fee structure that investors have to pay on private equity investments through a fund of funds as the industry’s major weakness. However, there are certain values created by FoF managers that investors are happy to pay a second layer of fees for. Market participants’ opinions differ on whether terms and conditions will become more standardised in the future or will retain their current heterogeneity (see Chart Ten). Almost half of respondents believe that terms and conditions will become even more diverse that they are now. Slightly more than a quarter of respondents think that they will move

The Directory


5E Holding AG
c/o Alpha Associates Innere Güterstrasse 4 Zug CH-6300 Switzerland Tel: +41 4 1726 7985 Fax: +41 4 1726 7986 Website: www.5eh.ch Branch Offices Assets under management / advisement CHF 123 million Year established 1998 Contacts Dr Peter Derendinger (Alpha Associates) Partner, CEO +41 43 244 3010 peter.derendinger@alpha-associates.ch Mr Peter Rojicek Partner, CIO +41 43 244 3004 petr.rojicek@alpha-associates.ch

Services offered Third party/co-mingled funds of funds Customised funds of funds Separate accounts Undertakes secondaries Undertakes directs / co-investments Invests in debut funds Approx. number of funds committed to Approx. capital committed ●

Regions invest in North America Western Europe Central & Eastern Europe Asia Pacific Latin America Middle East Africa

Fund types invest in Generalist Buyout / Later Stage Early Stage Venture Late Stage Venture Subordinated Debt / Mezzanine Fund of Funds Turnaround / Distressed Secondaries ● ● ● ● ●

Funds / GP groups committed to include: Accession Mezzanine Capital Advent Private Equity Fund Central Europe, LP Baring Communications Equity (Emerging Europe) Emerging Europe Private Equity Fund III Hungarian Equity Partners, LP Innova / 3 Innova /98 Polish Enterprise Fund IV Polish Private Equity Fund I

Profile 5E Holding AG was founded July 8, 1998 and has its headquarters in Zug.Together with its subsidiaries it comprises 5E Group. 5E specialises in Eastern European emerging equity. The core of the 5E Holding Group’s strategy is investing in private equity funds in Central and Eastern Europe.The 5E Holding Group executes commitments to invest in new funds as well as acquires interests in mature existing funds in the secondary market. All investments are advised and managed by Alpha Associates, Zurich.


Market Report

A Guide to Private Equity Fund of Funds Managers

747 Capital LLC
747 Third Ave 22nd Floor New York NY 10017 United States of America Tel: +1 212 747 7474 Fax: +1 212 355 9055 Website: www.747capital.com Email: info@747capital.com Branch Offices Curaçao, Netherlands Antilles +59 99 461 6261 Assets under management / advisement $50 million Year established 2000 Contacts Mr Gijs F. J. van Thiel Managing Partner Marc J. M. der Kinderen Managing Partner Mr. Joshua C. Sobeck Principal Mr. Evert Rakers (Curaçao office) Director Ms. Eva C. Kuit Investor Relations

Services offered Third party/co-mingled funds of funds Customised funds of funds Separate accounts Undertakes secondaries Undertakes directs / co-investments Invests in debut funds ● ● ●

Regions invest in North America Western Europe Central & Eastern Europe Asia Pacific Latin America Middle East Africa ●

Fund types invest in Generalist Buyout / Later Stage Early Stage Venture Late Stage Venture Subordinated Debt / Mezzanine Fund of Funds Turnaround / Distressed Secondaries

● ●

Approx. number of funds committed to 35 Approx. capital committed $75 million

Funds / GP groups committed to include: Brookside Pecks Capital Partners Canaan Partners Crescendo Ventures DW Health Partners Frazier Healthcare Harvest Partners Lincolnshire Management Noro-Moseley Partners Northstar Capital Partners

Profile 747 Capital is a New York-based investment advisory firm. It was formed in 2000 following the buyout of the US operations of Greenfield Capital Partners. 747 provides investment advisory services to European financial institutions and syndicates for investing in smaller ($100 million to $400 million) US private equity buyout and mezzanine funds. 747 is the investment advisor for several funds of funds. CapCorp, its primary $50 million funds of funds, has been an active participant in the US since 1984. In addition to CapCorp, it also manages a number of smaller funds of funds, which are invested in a selection of promising US private equity managers grouped by vintage or sub-asset class.


Market Report

A Guide to Private Equity Fund of Funds Managers

Allianz Private Equity Partners
Giselastrasse 4 80802 Munich Germany Tel: +49 89 3800 19900 Fax: +49 89 3800 19436 Website: www.allianz.com Email: munich@apep.com Branch Offices New York, United States of America +1 212 739 3400 Assets under management / advisement €3500 million Year established 1996 Contacts Ms Wanching Ang Managing Director +49 89 3800 3651 wanching.ang@apep.com Mr James Kester (New York office) Managing Director +1 212 739 3315 james.kester@apep.com Mr Elliot Royce (New York office) Managing Director +1 212 739 3310 elliot.royce@apep.com Mr Christian Mayert Business Development +49 89 3800 19714 christian.mayert@apep.com Mr Peter Mayrl (Munich / Milan office) Investment Director +49 89 3800 19143 (Munich) +39 348 223 8192 (Milan) peter.mayrl@allianz.com

Services offered Third party/co-mingled funds of funds Customised funds of funds Separate accounts Undertakes secondaries Undertakes directs / co-investments Invests in debut funds ● ● ● ● ● ●

Regions invest in North America Western Europe Central & Eastern Europe Asia Pacific Latin America Middle East Africa ● ● ● ● ●

Fund types invest in Generalist Buyout / Later Stage Early Stage Venture Late Stage Venture Subordinated Debt / Mezzanine Fund of Funds Turnaround / Distressed Secondaries ● ● ● ●

● ●

Approx. number of funds committed to >100 Approx. capital committed €3.5bn

Funds / GP groups committed to include: Affinity Asia Altor 2003 Fund Bain Capital Barclays Berkshire Fund Charles River HIG Capital Partners Investitori Associati Nmas 1 Riverside Capital

Profile Allianz Private Equity Partners (APEP) is one of the world's leading private equity fund managers.With a team of 37 professionals based in Munich and New York, APEP manages in excess of €3.5bn in private equity fund commitments and direct co-investments in private companies. In 2003, APEP assumed responsibility for managing Dresdner Bank's private equity fund portfolio.APEP serves institutional clients from within the Allianz Group as well as outside investors with a wide range of investment services, from market-leading due diligence to tailor-made asset allocations and customised investment vehicles and reporting.


Market Report

A Guide to Private Equity Fund of Funds Managers

Montagu Newhall Associates
4750 Owings Mills Boulevard Owings Mills MD 21117 United States of America Tel: +1 410 363 2725 Fax: +1 410 356 9937 Website: www.montagunewhall.com Branch Offices Redwood City, United States of America +1 650 632 4620 London, United Kingdom +44 20 7468 7405 Assets under management / advisement Mr Kevin Campbell Principal kevin@montagunewhall.com

Year established 2001 Contacts Mr Rupert A.S. Montagu (London office) General Partner & Co-founder +44 780 261 0902 rupert@montagunewhall.com Mr C. Ashton Newhall General Partner & Co-founder ashton@montagunewhall.com

Services offered Third party/co-mingled funds of funds Customised funds of funds Separate accounts Undertakes secondaries Undertakes directs / co-investments Invests in debut funds Approx. number of funds committed to Approx. capital committed ●

Regions invest in North America Western Europe Central & Eastern Europe Asia Pacific Latin America Middle East Africa ● ●

Fund types invest in Generalist Buyout / Later Stage Early Stage Venture Late Stage Venture Subordinated Debt / Mezzanine Fund of Funds Turnaround / Distressed Secondaries

● ●

● ●

Funds / GP groups committed to include: Abingworth BioVentures III and IV; Accel Europe, LP; Atlas Venture VI; Aurora Ventures IV; Boulder Ventures IV; Domain Associates; Healthcare Ventures VII; InterWest Partners; New Enterprise Associates X and XI; Northbridge Venture Partners V; Oak Investment Partners; Polaris Venture Partners IV; Questmark Partners II;TCV (Technology Crossover Ventures);Venrock Associates

Profile Montagu Newhall Associates is a venture capital fund of funds manager that focuses on investments in US and European venture capital vehicles. It was founded by Mr.Ashton Newhall and Mr. Rupert Montagu in early 2001 and has offices in Owings Mills, Maryland, and London, United Kingdom. Its debut fund of funds, Montagu Newhall Global Partners LP, was closed in 2002 on $52 million. The vehicle is now invested in a portfolio of venture capital funds focused on the IT, communications and healthcare/life sciences sectors. 20% of the vehicle was earmarked for co-investments. In January 2005 Montagu announced the close of Montagu Newhall Global Partners II, on $156 million.The vehicle will follow the same investment strategy as the group's debut fund, focusing on venture capital funds in Europe and the US managed by well established groups. Up to 20% of the fund's capital is available for co-investment.

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Partners Group
Zugerstrasse 57 6341 Baar-Zug Switzerland Tel:+ 41 41 768 8585 Fax:+ 41 41 768 8558 Website: www.partnersgroup.net Branch Offices London, United Kingdom +44 207 849 6362 Singapore +65 6533 1586 New York, United States of America +1 212 763 47 00 Guernsey, United Kingdom +44 1481 711 690 Services offered Third party/co-mingled funds of funds Customised funds of funds Separate accounts Undertakes secondaries Undertakes directs / co-investments Invests in debut funds ● ● ● ● ● ● Assets under management / advisement $7000 million Year established 1996 Contacts Mr Philipp Gysler Head Private Equity Asset Management +41 41 768 8597 philipp.gysler@partnersgroup.net Ms Sandra Pajarola Head Partnership Investments +41 41 768 8515 sandra.pajarola@partnersgroup.net Mr Stephan Schaeli Head Secondaries and Portfolio Management +41 41 768 8525 stephan.schaeli@partnersgroup.net

Regions invest in North America Western Europe Central & Eastern Europe Asia Pacific Latin America Middle East Africa ● ● ● ● ●

Fund types invest in Generalist Buyout / Later Stage Early Stage Venture Late Stage Venture Subordinated Debt / Mezzanine Fund of Funds Turnaround / Distressed Secondaries ● ● ● ● ● ● ●

Approx. number of funds committed to Over 100 Approx. capital committed

Funds / GP groups committed to include: BC European Capital VII; Doughty Hanson & Co IV; Graphite Capital Partners VI; New Enterprise Associates X; Nordic Capital Fund IV; Oxford Bioscience Partners IV; Polish Enterprise Fund V; Spanish Private Equity Fund II;Terra Firma Capital Partners II;The Third Cinven Fund; and others

Profile Partners Group is one of the largest alternative asset managers worldwide focusing on Private Equity and Hedge Funds. On the private equity side Partners Group is involved in primary direct and coinvestments, secondary transactions and publicly traded private equity investment vehicles.Vehicles managed include Partners Group Europe LP, Partners Group Secondary LP, Pearl Holdings Limited, Partners Group Private Equity Performance Holding Ltd (P3), Princess Private Equity Holding Limited and CSA Private Equity. Overall, Partners Group follows a diversified investment program and seeks both primary and secondary fund investment opportunities globally, in all investment stages.The firm recently opened an office in Singapore and is currently marketing its first dedicated Asian fund of funds product.


Market Report

A Guide to Private Equity Fund of Funds Managers

Robeco Alternative Investments
Coolsingel 120 Postbus 973 Rotterdam 3011 AG The Netherlands Tel: +31 10 224 26 08 Fax: +31 10 224 21 41 Website: www.robeco.com/alternatives Email: private.equity@robeco.nl Branch Offices Dr Harrie Meijers Partner +31 1 0224 7233 h.meijers@robeco.nl Assets under management / advisement $500 million (in private equity) Year established 2001 Contacts Mr Ad van den Ouweland Managing Partner +31 1 0224 7231 a.van.den.ouweland@robeco.nl Mr Andrew Musters Senior Investment Manager +31 1 0224 7240 a.musters@robeco.nl Mr Mikan van Zanten Senior Investment Manager +31 1 0224 7232 m.van.zanten@robeco.nl

Services offered Third party/co-mingled funds of funds Customised funds of funds Separate accounts Undertakes secondaries Undertakes directs / co-investments Invests in debut funds ● ● ● ● ●

Regions invest in North America Western Europe Central & Eastern Europe Asia Pacific Latin America Middle East Africa ● ● ● ● ● ● ●

Fund types invest in Generalist Buyout / Later Stage Early Stage Venture Late Stage Venture Subordinated Debt / Mezzanine Fund of Funds Turnaround / Distressed Secondaries ● ● ● ● ● ● ●

Approx. number of funds committed to 35 Approx. capital committed $400 million

Funds / GP groups committed to include: 3i Europartners IV-A, L.P. Accent Equity 2003, L.P. Advent GPE IV-D, L.P. Barclays Private Equity Europe Fund, L.P. Capital International Private Equity Fund IV, L.P. Charterhouse Capital Partners VII, L.P. Exponent Private Equity Partners L.P. EQT IV, L.P. Green Equity Investors IV, L.P Wellspring Capital Partners III, L.P.

Profile Robeco Alternative Investments manages institutional private equity funds of funds and an exchange listed fund of funds. The Robeco private equity team has a longstanding experience and has a strong track record.The team has built an elaborate network in the global private equity market.The team applies a well defined and disciplined investment process with a goal to achieve outstanding returns with a mitigated risk profile. Robeco Private Equity is a fund of funds listed on Euronext Amsterdam. The fund invests in private equity partnerships worldwide. Robeco Private Equity has invested in approximately 35 private equity funds through which it will have an exposure to approximately 500 non-listed companies. The portfolio is well spread over different regions, sectors and investment stages.

Appendix One


and London-based global fund of funds manager, which aims to raise a specific amount of new capital every year, in 2003 raised a total of $962 million, of which $553 million went into the group’s US fund and $409 million into the non-US partnership. The firm was able to round up the capital quickly and by July of last year stopped responding to requests for proposals from investors who hadn’t committed at that point. Also successful last year was Pantheon Ventures, which closed its third European fund of funds on €470 million – 50 percent above target.And in January 2004, Standard Life Investments beat its original target by €90 million when closing its second fund of funds on €1.09 billion. But while longer established and larger-scale managers are clearly hitting the right spot with the buy side, for newer and smaller players the outlook is considerably bleaker. "The brand leaders are vacuuming up all the capital, and it’s becoming very hard for smaller funds of funds," says Ray Maxwell, managing director of the private equity division at Invesco Asset Management. "If you are a relative newcomer, you need a large amount of cornerstone investment and/or a very different type of approach to have any chance of success in the fundraising market."

says his primary consideration is always the quality of people in the organisation and their experience as investors. If Mercer’s strategy is widely replicated, it will undoubtedly lead to megagroup dominance at the expense of smaller operators. But if is true that, as one market source suggests, "fund of funds that don’t raise at least $1 billion don’t seem credible" to a large part of the market, the question arises whether this is necessarily to the benefit of investors. Considering that a fund of funds’ performance will only be as good as that of the underlying partnership it invests in, access to the best performers is obviously key. As a result, long-established groups with a big footprint have an advantage when it comes to allocating capital to the most indemand managers.Take Sequoia Capital’s most recent fundraising last year, for instance: the group capped the fund at $395 million – 43 percent less than the previous $695 million vehicle in 2000.The firm reportedly could have raised billions, a reminder to investors, especially those lucky enough to get in, of the value of long relationships with the industry’s star performers. It is worth noting that, as the case of Sequoia illustrates, funds don’t have to be big to count among those that funds of funds ought to be selecting for their clients. Attractive funds specialising in strategies such as midmarket or venture are in fact often capped at levels that make it difficult

Flight to quality
There are obvious reasons why investors would wish to go with the larger groups.After any period of market turbulence, a flight to perceived quality is bound to occur. In this respect, the fund of funds segment is no different from the direct investment market where in-demand general partners like Permira, which last year were able to raise Europe’s largest-ever buyout fund, are able to amass large amounts of capital while many of their peers have less success. There is no getting around the fact that in turbulent times, investors will head for safe havens. Talking to investment consultants confirms the view that brand name fund of funds are very much in favour. Phil Chesters, European partner at Mercer Investment Consulting in London, says his organisation tends to advise clients to place their capital with around "half a dozen big names" and that smaller groups would "probably not" be considered. Chesters

Appendix One


Have it your way
March 2004 The maturation of the private equity market is creating a new class of investors who are faced with a luxury of choices: in-house versus outsourced investment staff; separate accounts vs. funds of funds, set menus versus ‘Chinese menus.’ Be careful what you order. David Snow reports Christopher Wagner, the senior investment officer of alternative assets for the Pasadena-based Los Angeles County Employees’ Retirement System (LACERA), confirms what private equity advisors find attractive about the separate accounts business – he likes separate accounts better than funds of funds. Wagner also points out something that private equity advisors don’t like about the separate accounts business – his pension is on its third separate accounts manager in 12 years. Make no mistake – the $26 billion (€21 billion) LACERA has a long-term commitment to the private equity asset class. The California pension has had an allocation to alternatives since 1992, and its target currently stands at 7 percent. But the firms LACERA has chosen to help manage its allocation to private equity have had short- to medium term relationships with the pension. LACERA first dipped its toes in private equity through a separate account managed by Invesco. In 1997, when its contract with the asset manager came to an end, the pension switched to Bala Cynwyd, Pennsylvania private equity advisor Hamilton Lane. In February 2001, Wagner noted the strong performance of the pension’s diversified alternatives portfolio and recommended a $540 million allocation increase to Hamilton Lane’s account. But at the end of the year, Hamilton Lane was out as an advisor and London- and Irvine, California-based Pathway Capital Management was in. Wagner says there are "a lot of reasons" for changing separate account managers, ranging from concerns about conflicts of interest to politics at the pension board level. He notes that although LACERA has the option

of ‘firing’ a separate account manager, it has never done so. Instead, the pension has sought fresh management teams with each contract expiration. The ability to switch managers is one reason Wagner says his pension finds separate accounts so appealing.A parting of ways with a separate account manager, although often accompanied by a penalty of some sort, is far easier than getting out of a partnership in which investors are co-mingled. Funds of funds, like single-GP private equity funds, require limited partners to be committed for the life of the fund, which can be as long as 12 years or more. The options for ‘firing’ a fund of funds manager are fairly grim. Either the investor must sell its partnership interest at a discount on the secondary market, or, more drastically, may cease honoring new capital calls but risk facing draconian capital-account slashings, not to mention gaining the reputation as a difficult LP. More importantly, though, LACERA likes the fees for separate accounts better than those associated with funds of funds. "If you want to put money to work each year, and you do it through a fund of funds, after a few years your management fees are going to be huge as opposed to what you can negotiate as a separate account client," Wagner says. "That to me seems to be the biggest point."

Outsourcing is in
Of course, every investor is different and has different needs, and there are two crucial things to note about LACERA. First, it is a comparatively large investor, in that it must put hundreds of millions of dollars to work, as opposed to the mere tens of, or single-digit million found among highnet-worth and small-institution investors. Second, it does not have the budget to hire an extensive alternative investment staff. These two qualities put the Los Angeles pension squarely in the middle of a trend that private equity advisors are seeking to exploit – the continued growth of private equity as an institutional asset class, and the continued need for investors to outsource the process of selecting and monitoring good GPs. Despite a several-year slump in private equity valuations, fundraising and investing, the institutional outlook for the asset class remains strong. According to a recent survey conducted by Goldman Sachs International


Appendix Two One Private Equity Manager on funds of funds
Funds of funds have more fun
February 2005 Thousands of data points, divergent investor needs and fierce competition have all conspired to make fund of funds administration an increasingly frenetic endeavour. By David Snow, Editor Managing a private equity fund of funds is like managing a regular private equity fund, only more so. Instead of a dozen portfolio companies, there are hundreds, if not thousands. The same goes for limited partners – funds of funds tend to have many investors, some more sophisticated than others. The bigger numbers associated with funds of funds also increase the complexity of administration exponentially. Not that fund of funds managers are complaining – they take on the burden of vetting, investing in and monitoring a private equity program so you don’t have to. But as the fund of funds business has evolved and become more competitive, funds of funds administrators have had to improve their operations, especially with regard to reporting, client servicing and taxes. Chenette, based in New York, notes that in 1999 San Francisco-based Paul Capital had only about $500 million under management. The firm now oversees roughly $4 billion in assets. Chenette notes that Paul Capital chief financial officer Philip Jensen joined the firm in 2001 to begin building out back-office infrastructure and personnel to support the firm’s rapid growth. The main challenge in running a fund of funds, says Chenette, is "gathering and tracking a huge amount of data. If you’re an LBO fund, you may have five investments; if you’re a fund of funds, you could have 100 partnerships with each having 15 investments." Thousands of portfolio companies means thousands of capital calls and distributions, as well as other administrative duties connecting the investors with the underlying partnerships. Competition has led funds of funds to offer more customised programs, and this has only compounded administrative complexity. For example, Darien,Connecticut investment advisor Portfolio Advisors offers clients a single fund of funds, but within that the ability to pick and choose among four specific sectors – buyouts, venture capital, special situations and real estate. According to Portfolio Advisors’ chief financial officer Hugh Perloff, all cash flows in and out of the fund of funds must be reallocated to the LPs based on their respective levels of participation in the four sectors. This customised allocation work applies not only to capital calls and distributions but to mundane items like legal bills and interest payments. Many fund of funds firms have established mechanisms to accommodate investors with specific tax needs, and this adds to the back-office burden. For example, unrelated business taxable income (UBTI) has long been a

Data in, data out
Leo Chenette, vice president of investor relations for secondary and primary fund of funds manager Paul Capital, says one of the most challenging parts of his job has been "the classic business challenge of keeping the back office up to speed with the front office."

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