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7 Introduction 41 Selecting and working with a placement agent

Allan Cooper and Mounir Guen, MVision Private Equity Advisers Allan Cooper, MVision Private Equity Advisers Limited
• GP objectives: what are the reasons for using a place-
11 Investors in private equity: an overview ment agent?
John Barber, Managing Director, Helix Associates • How to select the right placement agent
• The cost
• Investors in private equity - an abbreviated history • The role of the placement agent before, during and
• Investor profiles after the fundraising
• Final thoughts • Different types of placement agent
• So, who selects whom?
21 Selection of a lawyer
Josyane Gold, Partner, SJ Berwin 45 Ten things to expect from a placement agent
Christoffer Davidsson, Principal, Campbell Lutyens & Co. Ltd
• Why do you need a lawyer?
• Which law firm? • Overview
• Selecting a law firm • Deliverables
• Due diligence on the lawyer and by the lawyer • Summary
• Objectives and terms when mandating a lawyer
• Raising the fund 51 Notes to a placement agreement
• Conclusion Private Equity International

27 Private equity fund structuring • Introduction

Jason Glover, Nigel Hatfield and Matthew Judd, Private Funds • Key sections
Group, Clifford Chance LLP • Compensation
• Confidentiality
• Introduction • Conflict of interest
• Basic structuring considerations • Other items
• Types of vehicle • Annexes
• Specific investor issues
• Conclusion


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57 The offering memorandum 85 Preparation of the Limited Partnership Agreement

Bridget Barker, Partner and Stephen Sims, Senior Solicitor, Jonathan Blake and Jeanette Thompson, SJ Berwin
• Importance of the Limited Partnership Agreement
• Introduction • Key clauses in a Limited Partnership Agreement
• Content of the offering memorandum • Negotiating issues for the Limited Partnership
• Terms of the offering Agreement
• Verification • Jurisdictional issues
• Regulatory overview • Tax issues
• Information table
67 Presenting the proposition: planning and executing
the fundraising 99 When things go wrong
Robert E. Mast, Managing Director, Monument Group Private Equity International

• Planning and preparation pay off • Market factors

• Executing on the plan - practicalities of the fundraising • People factors
process • Information factors
• Approaching the closing • Campaign factors
• After the closing
• Final thoughts 107 SURVEYS
73 Due diligence on the fund 108 LP attitudes to fund terms and conditions
Jens Bisgaard-Frantzen, Managing Partner and Vibeke Wounlund, Private Equity International
ATP Private Equity Partners
• Introduction
• About ATP Private Equity Partners • Overview
• Investment strategy and fund types • Relative importance of different terms
• ATP PEP’s due diligence strategy and process • General partner commitment levels
• Five focus areas • Management fees
• Investment process • Transaction fee and other income
• Key focus areas: track record, team, strategy, process • Carried interest provisions
and terms and conditions • Keyman
• Track record
• From concrete track records to qualitative assessments
• Strategy, process and philosophy
• Team
• Consistency
• Reference checks
• Terms and conditions
• Due diligence and the manager

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122 LP attitudes to investor relations and reporting 151 DIRECTORY

Private Equity International
• Private equity software providers
• Introduction • Other technology providers
• Levels of contact • Fund administrators and outsourcers
• Channels of communication
• Benefits of contact 165 CONTRIBUTOR BIOGRAPHIES
• Importance of contact
• The annual limited partner meeting 171 APPENDICES
• Other contact
• Reporting 172 Appendix One:
• The dedicated investor relations officer Private Equity International on fund administration and technology

135 CASE STUDIES 186 Appendix Two:

Private Equity International on fundraising
136 “The new concept fund”: Accession Mezzanine
Capital LP 204 Appendix Three:
Christiian Marriott, Director, Investor Relations, Mezzanine Private Equity Manager on fundraising
Management UK Limited
217 Appendix Four:
138 “The first time fund raise”: Altor 2003 Fund on fundraising
John Barber, Managing Director, Helix Associates
224 Appendix Five:
140 “The debut US mid-market fund”: Arsenal About Private Equity International
Capital Partners LP
Terry Mullen, Co-founder and Managing Director, Arsenal 225 Appendix Six:
Capital Partners About Private Equity International Books

142 “Fundraising for the semi-captive”: The HSBC

Private Equity European LP
Vince O’Brien, Director, Montagu Private Equity Limited

145 “The mezzanine fund”: Indigo Capital IV LP

Christopher Howe, Director, Indigo Capital Limited, London

148 “The biotechnology fund”: HealthCap IV

Anki Forsberg, Partner, HealthCap


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essarily lead to top-notch results. Given the importance of care- Chart Three (again from the Goldman Sachs / Russell report)
Chart Two: Strategic Allocation to Private Equity by Type of
ful manager selection, a private equity fund portfolio needed to demonstrates the transformation of private equity in Europe
Organization (North America)
Organization (North America) be properly run, either by dedicated in-house professionals, or from a position of near-irrelevance (1.9% of all European survey
14.4% 14.2% with the advice of external consultants or asset managers, all respondents’ assets in 1996) to one requiring attention and

with sufficient experience to ask the right questions about non- influencing returns (4.0% of assets in 2003, forecast to rise to
traditional offerings. 4.5% in 2005). By 2003, despite the UK’s pre-eminent position
% of Total Assets


7.3% 7.1%
7.7% as a headquarters for private equity investing activity in Europe,
6.3% 6.1%
6% 4.9%
5.6% 5.9%
In practical terms, many institutions in the mid-to-late 1990s Continental European institutions had outstripped their UK
4% decided they could therefore afford to increase private equity counterparts in their allocations to private equity. While under-
exposure to levels not thought possible before – ranging up to standably employed in the Report, ‘Continental European’ is
Endowment/Foundation Corporate Public 25% of assets in some endowments’ case, but settling on a typi- too general a term to apply, thanks to significant regional varia-
1995 1996* 1999 2001 2003 cal aspiration of 5% of assets for a mainstream institution with tions in commitments to private equity. Countries in Northern
* Arithmetic average of 1996 strategic allocations of 1999 survey respondents
Source: Goldman Sachs International / Russell Investment Group "Report on Alternative
a conventional asset-liability profile. At the same time, institu- Europe with either mandatory or well-funded pension regimes,
Investing by Tax-Exempt Organizations 2003"
tional investment staffs began as a matter of routine to include such as The Netherlands and those of the Nordic region, con-
full-time private equity fund selection specialists. Established tributed disproportionately to the numbers. Meanwhile, the
fund of funds managers also benefited handsomely through more Latin part of Europe (France, Italy and Spain, with large-
growth in their assets under management, as institutions con- ly state-sponsored provision of retirement income) barely regis-
cluded that private equity was either too demanding or time- tered as sources of capital for private equity in comparison with
consuming a business for them to handle in-house. Many new their relative GDPs.
fund of funds businesses responded to market opportunity and
started life in this period. In other parts of Europe, such as Germany and Switzerland,
innovative asset-gatherers designed private equity fund of fund
Chart Two (drawn from the Goldman Sachs / Russell report) vehicles that utilised capital guarantees and tiering structures to
shows the growth in private equity allocations among North preserve capital, in the process obtaining investment grade cred-
American institutions from 1995 onwards, broken down by type it ratings. They proved more imaginative than many US coun-
of institution. Endowments and foundations in the survey, taken terparts, whose appetite for capital could be satisfied by conven-
Chart Three: Strategic Allocation to Private Equity by Region
as a whole, recorded by the turn of the 21st century an alloca- tional sources, and managed to secure commitments from
tion to private equity of over 14% of assets (up from 10% in investors previously considered next-to-impossible to convert to
1995), taking advantage of their ultra long-term investment the private equity gospel. These converts included fixed income-
5% 4.8%
4.5% horizons. Corporate pension plans demonstrated less rapid oriented and capital preservation-sensitive institutions such as
4.2% 4.2%
% of Total Fund Assets

4% 3.6% 3.7%
growth, but nonetheless had allocations to private equity German insurance companies. These risk-averse players were

3% 2.8%
approaching 8% by 2003, well above the 5% considered neces- prepared to commit to these new pooled private equity vehicles
2.2% sary for an impact to be felt on overall results. Public pension because of the promised return of capital they offered, as well as
plans, which controlled the lion’s share (68%) of the capital the reassurance of their ratings.
1% among survey respondents, provided the real growth in absolute
N/A N/A amounts committed to the asset class. By lifting private equity In the main, at the time of the Goldman Sachs / Russell report
1996* 1999 2001 2003 2005 (forecast)
allocations by about 50%, from just above 4% in 1995 to near- in 2003, North American and European institutions were – and
All UK Continental Europe
ly 6% in 2003, public pension plans were the major drivers of remain – the dominant financiers of private equity funds world-
* Arithmetic average of 1996 strategic allocations of 1999 survey respondents

Source: Goldman Sachs International / Russell Investment Group "Report on Alternative Investing by
the market’s growth, supplying tens of billions of dollars of wide, even providing the bulk of capital to those operating in
Tax-Exempt Organizations 2003"
incremental financing for private equity funds. other regions, such as Asia. Private families, banks and quasi-


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Selection of a lawyer

Josyane Gold, Partner, SJ Berwin

Why do you need a lawyer? firms). Because most funds pose difficult and often novel struc-
turing issues, it is essential for the legal team to have a wide
Raising a fund can be a long and difficult process; a good and range of fund structuring experience, and to be creative in the
experienced lawyer can make that process a lot easier. way in which they approach your fund structure.

Your lawyers’ role is to advise on the legal aspects of structuring, Your European law firm (unless they also have a US presence
marketing, closing and (often) future operation of your fund. themselves) will also usually need, depending on your investor
This is a wide-ranging role and, to be most effective, your base, a strong working relationship with a private equity law
lawyers should be involved at the earliest possible opportunity. firm in the United States. A significant proportion of the capital
available for investment in private equity and venture capital
Many teams raising their first fund will inevitably start by con- funds comes from US investors, and many issues arise from their
centrating on ‘big picture’ issues: what kind of investments the involvement. A European law firm that specialises in private
fund is to make, where is the vehicle going to be investing, and equity will be very familiar with these issues and have no diffi-
what investors to approach when fundraising and how much culty co-ordinating the advice needed from the US and other
money to target. Clearly, these are important aspects, but it is overseas jurisdictions.
also important to identify any legal, tax or regulatory obstacles
early on. Doing so will often pay dividends in the long run. Selecting a law firm

Which law firm? The most obvious choice is to use a law firm with which you
have an existing relationship, as you are already familiar with
Clearly, your lawyer needs to be familiar with the private equity their work. However, the specialist nature of the fundraising
industry, with fund structuring and the fundraising process. The process may mean that your existing lawyers do not have the
legal skills required include corporate law, tax law and knowledge of expertise that you require, and so a new relationship will need to
regulatory regimes, often across a number of different jurisdictions. be established. It is still the case that relatively few law firms have
a particular specialisation and deep experience in the area of pri-
Funds usually raise issues in a number of different countries - vate equity fund structuring and raising.
those into which the fund proposes to invest, those where
prospective investors are based and those where the manager / Local private equity and venture capital associations will usually
adviser are located - and legal and tax structuring across these have a list of firms with the requisite abilities: these firms will
various jurisdictions is highly complex. It is critical to ensure often be members of that association. For example, in most of
that your legal team can cover each of those countries (either Europe, the local venture capital association will include law
with their own expertise, or by working closely with other firms among its (associate) members. Many of these, however,


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position of the French tax authorities appears to be to deny tax v There is no obligation to disclose publicly the terms of its part-
transparency and therefore to treat foreign partnerships as non- nership agreement, the identity of its limited partners or its
tax residents and therefore not treaty protected. The net effect accounts (but such information may be required to be disclosed by
of this is that, for example, French corporate investors invest- a governmental investor under freedom of information legislation).
ing via this route will be taxed on their portion of the limited
partnership’s revenue at the standard corporate income tax v There is no need to maintain an office or personnel in
rate. However, it does appear from ongoing double tax treaty Delaware or in the US.
negotiations between France and the UK as though this may
possibly change (i.e. English limited partnerships may, in v Organising a fund as a Delaware LP can be accomplished
effect, be treated as tax transparent by the French tax authori- quickly and at little cost, and annual Delaware taxes and regis-
ties in the future) although it is not currently known if and tered agent fees normally are approximately $300.
when such change will come into effect.
Specific disadvantages include:
v It will not be possible for a limited partnership to take advan-
tage of the EU parent / subsidiary directive, although subsidiary v Non-US sponsors may be reluctant to use a US-law vehicle
companies owned by the limited partnership and individual because of concerns about lawsuits (the US courts have tried a
investors in the limited partnership may be able to do so. significant number of private equity fund related cases, generat-
ing a body of case law which is not mirrored in other jurisdic-
v It will only be possible to rely on double tax treaty protection tions) or becoming subject to US regulations.
to the extent that the underlying investor is able to do so. It should
v Somewhat more restrictive guidelines apply to avoid registra-
be noted, however, that sub-fund structuring (using, for example,
Dutch or Luxembourg holdco entities) is usually employed to tion of a Delaware LP and its limited partnership interests with
minimise withholding and achieve other tax objectives. the SEC than apply to non-US entities.

Although it is possible to generalise about the features of limit- v A Delaware LP must file US partnership tax returns (but non-
ed partnerships as a type of fund vehicle, there are significant US funds with US investors also often agree to file US partner-
differences between the different types of partnership established ship tax returns), and will be treated as a ‘United States person’
in different jurisdictions, and it is important to understand these for purposes of applying various US tax rules to investments in
differences when designing a structure. non-US companies.

Delaware LP v Non-US investors may be subject to internal investment

Many US brand funds have been structured using Delaware LPs. restrictions which require that the fund vehicle is, for example,
In addition to the advantages noted above for partnerships gen- an EU entity.
erally, specific advantages in relation to Delaware LPs include
the following: English LP
In Europe, one of the most regularly used limited partnership
v The standard form of private equity fund agreement used by vehicles is an English limited partnership (ELP) established pur-
US institutions and US investors has been developed for a suant to the Limited Partnerships Act 1907. ELPs have all of the
Delaware limited partnership. benefits noted above for partnerships generally. ELPs are tax
transparent for UK tax purposes and therefore capital gains gen-


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Presenting the proposition: planning and

executing the fundraising

Robert E. Mast, Managing Director, Monument Group

The primary job of the placement agent has always been to To make the fundraising process efficient and successful today,
introduce buyers and sellers of securities and facilitate the exe- the agent needs to play an important role in each step of the
cution of the subsequent transaction. In the private equity busi- process, from planning and pre-marketing at one end to advis-
ness, agents have traditionally made use of personal or firm rela- ing the GP with regard to investor retention at the other.
tionships with prospective limited partnership investors to bring Selected details of the agent’s role at various points of the process
them together periodically with the general partners of a fund are discussed in the pages that follow.
raising capital. The baton was then passed to the general part-
ners, who were responsible for selling the investors on the attrac- Planning and preparation pay off
tiveness of the investment proposition. Historically, this was a
fairly simple process, with many investors putting their trust in As the prior fund moves within range of full investment and the
the results of a fairly quick due diligence process, the agent’s rec- decision is made to gear up for a new fund, many GPs become
ommendation or their relationship with the general partners in anxious for meetings with potential investors in the follow-on
question, and hopefully resulted in an efficiently, but oppor- vehicle to begin. Time devoted to planning and preparing for
tunistically, assembled limited partner base. the launch of the new vehicle is well spent, however, and will
generally be more than paid back through increased fundraising
Times have changed. Collectively, today’s investors have far momentum and enhanced efficiency of the process. Key steps in
more experience with the private equity asset class, and have the planning process for a private equity fundraising are outlined
become far more sophisticated and demanding in their ques- briefly below, and several of these topics are covered in greater
tioning and information requirements, both prior to making the detail elsewhere in this publication.
investment decision and in the ongoing monitoring of the
investment. As a result, today’s GPs face increasing demands on Development of the marketing plan and timeline
their time during the fundraising process, in the form of
enhanced marketing and due diligence support and multiple The marketing plan provides a broad outline of key steps in the
meeting requirements, and an increasing investor relations fundraising process and their anticipated completion dates. The
requirement afterward. At the same time, the market itself has plan sets the stage for what needs to be accomplished, identify-
become increasingly competitive, with overextended investors ing key supporting materials (Private Placement Memorandum,
having begun to rationalise the structure of their investment due diligence information, presentation materials, legal docu-
programs by pruning the number of relationships they have with mentation, etc.) and assigning responsibility for their comple-
GP groups. Combined, these factors have increased the need for tion, and synchronises expectations regarding timing so that all
careful planning of the fundraising process and diversification of parties are in agreement and expectations aligned. The agent
the limited partner investor base, expanding and extending the should clearly communicate expectations regarding the time
role of the placement agent. required for fundraising. While some strongly performing funds


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presented to an investment committee, which makes the final Both positive factors and risk factors are formulated for each Definition of alpha and beta
decision on whether or not to invest in a fund. Meetings of the of the focus areas during the due diligence process. This is the The market risk of an investment is contributed by the
investment committee are held fortnightly or as necessary. nub of the due diligence process, and these factors are con- estimated beta times the market return; the uncorrelat-
tinually expanded and deepened before being summarised in ed risk of the investment is contributed by what is left –
i.e. by the volatility of the investment return minus the
The purpose of a due diligence is to ascertain whether a fund is the final investment memo.
market return times the investment beta. The return
in a position to deliver returns in the top quartile in its category. associated with this residual component, alpha, is the
The methodology involves carefully reviewing all information The following looks first at the due diligence process, i.e. the holy grail of active investment management.
on the fund and in the process of doing this, looking for consis- actual process as it unfolds, before discussing each of the five
tency, investment discipline and value-adding capabilities. focus areas in depth in separate sections.
Role of the investment committee
Five focus areas Investment process v Meets fortnightly or as required
v Provides ongoing feedback on due diligence projects
To properly get to grips with a fund and its potential, the due The due diligence undertaken on an individual fund is v Reaches formal decision on whether to invest in a fund
intended to explore and analyse all of the aforementioned or not
diligence undertaken by ATP PEP focuses on five areas which
are intended to ensure that every aspect of the fund is explored five focus areas. The process can take anything from 2-3
and analysed completely. These five key areas are: track record, weeks to up to 6-10 weeks, depending in part on the avail-
team, strategy, process and terms and conditions. ability of information on the fund and how far the fund is
into the fundraising process. It is a matter of striking a bal-
A fund must prove its worth in all of these areas. Experience ance between spending no more time than necessary and
shows that consistency between track record, team and strat- ensuring the necessary degree of thoroughness.
egy often provides a solid basis for a fund being able to deliv-
er top-quartile returns. The process is not an aim in itself but rather a way of ensur-
ing that all relevant areas are checked and verified. The

Chart One: Investment Process

Investment Committee Investment Committee

Screening inin
three phases
Screening Investment

Negotiations on terms
and conditions

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Approval or rejection Track record

Chart Two: Breakdown of Realised Multiples

13% When the investment committee has seen the recommen- Track record is the most objective and readily accessible of
dation, negotiations regarding the limited partnership ATP PEP’s five due diligence focus areas. Nevertheless, a
33% 10%
agreement, side letters, tax opinion, subscription agree- fund’s track record is based on a series of assessments of the
ment and so on complete the due diligence process. At value of the individual companies in which the fund invests.
this point there will still be some uncertainties about
whether or not a commitment should be made. From time A fund’s track record consists of the following elements:
to time we turn down funds due to deal-breakers in the
v Realised investments
limited partnership agreement. At one stage we decided to
v Unrealised investments – valued by means of their implied
turn down a fund with a good historical performance sim-
<1x 1-3x 3-5x 5-10x >10x ply because negotiations over terms and conditions clear- valuation (see later)
ly showed us that the GP was more focused on its man- v Partially realised investments
agement fee income than on aligning interests between it v Total investments
and limited partners in its fund.
If a manager has several generations of fund, each generation
Chart Three: Individual Track Records This is the way it has to be. Every investment must be of fund (Fund I, Fund II etc.) are listed, and each is then bro-
400 6.0x evaluated many times during the investment process. ken down as stated above. Charts two to four give an exam-
5.0x Some make it, some do not. Even in the final stages funds ple of the types of data that ATP PEP will gather on all of a
4.0x can be turned down despite the many man hours spent manager’s funds when conducting its analysis of the GP’s

200 3.0x and many miles travelled, but in the end those expenses track record.
2.0x are nothing compared to a potentially non-performing

1.0x investment: the price of making bad decisions is much Even during the initial screening, a fund’s track record plays
0 0.0x higher than the cost of the time and travel associated with a key role in whether we proceed with the fund as a potential
$ mio
Partner A Partner B Partner C Partner D Partner E Partner F Partner G

Invested Capital Realised Multiple

a due diligence. investment. If there is no track record or only a relatively lim-
ited realised track record, the team’s composition, expertise
Key focus areas: track record, team, strategy, process and experience are given greater priority in our analyses. In
and terms and conditions these situations we also choose to focus on value creation at
individual portfolio companies. There may be many good
Chart Four: Investment Pace, 1990-2004 The due diligence process itself is described above. As men- reasons for a limited track record, and this is not to be seen
$ mio.
Chart Four: Investment Pace, 1990-2004 tioned earlier, the process focuses on five main areas – track as necessarily a problem in itself.
700 16
record, team, strategy, process and terms and conditions –
600 14
which are explored through research, meetings and refer- When analysing a track record, we attach great importance to
10 ence checks. The following sections present these five focus continuity between track record, team stability and a consis-
areas in greater detail, and discuss the challenges in each. tent investment strategy (see ‘Consistency’ below).
200 The theory is illustrated with practical examples wherever
100 2 possible. Naturally, these examples have been rendered Obtaining information is not without its problems when it
0 0 fully anonymous. comes to stocks that are unquoted and therefore charac-
1990 1992 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Amount Nr. of Investments

terised by limited availability or low earnings visibility. The
difficulty of getting hold of data leads to asymmetric infor-


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pharma and technology sectors will be needing 2-3 years ahead IRR is not the only valuation parameter in the assessment of Definition of cash flow
and can therefore be expected to be interested in acquiring a fund’s track record. In particular, IRR is often used togeth- Gross cashflow (GCF) is used in the calculations because it
v Deal sourcing er with a cash multiple figure. is easier to reconstruct from annual reports and can be
v Network compared across funds. GCF we define as net earnings
v Experience of developing companies from idea to revenue The calculations are both retrospective and prospective. Has plus depreciation plus non-cash items.
the IRR on previous investments been acceptable? Is it likely
When it comes to the companies in which the fund invests, the that future investments will yield an acceptable return? In
important considerations are: connection with calculating the IRR, we also look at how the Investments in a venture capital fund are likely to
companies value their unrealised stocks. As they are not quot- result in positive value growth/creation if:
v Ability to spot the potential in a product ed and so do not have any immediately measurable market v A beta product is launched successfully among test
Insight into future market value, it is important that this is done realistically. v A good salesman (or sales force) with market insight
v Go-to-market strategy and large network is recruited
v Business development As a formula (see box-out), IRR appears relatively easy to cal- v Contracts are concluded with important distributors or
system integrators on sales of the product
Organisational development and the need for it later on culate. But there are two factors which make its calculation v Partnership agreements are entered into on joint
v Entrepreneurial spirit more subtle and to some degree a complex undertaking. development and milestone payments from the domi-
nant company in the market
v The product is integrated into other software
Fundamentally speaking, the venture capital fund must have Firstly, it is often based on the assumption that a set number packages
good experience of building companies. Building a company of portions are invested over time rather than a single sum at
can be compared with building a house. You need sound foun- the beginning. Similarly the return is delivered in several por-
dations if you are to be able to build at all – and the foundations tions over time. This means in practice that some of the
dictate how large and how tall the house can be built. The taller repayments actually consist of the return on the investment. Internal rate of return
the house is to be, the more important it is that its foundations IRR is the rate of interest where the NPV is equivalent
are in order. Secondly, it is important to define when payments are made to 0.
and when the IRR is being calculated from. Totally different
NPV = ∑ Pt (1+i)-t
The same goes for a venture-backed company. If it is to grow results can be achieved depending on whether a payment is
and create value, it is crucial that its technology (i.e. its founda- made at the beginning, in the middle or at the end of the cal-
tions) is 100% sound. The company’s organisation, people and culation period. A
IRR= i NPV = 0
business processes correspond to a building’s carcass. The size
and success of the company depends on the quality of and inter- The two main ways of calculating IRR are pooled IRR and
action between its organisation, people, processes and in partic- horizon IRR:
ular, its product (technology) as its cornerstone.
Pooled IRR
IRR and its calculation Pooled IRR is the IRR obtained by taking cashflows from a
number of companies and aggregating them into a pool as if
Whilst calculation of IRR is the backbone of a track record they were a single company. This is superior to either the
and plays an important role in the assessment of a fund’s average IRR, which can be skewed by large returns on rela-
underlying investments, it is very important for it to be cal- tively small investments, or the capital-weighted IRR, which
culated correctly. Our experience is that IRR can be calculat- weights each IRR by capital committed. The latter measure
ed in several different ways and that its interpretation can would be accurate only if all investments were made at once
lead to different conclusions. It should also be noted that at the beginning of the fund’s life.

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Vehicle Tax Legal Can avoid Management Restrictions on Other issues

transparent? entity? Permanent charge subject where it can be
Establishment to VAT? managed?

English limited Generally yes No Yes No No • Most common structure for Pan European funds
partnership • Loan / capital split
• Removal of 20 partner limit

Delaware limited Generally yes Yes Yes No No • Most common structure for North America funds
partnership • Still (occasionally) requested by US investors
• Established body of law and responsive legislation
• Caught by US reporting requirements

German limited Generally yes No Generally yes Generally no Yes • Generally only suitable for German investors
partnership (non- • Non-trading limited partnership criteria have been revised
trading for German • New ITA rules generally a move away from KGs
tax purposes) • Caught by German reporting requirements

French FCPR Generally yes No Yes Yes/No Yes • Generally drafted in French
98 • Prevalent structure for domestic French funds
• Tax transparent for French purposes

Jersey/Guernsey Generally yes No Yes No Yes • Generally needs to be regulated and administered in
limited partnership the Channel Islands
• Has been used for a number of funds
• Some continental European investors still have problem
with ‘offshore entity’
• Liability issues in the UK

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star performers within the GP will be highlighted, there is a All this means that your advisors need to have enough time to
growing interest amongst LPs to see evidence of meaningful risk get familiar with your firm and your team. If your incumbent Strategies for dealing with people factors:
mitigation by GPs with regard to its personnel. To quote a UK- legal advisors are not strong on fund structuring, make sure you
based fund of funds investor: “We don’t want to be buying just have started talking to a firm that is well in advance of launch- • Do you have a Head of Investor Relations?
one guy and we don’t therefore like to see just one person sell a ing the fund (and don’t assume the first candidates will be your • Maintain a regular, substantive dialogue with LPs
fund to us.” final choice). Possibly even more important is selecting a place- in your existing funds.
ment agent – assuming it has been decided that you will have the • Talk to your existing LPs first about your plans for
Increasingly private equity groups are appointing a senior, sea- input of such a firm. There has been an increasing stratification a new fund.
soned individual within the firm to be in charge of investor rela- of the placement agent industry with successful placement • Make a point of getting to know new personnel at
tions. This person will not only be pivotal in terms of nourish- groups being in considerable demand, enabling them to be high- investing institutions.
ing relations with LPs in existing funds but also will be at the ly selective as to which mandates they take on. This could well • Train a team of fundraising presenters – don’t rely
heart of the new fundraising. The presence of such an individual mean that your first choice agent will not be available; to dis- on one star.
has both practical and strategic benefits: they can act as point cover this one month before your scheduled fund launch is due • Make use of your younger/newer talent when pre-
person during the fund raise (see also ‘Campaign factors’ below) to start will be disastrous. senting.
and the presence of such an individual is not lost on investors • Select your advisors in good time.
either (he inference is that your firm takes relations with its Information factors • Make sure you get on with your advisory team.
investors seriously). • The fund raise will take months – even years – so
Although market and people factors each can have considerable be prepared to spend lengthy periods with your col-
It is also imperative that the broader fundraising team is appro- impact on the success or failure of a fundraising, probably the leagues and advisors.
priately structured and that it operates smoothly. Relations most important elements that shape the final outcome of a fund • Remember raising a private equity fund is not just
102 about numbers.
between GPs and their advisors can be highly charged: the sig- raise are what can be called information factors. These are the
nificance of raising the firm’s new fund, the intensity of the itin- facts and figures that detail the history of the firm and its prior • Tell your family they are going to see even less of
erary and the successive sales presentations all help ensure that a funds; they are the profiles of the individual team members at you over the coming months.
heady mix of adrenaline, fatigue and anxiety can influence inter- the GP who are tasked with investing the fund; they are the
personal relations. And if the fundraising is not running as terms tabled and the terms agreed in the Limited Partnership
smoothly as hoped then the tension only gets greater. Agreement (LPA). And they also relate to how such information
Comments one placement agent: “It’s like a marriage: you’re is managed: how due diligence questionnaires are completed;
spending lots – probably too much – time together, you talk how existing LPs are fed with timely and appropriate informa-
about the same things again and again and poor or lazy com- tion; and how information is delivered clearly and consistently
munication between one another turns a small issue into a big when marketing the new fund.
problem.” The lawyers involved in drafting the fund’s docu-
mentation are less exposed to the ups and downs experienced on Prior to officially launching the new fund, a private equity group
the fundraising trail but they too need to be able to gel with the must devote significant time and effort in preparing its private
private equity firm’s team. As commitments begin to be dis- placement memorandum (PPM). The information presented in
cussed and different lawyers start to get involved on behalf of this document must be extensive, accessible and – crucially –
LPs, so the tension mounts as terms are negotiated. It is vital at accurate. And that means the GP and its advisors must repeat-
this stage that the GP can have total faith in its legal representa- edly work through every aspect of the PPM. Bad research and
tion and that the lawyers themselves are equally as comfortable compilation now will return to haunt the fundraisers later in the
with their client. process. Recalls one GP who had a protracted fundraising: “It
was at the due diligence stage that it became clear to us that we

fundraising copy.QXD 07/14/2005 10:38 Page 111

Nonetheless, investors are mixed in their views as to whether or To better understand which terms and conditions are consid-
not the terms and conditions of US and European funds are ered by investors to be of most importance, and which are
converging. Almost half of respondents felt that this was the considered to be of least importance, respondents were asked
case, with only 16% stating that in their opinion they weren’t to rank a number of different issues addressed by a fund’s
(see Chart Four). However, a substantial proportion (38%) of terms in descending order of importance (rank one being the
investors were undecided. This may reflect the fact that many most important, followed by rank two and so on, to rank
investors in private equity funds remain regionally focused, con- eight). The topics respondents were asked to rank were: car-
centrating largely on domestic managers. It is generally only the ried interest sharing arrangements; co-investment arrange-
larger, more experienced investors that commit to private equity ments; keyman provisions; level of management fee and oper-
funds on a global basis, and who would therefore have the expe- ation of management fee step-down; no-fault and for-cause
rience to know whether European and US funds are converging. divorce provisions; operation of catch-up and clawback provi-
sions; side letters; and timeliness of reporting. Respondents
Chart Four: Are the terms and conditions of European and US
were asked to use each ranking only once.
funds converging?

Chart Five: Terms and conditions ranked by LPs as

most important
Not sure
Carried interest sharing

Keyman provisions

Yes Operation of catch-up and

clawback provisions 111
46% Level of management fee and
operation of step-down

No-fault and for-cause divorce

No provisions

16% Side letters

Rank 1

Timeliness of reporting
Rank 2

Co-investment arrangement

0% 10% 20% 30% 40% 50% 60% 70% 80%

Relative importance of different terms
% of respondents

Private equity and venture capital funds are complicated

vehicles. Their terms and conditions cover a broad spectrum; As can be seen from Chart Five, investors feel that carried inter-
a partnership agreement will deal not only with the funda- est sharing arrangements and keyman provisions to be of most
mentals of management fee and carried interest, but with importance when considering the relative importance of differ-
issues relating to the formation and composition of the fund, ent terms and conditions. Some 67% of respondents placed
the treatment of various fees and costs flowing into and out carried interest sharing arrangements in either rank one or
of the fund, and the rights and redresses given to limited rank two, with 61% of investors doing the same with keyman
partners, amongst others. Certain issues will be considered provisions (see Chart Five).
fundamental and will concern almost all investors. Other
considerations, such as co-investment provisions, will be of Arrangements governing the level and timing of carried inter-
importance to some investors but will be considered an irrel- est payments will exercise investors in private equity funds, as
evance by others. carried interest is the principal method by which a GP is


fundraising copy.QXD 07/14/2005 10:39 Page 131

Chart Fifteen: Value placed on hospitality events Chart Sixteen: How regularly should GPs provide LPs with
Examples of specific GP hospitality events men-
tioned by LPs include: None at all

v Box at the US Open.

A lot What value do 100%

v Cocktail parties and dinners.

11% LPs place on GP 87%
hospitality events?
v Golf (varying from outings to entire weekends). 80%

v GP and special advisor co-sponsored legal confer- 70%

% of Respondents
ences. 60%

v Museum / art gallery visits. 50%

v Night at a sports bar to watch a football game. 40%

v Race meetings. 30%

v Sailing.
A little
v Shooting days. 10% 4% 4%

v Theatre. cate that they place only a little value on GP hospitality events

v Tours of historic venues.

Monthly Quarterly Bi- Annually Other
(see Chart Fifteen). Only 11% of respondents see a lot of value annually
v Trips to the Ryder Cup. in them, while 16% state that they see no value whatsoever.
v Wimbledon. What value there is placed on hospitality events revolves around
v Wine tasting. relationship building and networking. Properly staged, a hospi- Chart Seventeen: In practice, how regularly are GPs providing
tality event can offer opportunities for investors to get to know LPs with reports? 131
the individuals at the GP better, which in turn fosters better rela-
tionships and helps to build trust. In particular, respondents
pointed to the ability to meet with junior members of the GP as 100%

a benefit of hospitality events, along with being able to experience 90%

how the different levels of staff at the GP interact. Respondents 80%

also appreciated the ability to network and interact with other 70%

% of Respondents
limited partners that some hospitality events can offer. 60%


When it comes to the frequency of reporting, general partners
are broadly in line with the expectations of limited partners. 20%

The vast majority of investors want to receive reports on a 10%

0% 1% 0% 1%
quarterly basis (see Chart Sixteen), with a small proportion 0%
Monthly Quarterly Bi- Annually Other
expressing a preference for monthly delivery and the same annually
number selecting bi-annually. Private equity is a long-term,
fairly illiquid asset class. For that reason, some investors may
find that receiving detailed reports twice per year will be suffi-
cient. Furthermore, this long-term nature means there is little


fundraising copy.QXD 07/14/2005 10:40 Page 136

“The new concept fund”
Accession Mezzanine Capital LP
Christiian Marriott, Director - Investor Relations,
Mezzanine Management UK Limited

Background Aside from organisation and formulation of the team, the longer time to begin drafting the marketing materials and partnership
job was formulating the investment case for the fund. The desire agreement. In the case of AMC, Blair Thompson of SJ Berwin
The idea of raising the first independent mezzanine fund for was for AMC’s investment rationale to be confirmed internally, was key in ensuring that the fund’s structure was going to be
Central Europe was discussed within Mezzanine Management validated externally, and then fine-tuned and articulated in a right for the investment strategy as well as being attractive and
from as early as 1999. However, Accession Mezzanine Capital way that would allow us to approach the institutional investor workable for potential LPs. A key element as we articulated the
LP (AMC) itself was not formerly launched until February community. In this respect the partnership with AMC’s corner- case for AMC was to stress that while it was a new concept,
2001. That fact in itself says much about what it takes to get a stone investor was key. The concept of a cornerstone investor Mezzanine Management had a track record of being involved in
new concept fund off the ground. Any new private equity or tends to be over-generalised by the industry, as it can mean dif- introducing mezzanine to new markets in Western Europe in the
mezzanine fund requires planning, but taking a new financing ferent things to different people. For AMC, the cornerstone late 1980s and early 1990s. The basic argument was that this ele-
instrument into an emerging private equity market was always investor provided more than capital. The European Bank for ment of ‘technology transfer’ was nothing to faze the firm or the
going to be a particular challenge. And to top it all, AMC was Reconstruction and Development (EBRD) was vital in validat- members of the team who would be making investments. In
going to saddled with the dreaded ‘first time fund’ label, some- ing Mezzanine Management’s thesis that there was a market for practical terms, this meant that there was also a meaningful con-
thing that Mezzanine Management hadn’t had to contend with mezzanine in Central Europe. There were definite parallels with text for the inclusion of the group’s 15-year Western European
since it opened its first fund back in 1988. what Mezzanine Management had achieved when setting up track record in the PPM and marketing materials. This feature
shop in Western Europe: a growing private equity market, a lack of AMC’s offering arguably gave the fund significantly more
During the planning stage before the fund was launched, sev- of intermediate finance and ongoing macro-economic change. marketability among institutional investors keen to apply some
eral key milestones had to be hit, some of which were specific Notwithstanding the similarities, however, if the largest investor sort of relevant quantitative track record analysis to their invest-
to AMC, but others common to all new funds that are intro- in private equity in Central Europe didn’t believe there would be ment decision.
ducing a new concept to the private equity market. Getting the demand for mezzanine in the region, we would probably do well
team together and organising the corporate structure was in to think twice. Having launched the marketing of AMC in Spring 2001, it
many ways straightforward. The rationale for taking mezza- was clear that the general conditions for raising capital were
nine as a product into this region had been formulated with One final aspect of the preparations was the legal due diligence not ideal. Institutions whose portfolios were suffering from
the two managing directors who were going to be running the in the principal countries targeted by the fund. This involved the cyclical downturn were finding it hard enough to commit
fund on a daily basis. One key advantage for AMC was that taking Western European loan documentation, having it trans- to any private equity product, let alone something as differ-
these two gentlemen were effectively part of the Mezzanine lated into both local language and local law, and gaining com- ent as a mezzanine fund focusing on Central Europe. In mar-
Management ‘family’. Franz Hoerhager had sat on the boards fort from lawyers on the ground that key concepts such as sub- keting trips to the US, it was clear that the ongoing accession
of the firm’s first two funds, while Ben Edwards had been with ordination would stand up in the local jurisdictions. process, during which the five core countries targeted by
Mezzanine Management from its inception and, after a short AMC would join the EU, was still something that many
time outside the firm, had returned to be a founding partner Marketing the fund institutions were either unconvinced by or unfamiliar with.
in the AMC team. The shared history made this ‘new concept’ Indeed, Central Europe was, for many institutions, an emerg-
seem more familiar to those that would be involved in making So after months of working with the EBRD and talking to inter- ing market like Latin America or the Pacific Rim.
it happen. mediaries and private equity funds in the region it was finally Anecdotally, a key milestone that started to resonate with

fundraising copy.QXD 07/14/2005 10:40 Page 140

“The debut US mid-market fund”
Arsenal Capital Partners, LP
Terry Mullen, Co-founder and Managing Director, Arsenal
Capital Partners

Rationale Execution Key facts

Name of fund: Arsenal Capital Partners, LP

Arsenal Capital’s debut fund was founded in 2001 to execute con- Firm building and fundraising were accomplished through a
trol investments of manufacturing and business services compa- staged approach of initial fundraising followed by team build- Launch date: May, 2001
nies. Terrence Mullen, Arsenal co-founder and Managing ing, deal execution, and portfolio company improvement.
Director, left Thomas H. Lee Partners in 2000 on the heels of sev- Success in team building and execution created a platform for a First close date and May 30, 2001; $50 million
eral successful buyouts, including Rayovac Corporation and rapid doubling of committed capital, and by demonstrating an amount:
Transwestern Publishing, in which strong operating leaders played ability to improve its portfolio companies Arsenal quickly
Final close date and May 30, 2003, $65 million (total
a significant role in delivering above-market returns. In building reached an overcommitted first fund. amount: $300 million)
out the Arsenal team, Mullen sought a strong operating profes-
sional to complement his own investment and financial back- Mullen and Siadat were able to raise an initial $50 million on Type of limited partners: Fund of funds, corporate and
ground. This search tapped Barry Siadat, the former Chief the strength of their prior successes, with commitments coming municipal pensions, banks,
140 universities, high net worth
Growth Officer of AlliedSignal/Honeywell, who over 27 years at from their network of LP relationships and from other, smaller
two diversified conglomerates (AlliedSignal and W.R. Grace) held investors. They had already brought on board a Vice President
a variety of senior managerial and technical positions in a broad who had worked with Mullen at T.H. Lee and two Associates Number of limited 100
range of industries. with investment banking and consulting backgrounds, and after partners:
successfully completing this initial funding in March 2001,
The founding principal behind Arsenal was to combine financial brought on an additional Managing Director, James Marden (an Name of law firm: Kirkland & Ellis
and operating expertise to make good companies better in operating and investment executive from Merck-Medco and
Name of placement George H. Carter, Zurich,
‘growth and productivity buyouts’. Mullen and Siadat believed Medical Logistics), as well as another Vice President (also from agents: Switzerland; Farrell Marsh & Co,
that this collaboration between investment and operating profes- T.H. Lee) and a third Associate. Siadat also reached out to his Greenwich, Connecticut, USA
sionals would result in an ability to source higher quality trans- extensive network, recruiting a group of Operating Directors
actions; quickly and accurately identify business strengths, weak- consisting of senior operating executives from firms known for
nesses and opportunities; more thoroughly evaluate management their industry leadership and operational excellence, including improving competitiveness and productivity, irrespective of the
teams and conduct due diligence; and actively grow and improve AlliedSignal, General Electric, General Motors, DuPont, and economic cycle. This strategy had resulted in above-market com-
investments. The two decided to invest in industries in which Bristol-Myers. pany performance and investment returns at T.H. Lee, at
they had prior investing and/or operating experience, including AlliedSignal, and at Merck-Medco. However, the strategy
specialty chemicals, specialty manufacturing, and certain sectors This Arsenal team had proven track records in executing the var- remained unproven by the Arsenal team.
of healthcare. The team at Arsenal would be built around these ious components of ‘growth and productivity’ investments. The
industries, as well as around certain key functional disciplines individuals comprising the Arsenal team all had experience of After the initial first closing on $50 million, the partners focused
that would apply to a broad range of businesses, including investing in basic middle-market companies, driving organic on deal sourcing and execution in order to demonstrate the mer-
human capital, quality, supply chain, and technology. growth while taking advantage of strategic acquisitions, and its of the Arsenal team and model. Over the next year Arsenal

fundraising copy.QXD 07/14/2005 10:41 Page 161

Fund administrators and outsourcers

Abacus Financial Services Group Ltd.

Company name Abacus Financial Services Group Ltd.
Address Tower 42, 25 Old Broad Street, London EC2N 1HN, United Kingdom
Phone +44 (0)20 7877 2104
Fax 44 (0)1481 728493
Other office locations Jersey, Guernsey, Edinburgh, Cheltenham, Amsterdam 161

Baring Fund Administration Services

Company name Baring Fund Administration Services
Address PO Box 71, Trafalgar Court, Les Banques, St. Peter Port GY1 3QL, Guernsey
Phone +44 (0)1481 745000
Fax +44 (0)1481 745050
Other office locations Dublin, Isle of Man, Jersey, London


fundraising copy.QXD 07/14/2005 10:42 Page 174

Gaining in sophistication
June 2005

Having a good IT platform is not just a means of making life easier the amount of a capital call is wrong or it’s requested at the ual partnerships), but also look through to the portfolio holding
for a GP’s front and back office teams: these days, it can play a vital wrong time,” he says. “Those who use Excel-based systems do companies. That is all incorporated in one system.”
role in evidencing ability to add value and can even make a differ- occasionally make such mistakes.”
ence to fundraising prospects. Andy Thomson reports on developments Doubling up
in private equity technology. Wooster adds that the use of more sophisticated systems has
gone hand in hand with more detailed reporting requirements. “Incorporation in one system” is not a phrase that appears to sit
If possession of a cutting edge technology platform were ever For example, the traditional method of valuing portfolio com- easily with the approach of many private equity firms. Wooster
considered a luxury by private equity firms, that is certainly no panies at cost is being increasingly usurped by the concept of says as many of half of Europe’s GPs are running what he calls
longer the case today. Not only do fund administrators need to ‘fair value’, as reflected in recent guidelines issued by a number ‘duplicate’ or ‘shadow’ administrative systems, whereby the GP
be using credible systems in order to win business from GPs, of European private equity associations as well as the Private continues to run its own in-house system even when fund
anecdotal reports indicate that GPs increasingly need to evi- Equity Industry Guidelines Group (PEIGG) in the US. reporting has been nominally outsourced to an external
dence use of a particular system – whether by outsourced admin- “Historically, private equity firms have kept valuations low until provider. Viewed one way, this may reflect a lack of trust in the
174 istrators or their own in-house team – when on the fundraising it comes to realisation, and then the rabbit is pulled out of the administrator and a desire on the part of the GP to retain some
trail. Given the increasing pressures on LPs to obtain regular, hat. Now, accounting standards demand fair value is applied control. But there are also practical reasons for such an
detailed information on the funds in which they invest, it could through the life of an investment,” says Wooster. approach, notably the widely acknowledged but not widely
be argued that never before has technology been such a high pri- broadcast fact that administrators will normally merely provide
ority when it comes to investor due diligence. It is not just ‘macro’ developments such as changes to account- a rubber stamp for valuations provided by the GP rather than
ing rules that are having an impact on reporting requirements – taking on such a sensitive role themselves.
In response to this, private equity firms are more likely to turn there is also structural change within the private equity industry
to off-the-shelf or tailored software systems rather than the less itself. Take for example the growth of funds of funds, whose part In viewing duplicate systems as a fact of life, Accounting
sophisticated means of gathering and distributing information GP-part LP status brings with it an added layer of complexity: Frameworks is promoting the ASP (application service provider)
that they have relied upon in the past. “It’s not that you can’t still ranging from serving their own clients to fielding reports from model as a way of attempting to ensure that the GP and admin-
use spreadsheets, but that approach is becoming less credible,” their underlying partnerships through to portfolio level data istrator can at least access the same real-time information rela-
says Alan Routledge of eFront Financial Solutions, a private associated with co-investments. They have forced technology tively cheaply. Traditionally, private equity firms have owned
equity software vendor. “You need to respond to new ways of providers to rise to the challenge of meeting their unique and paid for their own infrastructure, and linked the main serv-
reporting and new fund structures, and it’s hard to see how you demands. er to remote offices by means of a series of paid-for connections.
can cope with these demands using Excel or manual methods.” The ASP approach, on the other hand, means paying a sub-
This is illustrated by the case of LGT Partners, the Swiss private scription to access a shared server, thus greatly reducing infra-
Peter Wooster, director of Accounting Frameworks Limited, a equity and hedge fund manager with $5 billion under manage- structure costs.
private equity and venture capital software provider, says over- ment, which outsources its reporting to a technology vendor.
reliance on spreadsheets means being exposed to the possibility Says principal Robert Schlachter: “We not only track the cash Whilst ASP systems are still in their infancy, the implications
of human error. “Limited partners get very upset, for example, if flow and valuation between the fund of funds and the (individ- may be profound as private equity firms seek to grow interna-

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Fund administration and technology: the A to Z

June 2005

Rather like the private equity industry it supports, the world of fund tent with basic summaries of fund performance to the corner- L is for limited partner. Never upset one. Anecdotal reports indi-
administration and technology is becoming increasingly more com- stone institutional investor expecting more regular and detailed cate that while having a good back office system may not exact-
plex and esoteric. Here, we take an alphabetical stroll through some data than would normally be requested. Systems need to be flex- ly be make or break on the fundraising trial, it is edging up most
of the defining words and phrases. ible enough to respond to a wide range of demands. limited partners’ list of priorities.

A is for administrator. Increasingly, firms are outsourcing parts, G is for guidelines. How should portfolio companies be valued? M is for mobile working. As the private equity industry con-
if not all, of their fund administration to outsourced providers. Less a straightforward question than a cry for help over the years due tinues to expand into new territories, more and more invest-
Start-ups and spinouts in particular look to offshore administra- to the absence of a single set of valuation guidelines. But thanks to ment staff are working from remote offices, often with a min-
tors for all their fund reporting requirements. the recent efforts of industry associations such as the EVCA in imum of local support. GPs need to ensure that an increas-
Europe and the PEIGG in the US, the promised land of har- ingly mobile workforce remains in permanent contact with
B is for back office. Regardless of what the rainmaking deal monised valuation techniques seems to have come a step closer. support systems.
doers say, this is where it’s at … ok it’s not really, but without a
robust, reliable system (and team) behind them, the deal teams H is for high-tech. The high-tech nature of today’s fund admin- N is for numbers. You can provide as much detailed, strategy-
would struggle. istration and reporting systems is replacing the Excel standard level information as you like, but the bottom line is that it’s the
and allowing for electronic communication between GP and LP numbers that count. Chronological, quarter-by-quarter numer-
C is for choice. Five years ago, such an entry might also have con- rather than the mailing of heavy binders of paperwork. ical updates on portfolio company performance and clearly stat-
tained the words “or lack thereof”. Nowadays, with more options, ed valuations speak more than a thousand marketing words.
more systems and more suppliers, it’s worth researching the mar- I is for in-house software systems. Many private equity funds of
ketplace in depth before making a long-term commitment. funds develop such systems to handle the complexities of their O is for Outlook. New information management systems must
reporting: as LPs, they field reports from underlying general be compatible with Microsoft’s industry-leading email program
D is for detail. As limited partners become increasingly sophis- partnerships, but as co-investors, they may be even reaching into if any firms are going to be interested. In addition to working
ticated, so too do their information requirements. Funds of portfolio-level data. with the email program, jet-setting front office professionals also
funds in particular can require layers of detail that a top line want systems that are able to sync with their newest appendage
quarterly report may not be able to provide. J is for Jersey. The offshore jurisdiction of choice for European – the Blackberry.
private equity funds, Jersey recently enacted the Expert Funds
E is for email. Email, internet, web-based reporting, online category, which includes key regulatory changes designed to give P is for package. There is now a wide range of software packages
interaction. The future is here and it’s on the web. No more rain- the island the edge over its offshore rivals. available on the market and all are designed to allow the user to
forest-destroying reports every quarter, all you need is a log-in standardise, collate and make accessible relevant information.
name, password and away you go. K is for knowledge-led delivery. A buzz phrase much loved by But ownership of a package is one thing: how central you make
fund administrators. Another way of saying it’s not much use it to the way your business is run will determine whether or not
F is for flexibility. Different types of fund investor have very dif- having state-of-the-art systems if you don’t have people who you can boast a successful IT operation.
ferent requirements, from the high-net-worth individual con- know how to get the best out of them.

fundraising copy.QXD 07/14/2005 10:44 Page 199

Nice work if you can get it

April 2005

The current increase in fundraising activity is good news for place- this, and they also recognise that the process as a whole is American venture funds (Sequoia and Kleiner Perkins come to
ment agents. But intense competition for mandates and a sharpened becoming more and more complex. LPs are developing a more mind) and the doyen of multi-strategy, serial fundraising, The
focus on professional standards means a shakeout in the industry is differentiated understanding of how they want to participate in Carlyle Group, appear confident enough to brave the market
likely to occur, writes Philip Borel. the asset class and which types of – as well as how many – man- entirely on their own. And even some of these firms have been
ager they want to work with. Gone are the days, therefore, of known to deploy an external fund placement specialist on a par-
Global private equity is in fundraising mode. After 24 months general partners being able to take a cavalier approach to their ticular mission – such as tapping a new community of investors.
of intense capital deployment driven by an unprecedented push fund raise and, more broadly, to their investor relations. For a
on the world’s M&A markets, droves of general partners are number of years now, the trend amongst the bigger private equi- The high flyers aside, most managers still retain the services of
going back to institutional investors to refill their coffers. In the ty groups has been towards building dedicated, in-house fund outside advisors, regardless of how much in-house resource they
world’s key money management centres, the airport lounges are placement and investor relations capabilities, headed by senior may already have put in place. The challenge is to how best seg-
playing simultaneous host to numerous fundraising GPs. Even members of the partnership who have deep knowledge of the ment this market of potential clients. One fund placement veter-
in more remote locations, sightings of private equity managers theory and practice of the fundraising process as well as the inner an describes his universe of prospects as comprising every private
looking for fresh commitments are increasingly common – as workings of their firm. equity group on the planet minus the top 10 percent of in-
long as you happen to be in the hometown of a US state pen- demand partnerships that are able to raise any amount of institu-
sion headquarters, a Scandinavian insurance company or a fam- At face value, this trend appears to be a threat to placement tional capital more or less at will, as well as the 30 percent of man-
ily office in the Middle East. agents, those middlemen (and women) making a living out of agers who the buy-side will refuse to back; the remaining 60 per-
helping to persuade investors to entrust their capital with spe- cent will require hard work that will ultimately pay off – which is
On the buy-side, investors are surveying the host of new funds cific funds. The less knowledgeable of the fundraising process where this particular agent sees his profession’s sweet spot.
coming their way with just as much intensity. Yield-hungry their clients are – placement agents get paid by the managers
institutions are betting that private equity can provide at least they represent – the greater their need for billable services. The reason why the majority of GP groups still favour using an
part of the answer to their performance-related difficulties. Disintermediation, arising from this growing number of gen- agent is simple: even the most dedicated investor relations pro-
However, the positive inclination towards the asset class does eral partners busily honing their DIY fundraising skills, is fessional at a private equity firm is unlikely to be as permanent-
not mean money is being thrown at private equity groups eroding the ground on which many a private equity fund ly engaged in dialogue “with the market” as a placement agent
indiscriminately. According to practitioners familiar with the placement business model has been built. Or as one head of IR looking after a portfolio of client relationships. As a result, the
current institutional investor mindset, limited partner due dili- at a recently fund raising partnership put it: “Why buy a dog in-house specialists may find it more difficult to keep track of
gence on new funds is as detailed and scrupulous as it has ever and bark yourself?” exactly how a given limited partner’s attitudes and investment
been. “Limited partners have never been busier,” says John requirements are shifting over time – especially if the limited
Barber, a director at London-based fund placement advisors Are placement agents an endangered species then? At first partner in question is not an existing client but someone the
Helix Associates. glance, there is no evidence of them disappearing from view. Of manager would like to bring into a future partnership. Access to
the many new campaigns being launched every year, only the a placement agent’s first-hand knowledge of the shifting patterns
As a result, queues of managers are forming outside limited part- very largest LBO groups (Bain Capital, Permira, Providence and amongst the buy-side can be a powerful supplement to in-house
ner offices. Fund raising general partners are all too aware of BC Partners to give some recent examples), uber-popular North relationships and know-how.


fundraising copy.QXD 07/14/2005 10:45 Page 218

The loneliness of the long distance

August 2004

It was the trip back in the cab from the airport early Saturday And talking of reputational hazard: no one at the GP wanted to
morning that gave the IR manager time - too much time - to assess be mandating an agent perceived as representing second or third
the likely outcome of the many meetings he and the managing part- tier funds. It was like a Saturday night dance: lots of wallflowers,
ner had squeezed into the past four days (and three different cities). plenty of eye contact but only the golden couples out on the
floor. Neither agent nor fund wanted to be seen out with the
It’s not as if any of the sessions, many of them with existing lim- wrong partner. People would talk.
ited partners in the firm’s earlier funds, had been bad. But none
seemed to move beyond the pleasantly vague. All of these Then there was that particularly edgy session with one agent
prospects had received the placement memorandum and had who told the managing partner that they were raising the new
then taken the meeting: shouldn’t that indicate serious interest? fund too soon, implying that a hunger for fresh management fee
income was driving a premature launch. That was a rapid no.
But several of the current LPs had new people running their alter-
natives programmes now, and there was a clear sense that no GP Time seemed not to be on the firm’s side either. Increasingly
was going to be able to assume an automatic re-up from these investors were wanting to see others commit before moving to a
investors just because of history. As the managing partner hissed decision themselves, and as the pre-committal phase was drag-
as they walked back into the lift from one such session: “This guy ging on, the mood seemed to change - at the GP as well as
has got something to prove: and we’re going to be the proof.” amongst the LPs. Previous decisions (who to see, what to say,
when to say it) were revisited back at the office. Meanwhile
All of which depressed the IR director. The nuances of modern investor attention drifted, no doubt because other eager
fundraising were becoming starkly obvious to him now: how much fundraising GPs were lining up outside the LPs’ office.
pre-marketing one needed to do; how the timing of the subsequent
“official” launch of fundraising set the clock ticking so that every The IR director paid the cab and walked up the steps of his
day before the first close mattered; how the investment partners at townhouse. Just time enough to sort some fresh laundry before
the GP clearly wanted the buck to stop with him. Perhaps the deci- Sunday’s flight to Asia. Would he still be on the road in a year’s
sion not to use a placement agent had been premature? time he wondered?

But when the new fund was being planned, those meetings with
agents had turned out to be less than satisfactory. Several had
politely declined to take the conversation forward. The top tier
ones who had been involved in over-subscribed, rapid raisings
were clearly able to be ultra-selective - and the GP’s track record
had to be stellar.

fundraising copy.QXD 07/14/2005 10:46 Page 225

Appendix Six:
About Private Equity International Books

Our expanding range of in-depth market reports, research tory is the most comprehensive, extensive and user friendly • The UK LBO Manual
guides and directories cover the issues and trends shaping the guide to current and active investors in the asset class avail- A practical guide to structuring private equity-backed buy-
asset class on a global basis. They offer private equity and other able. An indispensable fundraising tool for those raising and outs in the United Kingdom. Written and researched by
alternative asset professionals, investors, advisors and others marketing private real estate funds of all types. leading international law firm Ashurst, this is the first in a
involved in private equity and real estate the quality research, in- series of country-specific guides that address all aspects of
depth analysis and insightful comment they need. Market Reports private equity-backed buyouts. Topics covered include: the
development of the UK buyout market; the structure of
Directories These highly specialised and targeted reports are aimed at cover- leveraged buyouts; documentation; taking equity; debt and
ing technical issues or particular areas of the private equity security; taxation aspects of LBOs; the impact of EC and
These practically orientated, comprehensive and detailed publica- industry in an incisive manner, providing readers with a valuable UK merger control and anti-trust rules; public to privates;
tions profile investors in the private equity and real estate asset class- primer on these issues. structuring equity incentives for management; insolvency;
es, as well as advisors, service providers and private equity firms. and more. This 156-page report is an essential resource for
• A Guide to Private Equity Fund of Funds Managers all those involved in UK private equity buyouts.
• The Global Limited Partners Directory The definitive guide to the global private equity fund of
The most comprehensive international guide to investors in funds market. This 276-page Market Report consists of in- • Private Equity Technology: Assessing the Alternatives
private equity funds. This 990-page directory provides depth editorial from leading fund of funds managers, place- An assessment of technology solutions and how they apply
detailed, in-depth profiles of the private equity investment ment agents and advisors, along with the results of a survey to private equity firms. This 222-page Market Report covers
programs of over 870 institutional investors and advisors into the dynamics and future of the fund of funds market the importance and risks of technology, how technology
from around the globe. Built from the ground-up by a team undertaken with fund of funds managers, placement agents specifically applies to the modern private equity firm and
of multi-lingual researchers, this directory is the most com- and LPs. Also contains the most comprehensive directory of includes a detailed analysis of the technology solutions cur-
prehensive, extensive and user friendly guide to current and fund of funds managers available, profiling more than 150 rently available to private equity firms. The guide is sup-
active investors in the asset class available. An indispensable managers from around the globe, including contact details, ported by a survey of investors’ use of and attitudes towards
fundraising tool for those raising and marketing private investment remits and previous funds backed. This report is technology, along with a unique directory of private equity
equity and venture capital funds. an essential purchase for anyone interested in understanding technology providers and their products/services. This guide
and raising capital from this increasingly important area of is essential reading for anyone involved in developing a pri-
• The Global Directory of Investors in Private Real Estate the private equity market. vate equity firm’s technology infrastructure.
The only guide to investors in private real estate funds. This Contributors include Adams Street Partners, London • A Guide to Private Equity Fund Placement Specialists
directory provides detailed, in-depth profiles of the private Business School, Mowbray Capital LLP, O’Melveny & The definitive guide to private equity placement agents, this
real estate investment programs of over 500 institutional Myers LLP, Partners Group, Probitas Partners, SCM 120-page Market Report combines in-depth editorial with a
investors and advisors from around the globe. Built from the Strategic Capital Management, Standard Life Investments global directory of agents and the results from surveying
ground-up by a team of multi-lingual researchers, this direc- (Private Equity) Ltd. both LPs and GPs about their views on the role and contri-


fundraising copy.QXD 07/14/2005 10:46 Page 226

bution of agents in the fund raising process. The book is It combines expert editorial from leading market practition- If you have any queries about Private Equity International’s current
filled with information and comment relevant to anyone ers with the results of two surveys of limited partners on the and forthcoming research publications please contact:
involved with private equity funds and fund raising. topics of fund terms and conditions and investor relations,
alongside a number of unique case studies of actual recent Nick Gordon
Research Guides fundraisings. Head of Research Publications
Private Equity International
Cover the broader issues, themes and trends that are helping to Contributors include Arsenal Capital Partners, ATP Private Second Floor
shape the development of the private equity asset class. Equity Partners, Campbell Lutyens & Co. Limited, Clifford Sycamore House
Consisting of in-depth analysis and comment, along with the Chance LLP, Helix Associates, Indigo Capital Limited, Sycamore Street
results of surveys into the attitudes and opinions of private equi- Macfarlanes, Mezzanine Management UK Limited, London EC1Y 0SG
ty professionals and investors, these research-rich, multi-con- Montagu Private Equity Limited, Monument Group, United Kingdom
tributor studies provide readers with some of the most authori- MVision Private Equity Advisers Limited, Odlander, +44 (0)20 7566 5437
tative and substantive comment available on private equity. Fredrikson & Co AB, SJ Berwin.

• The Guide to Private Equity Fund Investment Due Diligence • Routes to Liquidity
A detailed study into performing due diligence on private A detailed study of how liquidity is being brought to the
equity and venture capital funds and managers designed to asset class. This 224-page Research Guide includes contri-
assist institutional investors in making investment selections butions from leading players in the liquidity field, combin-
in this inefficient asset class. This 212-page Research Guide ing in-depth editorial with a global directory of secondary
includes contributions from leading institutional investors buyers and advisors, along with the results of a unique sur-
in private equity funds, placement agents, fund managers vey into the attitudes towards the secondary market of buy-
and investment consultants and advisors. It combines in- ers, sellers and GPs.
depth editorial with a global directory of consultants pro-
viding specialised private equity advice to institutions, along Contributors include Camelot Group, Campbell Lutyens,
with the results of a in-depth survey into limited partner Capital Dynamics, Cogent Partners, Coller Capital,
attitudes towards fund investment due diligence. Debevoise & Plimpton, Deutsche Bank, Goldman Sachs,
Greenpark Capital, Landmark Partners, Lexington Partners,
Contributors include AlpInvest Partners N.V., Cooley LGT Capital Partners, London Business School, New York
Godward LLP, Dow Employees’ Pension Plan, Key Capital Private Placement Network, Pantheon Ventures, Partners
Corporation, Mark Weisdorf Associates Ltd., Pacific Group, Paul Capital Partners, Pomona Capital, Probitas
Corporate Group LLC, Pantheon Ventures, Pension Partners, Schroder Ventures International Investment Trust,
Consulting Alliance Inc., Probitas Partners, Proskauer Rose SJ Berwin, Standard & Poor’s and Vision Capital.
LLP, SJ Berwin, VCM Venture Capital Management
GmbH, Watson Wyatt & Company.

• The Guide to Private Equity Fundraising

A complete and in-depth examination of all the issues sur-
rounding private equity fundraising. This Research Guide
includes contributions from leading general partners, private
equity placement agents, legal advisors and limited partners.