The

Preqin Quarterly
Private Equity - Insight on the quarter from the leading provider of alternative assets data
Q2 2010 JULY 2010
Content Includes....
Latest Fundraising Figures
Lowest aggregate fundraising
total since 2003 reveals
continuing challenges.
Performance as of
Q4 2009
Latest figures show private
equity performance
continuing to improve.
Buyout Deals
Q2 2010 is the strongest
quarter for private equity-
backed buyout deals in the
post-credit crunch landscape.
Terms and Conditions:
ILPA Principles
Are the ILPA principles being
followed? We investigate.
Q2 Special Guest Contributors: Glenn Siegel & Davin Hall, Dechert // Tripp Brower, Capstone Partners
2
► 2
Editor:
Tim Friedman
Chief Production Editor:
Helen Wilson
Sub-Editor:
Claire Wilson
Contributors:
Manuel Carvalho
Helen Kenyon
Adam Palmer
Etienne Paresys
External Contributors:
Tripp Brower, Capstone Partners
Davin Hall, Dechert
Glenn Siegel, Dechert
London:
Scotia House
33 Finsbury Square
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United Kingdom
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Email: info@preqin.com
Web: www.preqin.com
Contents
1.
Editor’s Note
3
2.
Expert Comments
Tripp Brower, Capstone Partners 4
Glenn Siegel & Davin Hall, Dechert 5
3.
Investor Survey Results
6
4.
Q2 Fundraising in Focus
Fundraising Overview 8
Regional Fundraising 11
Buyout & Venture Fundraising 12
Private Equity Fundraising: Other Fund Types 13
5.
Funds on the Road
Funds on the Road Overview 14
Funds on the Road by Type 15
6.
Fundraising Future Predictions
16
7.
Q2 Private Equity-Backed Deals in Focus
Deals Overview & Deals by Region 17
Deals by Type, Value & Industry 18
Largest Deals & Notable Exits 20
8.
Dry Powder
21
9.
Performance Update
22
10.
Fund Terms & Conditions: ILPA Principles
23
11.
About Preqin
25
3
The Preqin Quarterly, Q2 2010
► 3
© 2010 Preqin Ltd. / www.preqin.com
Editor’s Note
The second quarter of 2010 represents a turning point for the industry, with the latest data on fundraising, dealflow and
institutional investor appetite providing us with some important clues as to the future of the private equity asset class.
Within the buyout sector, we have seen the most active quarter since the onset of the financial crisis. As our report on
page 17 shows, $43bn in new deals has been announced in Q2 2010. A similar surge has been seen in exits, with a total
of $42bn being realized.
While still some way short of the activity levels experienced in 2006 – 2008, this is certainly a positive sign for the
industry, and is welcome news for the institutional backers of the asset class.
Fundraising has been exceptionally challenging over the past couple of years, with investor confidence shaken after fund
valuations fell dramatically in late 2008 and early 2009. In addition, a lack of capital flowing back to investors in the form
of distributions meant many investors were able to maintain their allocations while making very few new commitments.
Many of the bigger fund managers that raised significant vehicles over recent years have delayed their re-entry into the
fundraising market, relying on the relatively high levels of dry powder collected during the boom times (see our article on
page 21 for more details).
This combined with low levels of investor confidence in the asset class resulted in a dearth of new vehicles achieving
a final close. As our report on page eight shows, fundraising reached a new low point during Q2 2010 with only $41bn
raised across all fund types globally – the lowest total since 2003.
With the capital cycle now gathering steam, investors will be receiving more in the way of distributions. After seeing
performance for the industry rising significantly in recent quarters (see page 22), investors are slowly showing signs of
increased confidence and this is reflected in our LP survey results, which can be found on page six.
Although an improvement in fundraising will not come overnight, heightened levels of deals activity and the improvement
in fund performance will lead to a recovery in fundraising, with early 2011 now looking to be the period when activity
really picks up as more of the brand name firms embark on the fundraising trail.
The outlook for private equity is looking brighter, although there are still many challenges facing firms investing capital
and for those seeking out commitments for new vehicles.
The Preqin Quarterly utilizes data from a variety of Preqin’s products and publications in order to give a detailed overview
of the latest market conditions. We are also thrilled to have guest articles from leading placement agent Capstone
Partners and top law firm Dechert providing further perspectives on the key trends affecting the industry.
We hope that you find the publication to be informative and interesting, and as ever we welcome any feedback and
suggestions that you may have.
Tim Friedman, Editor
4
Despite an apparent rise in confidence amongst LPs,
Preqin’s second quarter fundraising stats shows new
fundraising to be at its lowest point since 2003. When do
you see things picking up?
It will be the first half of 2011 before we start to see a
reasonable pick-up in fundraising. Many investors are looking
for ways to reduce the overall number of PE relationships,
so re-ups are under heavy scrutiny, and the requirements
for adding a new GP relationship are high. These decisions
often pivot on performance, especially a GP’s ability to deliver
compelling, consistent cash on cash returns. Although there
is a large number of fund managers seeking capital (many of
which are high quality teams with interesting strategies), the
level of realizations is not as high as the LPs would like.
Many of the brand-name and historically top-performing GPs
have delayed fundraising due to limited deal transactions
in 2008-09, deeper re-up queues and tight allocations. The
fundraising machinery is still “jammed”, and even though
LPs’ balance sheets are healthier, it will take time for this to
translate into a significant increase in commitment levels.
We will see a more focused ‘priming of the pump’ effort
later this year from GPs that intend to be in the market by
2011. Our guidance for groups planning to raise capital is
to talk to your existing LP base and targeted new investors
in the second half of 2010 so that they know you are
coming to market. LPs’ forward calendars are loaded, so
communicating earlier will provide a better shot at getting the
right attention.
So fundraising is certainly becoming a more long-term
consideration?
GPs that excel in fundraising know it’s a perpetual effort.
Fundraising does take on a different intensity when you
actually have an offering in market and are truly raising
capital, but routinely the GPs that do fundraising well are
treating the LP side of the equation with nearly as much focus
as their deal flow generation. Thoughtful GPs systematically
communicate news of organizational developments, deals
and exits with LPs that did not invest in the last fund but
came close and remain interested in following their progress.
To what extent are LPs’ cashflow situations hindering
the market?
LPs have not seen much in the way of capital calls or
distributions, certainly primary factors in the slowing of the
fundraising market. The tough environment over the past
couple of years impeded new investments and exits. We are
now starting to see a real pick-up in dealflow, with positive
implications for GPs that are selling into that dealflow and
able to return capital to their LPs. This can only serve to
improve investor confidence and pave the way for LPs to
redeploy this capital either to existing GPs or to others that
have made a compelling case for their new vehicle.
So what areas and strategies are investors interested in
right now?
Certainly areas of market dislocation and disruption are
of interest, anywhere there are inefficiencies in markets -
where the opportunities for cash on cash return are high and
compelling. LPs are generally searching for opportunities
in smaller funds, although definitions of small will vary
considerably from LP to LP. More specifically, there are some
healthy buyout strategies, whether generalist, operationally
intensive, or industry focused, that are getting attention. The
controlled distressed arena in the small fund category has
lots of room to run in terms of LP appetite. Special situations
and opportunistic strategies with an edge are generally
getting good interest from investors.
To what extent are fund terms and conditions dictating
negotiations between LPs and GPs?
LPs have power with regards to fund terms in the current
market. This is the first time in 20 years that I have seen LPs
really driving terms so that they are at least neutral if not LP
friendly. On the economic side of the equation, we are talking
about management fees, carry waterfalls and transaction
fees, and on the governance side, terms like key-man
clauses need to have real substance to them. Views are
being expressed early on in negotiations and are playing an
important part in the overall fundraising process.
LPs have also made it clear that they view the commitments
that GPs make to their own funds as an extremely
important factor, and those that are able to make oversized
commitments can make a big statement and inspire
confidence in potential LPs.
Private equity is in the spotlight on several levels –
political, regulatory and fiscal. What is your take on the
various initiatives?
Time and space limitations make addressing this topic
difficult at best. Suffice to say that the cost and complexity
of running a PE business are on the rise. At the risk of
generalizing, much of the regulatory action in the US and
Europe is aimed at avoiding systemic risk, enhancing
investor protection, increasing transparency and providing
regulatory bodies with more power. The recent SEC
announcement banning unregistered placement agents from
dealings with public pensions strikes us as a constructive
regulatory solution to problems created by a few “bad actors”
in the placement industry. Given the economic challenges
in the US, it’s also no surprise that GPs are viewed as one
of the means of raising tax revenue via pending changes
in the tax treatment of carried interest. In the category of
transparency, private equity and hedge fund managers have
been preparing for the required SEC registration (still to be
approved by both houses of Congress) that at this stage is
inevitable. While the additional reporting and compliance
requirements will have some benefits, hopefully the various
regulatory bodies will resist the temptation to over reach. The
best advice is to follow the frequent reporting on FINREG
developments, the AIFM Directive, and other initiatives to
stay current and prepare for the implications to the private
equity industry.
Expert Comments
Capstone
Partners
Interview with Tripp Brower, June 2010
5
The Preqin Quarterly, Q2 2010
2009 was a record year for defaults and restructurings.
Ownership of companies changed rapidly and, given
the freeze up in capital markets, most of the new capital
structures were significantly deleveraged leaving little role for
pre-existing sponsors and other equity holders of troubled
companies. Halfway through 2010, even though actual
bankruptcies have declined, restructuring continues through
an amendment and forbearance process that is driven by the
potential consequences to stakeholders in a court-supervised
restructuring. Private equity and distressed debt funds are
active participants in this process as a result of their equity
positions in portfolio companies and as active investors.
This article will briefly discuss the way major players in
these troubled situations achieve their goals with a particular
emphasis on current shareholders and those who wish
to become the shareholders at the conclusion of the
process. These strategies can be employed by the current
equity sponsor on its own or in collaboration with a partner
(preferably a senior lender). Alternatively, an interested
investor - with the inclination to provide lending and other
forms of liquidity during the transition to new ownership - can
position itself as the likely acquiror of the business.
Given virtually every distressed business’s need for working
capital and the inevitable constraints created by the
covenants present in most credit agreements, the ability to
raise capital provides the willing lender tremendous leverage
in the operation of the business and the fate of ownership.
Outside of bankruptcy the pre-existing lender will insist that
new dollars be put in on a junior basis and, in the case of the
sponsor, may insist on a capital contribution.
An interested bidder for the business may seek to benefit
from this dynamic by offering to purchase the existing senior
debt (at par or at a negotiated discount) coupled with an offer
to provide new liquidity. Increasingly, the interested bidder
may even be a current lender with the flexibility to own the
business or who may have bought into the credit previously
allowing for the possibility of an opportunity to own. The
existing equity sponsor can also seek to take advantage of
this by purchasing the senior secured debt so long as it is
not prohibited from doing so by the loan documents. This
situation is most likely to exist where there is a second lien
and the second lien holders have prohibited the purchase of
senior debt by the sponsor.
The cost of this new liquidity may be a forced bankruptcy
where the existing senior debt is converted to equity or
the assets are sold at auction subject to a senior creditor’s
right to credit bid. To ensure greater control over the
restructuring, a distressed investor can provide debtor in
possession financing (“DIP financing”) to the company once
it commences a chapter 11 case. DIP financing can enable
the distressed investor to take control of the negotiations
concerning the company’s chapter 11 plan or to control
the sale of assets to the DIP lender by conditioning the
extension of postpetition credit on the approval of covenants
that require any chapter 11 plan or sale of assets must be
satisfactory to the DIP lender.
At the conclusion of the restructuring (whether out of court
or in court), new financing extended by the distressed
investor can be converted into equity or exit financing of the
restructured company, and additional liquidity for the target
business can be raised through a rights offering. Below we
briefly discuss a few recent, relevant bankruptcy cases to
illustrate potential acquisition strategies and attendant risks
for distressed investors.
Acquisition of Company by DIP Lender - In the Delphi
Corporation case, the company sought to sell substantially
all of its assets to a third party private equity firm where the
sale proceeds would have been insufficient to pay the DIP
lenders in full. Notwithstanding this attempt, the bankruptcy
court recognized the rights of the DIP lenders to credit bid
and eventually the company supported a sale of most of its
business to the DIP lenders.
Acquisition by Conversion of Senior Debt to Equity and
Rights Offering - In the chapter 11 restructuring of Lyondell
Chemical, the lenders sponsored a plan of reorganization
whereby they would contribute their claims for new equity in
reorganized Lyondell, as well as backstop a rights offering of
new stock and new notes, using the proceeds of the rights
offering to partially pay down their debt claims.
Acquisition by Second Lienholders by Reinstatement
of Senior Debt - In Charter Communications, a balance
sheet restructuring of the company around subordinated
bondholders was made feasible through the reinstatement
of the company’s senior credit facility. This was possible
because the reorganized company had the capacity to
service the existing first lien debt and the court found that the
restructuring did not otherwise violate the loan documents.
Attempts to Block the Right of Secured Creditors to
Credit Bid – In the Philadelphia Newspapers case, the
Third Circuit held that while a secured creditor has the right
to credit bid in stand-alone sale of assets to a third party,
the court could confirm a plan of reorganization over the
objection of a secured creditor that was not allowed to credit
bid. In reaction to this decision, the secured creditors of
Philadelphia Newspapers bid cash at the auction and were
the successful bidders. This strategy was easy for these
creditors to implement since they had the available liquidity
and knew they would receive the first cash from closing as
the senior lienholder.
Disallowance of Vote of Creditor Which Purchases Its
Claim with the Goal of Buying the Business - In DBSD
North America, the bankruptcy court did not count the
vote of a strategic competitor which purchased debt with
the expectation of acquiring the company’s assets to the
exclusion of every other restructuring alternative.
In the current environment, investors can take advantage of
depressed valuations to acquire businesses with the potential
for substantial returns or increase their ownership stakes in
existing portfolio companies at favorable valuations. In order
to maximize their chances of succeeding, investors must be
willing to provide short-term liquidity as a bridge to ownership
while keeping in mind that they always run the risk of being
outbid.
Dechert
Investor Strategies to Realize Returns in
Troubled Situations, Glenn Siegel & Davin
Hall.
© 2010 Preqin Ltd. / www.preqin.com
6
Investor Survey Results
Investor Survey Results
T
he financial crisis has clearly had a significant
impact on private equity fundraising over the past
18 months. Funds that reached a final close during
2009 secured $279bn in capital commitments, a far cry
from the $643bn secured by the funds that closed the
year before. Investor confidence in private equity also
suffered as fund valuations fell during 2009 and the lack
of dealflow in the industry left many investors over-
committed to the asset class with a shortage of capital for
new investments.
Despite increasing fund valuations and evidence
of improving investor appetite for private equity
seen towards the end of 2009, fundraising in early
2010 still fell below levels seen the previous year:
in Q1 2010, 97 funds closed having raised $60bn,
compared to the 174 funds which closed in Q1 2009
having raised $77bn. Furthermore, our December
2009 LP survey showed that the proportion of
investors seeking to reduce their private equity
allocations over the coming year had reached a
considerable 13%, though perhaps this was a
reflection of the fact that many LPs found themselves
over-allocated to the asset class at this time.
Investor Attitudes to Private Equity in Mid-2010
In June 2010, Preqin spoke to 100 of the most
prominent institutional investors across the globe
in order to assess their current appetite for the
asset class. Despite the slow start to fundraising
in 2010, the results of the survey show continuing
improvement in investor attitudes towards private
equity, with 54% of respondents already having made
at least one commitment during the first half of the year.
Almost two-thirds (65%) of respondents told us they intend
to make their next commitment to a private equity fund
during the second half of 2010. A further 19% anticipate
doing so in 2011. In December 2009 a quarter of investors
were uncertain when they would next be active in the
asset class, but just 12% of respondents in June 2010 had
yet to decide on the timing of their next commitment.
For many investors, the amount of capital they will set
aside for new commitments in 2010 will be greater than
the amount they pledged to vehicles in 2009. As shown in
Fig. 1, 44% of investors intend to use more capital for new
commitments in 2010 than they did in 2009 and a further
third intend to commit the same amount. An investment
company in the Middle East declared that it will “definitely
invest more in 2010; 2009 was a ‘wait and watch’ year.”
It is worth noting, however, that in June 2010, almost a
quarter (23%) of respondents anticipated committing less
capital in 2010 than in 2009, compared to just 8% that
anticipated such a decrease in December 2009, showing
that LPs have perhaps been less active in the asset class
this year than they had initially planned.
The vast majority (88%) of LPs plan to either increase
the amount of capital set aside for new commitments in
2011 compared to 2010 or invest capital at the same rate.
During 2011, just under half (49%) of investors expect
to commit the same level of capital as in 2010 and a
significant 39% of respondents intend to increase the
amount of capital set aside for new commitments. The
remaining 12% intend to reduce the amount of capital they
commit that year.
Fig. 1: Investor Intentions: 2010 vs. 2009
Fig. 2: Investors’ Intentions for Their Private Equity Allocations
19%
36%
76%
62%
6%
2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Next 12 Months Longer Term
Decrease
Allocation
Maintain
Allocation
Increase
Allocation
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7
The Preqin Quarterly, Q2 2010
Fund managers can be encouraged by the longer-
term plans of LPs, as illustrated by Fig. 2. Few
intend to cut back their allocations and in fact many
foresee the size of their allocations rising over the
next few years. In our December 2009 survey, 11%
of respondents told us they anticipated reducing
their allocations to private equity over the next three
to five years. In June 2010, however, just 2% of
respondents expected to do so and a considerable
36% intend to increase their allocations (Fig.2).
Investors’ plans in the short term have also improved:
6% of respondents intend to reduce their exposure to
private equity over the following 12 months compared
to 13% in December 2009.
Areas of Investor Interest
The results of our survey point towards a gradual
increase in the amount of capital available for new
commitments in the coming months, although
perhaps not as great an increase as many would
have hoped. But what is this capital likely to be used
for? Without prompting with pre-defined answers,
we asked LPs which types of funds they intended to
make commitments to during 2010/11. The results
displayed in Fig. 3 indicate the areas of the market
that are attracting the most investor attention at
present. It is important to note that Fig. 3 only shows
the responses from LPs that intend to make further
commitments to private equity funds during 2010/11.
A considerable 65% of investors that are set to
be active in 2010/11 intend to commit to small to
mid-market buyout funds and 28% have identified
distressed private equity funds as a strategy they will
be seeking to invest in during the next 18 months.
We have also seen emerging markets continue to attract a
significant degree of attention from institutional investors.
In December 2009, 67% of respondents to our survey
stated that they will consider investing in emerging
markets. In June 2010, this had risen to 72%, showing
a gradual increase in investor appetite for emerging
markets. When asked which countries or regions in
emerging markets are currently presenting the best
opportunities, 56% of LPs named Asia and 37% named
China specifically, as shown in Fig. 4.
Outlook for Fundraising
The results of our survey indicate that there is likely to
be a gradual increase in the amount of capital available
for fresh private equity commitments during the next 18
months. This is encouraging news for GPs set to enter the
market with their latest fund offerings. Despite the increase
in the amount of capital investors are setting aside for
new commitments, however, it will still fall far short of the
amounts seen prior to the financial downturn. Fundraising
is consequently set to remain challenging over 2010 and
into 2011, although some improvement in the overall
amount of capital secured by funds is likely to occur.
Fund managers must be prepared to listen to what
LPs want in order to improve their chances of securing
commitments. Investors are set to remain cautious in
their future private equity investments and will continue to
scrutinize the terms and conditions of prospective funds
more closely than before the financial crisis. A recent
Preqin survey of investor attitudes towards fund terms
and conditions found that 42% of investors disagree
that interests are properly aligned between GPs and
LPs. When coupled with the fact that a considerable
81% of LPs feel that they have seen a definite shift in
the balance of power between GPs and LPs at fund
negotiations, we are likely to continue to see LPs push
for more concessions over the next few months, a fact
that GPs must be prepared for in the current fundraising
environment.
© 2010 Preqin Ltd. / www.preqin.com
12%
11%
12%
14%
14%
16%
21%
28%
65%
0% 20% 40% 60% 80%
Other
Cleantech
Mezzanine
Secondaries Funds
Venture
Large to Mega Buyout
Fund of Funds
Distressed Private Equity
Small to Mid-Market Buyout
Fig. 3: Types of Funds that Active LPs are Seeking to Invest in
During 2010/11
Proportion of Respondents
2%
4%
10%
12%
13%
19%
25%
25%
37%
56%
0% 10% 20% 30% 40% 50% 60%
Other
Middle East
Russia
Central & Eastern Europe
Africa
South America
Brazil
India
China
Asia
Fig. 4: Regions and Countries within Emerging Markets Viewed
by LPs as Presenting the Best Opportunties in the Current
Financial Climate
Proportion of Respondents
8
Fundraising Overview
Q2 Fundraising in Focus
P
rivate equity quarterly fundraising reached
its lowest level since 2003 in Q2 2010, with
82 vehicles reaching a final close raising an
aggregate $41.3bn. Many in the industry, including
Preqin, had anticipated a recovery in the market
following an increase in fundraising in the first quarter
of the year, but these figures show that the difficult
fundraising conditions experienced during the
economic crisis are yet to ease, with fund managers
still struggling to gain investor commitments and many
of the funds that are closing doing so below target.
The $41.3bn raised by private equity funds in Q2
2010 represents a 32% decrease in capital raised
from the previous quarter, when $60bn was raised.
This new low point in fundraising shows that the
effects of the financial crisis are still very much
affecting the industry’s ability to raise new capital.
Of the funds that are closing, many are doing so
below target, and after having spent a substantial
amount of time on the road. As can be seen in Fig.
6, 39% of the funds closed in Q1 2010 had been in
market for 19-24 months. A further 24% of funds had
been in market for longer than this, with 3% having
spent over three years on the road. For each year
between 2004 and 2008 the average time spent in
market by a private equity fund never exceeded 18
months; however, in 2010 to date the average time
taken by a fund to reach a final close has been 19.8
months as shown in Fig. 6.
In terms of fund type, the most capital was raised by
buyout funds during Q2 2010, with 14 such vehicles
raising an aggregate $13.9bn (Fig.7). Infrastructure
funds raised the second-largest amount of capital,
with five such funds raising a combined $6.1bn
and accounting for 15% of the capital raised in the
quarter. Venture funds were the most numerous,
with 24 such vehicles closing having raised $4.4bn.
Real estate funds were the second most numerous
and raised the third-largest amount of capital, with 15
such funds raising $5.9bn and accounting for 14% of
capital raised in the quarter. This shows a significant
decline from the previous quarter when 12 real estate
vehicles raised an aggregate $9.8bn.
The table on page 10 shows details of the 10 largest
funds to close during Q2 2010.
Fig. 7: Q2 2010 Private Equity Fundraising by Type
8%
16%
13%
39%
16%
5%
3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1-6
Months
7-12
Months
13-18
Months
19-24
Months
25-30
Months
31-36
Months
37
Months +
Fig. 6: Time Spent on the Road for Funds Closed in Q2 2010
222119
38
55
51
48
51
63
94
80
109
122
140
149
126
123
205
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195
167
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162
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Fig. 5: All Private Equity Fundraising by Quarter:
Q1 2003 - Q2 2010
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One Calleria 1ower, ¹3355 Noel Road, Dallas, 1exas 752^0
+!.972.9S0.5S00
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Crand·Rue ¹9, ¹260 Nyon · SwiLzerland
+4!.22.365.4500
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SuiLe 209, Block B, 570 WesL Huaihai Road, Shanghai 200052 · China
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equity fundraisinc
proven success
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personaliLy
ellcienL
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ellcie
commiLmenL
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nL
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eLhical
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AWARDS 2009
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Q2 Fundraising in Focus
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11
The Preqin Quarterly, Q2 2010
O
f the 82 vehicles closed during Q2 2010, over half
(56%) are primarily focused on making investments
in North America, with a similar proportion of the
aggregate capital raised accounted for by such funds. It is
unsurprising that North America-focused funds account for
such a large proportion of fundraising, but what is notable is
that primarily Asia and Rest of World-focused funds have raised
more capital than their Europe-focused counterparts in the
quarter.
As can be seen in Fig.8, in Q2 2010 17 funds focused primarily
on Asia and Rest of World closed with $9bn in commitments,
accounting for 22% of the aggregate capital raised in the
quarter. This is a marked increase from the same time last
year, when such funds raised $2.5bn and accounted for just
3% of the aggregate capital raised in the quarter. However,
it represents a decrease from Q1 2010 when such vehicles
raised $14.5bn and accounted for 29% of all capital raised in
the quarter.
Funds focused primarily on Europe accounted for the lowest
amount of capital raised in the quarter with 19 vehicles
raising $8bn, which represents 19% of the total. This marks a
substantial shift in regional fundraising compared to both the
previous quarter and the same period last year. In Q2 2009 23
Europe-focused funds raised $24.7bn, accounting for a more
sizeable 31% of capital raised. Similarly in Q1 2010 Europe-
focused funds accounted for 29% of capital raised during the
quarter, with 21 vehicles having garnered $14.6bn.
A total of 46 funds primarily focused on North America closed
during Q2 2010, raising an aggregate $24.3bn. This is a
significant decrease from the same time last year, when 91
vehicles primarily investing in the region closed, having raised
an aggregate $102.1bn. There has been a significant reduction
in the amount of capital raised by North America-focused
funds over this period; however, this has been in line with the
decrease that has been seen across private equity globally.
Primarily North America-focused funds still account for the
largest proportion of capital raised by private equity funds
worldwide and many of the largest funds closed in the quarter
will be investing in this region.
46
19
17
24.3
8.0
9.0
0
5
10
15
20
25
30
35
40
45
50
North America Europe Asia and Rest of World
No. Funds
Raised
Aggregate
Capital
Raised
($bn)
Regional Fundraising
Fig. 8: Q2 2010 Private Equity Fundraising by Primary Geographic Focus
© 2010 Preqin Ltd. / www.preqin.com
12
Buyout & Venture Fundraising
Fig. 9: Private Equity Buyout Fundraising by Quarter:
Q1 2008 - Q2 2010
I
n Q2 2010 14 buyout funds closed having raised
an aggregate $13.9bn, which accounted for 34% of
the capital raised by all private equity funds in the
quarter. This represents a decrease in capital raised
by buyout funds compared to the previous quarter,
when 22 buyout vehicles raised $17.3bn although
their share of the market has remained relatively
consistent.
The largest buyout fund to close in Q2 2010
was Madison Dearborn Capital Partners VI,
a North America-focused vehicle targeting
management buyouts, growth equity financings,
recapitalizations and acquisition-orientated
financing transactions. It closed on $4.1bn in
May 2010, short of its original target of $7.5bn.
The second-largest buyout fund to close in the
quarter was Carlyle Asia Partners III, which raised
$2.55bn. It too closed short of its original target of
$3bn.
Venture fundraising was down considerably from
Q1 2010, with 24 vehicles closing in Q2 2010
having raised an aggregate $4.4bn, compared
to 30 funds closing in Q1 2010 having raised
$11.6bn. As a result, venture funds accounted
for a smaller proportion of the total capital raised,
with commitments to such funds accounting for
11% of the total in Q2 2010, compared to 23% in
the previous quarter.
Columbia Capital Equity Partners V was the
largest venture fund to close in Q2 2010, closing
short of its original target on $441mn in April
2010. The fund will focus on investments in the
US media and technology sectors.
Fund Fund Manager Size (mn)
Madison Dearborn
Capital Partners VI
Madison Dearborn
Partners
4,100 USD
Carlyle Asia Partners III Carlyle Group 2,550 USD
Advent Latin American
Fund V
Advent International 1,650 USD
CDH China Fund IV
CDH China
Management Company
1,428 USD
Gilde Buyout Fund IV Gilde Buy Out Partners 800 EUR
Fig. 11: Five Largest Buyout Funds Closed in Q2 2010 Fig. 12: Five Largest Venture Funds Closed in Q2 2010
Fig. 10: Private Equity Venture Fundraising by Quarter:
Q1 2008 - Q2 2010
Fund Fund Manager Size (mn)
Columbia Capital Equity
Partners V
Columbia Capital 441 USD
CX Partners CX Partners 515 USD
Drug Royalty II DRI Capital 701 USD
SV Life Sciences
Fund V
SV Life Sciences 523 USD
Avigo SME Fund III Avigo Capital Partners 240 USD
Q2 Fundraising in Focus
87
85
74
82
52
57
43
38
30
24
15.5 16.2
17.1
13.9
8.6
7.1 7.2
6.2
11.6
4.4
0
10
20
30
40
50
60
70
80
90
100
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
No. Funds
Raised
Aggregate
Commitments
($bn)
52
57
46
64
33
25
22
16
22
14
67.9
52.1
41.6
71.3
33.2
29.4
30.6
14.1
17.3
13.9
0
10
20
30
40
50
60
70
80
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
No. Funds
Raised
Aggregate
Commitments
($bn)
13
The Preqin Quarterly, Q2 2010
B
uyout and venture funds raised just under half of all
private equity capital in Q2 2010, with the remaining
56% raised by other types of vehicles. Of these funds,
infrastructure and real estate funds raised the most capital,
although real estate fundraising is down by 40% from the
previous quarter.
As can be seen in Fig. 13, infrastructure funds raised the
most capital out of all other types of funds, with six such
funds raising a combined $6.7bn and accounting for 16% of
the total capital raised in the quarter. This is an increase from
the previous quarter when five vehicles raised $5.9bn.
Real estate funds raised the second-largest amount of
capital and were the most numerous, with 17 real estate
funds raising $6.6bn and accounting for 16% of the capital
raised in the quarter. However, real estate fundraising is
down from the previous quarter when 18 such funds raised
$9.8bn and represented 16% of the fundraising market.
Starwood Global Opportunity Fund VIII was the largest real
estate fund to close in the quarter, raising $1.8bn to invest
globally in a range of property.
Six private equity fund of funds vehicles reached a final close in
Q2 2010, raising an aggregate $1.1bn. This marks a decrease
of 50% in fundraising for funds of funds compared to Q1 2010,
when nine such funds raised $2.2bn. One real estate fund of
funds reached a final close in Q2 2010 on $300mn.
There are two distressed debt funds in the table in Fig. 14,
the only two such funds to reach a close in the quarter.
Between them these vehicles raised an aggregate $2.2bn
and accounted for 5% of the capital raised in the quarter. This
marks a 69% decrease from the previous quarter in terms of
capital raised.
Crown Global Secondaries II was the largest secondaries fund
to close in the quarter, with the $1.2bn collected accounting for
over half of the capital raised by such vehicles in the quarter.
Private Equity Fundraising: Other Types
Type of Fund
Fig. 13: Q2 2010 Private Equity Fundraising (Excluding Buyout
and Venture Funds) by Fund Type
Fig. 14: 10 Largest Other Types of Funds Closed in Q2 2010
Fund Fund Manager Fund Type Size (mn)
GS Infrastructure Partners II GS Infrastructure Investment Group Infrastructure 3,100 USD
Starwood Global Opportunity
Fund VIII
Starwood Capital Group Real Estate 1,800 USD
Macquarie Infrastructure Partners
II
Macquarie Capital Funds Infrastructure 1,600 USD
Crown Global Secondaries II LGT Capital Partners Secondaries 1,200 USD
ICG Recovery Fund 2008 Intermediate Capital Group Distressed Debt 843 EUR
Carlyle Global Financial Services
Partners
Carlyle Group Distressed Debt 1,100 USD
Starwood Capital Global
Hospitality Fund II
Starwood Capital Group Real Estate 965 USD
Sankaty Middle Market
Opportunities Fund
Sankaty Advisors Mezzanine 904 USD
Fortress Japan Opportunity Fund Fortress Investment Group Real Estate 75,000 JPY
White Deer Energy I White Deer Energy Natural Resources 821 USD
© 2010 Preqin Ltd. / www.preqin.com
14
F
ollowing four years of annual increases in both
the number of private equity funds in market and
the aggregate capital sought, 2010 marked the
first year in which there was a decline. At the start of
2010 1,582 private equity vehicles were targeting capital
commitments of $691bn, a 21% decrease in aggregate
capital sought from Q1 2009. As 2010 has progressed
this figure has declined even further and, as of Q3 2010,
there are 1,510 vehicles on the road targeting $557bn.
Since the beginning of the year there has been
a decrease of 5% in the number of private equity
vehicles on the road and a 19% reduction in the
aggregate capital targeted by such vehicles, as
illustrated in Fig.15. These figures show that
the difficult fundraising conditions experienced
throughout the financial crisis are yet to ease. As a
result, many fund managers are having to reduce
their fundraising targets, and this is reflected in the
significant decrease in the average target size of
funds on the road. In Q1 2009 the average fund
in market was targeting $547mn, this figure now
stands at $369mn, representing a decrease of
nearly one-third.
A large proportion of the funds in market are
primarily focused on North America, with 697 such
vehicles targeting an aggregate $291.7bn, as shown
in Fig. 16. Primarily North America-focused funds
account for 46% of the number of funds in market
and over half of the aggregate target capital. Such
funds also have the largest average target size out
of all funds in market, with the average fund target of
a North America-focused fund standing at $419mn,
compared to $346mn for Europe-focused funds and
$311mn for Asia and Rest of World-focused funds.
The largest fund currently in market is primarily
North America-focused Blackstone Capital Partners VI.
The buyout fund is targeting $15bn, having already held its
third interim close on $8.8bn in August 2009 and is likely to
hold a final close later this year. Like many of the primarily
North America-focused funds on the road, the vehicle will
also consider making investments in other regions.
Asia and Rest of World-focused funds are targeting the
second-largest amount of capital. 443 such vehicles are
seeking $137.8bn in aggregate commitments, accounting
for 29% of the number of funds and 25% of the aggregate
targeted capital of all funds in market.
There are currently 369 primarily Europe-focused funds
on the road targeting an aggregate $127.7bn in investor
capital. Europe-focused funds account for 23% of the
global targeted capital and 24% of the number of funds on
the road.
Funds on the Road Overview
1,304
1,624
1,673
1,622
1,574 1,582
1,562
1,510
705
889 887
807
754
691
636
557
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Q1
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
No. Funds
on Road
Aggregate
Target
($bn)
697
369
443
291.7
127.7
137.8
0
100
200
300
400
500
600
700
800
North America Europe Asia and Rest of World
No. Funds
on Road
Aggregate
Target
($bn)
Fig. 15: Funds in Market by Quarter
Primary Geographic Focus
Fig. 16: Composition of Funds in Market by Primary
Geographic Focus
Funds on the Road
15
The Preqin Quarterly, Q2 2010
Funds on the Road by Type
R
eal estate funds are targeting the largest ammount of
capital of all funds in market, accounting for 24% of
all the commitments being sought by funds in market
worldwide. There are 378 private equity real estate vehicles
currently on the road targeting an aggregate $133bn in investor
commitments. This is a decrease in both the number and
aggregate target from the same period last year, when 403
such funds were targeting a combined $191bn. This represents
a 30% decrease in the aggregate capital sought by real estate
vehicles.
There has been a similar decline in the number and
aggregate target of buyout vehicles on the road since
the same time last year. In Q3 2009 235 buyout funds
were on the road seeking an aggregate $168bn in capital
commitments. A year later 201 buyout vehicles are in
market with an aggregate target of $114.4bn, which
represents a decrease in targeted capital of 32%. Buyout
funds currently account for 20% of the aggregate targeted
capital and 13% of the number of funds in market.
Venture funds are the most numerous type of fund in
market, with 448 such vehicles currently on the road
representing 30% of the total number of funds in market.
Such vehicles are targeting the third-largest amount
of capital, with an aggregate target of $79.7bn. This
represents a relatively small decrease in aggregate capital
targeted compared to last year, with 4% less capital being
sought in Q3 2010.
The fourth-largest amount of capital is being targeted
by infrastructure funds, with 103 such vehicles seeking
$78.2bn in aggregate commitments and accounting for
14% of the capital targeted. Infrastructure vehicles have
the largest average target size of fund types, with the
average infrastructure fund seeking $759mn in investor
commitments. This is significantly lower than at the
same point in 2009 when the average target size of an
infrastructure fund in market was $933mn, representing a
decrease of 19%.
Funds of funds, distressed private equity funds, and
secondaries funds all account for a significant proportion
of the funds in market. Funds of funds represent 8% of all
capital sought by funds in market, with 144 funds targeting
$42bn. There are 53 distressed private equity funds
targeting $37.1bn, accounting for 7% of the total targeted
capital. Secondaries funds account for 2% of the number
of funds in market and 3% of all capital targeted.
Fig. 17: Composition of Funds in Market by Fund Type
Type of Fund
© 2010 Preqin Ltd. / www.preqin.com
16
Fundraising Future Predictions
A
lthough institutional investors are growing in confidence
as a result of deals activity picking up and private equity
fund performance recovering following the big drops we
saw last year, fundraising remains an extremely challenging
prospect.
As our LP survey on page six shows, most investors
(76%) are simply looking to maintain allocations in the
next 12 months. While in previous years maintaining
an allocation would require significant reinvestment of
distributed capital from existing investments, the fact that
distributions to investors have been so low means that
investors have not had to invest in new funds at the same
rate in order to keep their allocations steady. This has
clearly impacted upon fundraising in Q2 2010, which saw
the lowest aggregate total raised since 2003.
The length of time required to raise a fund from launch
to final close has extended to a record 19.8 months, with
the increasingly challenging market causing many firms to
hold multiple interim closes before reaching a final close.
With market conditions improving, the churn of capital is
starting to pick up, and this will have a positive impact on
new fundraising as investors seek to reinvest distributed
capital. This extra capital may allow some of the firms that
have already held multiple interim closes to achieve a final
close on vehicles that have been in market for some time.
Another important factor to consider is that while there are
still lots of funds on the road, and amongst them offerings
from some top-quality managers, many of the brand-name
and best-performing managers have delayed the launch
of their next funds due to the current climate and the fact
that they still have available capital from older vehicles.
Now that dealflow has started to pick up, there will be an
increased need for a significant number of these big name
fund managers to launch new offerings towards the end
of this year and into next year. We are already seeing
the levels of dry powder begin to fall, and this trend will
continue until fundraising picks up. Many managers will
also see themselves in a better position to raise capital
now that their fund NAVs have improved, and they have
more positive news to communicate to existing and
potential new LPs on the deals front.
It is therefore likely that we will see a real pick-up in
fundraising activity as we move into 2011, helped by
the plans of more than a third of investors to increase
allocations in the longer term. In the short term, it is likely
that we are going to see a number of bigger firms entering
the fundraising market in pre-marketing mode before
launching in earnest in 2011. The next six months are
likely to remain at relatively low levels, but if the market for
deals and exits continues to improve, things are likely to
improve significantly in 2011, with quarterly totals for next
year potentially reaching the $100bn mark once again.
The one sector that could continue to struggle into and
beyond 2011 is private equity real estate, where we
have not seen the same kind of pick-up in activity and
improvement in fund performance as elsewhere in the
industry. With PERE collecting amongst the highest
levels of capital of all fund types aside from buyout funds
in recent years, this will have an impact on the absolute
levels of capital that the overall industry is able to garner.
Funds on the Road
Fig. 18: Possible Follow-On Funds to Be Launched in Short to Medium Term
Firm Name Available Capital Position
Goldman Sachs PE Group Last major buyout fund (2007 vintage) 40% called as of December 31st 2009
Carlyle Group Last major US- and Europe-focused vehicles are 2007 vintage (40% and 33% called respectively as of December 31st 2009)
Kohlberg Kravis Roberts KKR Fund 2006 is now 80% called up, although more recent European and Asian funds still have ample dry powder
Warburg Pincus Last major 2007 vintage fund 45% called as of March 31st 2010
Permira Last major fund is 2006 vintage and was 65% called as of March 31st 2010
First Reserve Corporation 2008 vintage fund 40% called as of March 31st 2010
Providence Equity Partners Last major buyout fund (2007 vintage) 70% called as of March 31st 2010
AXA Private Equity Last LBO fund (2007 vintage) 50% called as of March 31st 2010
Thomas H Lee Partners 2006 vintage buyout fund 55% called as of December 31st 2009, firm has done three additional deals since
Avenue Capital Group Most recent US fund is 100% called, most recent European fund is over 80% called
17
The Preqin Quarterly, Q2 2010
G
lobal dealflow in Q2 2010 represents the
strongest quarter for private equity-backed
buyout deals in the post-credit crunch
landscape, with a total of 411 private equity buyout deals
announced with an aggregate value of $43.3bn (Fig.
19). This represents a 60% increase in aggregate deal
value from the previous quarter, when 356 deals were
announced with an aggregate value of $27.1bn.
The buyout industry witnessed a significant decline in
dealflow moving into 2009, with the aggregate deal
value reaching its lowest point in Q1 2009, when it
stood at $11bn. Dealflow began picking up momentum
in Q4 2009, when 382 deals were announced with an
aggregate value of $40.4bn. Despite a disappointing
first quarter in 2010, when aggregate deal value fell by a
third from the previous quarter, Q2 2010 shows that the
environment has improved for buyout deals.
As shown in Fig. 20 aggregate deal value in Q2 2010
in North America increased sharply in comparison with
the previous quarter with 175 deals accounting for
$26.7bn. Dealflow in this quarter was stronger in terms of
aggregate value than for any quarter since 2008, proving
that buyout funds focused on North America are actively
completing deals. Nine of the 10 largest deals completed
in Q2 2010 took place in North America, with these deals
accounting for a considerable $16.5bn, or 38%, of the
aggregate deal value in this quarter.
Dealflow in Europe has remained relatively stable. 169
deals were announced in Q2 2010 with aggregate deal
value of $11bn compared to the $10.3bn in deal value
seen in the previous quarter. The sixth-largest deal
worldwide in the quarter, the $1.4bn recapitalization of
Avolon by Cinven, CVC Capital Partners and Oak Hill
Capital Partners, took place in Ireland.
Asia and Rest of World witnessed increased deal activity
in Q2 2010 with 67 deals announced with an aggregate
deal value of $5.6bn. This represents a 40% increase in
aggregate deal value in comparison to Q1 2010, when
39 deals with an aggregate deal value of $4bn were
announced.
464
509
483
325
288
295
357
382
356
411
58.4
68.0
45.1
16.7
11.0
14.6
18.9
40.4
27.1
43.3
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
0
100
200
300
400
500
600
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
No. of Deals Aggregate Deal Value
38.7
27.1
22.2
6.2
4.4
8.6
9.5
21.0
12.8
26.7
13.2
32.8
20.9
6.6
3.3 2.0
5.6
12.8
10.3
11.0
6.5
8.1
2.0 3.9
3.3
3.9
3.8
6.6
4.0
5.6
0
5
10
15
20
25
30
35
40
45
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
North America Europe Asia and Rest of World
Deals Overview & Deals by Region
Fig. 19: Number and Aggregate Value of Buyout Deals
by Quarter
N
u
m
b
e
r

o
f

D
e
a
l
s
A
g
g
r
e
g
a
t
e

D
e
a
l

V
a
l
u
e

(
$
b
n
)
Fig. 20: Aggregate Deal Value in Quarter by Regional Focus
A
g
g
r
e
g
a
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e

D
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© 2010 Preqin Ltd. / www.preqin.com
18
A
lmost half of all private equity-backed deals
announced globally in Q2 2010 were leveraged
buyouts, accounting for 54% of the aggregate
deal value worldwide during the quarter (Fig. 21). This
is down from the previous quarter when such deals
accounted for 60% of the aggregate deal value.
Growth capital investments accounted for 23% of
deals announced during Q2 2010, with such deals
representing 7% of the aggregate deal value. A
total of 3% of deals announced in Q2 2010 were
public to private transactions with these large deals
representing 24% of the global aggregate deal value.
Significant public to private deals announced in Q2
2010 include the $3.4bn acquisition of Interactive
Data Corporation by Warburg Pincus and Silver
Lake, and the announced privatization of DynCorp
International in a $1.5bn transaction by Cerberus
Capital Management.
In terms of industry, the highest dealflow in Q2 2010
was in the industrial sector with a quarter of all global
buyout deals and 15% of the aggregate deal value
globally accounted for by this sector (Fig. 22). The
consumer and retail sector was the most prominent
sector in terms of aggregate deal value, accounting
for 26% of aggregate deal value and 18% of the
number of deals announced in Q2 2010. This marks
an increase from the previous quarter when deals
in the sector accounted for 20% of the aggregate
deal value announced in the quarter. The business
services sector, which includes business, financial
and legal services, accounted for 15% of all deals
announced globally and 23% of aggregate deal value
in Q2 2010.
Mid-market and large deals represent the majority of
buyout capital deployed globally by fund managers,
with deals valued at $500-999mn and over $1bn
representing 23% and 46%, respectively, of total
aggregate deal value in the quarter. As shown in Fig.
23, 50% of buyout deals globally in Q2 2010 were
valued at less than $100mn, with deals in this value
band representing only 5% of the aggregate deal
value globally.
50%
5%
23%
13%
10%
13%
9%
23%
8%
46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
No. of Deals Aggregate Deal Value
Less than $100mn $100-249mn $250-499mn $500-999mn $1bn+
Fig. 23: Aggregate Deal Value in Quarter by Deal Size
Fig. 22: Aggregate Deal Value in Quarter by Industry
49%
54%
23%
7%
19%
5%
3%
24%
3%
5%
3%
5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
No. of Deals Aggregate Deal Value
LBO Growth Capital Add-on Public to Private PIPE Recapitalization
Fig. 21: Aggregate Deal Value in Quarter by Type
Deals by Type, Value & Industry
Q2 Private Equity-Backed Deals in Focus
PRIVATE EQUITY
Funds
Investments
Transactions
Exits
For more information,
please contact:
Carl A. de Brito
+1 212 698 3543
carl.debrito@dechert.com
Daniel O’Donnell
+1 215 994 2762
daniel.odonnell@dechert.com
Private equity investors around the world rely on our
interdisciplinary team of 200 deal lawyers at every
phase of the investment life cycle.
Dechert is consistently recognized as one of the
“most active law firms” for fund formation and fund
investments by Private Equity Analyst and among
the top ten law firms for private equity buyouts in
The American Lawyer’s “Corporate Scorecard.” We
are also ranked among the top law firms for total
value and volume of North American private
equity buyouts by mergermarket and have been
recommended for private equity transactions by
Chambers, The Legal 500, and JUVE.
dechert.com
U.S. Austin • Boston • Charlotte • Hartford • New York • Orange County • Philadelphia • Princeton • San Francisco • Silicon Valley
Washington, D.C. EUROPE Brussels • Dublin • London • Luxembourg • Moscow • Munich • Paris ASIA Beijing • Hong Kong
20
Largest Deals & Notable Exits
Q2 Private Equity-Backed Deals in Focus
Fig. 24: 10 Largest Deals in Quarter
Company Name Date Deal Value Investment Type Acquiror/Financial Sponsor Location Industry
Extended Stay May-10 USD 3.9bn Buyout
Blackstone Group, Centerbridge Capital
Partners, Paulson & Co.
US Hotels
Interactive Data
Corporation
May-10 USD 3.4bn Public to Private Silver Lake, Warburg Pincus US Financial Services
Michael Foods,
Inc.
May-10 USD 1.7bn Buyout Goldman Sachs Private Equity Group US Food
DynCorp
International
Apr-10 USD 1.5bn Public to Private Cerberus Capital Management US Business Services
Vertafore, Inc. Jun-10 USD 1.4bn Buyout TPG US IT
Avolon May-10 USD 1.4bn Recapitalization
Cinven, CVC Capital Partners, Oak Hill Capital
Partners
Ireland Transportation
American Tire
Distributors
Apr-10 USD 1.3bn Buyout TPG US Distribution
Kroll Jun-10 USD 1.1bn Add-on Altegrity, Providence Equity Partners US Business Services
Sedgwick CMS Apr-10 USD 1.1bn Buyout Hellman & Friedman, Stone Point Capital US Business Services
InVentiv Health May-10 USD 1.1bn Public to Private Thomas H Lee Partners US Healthcare
Fig. 25: 5 Notable Exits in Quarter
Company Name
Date
Acquired
Firms Investing
Transaction
Size
Exit Type Date Sold To
Exit
Transaction
Size
Cognis Nov-01
Goldman Sachs
Private Equity Group,
Permira, Schroder
Ventures
EUR 3bn Trade Sale Jun-10 BASF plc EUR 3.1bn
Vertafore, Inc. Nov-04
Hellman & Friedman,
JMI Equity
Secondary
Buyout Sale
Jun-10 TPG USD 1.4bn
Michael Foods,
Inc.
Nov-03
Thomas H Lee
Partners
Secondary
Buyout Sale
May-10
Goldman
Sachs Private
Equity Group
USD 1.7bn
Sedgwick CMS Jan-06
Evercore Partners,
Fidelity National
Financial, Thomas H
Lee Partners
USD 635mn
Secondary
Buyout Sale
Apr-10
Hellman &
Friedman,
Stone Point
Capital
USD 1.1bn
Amadeus Jul-05
Air France, BC
Partners, Cinven,
Deutsche Lufthansa,
Iberia
EUR 4.3bn IPO* Apr-10 n/a EUR 1.3bn
* Partial Exit
21
The Preqin Quarterly, Q2 2010
Dry Powder
T
he amount of dry powder available to fund
managers of all private equity funds grew at
a significant rate in the years preceding the
financial crisis, but since December 2008 dry powder
levels have stopped their growth and started to
decline.
As can be seen in Fig. 26, the amount of dry powder
available has decreased across all fund types with the
exception of real estate funds and, as of June 2010,
is lower than it was in 2008. The most significant
decrease has been for distressed private equity
funds, with the level of uncalled capital available to
such funds decreasing by 12% between December
2008 and June 2010. The dry powder reserves of
mezzanine funds have decreased by 9% in this
period.
In terms of geography, the amount of dry powder
available to funds primarily focused on North America
has decreased by 7% since December 2008 and now
stands at $580bn. In the same period funds primarily
focused on Europe have seen a decrease of 3%, and
vehicles primarily focused on Asia and Rest of World
a decrease of 4%.
The decline in dry powder is a result of the significant
slowdown in private equity fundraising over the
past 18 months, during which time very little fresh
capital has been committed to the asset class. As
the number of deals being done has also slowed, dry
powder has still remained at a relatively high level,
although a recent upturn in activity is likely to lead to
a more dramatic decline in the coming months before
fundraising has a chance to recover.
Fig. 28 shows the amount of capital invested and
dry powder remaining for buyout funds of vintages
2004-2009. The median investment period for buyout
funds is five years, which means that vintage 2006
and 2007 funds will be nearing the end of their
investment period over the next few years. Vintage
2006 funds, which will typically be reaching the end of
their investment periods in 2011, still have $70bn of
dry powder at their disposal, while vintage 2007 funds
have $148bn. It is likely that fund managers will be
keen to deploy this capital over the next two to three
years, a factor contributing to the recent increase in
activity, helped by improving market conditions.
© 2010 Preqin Ltd. / www.preqin.com
0
200
400
600
800
1000
1200
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10
Other
Mezzanine
Distressed
Real Estate
Venture
Buyout
Fig. 26: Dry Powder by Fund Type: 2003- 2010 YTD
D
r
y

P
o
w
d
e
r

(
$
b
n
)
61
143
174
115
50
13
4
20
70
148
174
103
0
50
100
150
200
250
300
2004 2005 2006 2007 2008 2009
Dry
Powder
($bn)
Capital
Invested
($bn)
Fig. 28: Buyout Funds - Capital Invested and Dry Powder
Remaining by Vintage Year as of 31st December 2009
0
100
200
300
400
500
600
700
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10
North
America
Europe
Asia and
Rest of
World
Fig. 27: All Private Equity Dry Powder by Regional Focus:
2003-2010 YTD
D
r
y

P
o
w
d
e
r

(
$
b
n
)
22
D
ata to Q4 2009 is now in, and shows that
fund performance is continuing its recovery,
with net asset values increasing from Q3
2009 by 5.6% during the fourth quarter of 2009.
NAVs increased by 13.5% over the course of 2009
compared to a decrease of 15.8% in 2008.
Looking at the change in net asset value between
consecutive quarters in recent years shows that
fund valuations registered almost no change in
Q1 and Q2 2008, decreased steeply between Q3
2008 and Q1 2009 due to the effects of the financial
downturn and implementation of FASB 157 mark-to-
market accounting standards, and started recovering
in Q2 2009. The weighted quarterly change, which
takes into account fund size, shows that the biggest
quarter-on-quarter decline in net asset value came
in Q4 2008, with a fall of 14.0%. In the first quarter
of 2009 the decrease in NAV continued but at a
much slower rate. Fund valuations started to recover
in the second quarter of 2009 and the largest NAV
improvements happened in Q3 2009, with valuations
increasing by 6.7%.
The discrepancy between the weighted and the
non-weighted changes in NAV shows that larger
funds have seen wider variations in their valuations.
Larger funds were the most affected by the financial
crisis but have also recovered faster.
The overall private equity horizon IRR for the
one-year period to December 31st, 2009 stands
at 13.8%, an improvement on the -9.2% posted at
September 30th, 2009. All private equity strategies
are now posting positive one-year returns as at
Q4 2009. With a horizon IRR of 16.7%, buyout is
posting the highest returns. Venture capital shows
a one-year return of 5%, mezzanine 2.3% and funds of
funds 0.2%.
Private equity three-year horizon IRRs are just above
0% for all fund types except mezzanine, which stands
at 6.5%. Long-term returns remain strong, with private
equity posting an annualized 17.5% over the five-year
period. With a horizon IRR of 21.8%, buyout funds are
posting the strongest returns over the five-year period.
As Fig. 30 shows, over the past year the industry
has fallen short of the returns posted by all of the
major listed indices shown. However, it is important
to consider the long-term nature of private equity, and
over a longer time period the asset class has achieved
out-performance over listed equities – beating all but
the MSCI emerging markets over three years, and
exceeding all indices over a five-year period.
Portfolio companies were significantly marked down in
the second half of 2008 but fund valuations and private
equity performance have improved steadily since the
second quarter of 2009. Private equity performance
has still not reached the level seen prior to the financial
crisis but is on a strong path to recovery.
Performance Update
Performance Update
-20%
-15%
-10%
-5%
0%
5%
10%
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Non-
Weighted
Weighted
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1-year to Dec 2009 3 years to Dec 2009 5 years to Dec 2009
All Private
Equity
S&P 500
MSCI
Europe
MSCI
Emerging
Markets
Fig. 29: All Private Equity Change in NAV by Quarter
A
v
e
r
a
g
e

C
h
a
n
g
e

i
n

N
A
V

f
r
o
m

P
r
e
v
i
o
u
s

Q
u
a
r
t
e
r

A
n
n
u
a
l
i
z
e
d

R
e
t
u
r
n
s
Fig. 30: Private Equity Horizon IRR vs. Public Indices,
as of 31 Decemeber 2009
23
The Preqin Quarterly, Q2 2010
Fund Terms & Conditions
F
ollowing extensive discussion, surveying and
roundtable meetings, the Institutional Limited
Partners Association (ILPA) released its best
practice guide to private equity fund terms and
conditions, the Private Equity Principles, in September
2009. ILPA currently has over 100 organizations
endorsing the practices outlined in the document.
Using Preqin’s extensive data on terms and conditions taken
from the newly released 2010 Preqin Fund Terms Advisor
publication, it is possible to assess the level to which new funds
are adhering to a selection of quantifiable ILPA ‘best practices’.
Deal-by-Deal vs. Whole Fund Carry
ILPA: A standard all-contributions-plus-preferred-return-back-
first model should be recognized as best practice.
Preqin: 62% of funds closed in 2009, 2010 and currently
raising utilize a whole fund structure
Although the majority of funds are adhering to a whole fund
carry structure, 38% continue to work on a deal-by-deal basis.
Within Europe, whole fund structures are the norm, with
only 7% of vehicles focusing on the region using a deal-by-
deal structure. In the US, half of all funds are still distributing
proceeds on a deal-by-deal basis.
Management Fees Post-Investment Period
ILPA: Management fees should step down significantly
upon the formation of a follow-on fund and at the end of the
investment period.
Preqin: Only 3% of funds maintain the original management
fees upon the completion of the investment period.
This is an area where the vast majority of fund managers are
adhering to the Principles, although there is a wide range of
different methods used for reducing fees, with the savings for
LPs varying considerably. For buyout funds, 99% of funds will
reduce the fees, but 61% still charge the same rate applied only
to the invested capital. 25% of funds go further, reducing the
rate and applying to invested capital only.
Transaction and Monitoring Fees
ILPA: All transaction, monitoring, directory, advisory, and exit
fees charged by the general partner should accrue 100% to the
benefit of the fund.
Preqin: 39% of the most recent funds rebate 100% of such
fees back to the fund.
There has been considerable movement towards rebating fees
to the fund in recent years, but the majority of funds still retain a
proportion of such fees for the GP. Only 1% of recent vehicles
rebate less than 50% of fees, but a considerable 28% rebate
only 50% - 60%.
No-Fault Divorce Clause
ILPA: No fault rights upon a two-thirds in interest vote of limited
partners for the following: Removal of the general partner;
Dissolution of the Fund.
Preqin: Less than 4% of the most recent funds comply with this
statement. 80% in interest is the most common supermajority.
Although only a small minority of funds set the supermajority
as low as the 67% identified by ILPA, it is now commonplace
to have a no-fault divorce clause in place. 58% of funds
set an 80% supermajority, while 34% require a 70% - 79%
supermajority.
GP Contributions
ILPA: The general partner should have a substantial equity
interest in the fund to maintain a strong alignment of interest
with the limited partners.
Preqin: 39% of funds have a GP contribution of 1-1.99%; 22%
of funds have a GP contribution of 2-2.99%; 10% of funds have
a GP contribution of 5-5.99%; 14% have a GP contribution of
10% or more.
A GP making a substantial commitment to their own vehicle is
an excellent way to align interests in the GP – LP relationship,
and has been noted by placement agents as one of the best
ways that GPs can make a statement of intent when seeking
commitments for new vehicles in the current market. We
have seen a notable increase in the level of GP capital being
committed to funds, with 54% of the most recent funds having
above 1% commitment levels, and 14% of new vehicles seeing
GP contributions of 10% or higher.
Summary
With investors having significantly less capital to deploy into
new vehicles than in previous years, and with a large number
of vehicles still on the road, it is clear that the balance of power
has swung towards LPs in fund terms negotiations. With over
100 firms already endorsing the Principles, it is important that
firms are aware of these best practices, and have considered
them when assembling PPMs. Preqin’s data shows that while
some areas of the Principles are being followed, other areas
are not enjoying such widespread support, with the continued
prevalence of deal-by-deal carry funds in the US perhaps the
most notable area where GPs continue to resist change.
Although only a minority of LPs polled in a recent Preqin survey
would not dismiss a fund based solely on their non-adherence
to the Principles (13%), the majority would see this as a reason
to consider not investing (58%). As a result it is especially vital
that those managers which maintain non-best practice terms
are able to communicate exactly why this is to an increasingly
terms and conditions-sensitive LP universe.
Are the ILPA Principles Being Followed?
© 2010 Preqin Ltd. / www.preqin.com
The Fund Terms Advisor is a vital tool for all fund formation lawyers and for private equity firms and
placement agents involved with the fund formation process. It also contains valuable intelligence for all
those investing in private equity, and for those advising LPs. Key features include:
• Actual terms and conditions data for over 1,400 funds, including management fees and mechanisms
for reduction after the investment period, carry, carry distribution methods, hurdles, preferred return,
fee rebates, no-fault divorce clause, GP commitments, investment period.
• Benchmark terms and conditions data for funds of all different types: buyout, venture, real estate,
distressed, mezzanine, fund of funds, secondaries and more…
• Results of our LP and placement agent surveys - the most comprehensive studies of current opinions
on fund terms and conditions ever conducted.
• Data and analysis on the actual fees and costs incurred by LPs, with listings showing costs for 1,200
named vehicles.
• Full access to our updated Fund Terms Advisor Online product, which enables you to model the real
economic impact of fund terms and conditions, and download detailed fund terms for further analysis.
• Comprehensive analysis on all aspects of private equity fund terms and conditions including how
conditions have changed over time and what variations exist amongst funds of different type, size and
region.
• Listings for 100 leading law firms involved in the fund formation process, including contact details and
sample previous assignments.
2010 Preqin
Fund Terms Advisor:
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Contents
1. 2.
Editor’s Note Expert Comments
Tripp Brower, Capstone Partners Glenn Siegel & Davin Hall, Dechert 4 5 6
Chief Production Editor:

3

Editor:

Tim Friedman

Helen Wilson
Sub-Editor:

3. 4.

Investor Survey Results Q2 Fundraising in Focus
Fundraising Overview Regional Fundraising Buyout & Venture Fundraising Private Equity Fundraising: Other Fund Types

Claire Wilson
Contributors:

8 11 12 13

Manuel Carvalho Helen Kenyon Adam Palmer Etienne Paresys
External Contributors:

5.

Funds on the Road
Funds on the Road Overview Funds on the Road by Type 14 15 16

Tripp Brower, Capstone Partners Davin Hall, Dechert Glenn Siegel, Dechert

London:

6. 7.

Fundraising Future Predictions Q2 Private Equity-Backed Deals in Focus
Deals Overview & Deals by Region Deals by Type, Value & Industry Largest Deals & Notable Exits

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17 18 20 21 22 23 25

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8. 9. 10. 11.

Dry Powder Performance Update Fund Terms & Conditions: ILPA Principles About Preqin

230 Park Avenue 10th Floor New York NY 10169 US
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►2

2

We are also thrilled to have guest articles from leading placement agent Capstone Partners and top law firm Dechert providing further perspectives on the key trends affecting the industry. As our report on page 17 shows. with a total of $42bn being realized. fundraising reached a new low point during Q2 2010 with only $41bn raised across all fund types globally – the lowest total since 2003. relying on the relatively high levels of dry powder collected during the boom times (see our article on page 21 for more details).preqin. In addition. heightened levels of deals activity and the improvement in fund performance will lead to a recovery in fundraising. A similar surge has been seen in exits. Fundraising has been exceptionally challenging over the past couple of years. although there are still many challenges facing firms investing capital and for those seeking out commitments for new vehicles. $43bn in new deals has been announced in Q2 2010. with the latest data on fundraising. this is certainly a positive sign for the industry. Within the buyout sector. investors are slowly showing signs of increased confidence and this is reflected in our LP survey results. The outlook for private equity is looking brighter.com 3 ►3 . Tim Friedman. and is welcome news for the institutional backers of the asset class. with investor confidence shaken after fund valuations fell dramatically in late 2008 and early 2009. a lack of capital flowing back to investors in the form of distributions meant many investors were able to maintain their allocations while making very few new commitments. / www. Q2 2010 Editor’s Note The second quarter of 2010 represents a turning point for the industry. Editor © 2010 Preqin Ltd. dealflow and institutional investor appetite providing us with some important clues as to the future of the private equity asset class. we have seen the most active quarter since the onset of the financial crisis. As our report on page eight shows. Although an improvement in fundraising will not come overnight.The Preqin Quarterly. After seeing performance for the industry rising significantly in recent quarters (see page 22). Many of the bigger fund managers that raised significant vehicles over recent years have delayed their re-entry into the fundraising market. We hope that you find the publication to be informative and interesting. and as ever we welcome any feedback and suggestions that you may have. which can be found on page six. While still some way short of the activity levels experienced in 2006 – 2008. investors will be receiving more in the way of distributions. The Preqin Quarterly utilizes data from a variety of Preqin’s products and publications in order to give a detailed overview of the latest market conditions. with early 2011 now looking to be the period when activity really picks up as more of the brand name firms embark on the fundraising trail. With the capital cycle now gathering steam. This combined with low levels of investor confidence in the asset class resulted in a dearth of new vehicles achieving a final close.

and even though LPs’ balance sheets are healthier. On the economic side of the equation. with positive implications for GPs that are selling into that dealflow and able to return capital to their LPs. and the requirements for adding a new GP relationship are high. These decisions often pivot on performance. Although there is a large number of fund managers seeking capital (many of which are high quality teams with interesting strategies). private equity and hedge fund managers have been preparing for the required SEC registration (still to be approved by both houses of Congress) that at this stage is inevitable. So what areas and strategies are investors interested in right now? Certainly areas of market dislocation and disruption are of interest. increasing transparency and providing regulatory bodies with more power. Special situations and opportunistic strategies with an edge are generally getting good interest from investors. deals and exits with LPs that did not invest in the last fund but came close and remain interested in following their progress. Given the economic challenges in the US. In the category of transparency. Thoughtful GPs systematically communicate news of organizational developments. especially a GP’s ability to deliver compelling. although definitions of small will vary considerably from LP to LP. so communicating earlier will provide a better shot at getting the right attention. anywhere there are inefficiencies in markets where the opportunities for cash on cash return are high and compelling. Private equity is in the spotlight on several levels – political. More specifically. LPs’ forward calendars are loaded. At the risk of generalizing. The tough environment over the past couple of years impeded new investments and exits. To what extent are LPs’ cashflow situations hindering the market? LPs have not seen much in the way of capital calls or distributions. Many investors are looking for ways to reduce the overall number of PE relationships. The recent SEC announcement banning unregistered placement agents from dealings with public pensions strikes us as a constructive regulatory solution to problems created by a few “bad actors” in the placement industry. Preqin’s second quarter fundraising stats shows new fundraising to be at its lowest point since 2003. and other initiatives to stay current and prepare for the implications to the private equity industry. consistent cash on cash returns. 4 . we are talking about management fees. that are getting attention. To what extent are fund terms and conditions dictating negotiations between LPs and GPs? LPs have power with regards to fund terms in the current market. We are now starting to see a real pick-up in dealflow. operationally intensive. but routinely the GPs that do fundraising well are treating the LP side of the equation with nearly as much focus as their deal flow generation. or industry focused.Expert Comments Capstone Partners Interview with Tripp Brower. deeper re-up queues and tight allocations. it will take time for this to translate into a significant increase in commitment levels. Our guidance for groups planning to raise capital is to talk to your existing LP base and targeted new investors in the second half of 2010 so that they know you are coming to market. Suffice to say that the cost and complexity of running a PE business are on the rise. certainly primary factors in the slowing of the fundraising market. carry waterfalls and transaction fees. the AIFM Directive. This is the first time in 20 years that I have seen LPs really driving terms so that they are at least neutral if not LP friendly. much of the regulatory action in the US and Europe is aimed at avoiding systemic risk. it’s also no surprise that GPs are viewed as one of the means of raising tax revenue via pending changes in the tax treatment of carried interest. June 2010 Despite an apparent rise in confidence amongst LPs. enhancing investor protection. The fundraising machinery is still “jammed”. Views are being expressed early on in negotiations and are playing an important part in the overall fundraising process. so re-ups are under heavy scrutiny. terms like key-man clauses need to have real substance to them. and those that are able to make oversized commitments can make a big statement and inspire confidence in potential LPs. What is your take on the various initiatives? Time and space limitations make addressing this topic difficult at best. While the additional reporting and compliance requirements will have some benefits. hopefully the various regulatory bodies will resist the temptation to over reach. Many of the brand-name and historically top-performing GPs have delayed fundraising due to limited deal transactions in 2008-09. there are some healthy buyout strategies. The best advice is to follow the frequent reporting on FINREG developments. So fundraising is certainly becoming a more long-term consideration? GPs that excel in fundraising know it’s a perpetual effort. and on the governance side. The controlled distressed arena in the small fund category has lots of room to run in terms of LP appetite. LPs have also made it clear that they view the commitments that GPs make to their own funds as an extremely important factor. This can only serve to improve investor confidence and pave the way for LPs to redeploy this capital either to existing GPs or to others that have made a compelling case for their new vehicle. LPs are generally searching for opportunities in smaller funds. Fundraising does take on a different intensity when you actually have an offering in market and are truly raising capital. whether generalist. When do you see things picking up? It will be the first half of 2011 before we start to see a reasonable pick-up in fundraising. the level of realizations is not as high as the LPs would like. regulatory and fiscal. We will see a more focused ‘priming of the pump’ effort later this year from GPs that intend to be in the market by 2011.

given the freeze up in capital markets.com 5 . even though actual bankruptcies have declined. Ownership of companies changed rapidly and. the Third Circuit held that while a secured creditor has the right to credit bid in stand-alone sale of assets to a third party. Increasingly. The cost of this new liquidity may be a forced bankruptcy where the existing senior debt is converted to equity or the assets are sold at auction subject to a senior creditor’s right to credit bid. the bankruptcy court did not count the vote of a strategic competitor which purchased debt with the expectation of acquiring the company’s assets to the exclusion of every other restructuring alternative. the ability to raise capital provides the willing lender tremendous leverage in the operation of the business and the fate of ownership. restructuring continues through an amendment and forbearance process that is driven by the potential consequences to stakeholders in a court-supervised restructuring. This strategy was easy for these creditors to implement since they had the available liquidity and knew they would receive the first cash from closing as the senior lienholder.The Preqin Quarterly. In order to maximize their chances of succeeding.preqin. a distressed investor can provide debtor in possession financing (“DIP financing”) to the company once it commences a chapter 11 case. the court could confirm a plan of reorganization over the objection of a secured creditor that was not allowed to credit bid.In the chapter 11 restructuring of Lyondell Chemical. investors must be willing to provide short-term liquidity as a bridge to ownership while keeping in mind that they always run the risk of being outbid. Q2 2010 Dechert Investor Strategies to Realize Returns in Troubled Situations.In the Delphi Corporation case. may insist on a capital contribution. most of the new capital structures were significantly deleveraged leaving little role for pre-existing sponsors and other equity holders of troubled companies. the secured creditors of Philadelphia Newspapers bid cash at the auction and were the successful bidders. an interested investor . In reaction to this decision. Notwithstanding this attempt. © 2010 Preqin Ltd. Given virtually every distressed business’s need for working capital and the inevitable constraints created by the covenants present in most credit agreements. Attempts to Block the Right of Secured Creditors to Credit Bid – In the Philadelphia Newspapers case. Private equity and distressed debt funds are active participants in this process as a result of their equity positions in portfolio companies and as active investors. Acquisition by Second Lienholders by Reinstatement of Senior Debt . An interested bidder for the business may seek to benefit from this dynamic by offering to purchase the existing senior debt (at par or at a negotiated discount) coupled with an offer to provide new liquidity. Disallowance of Vote of Creditor Which Purchases Its Claim with the Goal of Buying the Business . This was possible because the reorganized company had the capacity to service the existing first lien debt and the court found that the restructuring did not otherwise violate the loan documents. Alternatively. At the conclusion of the restructuring (whether out of court or in court).In Charter Communications. Outside of bankruptcy the pre-existing lender will insist that new dollars be put in on a junior basis and. using the proceeds of the rights offering to partially pay down their debt claims. and additional liquidity for the target business can be raised through a rights offering. Below we briefly discuss a few recent. the bankruptcy court recognized the rights of the DIP lenders to credit bid and eventually the company supported a sale of most of its business to the DIP lenders. To ensure greater control over the restructuring. These strategies can be employed by the current equity sponsor on its own or in collaboration with a partner (preferably a senior lender). the interested bidder may even be a current lender with the flexibility to own the business or who may have bought into the credit previously allowing for the possibility of an opportunity to own. in the case of the sponsor.can position itself as the likely acquiror of the business. / www. new financing extended by the distressed investor can be converted into equity or exit financing of the restructured company. a balance sheet restructuring of the company around subordinated bondholders was made feasible through the reinstatement of the company’s senior credit facility. In the current environment. This article will briefly discuss the way major players in these troubled situations achieve their goals with a particular emphasis on current shareholders and those who wish to become the shareholders at the conclusion of the process. This situation is most likely to exist where there is a second lien and the second lien holders have prohibited the purchase of senior debt by the sponsor. Glenn Siegel & Davin Hall. as well as backstop a rights offering of new stock and new notes. the company sought to sell substantially all of its assets to a third party private equity firm where the sale proceeds would have been insufficient to pay the DIP lenders in full. the lenders sponsored a plan of reorganization whereby they would contribute their claims for new equity in reorganized Lyondell. 2009 was a record year for defaults and restructurings.In DBSD North America. Acquisition of Company by DIP Lender . Halfway through 2010.with the inclination to provide lending and other forms of liquidity during the transition to new ownership . The existing equity sponsor can also seek to take advantage of this by purchasing the senior secured debt so long as it is not prohibited from doing so by the loan documents. DIP financing can enable the distressed investor to take control of the negotiations concerning the company’s chapter 11 plan or to control the sale of assets to the DIP lender by conditioning the extension of postpetition credit on the approval of covenants that require any chapter 11 plan or sale of assets must be satisfactory to the DIP lender. relevant bankruptcy cases to illustrate potential acquisition strategies and attendant risks for distressed investors. investors can take advantage of depressed valuations to acquire businesses with the potential for substantial returns or increase their ownership stakes in existing portfolio companies at favorable valuations. Acquisition by Conversion of Senior Debt to Equity and Rights Offering .

however. though perhaps this was a reflection of the fact that many LPs found themselves over-allocated to the asset class at this time. 97 funds closed having raised $60bn. A further 19% anticipate doing so in 2011. just under half (49%) of investors expect to commit the same level of capital as in 2010 and a significant 39% of respondents intend to increase the amount of capital set aside for new commitments. showing that LPs have perhaps been less active in the asset class this year than they had initially planned. Investor Attitudes to Private Equity in Mid-2010 In June 2010. 2: Investors’ Intentions for Their Private Equity Allocations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Next 12 Months Longer Term 19% 36% Increase Allocation 76% Maintain Allocation 62% Decrease Allocation 6% 2% Almost two-thirds (65%) of respondents told us they intend to make their next commitment to a private equity fund during the second half of 2010. The remaining 12% intend to reduce the amount of capital they commit that year. An investment company in the Middle East declared that it will “definitely invest more in 2010. 1: Investor Intentions: 2010 vs. The vast majority (88%) of LPs plan to either increase the amount of capital set aside for new commitments in 2011 compared to 2010 or invest capital at the same rate. compared to the 174 funds which closed in Q1 2009 having raised $77bn. the results of the survey show continuing improvement in investor attitudes towards private equity. almost a quarter (23%) of respondents anticipated committing less capital in 2010 than in 2009. our December 2009 LP survey showed that the proportion of investors seeking to reduce their private equity allocations over the coming year had reached a considerable 13%. but just 12% of respondents in June 2010 had yet to decide on the timing of their next commitment. Despite the slow start to fundraising in 2010. Funds that reached a final close during 2009 secured $279bn in capital commitments. the amount of capital they will set aside for new commitments in 2010 will be greater than the amount they pledged to vehicles in 2009. During 2011. For many investors. Investor confidence in private equity also suffered as fund valuations fell during 2009 and the lack of dealflow in the industry left many investors overcommitted to the asset class with a shortage of capital for new investments. that in June 2010. with 54% of respondents already having made at least one commitment during the first half of the year. 2009 Proportion of Respondents Despite increasing fund valuations and evidence of improving investor appetite for private equity seen towards the end of 2009. In December 2009 a quarter of investors were uncertain when they would next be active in the asset class. Furthermore. As shown in Fig. Fig. fundraising in early 2010 still fell below levels seen the previous year: in Q1 2010. 44% of investors intend to use more capital for new commitments in 2010 than they did in 2009 and a further third intend to commit the same amount. 6 .Investor Survey Results Investor Survey Results T he financial crisis has clearly had a significant impact on private equity fundraising over the past 18 months. Fig. a far cry from the $643bn secured by the funds that closed the year before. Preqin spoke to 100 of the most prominent institutional investors across the globe in order to assess their current appetite for the asset class. 2009 was a ‘wait and watch’ year. compared to just 8% that anticipated such a decrease in December 2009.” It is worth noting. 1.

Areas of Investor Interest The results of our survey point towards a gradual increase in the amount of capital available for new commitments in the coming months. as shown in Fig. although perhaps not as great an increase as many would have hoped. When asked which countries or regions in emerging markets are currently presenting the best opportunities. The results displayed in Fig. however.com 7 . But what is this capital likely to be used for? Without prompting with pre-defined answers. 56% of LPs named Asia and 37% named China specifically. 67% of respondents to our survey stated that they will consider investing in emerging markets. Outlook for Fundraising The results of our survey indicate that there is likely to be a gradual increase in the amount of capital available for fresh private equity commitments during the next 18 months. Investors are set to remain cautious in their future private equity investments and will continue to scrutinize the terms and conditions of prospective funds more closely than before the financial crisis. Fundraising is consequently set to remain challenging over 2010 and into 2011. Fund managers must be prepared to listen to what LPs want in order to improve their chances of securing commitments. Q2 2010 Fund managers can be encouraged by the longerterm plans of LPs. 2. as illustrated by Fig. we are likely to continue to see LPs push for more concessions over the next few months. 3 indicate the areas of the market that are attracting the most investor attention at present. 3: Types of Funds that Active LPs are Seeking to Invest in During 2010/11 Small to Mid-Market Buyout Distressed Private Equity Fund of Funds Large to Mega Buyout Venture Secondaries Funds Mezzanine Cleantech Other 0% 21% 16% 14% 14% 12% 11% 12% 20% 40% 60% 80% 28% 65% Proportion of Respondents Fig. Fig. just 2% of respondents expected to do so and a considerable 36% intend to increase their allocations (Fig. It is important to note that Fig. A considerable 65% of investors that are set to be active in 2010/11 intend to commit to small to mid-market buyout funds and 28% have identified distressed private equity funds as a strategy they will be seeking to invest in during the next 18 months. In June 2010. this had risen to 72%. we asked LPs which types of funds they intended to make commitments to during 2010/11.2). 11% of respondents told us they anticipated reducing their allocations to private equity over the next three to five years. In June 2010.The Preqin Quarterly. however. This is encouraging news for GPs set to enter the market with their latest fund offerings. 4: Regions and Countries within Emerging Markets Viewed by LPs as Presenting the Best Opportunties in the Current Financial Climate Asia China India Brazil South America Africa Central & Eastern Europe Russia Middle East Other 0% 4% 2% 10% 20% 30% 40% 50% 60% 13% 12% 10% 19% 25% 25% 37% 56% Proportion of Respondents We have also seen emerging markets continue to attract a significant degree of attention from institutional investors. showing a gradual increase in investor appetite for emerging markets. A recent Preqin survey of investor attitudes towards fund terms and conditions found that 42% of investors disagree that interests are properly aligned between GPs and LPs. In our December 2009 survey. In December 2009. 4.preqin. 3 only shows the responses from LPs that intend to make further commitments to private equity funds during 2010/11. Investors’ plans in the short term have also improved: 6% of respondents intend to reduce their exposure to private equity over the following 12 months compared to 13% in December 2009. although some improvement in the overall amount of capital secured by funds is likely to occur. Despite the increase in the amount of capital investors are setting aside for new commitments. When coupled with the fact that a considerable 81% of LPs feel that they have seen a definite shift in the balance of power between GPs and LPs at fund negotiations. it will still fall far short of the amounts seen prior to the financial downturn. Few intend to cut back their allocations and in fact many foresee the size of their allocations rising over the next few years. © 2010 Preqin Ltd. a fact that GPs must be prepared for in the current fundraising environment. / www.

This new low point in fundraising shows that the effects of the financial crisis are still very much affecting the industry’s ability to raise new capital. Venture funds were the most numerous. the most capital was raised by buyout funds during Q2 2010. and after having spent a substantial amount of time on the road. 7: Q2 2010 Private Equity Fundraising by Type 8 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 13% 5% 3% Time Spent on the Road Type of Fund . Many in the industry. 5: All Private Equity Fundraising by Quarter: Q1 2003 . with 3% having spent over three years on the road. The table on page 10 shows details of the 10 largest funds to close during Q2 2010. 6. with 24 such vehicles closing having raised $4. with fund managers still struggling to gain investor commitments and many of the funds that are closing doing so below target.9bn and accounting for 14% of capital raised in the quarter. A further 24% of funds had been in market for longer than this. had anticipated a recovery in the market following an increase in fundraising in the first quarter of the year. Real estate funds were the second most numerous and raised the third-largest amount of capital. but these figures show that the difficult fundraising conditions experienced during the economic crisis are yet to ease. 6: Time Spent on the Road for Funds Closed in Q2 2010 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1-6 Months 7-12 Months 13-18 Months 19-24 Months 25-30 Months 31-36 Months 37 Months + 8% 16% 16% 39% Proportion of Funds Closed Fig.9bn (Fig.8 months as shown in Fig.7). 6. Of the funds that are closing.3bn. with 14 such vehicles raising an aggregate $13.3bn raised by private equity funds in Q2 2010 represents a 32% decrease in capital raised from the previous quarter.Q2 Fundraising in Focus Fundraising Overview P Aggregate Capital Raised ($bn) rivate equity quarterly fundraising reached its lowest level since 2003 in Q2 2010. in 2010 to date the average time taken by a fund to reach a final close has been 19.1bn and accounting for 15% of the capital raised in the quarter. when $60bn was raised. Infrastructure funds raised the second-largest amount of capital. however.8bn. 50 59 53 60 41 Fig. For each year between 2004 and 2008 the average time spent in market by a private equity fund never exceeded 18 months. including Preqin. with five such funds raising a combined $6. with 15 such funds raising $5. 39% of the funds closed in Q1 2010 had been in market for 19-24 months. This shows a significant decline from the previous quarter when 12 real estate vehicles raised an aggregate $9.4bn. Fig.Q2 2010 250 205 195 195 200 150 100 55 38 22 21 19 0 51 4851 167 162 149 140 126 122 123 123 122 94 109 92 80 77 63 The $41. with 82 vehicles reaching a final close raising an aggregate $41. As can be seen in Fig. In terms of fund type. many are doing so below target.

AWARDS 2009 .

650 USD Advent International Consumer Products.100 USD Infrastructure North America. Mexico. Central America Macquarie Infrastructure Partners II Infrastructure 1. Middle East Advent Latin American Fund V Buyout 1. Asia Starwood Global Opportunity Fund VIII Real Estate 1. South America. Europe.600 USD Infrastructure Macquarie Capital Funds Canada. India. US CDH China Fund IV CDH China Management Company Buyout 1. Asia. Mexico.100 USD Financial Services.100 USD Diverse North America Buyout Infrastructure 3.428 USD Diverse China Crown Global Secondaries II Secondaries 1. Retail. China.550 USD Diverse Australia.800 USD Property Starwood Capital Group North America. Africa. Financial Services. Europe. Aerospace. Business Services Argentina. North America.200 USD LGT Capital Partners Diverse China. South America. Insurance US. Consumer Services. Global ICG Recovery Fund 2008 Intermediate Capital Group Distressed Debt 843 EUR Diverse Europe Carlyle Global Financial Services Partners Distressed Debt Carlyle Group 1. Brazil. Global. South Korea. Europe Top Ten Funds Closed During Q2 2010 by Final Close Size Fund Manager Madison Dearborn Capital Partners VI Madison Dearborn Partners GS Infrastructure Partners II GS Infrastructure Investment Group Q2 Fundraising in Focus Carlyle Asia Partners III Carlyle Group Buyout 2.10 Type Final Size (mn) Industry Focus Geographic Focus 4. Global . US. Education / Training.

which represents 19% of the total.8.preqin. accounting for 22% of the aggregate capital raised in the quarter. when such funds raised $2. when 91 vehicles primarily investing in the region closed. 8: Q2 2010 Private Equity Fundraising by Primary Geographic Focus 50 46 45 40 35 30 25 20 15 10 5 0 North America Europe Asia and Rest of World 8. but what is notable is that primarily Asia and Rest of World-focused funds have raised more capital than their Europe-focused counterparts in the quarter. There has been a significant reduction in the amount of capital raised by North America-focused funds over this period.3bn. Funds Raised 17 Aggregate Capital Raised ($bn) © 2010 Preqin Ltd.6bn. This is a significant decrease from the same time last year. accounting for a more sizeable 31% of capital raised. in Q2 2010 17 funds focused primarily on Asia and Rest of World closed with $9bn in commitments. raising an aggregate $24. with a similar proportion of the aggregate capital raised accounted for by such funds. However. with 21 vehicles having garnered $14. having raised an aggregate $102.com 11 . over half (56%) are primarily focused on making investments in North America.3 19 No.The Preqin Quarterly. It is unsurprising that North America-focused funds account for such a large proportion of fundraising. As can be seen in Fig. This marks a substantial shift in regional fundraising compared to both the previous quarter and the same period last year.1bn. Primarily North America-focused funds still account for the largest proportion of capital raised by private equity funds worldwide and many of the largest funds closed in the quarter will be investing in this region.0 9.5bn and accounted for 29% of all capital raised in the quarter. Funds focused primarily on Europe accounted for the lowest amount of capital raised in the quarter with 19 vehicles raising $8bn.7bn. A total of 46 funds primarily focused on North America closed during Q2 2010. it represents a decrease from Q1 2010 when such vehicles raised $14. Q2 2010 Regional Fundraising O f the 82 vehicles closed during Q2 2010. This is a marked increase from the same time last year. Similarly in Q1 2010 Europefocused funds accounted for 29% of capital raised during the quarter. In Q2 2009 23 Europe-focused funds raised $24.5bn and accounted for just 3% of the aggregate capital raised in the quarter. Fig.0 24. however. this has been in line with the decrease that has been seen across private equity globally. / www.

growth equity financings.2 17. venture funds accounted for a smaller proportion of the total capital raised.1 71. The second-largest buyout fund to close in the quarter was Carlyle Asia Partners III.3 64 No.6bn. Funds Raised Fig.5 16.2 52 57 43 38 30 11. compared to 30 funds closing in Q1 2010 having raised $11. with 24 vehicles closing in Q2 2010 having raised an aggregate $4.6 33. This represents a decrease in capital raised by buyout funds compared to the previous quarter.4 25 30.2 33 29. which accounted for 34% of the capital raised by all private equity funds in the quarter. Venture fundraising was down considerably from Q1 2010.Q2 2010 100 90 80 70 60 50 40 30 20 10 0 15.1bn in May 2010. 11: Five Largest Buyout Funds Closed in Q2 2010 Fund Madison Dearborn Capital Partners VI Carlyle Asia Partners III Advent Latin American Fund V CDH China Fund IV Gilde Buyout Fund IV Fig.9bn. Columbia Capital Equity Partners V was the largest venture fund to close in Q2 2010. I Fig. compared to 23% in the previous quarter.6 7.100 USD 2.55bn. The fund will focus on investments in the US media and technology sectors.3bn although their share of the market has remained relatively consistent. Funds Raised Aggregate Commitments ($bn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 Fig.1 7. recapitalizations and acquisition-orientated financing transactions.650 USD 1.550 USD 1. As a result.6 6. 10: Private Equity Venture Fundraising by Quarter: Q1 2008 .428 USD 800 EUR Fund Columbia Capital Equity Partners V CX Partners Drug Royalty II SV Life Sciences Fund V Avigo SME Fund III Fund Manager Columbia Capital CX Partners DRI Capital SV Life Sciences Avigo Capital Partners Size (mn) 441 USD 515 USD 701 USD 523 USD 240 USD 12 .2 4. a North America-focused vehicle targeting management buyouts.4bn.9 8. when 22 buyout vehicles raised $17.Q2 Fundraising in Focus Buyout & Venture Fundraising n Q2 2010 14 buyout funds closed having raised an aggregate $13.1 13. It closed on $4.4 24 87 85 74 82 No. which raised $2.9 57 52.5bn. It too closed short of its original target of $3bn.3 16 14 13.9 ($bn) 14. 9: Private Equity Buyout Fundraising by Quarter: Q1 2008 .6 22 Aggregate 22 Commitments 17. short of its original target of $7.Q2 2010 80 70 60 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 52 67. closing short of its original target on $441mn in April 2010. The largest buyout fund to close in Q2 2010 was Madison Dearborn Capital Partners VI.1 46 41. 12: Five Largest Venture Funds Closed in Q2 2010 Fund Manager Madison Dearborn Partners Carlyle Group Advent International CDH China Management Company Gilde Buy Out Partners Size (mn) 4. with commitments to such funds accounting for 11% of the total in Q2 2010.

infrastructure and real estate funds raised the most capital. with six such funds raising a combined $6. Of these funds. Crown Global Secondaries II was the largest secondaries fund to close in the quarter. As can be seen in Fig. Fig.The Preqin Quarterly. Type of Fund There are two distressed debt funds in the table in Fig.8bn to invest globally in a range of property. 14: 10 Largest Other Types of Funds Closed in Q2 2010 Fund GS Infrastructure Partners II Starwood Global Opportunity Fund VIII Macquarie Infrastructure Partners II Crown Global Secondaries II ICG Recovery Fund 2008 Carlyle Global Financial Services Partners Starwood Capital Global Hospitality Fund II Sankaty Middle Market Opportunities Fund Fortress Japan Opportunity Fund White Deer Energy I Fund Manager GS Infrastructure Investment Group Starwood Capital Group Macquarie Capital Funds LGT Capital Partners Intermediate Capital Group Carlyle Group Starwood Capital Group Sankaty Advisors Fortress Investment Group White Deer Energy Fund Type Infrastructure Real Estate Infrastructure Secondaries Distressed Debt Distressed Debt Real Estate Mezzanine Real Estate Natural Resources Size (mn) 3.100 USD 1.preqin. Six private equity fund of funds vehicles reached a final close in Q2 2010. Starwood Global Opportunity Fund VIII was the largest real estate fund to close in the quarter. This is an increase from the previous quarter when five vehicles raised $5. when nine such funds raised $2.1bn.7bn and accounting for 16% of the total capital raised in the quarter.000 JPY 821 USD © 2010 Preqin Ltd.2bn. Q2 2010 Private Equity Fundraising: Other Types B uyout and venture funds raised just under half of all Fig.800 USD 1.9bn. the only two such funds to reach a close in the quarter. real estate fundraising is down from the previous quarter when 18 such funds raised $9. Real estate funds raised the second-largest amount of capital and were the most numerous.2bn collected accounting for over half of the capital raised by such vehicles in the quarter. This marks a decrease of 50% in fundraising for funds of funds compared to Q1 2010. 14.com 13 .100 USD 965 USD 904 USD 75. with the remaining and Venture Funds) by Fund Type 56% raised by other types of vehicles. with 17 real estate funds raising $6. One real estate fund of funds reached a final close in Q2 2010 on $300mn. However. raising $1. although real estate fundraising is down by 40% from the previous quarter.200 USD 843 EUR 1.8bn and represented 16% of the fundraising market. This marks a 69% decrease from the previous quarter in terms of capital raised.6bn and accounting for 16% of the capital raised in the quarter. infrastructure funds raised the most capital out of all other types of funds.600 USD 1.2bn and accounted for 5% of the capital raised in the quarter. Between them these vehicles raised an aggregate $2. / www. 13. 13: Q2 2010 Private Equity Fundraising (Excluding Buyout private equity capital in Q2 2010. with the $1. raising an aggregate $1.

Funds on the Road Funds on the Road Overview F ollowing four years of annual increases in both the number of private equity funds in market and the aggregate capital sought.7 Aggregate Target ($bn) 369 443 697 No. the vehicle will also consider making investments in other regions. In Q1 2009 the average fund in market was targeting $547mn. Primarily North America-focused funds account for 46% of the number of funds in market and over half of the aggregate target capital. as illustrated in Fig. Funds on Road 137. as of Q3 2010. A large proportion of the funds in market are primarily focused on North America. 16: Composition of Funds in Market by Primary Geographic Focus 800 700 600 500 400 300 200 127.800 1. with 697 such vehicles targeting an aggregate $291.7 100 0 North America Europe Asia and Rest of World 291. 15: Funds in Market by Quarter 1.673 1. there are 1. Asia and Rest of World-focused funds are targeting the second-largest amount of capital.8bn in August 2009 and is likely to hold a final close later this year.7bn. representing a decrease of nearly one-third. 16. As 2010 has progressed this figure has declined even further and.622 1. with the average fund target of a North America-focused fund standing at $419mn.562 1. 557 Aggregate Target ($bn) Fig.000 800 600 400 200 0 Q1 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 705 889 887 807 1.7bn in investor capital. Such funds also have the largest average target size out of all funds in market. Europe-focused funds account for 23% of the global targeted capital and 24% of the number of funds on the road. There are currently 369 primarily Europe-focused funds on the road targeting an aggregate $127. compared to $346mn for Europe-focused funds and $311mn for Asia and Rest of World-focused funds.400 1. Fig.304 1.582 private equity vehicles were targeting capital commitments of $691bn.200 1. At the start of 2010 1.8 Primary Geographic Focus The largest fund currently in market is primarily North America-focused Blackstone Capital Partners VI. 443 such vehicles are seeking $137.600 1. As a result. Funds on Road 754 691 636 Since the beginning of the year there has been a decrease of 5% in the number of private equity vehicles on the road and a 19% reduction in the aggregate capital targeted by such vehicles. These figures show that the difficult fundraising conditions experienced throughout the financial crisis are yet to ease. 14 . Like many of the primarily North America-focused funds on the road. having already held its third interim close on $8.574 1.624 1. this figure now stands at $369mn.510 No. as shown in Fig. accounting for 29% of the number of funds and 25% of the aggregate targeted capital of all funds in market. The buyout fund is targeting $15bn. a 21% decrease in aggregate capital sought from Q1 2009. and this is reflected in the significant decrease in the average target size of funds on the road. 2010 marked the first year in which there was a decline. many fund managers are having to reduce their fundraising targets.8bn in aggregate commitments.15.582 1.510 vehicles on the road targeting $557bn.

There are 378 private equity real estate vehicles currently on the road targeting an aggregate $133bn in investor commitments. There has been a similar decline in the number and aggregate target of buyout vehicles on the road since the same time last year. with 144 funds targeting $42bn. with 4% less capital being sought in Q3 2010. with 448 such vehicles currently on the road representing 30% of the total number of funds in market. with an aggregate target of $79.com 15 . accounting for 7% of the total targeted capital.7bn. This represents a 30% decrease in the aggregate capital sought by real estate vehicles. Secondaries funds account for 2% of the number of funds in market and 3% of all capital targeted. / www. and secondaries funds all account for a significant proportion of the funds in market.4bn. Q2 2010 Funds on the Road by Type R eal estate funds are targeting the largest ammount of capital of all funds in market. 17: Composition of Funds in Market by Fund Type Type of Fund © 2010 Preqin Ltd. Venture funds are the most numerous type of fund in market. In Q3 2009 235 buyout funds were on the road seeking an aggregate $168bn in capital commitments. This is significantly lower than at the same point in 2009 when the average target size of an infrastructure fund in market was $933mn. accounting for 24% of all the commitments being sought by funds in market worldwide.2bn in aggregate commitments and accounting for 14% of the capital targeted. There are 53 distressed private equity funds targeting $37. distressed private equity funds. This is a decrease in both the number and aggregate target from the same period last year. with the average infrastructure fund seeking $759mn in investor commitments. with 103 such vehicles seeking $78. This represents a relatively small decrease in aggregate capital targeted compared to last year. Fig. Funds of funds. A year later 201 buyout vehicles are in market with an aggregate target of $114. The fourth-largest amount of capital is being targeted by infrastructure funds.The Preqin Quarterly. Buyout funds currently account for 20% of the aggregate targeted capital and 13% of the number of funds in market. when 403 such funds were targeting a combined $191bn.1bn. Such vehicles are targeting the third-largest amount of capital. Funds of funds represent 8% of all capital sought by funds in market. which represents a decrease in targeted capital of 32%. Infrastructure vehicles have the largest average target size of fund types. representing a decrease of 19%.preqin.

although more recent European and Asian funds still have ample dry powder Last major 2007 vintage fund 45% called as of March 31st 2010 Last major fund is 2006 vintage and was 65% called as of March 31st 2010 2008 vintage fund 40% called as of March 31st 2010 Last major buyout fund (2007 vintage) 70% called as of March 31st 2010 Last LBO fund (2007 vintage) 50% called as of March 31st 2010 2006 vintage buyout fund 55% called as of December 31st 2009. many of the brand-name and best-performing managers have delayed the launch of their next funds due to the current climate and the fact that they still have available capital from older vehicles. Another important factor to consider is that while there are still lots of funds on the road. and this trend will continue until fundraising picks up. The next six months are likely to remain at relatively low levels.Funds on the Road Fundraising Future Predictions lthough institutional investors are growing in confidence as a result of deals activity picking up and private equity fund performance recovering following the big drops we saw last year. it is likely that we are going to see a number of bigger firms entering the fundraising market in pre-marketing mode before launching in earnest in 2011. We are already seeing the levels of dry powder begin to fall. and they have more positive news to communicate to existing and potential new LPs on the deals front. which saw the lowest aggregate total raised since 2003. This extra capital may allow some of the firms that have already held multiple interim closes to achieve a final close on vehicles that have been in market for some time. the churn of capital is starting to pick up. where we have not seen the same kind of pick-up in activity and improvement in fund performance as elsewhere in the industry. and amongst them offerings from some top-quality managers. things are likely to improve significantly in 2011. helped by the plans of more than a third of investors to increase allocations in the longer term. there will be an increased need for a significant number of these big name fund managers to launch new offerings towards the end of this year and into next year.and Europe-focused vehicles are 2007 vintage (40% and 33% called respectively as of December 31st 2009) KKR Fund 2006 is now 80% called up. With PERE collecting amongst the highest levels of capital of all fund types aside from buyout funds in recent years. With market conditions improving. As our LP survey on page six shows. The length of time required to raise a fund from launch to final close has extended to a record 19. It is therefore likely that we will see a real pick-up in fundraising activity as we move into 2011. 18: Possible Follow-On Funds to Be Launched in Short to Medium Term Firm Name Goldman Sachs PE Group Carlyle Group Kohlberg Kravis Roberts Warburg Pincus Permira First Reserve Corporation Providence Equity Partners AXA Private Equity Thomas H Lee Partners Avenue Capital Group Available Capital Position Last major buyout fund (2007 vintage) 40% called as of December 31st 2009 Last major US. Fig. and this will have a positive impact on new fundraising as investors seek to reinvest distributed capital. most investors (76%) are simply looking to maintain allocations in the next 12 months. but if the market for deals and exits continues to improve. This has clearly impacted upon fundraising in Q2 2010. Many managers will also see themselves in a better position to raise capital now that their fund NAVs have improved. this will have an impact on the absolute levels of capital that the overall industry is able to garner. most recent European fund is over 80% called 16 . the fact that distributions to investors have been so low means that investors have not had to invest in new funds at the same rate in order to keep their allocations steady.8 months. A Now that dealflow has started to pick up. with quarterly totals for next year potentially reaching the $100bn mark once again. with the increasingly challenging market causing many firms to hold multiple interim closes before reaching a final close. The one sector that could continue to struggle into and beyond 2011 is private equity real estate. firm has done three additional deals since Most recent US fund is 100% called. While in previous years maintaining an allocation would require significant reinvestment of distributed capital from existing investments. fundraising remains an extremely challenging prospect. In the short term.

CVC Capital Partners and Oak Hill Capital Partners. As shown in Fig.5 32.0 357 288 295 382 40.0 0. Despite a disappointing first quarter in 2010. when 39 deals with an aggregate deal value of $4bn were announced. 19: Number and Aggregate Value of Buyout Deals by Quarter 600 500 400 300 200 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 No.33.6 8. the $1.6 9.6 3.2 6.6 18. when 382 deals were announced with an aggregate value of $40.7 11. Q2 2010 Deals Overview & Deals by Region G Number of Deals lobal dealflow in Q2 2010 represents the strongest quarter for private equity-backed buyout deals in the post-credit crunch landscape. with a total of 411 private equity buyout deals announced with an aggregate value of $43.The Preqin Quarterly.0 50.9 3. of the aggregate deal value in this quarter.4 3. with these deals accounting for a considerable $16.0 Aggregate Deal Value ($bn) 60.7 Q4 2008 Q4 2009 Q1 2010 Q2 2010 North America Asia and Rest of World © 2010 Preqin Ltd.0 14.2 20.8 8.3bn in deal value seen in the previous quarter.8 3. when it stood at $11bn. / www.0 26.6 10.0 Q2 2008 Q3 2008 6. This represents a 60% increase in aggregate deal value from the previous quarter.0 Q1 2009 Europe Q2 2009 Q3 2009 11.0 4.4bn. Nine of the 10 largest deals completed in Q2 2010 took place in North America. of Deals Aggregate Deal Value 16.3 2.9 5. 19).3 4. Dealflow in Europe has remained relatively stable.4 27.2 2.8 12.3bn (Fig.preqin. Dealflow began picking up momentum in Q4 2009.7bn. when 356 deals were announced with an aggregate value of $27. The sixth-largest deal worldwide in the quarter.0 5.0 70.1 22.8 27. This represents a 40% increase in aggregate deal value in comparison to Q1 2010.1 6.7 Aggregate Deal Value ($bn) 35 30 25 20 15 10 5 0 Q1 2008 13.0 30. or 38%.1bn.1 325 The buyout industry witnessed a significant decline in dealflow moving into 2009. Q2 2010 shows that the environment has improved for buyout deals.9 509 464 58.com 17 .0 20. 20: Aggregate Deal Value in Quarter by Regional Focus 45 40 38. Fig. took place in Ireland. 169 deals were announced in Q2 2010 with aggregate deal value of $11bn compared to the $10.9 12. with the aggregate deal value reaching its lowest point in Q1 2009. proving that buyout funds focused on North America are actively completing deals.6 21.1 411 356 43.4bn recapitalization of Avolon by Cinven.6bn. Dealflow in this quarter was stronger in terms of aggregate value than for any quarter since 2008. 20 aggregate deal value in Q2 2010 in North America increased sharply in comparison with the previous quarter with 175 deals accounting for $26.4 483 68.5bn.0 40.0 10.5 6. Fig.0 45. when aggregate deal value fell by a third from the previous quarter. Asia and Rest of World witnessed increased deal activity in Q2 2010 with 67 deals announced with an aggregate deal value of $5.3 80.

with deals valued at $500-999mn and over $1bn representing 23% and 46%. accounting for 26% of aggregate deal value and 18% of the number of deals announced in Q2 2010. 21). A total of 3% of deals announced in Q2 2010 were public to private transactions with these large deals representing 24% of the global aggregate deal value. with such deals representing 7% of the aggregate deal value. The business services sector. This marks an increase from the previous quarter when deals in the sector accounted for 20% of the aggregate deal value announced in the quarter.4bn acquisition of Interactive Data Corporation by Warburg Pincus and Silver Lake. financial and legal services. which includes business. 22). The consumer and retail sector was the most prominent sector in terms of aggregate deal value.Q2 Private Equity-Backed Deals in Focus Deals by Type. Fig. 22: Aggregate Deal Value in Quarter by Industry Fig. Significant public to private deals announced in Q2 2010 include the $3.5bn transaction by Cerberus Capital Management. Fig. In terms of industry. As shown in Fig. with deals in this value band representing only 5% of the aggregate deal value globally. the highest dealflow in Q2 2010 was in the industrial sector with a quarter of all global buyout deals and 15% of the aggregate deal value globally accounted for by this sector (Fig. 23: Aggregate Deal Value in Quarter by Deal Size 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% No. and the announced privatization of DynCorp International in a $1. of Deals LBO Growth Capital Add-on Aggregate Deal Value Public to Private PIPE Recapitalization 49% 54% 23% 5% 7% 3% 3% 3% 19% 5% 5% 24% Growth capital investments accounted for 23% of deals announced during Q2 2010. This is down from the previous quarter when such deals accounted for 60% of the aggregate deal value. 50% of buyout deals globally in Q2 2010 were valued at less than $100mn. of total aggregate deal value in the quarter. Mid-market and large deals represent the majority of buyout capital deployed globally by fund managers. Value & Industry A lmost half of all private equity-backed deals announced globally in Q2 2010 were leveraged buyouts. of Deals Less than $100mn $100-249mn 50% 23% 13% 13% 5% 23% 8% 9% 10% 46% Aggregate Deal Value $250-499mn $500-999mn $1bn+ 18 . 23. respectively. accounted for 15% of all deals announced globally and 23% of aggregate deal value in Q2 2010. accounting for 54% of the aggregate deal value worldwide during the quarter (Fig. 21: Aggregate Deal Value in Quarter by Type 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% No.

com U.com Private equity investors around the world rely on our interdisciplinary team of 200 deal lawyers at every phase of the investment life cycle. and JUVE. The Legal 500.com Daniel O’Donnell +1 215 994 2762 daniel.S.” We are also ranked among the top law firms for total value and volume of North American private equity buyouts by mergermarket and have been recommended for private equity transactions by Chambers. de Brito +1 212 698 3543 carl. Dechert is consistently recognized as one of the “most active law firms” for fund formation and fund investments by Private Equity Analyst and among the top ten law firms for private equity buyouts in The American Lawyer’s “Corporate Scorecard.PRIVATE EQUITY Funds Investments Transactions Exits For more information.odonnell@dechert.debrito@dechert. D. dechert. Austin • Boston • Charlotte • Hartford • New York • Orange County • Philadelphia • Princeton • San Francisco • Silicon Valley Washington. EUROPE Brussels • Dublin • London • Luxembourg • Moscow • Munich • Paris ASIA Beijing • Hong Kong . please contact: Carl A.C.

1bn Vertafore. Inc. Paulson & Co.7bn USD 1. Inc.9bn USD 3. JMI Equity Thomas H Lee Partners Evercore Partners. Fidelity National Financial. Silver Lake. Warburg Pincus Goldman Sachs Private Equity Group Cerberus Capital Management TPG Cinven. Providence Equity Partners Hellman & Friedman.1bn USD 1. Avolon American Tire Distributors Kroll Sedgwick CMS InVentiv Health Date May-10 May-10 May-10 Apr-10 Jun-10 May-10 Apr-10 Jun-10 Apr-10 May-10 Deal Value USD 3. Stone Point Capital Thomas H Lee Partners Location US US US US US Ireland US US US US Industry Hotels Financial Services Food Business Services IT Transportation Distribution Business Services Business Services Healthcare Fig.Q2 Private Equity-Backed Deals in Focus Largest Deals & Notable Exits Fig. Thomas H Lee Partners Air France. Stone Point Capital USD 1.4bn USD 1. DynCorp International Vertafore.4bn Nov-03 May-10 USD 1.1bn USD 1. Iberia Exit Type Date Sold To Cognis Nov-01 EUR 3bn Trade Sale Jun-10 BASF plc EUR 3.3bn IPO* Apr-10 n/a EUR 1. Cinven.3bn USD 1. 24: 10 Largest Deals in Quarter Company Name Extended Stay Interactive Data Corporation Michael Foods. Oak Hill Capital Partners TPG Altegrity. Schroder Ventures Hellman & Friedman. Inc. Centerbridge Capital Partners.7bn Sedgwick CMS Jan-06 USD 635mn Secondary Buyout Sale Apr-10 USD 1. 25: 5 Notable Exits in Quarter Date Acquired Transaction Size Exit Transaction Size Company Name Firms Investing Goldman Sachs Private Equity Group. Inc.4bn USD 1.5bn USD 1.3bn * Partial Exit 20 .4bn USD 1.1bn Investment Type Buyout Public to Private Buyout Public to Private Buyout Recapitalization Buyout Add-on Buyout Public to Private Acquiror/Financial Sponsor Blackstone Group. Michael Foods. Deutsche Lufthansa.1bn Amadeus Jul-05 EUR 4. Nov-04 Secondary Buyout Sale Secondary Buyout Sale Jun-10 TPG Goldman Sachs Private Equity Group Hellman & Friedman. BC Partners. Permira. CVC Capital Partners.

/ www. Q2 2010 Dry Powder T he amount of dry powder available to fund managers of all private equity funds grew at a significant rate in the years preceding the financial crisis. and vehicles primarily focused on Asia and Rest of World a decrease of 4%.The Preqin Quarterly. Vintage 2006 funds. As the number of deals being done has also slowed. the amount of dry powder available to funds primarily focused on North America has decreased by 7% since December 2008 and now stands at $580bn. Dry Powder ($bn) Fig. as of June 2010. although a recent upturn in activity is likely to lead to a more dramatic decline in the coming months before fundraising has a chance to recover. 28 shows the amount of capital invested and dry powder remaining for buyout funds of vintages 2004-2009.2010 YTD 1200 Other Mezzanine 800 Distressed 600 Real Estate 400 Venture 200 Buyout 0 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10 1000 As can be seen in Fig. dry powder has still remained at a relatively high level. still have $70bn of dry powder at their disposal. The dry powder reserves of mezzanine funds have decreased by 9% in this period.com 21 . Fig. The decline in dry powder is a result of the significant slowdown in private equity fundraising over the past 18 months. the amount of dry powder available has decreased across all fund types with the exception of real estate funds and.preqin. with the level of uncalled capital available to such funds decreasing by 12% between December 2008 and June 2010. which will typically be reaching the end of their investment periods in 2011.Capital Invested and Dry Powder Remaining by Vintage Year as of 31st December 2009 300 250 200 150 100 50 0 2004 2005 2006 2007 2008 4 61 143 20 70 148 174 174 115 50 13 2009 103 Dry Powder ($bn) Capital Invested ($bn) © 2010 Preqin Ltd. The most significant decrease has been for distressed private equity funds. is lower than it was in 2008. 28: Buyout Funds . Fig. In the same period funds primarily focused on Europe have seen a decrease of 3%. 27: All Private Equity Dry Powder by Regional Focus: 2003-2010 YTD 700 600 500 North America Dry Powder ($bn) 400 Europe 300 200 100 0 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10 Asia and Rest of World Fig. 26: Dry Powder by Fund Type: 2003. but since December 2008 dry powder levels have stopped their growth and started to decline. during which time very little fresh capital has been committed to the asset class. helped by improving market conditions. which means that vintage 2006 and 2007 funds will be nearing the end of their investment period over the next few years. It is likely that fund managers will be keen to deploy this capital over the next two to three years. 26. In terms of geography. The median investment period for buyout funds is five years. while vintage 2007 funds have $148bn. a factor contributing to the recent increase in activity.

The discrepancy between the weighted and the non-weighted changes in NAV shows that larger funds have seen wider variations in their valuations. With a horizon IRR of 21. shows that the biggest quarter-on-quarter decline in net asset value came in Q4 2008. Venture capital shows a one-year return of 5%. The overall private equity horizon IRR for the one-year period to December 31st. 22 . buyout funds are posting the strongest returns over the five-year period. decreased steeply between Q3 2008 and Q1 2009 due to the effects of the financial downturn and implementation of FASB 157 mark-tomarket accounting standards. as of 31 Decemeber 2009 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% 1-year to Dec 2009 3 years to Dec 2009 5 years to Dec 2009 MSCI Emerging Markets MSCI Europe S&P 500 All Private Equity Annualized Returns Portfolio companies were significantly marked down in the second half of 2008 but fund valuations and private equity performance have improved steadily since the second quarter of 2009. The weighted quarterly change. 2009.8% in 2008. and over a longer time period the asset class has achieved out-performance over listed equities – beating all but the MSCI emerging markets over three years. In the first quarter of 2009 the decrease in NAV continued but at a much slower rate.3% and funds of funds 0. All private equity strategies are now posting positive one-year returns as at Q4 2009.2% posted at September 30th. which stands at 6. with net asset values increasing from Q3 2009 by 5. Private equity performance has still not reached the level seen prior to the financial crisis but is on a strong path to recovery.7%. mezzanine 2. Fund valuations started to recover in the second quarter of 2009 and the largest NAV improvements happened in Q3 2009. NAVs increased by 13. with a fall of 14. with valuations increasing by 6.2%. buyout is posting the highest returns. 30 shows. 2009 stands at 13. over the past year the industry has fallen short of the returns posted by all of the major listed indices shown. and shows that fund performance is continuing its recovery.7%. With a horizon IRR of 16.8%. Private equity three-year horizon IRRs are just above 0% for all fund types except mezzanine. it is important to consider the long-term nature of private equity. 30: Private Equity Horizon IRR vs. with private equity posting an annualized 17.5%. 29: All Private Equity Change in NAV by Quarter 10% 5% 0% Q1 2008 -5% Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 NonWeighted -10% Weighted -15% -20% Fig. Long-term returns remain strong.5% over the course of 2009 compared to a decrease of 15. However.5% over the five-year period. and started recovering in Q2 2009. Fig.Performance Update Performance Update Average Change in NAV from Previous Quarter D ata to Q4 2009 is now in. and exceeding all indices over a five-year period. As Fig. which takes into account fund size. Public Indices.0%.8%. Larger funds were the most affected by the financial crisis but have also recovered faster. an improvement on the -9. Looking at the change in net asset value between consecutive quarters in recent years shows that fund valuations registered almost no change in Q1 and Q2 2008.6% during the fourth quarter of 2009.

Only 1% of recent vehicles rebate less than 50% of fees. the majority would see this as a reason to consider not investing (58%). but 61% still charge the same rate applied only to the invested capital.99%. No-Fault Divorce Clause ILPA: No fault rights upon a two-thirds in interest vote of limited partners for the following: Removal of the general partner. / www. and have considered them when assembling PPMs. advisory. while 34% require a 70% . © 2010 Preqin Ltd. with 54% of the most recent funds having above 1% commitment levels. with only 7% of vehicles focusing on the region using a deal-bydeal structure. 99% of funds will reduce the fees. Using Preqin’s extensive data on terms and conditions taken from the newly released 2010 Preqin Fund Terms Advisor publication. although there is a wide range of different methods used for reducing fees.preqin. it is important that firms are aware of these best practices. the Institutional Limited Partners Association (ILPA) released its best practice guide to private equity fund terms and conditions. Preqin’s data shows that while some areas of the Principles are being followed. Whole Fund Carry ILPA: A standard all-contributions-plus-preferred-return-backfirst model should be recognized as best practice. ILPA currently has over 100 organizations endorsing the practices outlined in the document. reducing the rate and applying to invested capital only. in September 2009. 2010 and currently raising utilize a whole fund structure Although the majority of funds are adhering to a whole fund carry structure. Transaction and Monitoring Fees ILPA: All transaction.60%. This is an area where the vast majority of fund managers are adhering to the Principles. it is now commonplace to have a no-fault divorce clause in place.com 23 .99%. it is clear that the balance of power has swung towards LPs in fund terms negotiations. With over 100 firms already endorsing the Principles. Dissolution of the Fund. but the majority of funds still retain a proportion of such fees for the GP. Preqin: 62% of funds closed in 2009. the Private Equity Principles. There has been considerable movement towards rebating fees to the fund in recent years. 14% have a GP contribution of 10% or more. 58% of funds set an 80% supermajority. directory. Preqin: Only 3% of funds maintain the original management fees upon the completion of the investment period.99%. Preqin: 39% of the most recent funds rebate 100% of such fees back to the fund. whole fund structures are the norm. Summary With investors having significantly less capital to deploy into new vehicles than in previous years. In the US. and 14% of new vehicles seeing GP contributions of 10% or higher. other areas are not enjoying such widespread support. For buyout funds. GP Contributions ILPA: The general partner should have a substantial equity interest in the fund to maintain a strong alignment of interest with the limited partners. Deal-by-Deal vs. and exit fees charged by the general partner should accrue 100% to the benefit of the fund.The Preqin Quarterly. Preqin: Less than 4% of the most recent funds comply with this statement. with the savings for LPs varying considerably. Q2 2010 Fund Terms & Conditions Are the ILPA Principles Being Followed? F ollowing extensive discussion. it is possible to assess the level to which new funds are adhering to a selection of quantifiable ILPA ‘best practices’.79% supermajority. A GP making a substantial commitment to their own vehicle is an excellent way to align interests in the GP – LP relationship. Preqin: 39% of funds have a GP contribution of 1-1. 80% in interest is the most common supermajority. Although only a minority of LPs polled in a recent Preqin survey would not dismiss a fund based solely on their non-adherence to the Principles (13%). but a considerable 28% rebate only 50% . As a result it is especially vital that those managers which maintain non-best practice terms are able to communicate exactly why this is to an increasingly terms and conditions-sensitive LP universe. We have seen a notable increase in the level of GP capital being committed to funds. surveying and roundtable meetings. 22% of funds have a GP contribution of 2-2. Although only a small minority of funds set the supermajority as low as the 67% identified by ILPA. 10% of funds have a GP contribution of 5-5. and with a large number of vehicles still on the road. with the continued prevalence of deal-by-deal carry funds in the US perhaps the most notable area where GPs continue to resist change. monitoring. Management Fees Post-Investment Period ILPA: Management fees should step down significantly upon the formation of a follow-on fund and at the end of the investment period. Within Europe. and has been noted by placement agents as one of the best ways that GPs can make a statement of intent when seeking commitments for new vehicles in the current market. half of all funds are still distributing proceeds on a deal-by-deal basis. 25% of funds go further. 38% continue to work on a deal-by-deal basis.

email or post I would like to purchase the 2010 Preqin Fund Terms Advisor £885 + £10 Shipping $1.2010 Preqin Fund Terms Advisor: Order Form The Fund Terms Advisor is a vital tool for all fund formation lawyers and for private equity firms and placement agents involved with the fund formation process. Key features include: • • • • • • • Actual terms and conditions data for over 1.230 Park Avenue.com / t: +44 (0)20 7065 5100 / f: +44 (0)87 0330 5892 or +1 440 445 9595 © 2010 Preqin Ltd. Job Title: Post / Zip Code: Email: *Security Code: Country: Preqin .com / e: info@preqin.preqin. including contact details and sample previous assignments. real estate. Comprehensive analysis on all aspects of private equity fund terms and conditions including how conditions have changed over time and what variations exist amongst funds of different type. Name: Firm: Address: City: Telephone: Payment Options: Cheque enclosed (please make cheque payable to ‘Preqin’) Credit Card Please invoice me Card Number: Expiration Date: Name on Card: Security Code*: American Express: the 4 digit code is printed on the front of the card. GP commitments. which enables you to model the real economic impact of fund terms and conditions.preqin.the most comprehensive studies of current opinions on fund terms and conditions ever conducted.preqin.Please complete and return via fax. distressed.200 named vehicles. Listings for 100 leading law firms involved in the fund formation process. investment period. It also contains valuable intelligence for all those investing in private equity. 10th floor. venture. London. New York. Only available alongside purchase of the publication). NY 10169 w: www. EC2A 1BB Preqin . Full access to our updated Fund Terms Advisor Online product. hurdles. fund of funds. with listings showing costs for 1. mezzanine. Visa Mastercard Amex Visa / Mastercard: the last 3 digits printed on the back of the card.com . fee rebates.400 funds. size and region. / www. carry. preferred return. Benchmark terms and conditions data for funds of all different types: buyout. If shipped to multiple addresses then full postage rates apply for additional copies) I would like to purchase the 2010 Fund Terms Advisor Graphs & Charts Data Pack in MS Excel Format: $300 / £175 / €185 (contains all underlying data for charts and graphs contained in the publication. no-fault divorce clause. and download detailed fund terms for further analysis. 33 Finsbury Square.com/fta ------------------------------------------------------------------------------------2010 Preqin Fund Terms Advisor Order Form . The 2010 Preqin Fund Terms Advisor: A Guide to Terms and Conditions of Private Equity Funds www. including management fees and mechanisms for reduction after the investment period.Scotia House. secondaries and more… Results of our LP and placement agent surveys . Data and analysis on the actual fees and costs incurred by LPs. and for those advising LPs. carry distribution methods.495 + $40 Shipping €950 + €25 Shipping  Additional Copies £110 + £5 Shipping $180 + $20 Shipping €115 + €12 Shipping (Shipping costs will not exceed a maximum of £15 / $60 / €37 per order when all shipped to same address.

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