BRAND NEW MEXICO - Store & Retrieve Data Anywhere NEW MEXICO How a stricken LP is bouncing back ... behind the Alibaba buyback; ... 20 the weakest link

Issue 113 | March 2013 | privateequityinternational.com

BRAND NEW MEXICOHow a stricken LP is bouncing back

THRIVING OR SURVIVING?Fund of funds managers’ battle for relevance

STILL THE NEXT BIG THINGTurkey starts to fulfil its potential

THE $24bn QUESTIONCan Silver Lake really reboot Dell?

pLUS: Brazil and overheating; lessons from Lion on supply chain risk; the story behind the Alibaba buyback; a second look at secondary buyouts; Navis’s 10x TrimCo deal; life after the Arab Spring; whither 3i; and more...

is pleased to announce the closing of

Altra Private Equity Fund II, L.P.and parallel investment funds

A Value-Oriented Buyout Fund FocusedOn Midcap Companies in Colombia and Perú

This announcement appears as a matter of record only.

$355,885,000Limited Partnership Interests

The undersigned acted as financial advisor andplacement agent for the limited partnership interests.

www.stanwichadvisors.com

altra_pea_ad_2_2013_pea_v1.qxd:Stanwich 2/13/13 11:46 AM Page 1

1march 2013 private equity international

Better times ahead

It’s been a funny old start to the year. When I was talking to industry people in January about their expectations for 2013, the gen-eral consensus was that it would probably be more of the same as far as private equity was concerned – better than last year, probably, but still nothing to write home about. After all, nothing had fundamentally changed; the big macroeconomic cans had just been kicked down the road a bit.

And yet before the new year was six weeks old, we’d seen equity prices soar to five-year highs, and the announcement of two $20 billion-plus buyout deals (plus some frenzied speculation about which big target would be next). All very 2006. And all very peculiar.

We probably shouldn’t read too much into the $24 billion Dell deal, since that was a very specific set of circumstances (and there’s a lot of scepticism about it, as we discuss on p. 12). On the other hand, that and the $23 billion Heinz deal clearly show that the banks are ready, willing and able to make big new loans for the right deals. That has to be good for gen-eral confidence levels in 2013, and the impor-tance of that shouldn’t be underestimated.

One institution that is certainly hoping for better times ahead is the New Mexico State Investment Council, the subject of this month’s Privately Speaking (p. 28). A few years ago, this $16.6 billion US LP was caught up in the pay-to-play scandal. But since 2009, with the arrival of chief investment officer Steven Moise and deputy Vince Smith, it has undergone quite a

transformation. Sam Sutton travelled to Santa Fe to find out more.

Elsewhere, we take an in-depth look at two of the world’s hottest emerging markets in recent years: Turkey (p. 35) and Brazil (p. 53). Both countries have attracted plenty of capital from investors eager to search out pockets of growth away from the stagnant, ageing West. But both have been facing headwinds lately, as economic growth has slowed and the added competition for a relatively small pool of assets has pushed up prices. Locals insist that opportunities are

still available, though – particularly for those investors willing to head off the beaten track.

Of course, that’s easier said than done for many LPs, who don’t have the resources to assess a selection of (say) local Anatolian funds. Which is where a good fund of funds manager might come in. These are difficult times for funds of funds: some investors are baulking at the extra level of fees (particularly in the cur-rent fundraising climate), while existing clients are getting increasingly demanding (which eats into margins). However, many of these manag-ers are staying relevant by supplementing or even reinventing their offering, as we explain in our special report on p. 43.

Reinvention is something that many in the industry need to be thinking about, given how volatile and fast-moving today’s market is. Those groups that don’t might find themselves on the wrong side of history. And they can’t all rely on getting bought by Silver Lake.

Happy Reading,

James Taylor

issn 1474–8800 issue 113 | march 2013

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‘Building Value’ is PEI’s campaign to promote examples of genuine operational value creation by private equity owners

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James tayloreDitor's letter

2 private equity international march 2013

contents

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MIX

®

12 Down on Dell Can Silver Lake generate a private

equity-style return with a company as challenged as Dell?

14 new lease of life A Park Hill hire shows the increasing

importance of fund restructuring expertise

16 the alibaba show How a group of Chinese investors

pulled off Alibaba’s tricky PE-led buyback of Yahoo! shares

18 a true reawakening? Can private equity reap the rewards of

Shinzo Abe’s radical $116trn stimulus package?

19 slower, but smarter Retail is slowing in China – but

the midmarket still offers good opportunities for private equity

20 the weakest link How can GPs mitigate supply chain risks

like those that have recently afflicted Lion Capital?

21 listing badly 3i faces anxious times as cutbacks

continue and its fundraising outlook deteriorates

22 building bridges The sea change in attitudes to social

investing over the 10-year life of Bridges Ventures

23 a second look A report suggests secondary buyouts

actually deliver better returns than primary deals

24 in search of green shoots North African GPs say the market is

showing signs of life after the Arab Spring

35 turkey: maturing nicely? Turkey has long been tipped as a

hotbed of private equity activity. PEI asks four of the market’s key players whether the market is finally set to take off

43 Fund of funds special: evolving to survive

How can funds of funds managers stay relevant and keep attracting business in today’s difficult climate?

53 briefing: brazil Brazil’s economic slowdown – and a

possible over-supply of capital – has led to questions about its potential

4 First round Moment of Clarity; Inglorious

Congress; On the sauce

10 the world this month The biggest private equity stories

from around the globe – including San Franciso, London, Ontario, Brazil, Hong Kong, South Africa and Sri Lanka

26 Deal mechanic How Navis turned TrimCo into a

global player – and made a 10x return in the process

52 on the record Paul Yang of China Development

Industrial Bank / CDIB Capital on his ‘China corridor’ strategy

60 lP radar: ill-defined commitments

The switch to DC – and why managers need to get their act together now

61 investor base: open for business Two major LPs have been busy

strengthening their traditional fund commitment operations

62 capital watch Funds currently in market

66 Data room Focus on ... global fundraising in 2012

68 nicholas Pye, buyout Guy Pye gets caught napping on value

creation

2653

also in this issue

reGularson the cover

28 Privately speaking: the new mexico state investment council

Not long after it was torn apart by a pay-to-play scandal, the NMSIC has re-established itself as one of the top LPs in the industry. Sam Sutton asks state investment officer Steven Moise and deputy Vince Smith how they turned things around

Innovative Directions in Private Equity Investing

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First Round is a big admirer of The Blackstone Group’s Tony James. Anyone who can pull off being Steve Schwarzman’s human shield with such graceful equanimity clearly has a lot going for them. And during his time as BX’s front man, he has man-aged to adroitly position himself as one of the industry’s most visible and vocal advocates – without making any embarrassing comments about noodle salesmen in Nagasaki or such like. Easier said than done, First Round is sure you’ll agree.

However, there are lines in the sand – lines that exist for a reason. And TJ definitely crossed one of those lines in the firm’s fourth quar-ter earnings call, when he suggested that private equity should rename

itself ‘clarity equity’ – because it brings clarity to a company’s pri-orities, or to management’s incen-tive, or something along those lines. To be honest, First Round wasn’t paying particularly close atten-tion to the explanation, because it was too busy RETCHING AT THE MERE MENTION of the term ‘clarity equity’.

Now it must be said: FR is no PR. The dark arts of corporate com-munication are as much a mystery to this section as the vagaries of string theory (as indeed they are to a large number of people who work in PR, to be fair). And it is quite prepared to accept – even as a magazine intro section with a deeply vested inter-est in the status quo – that private equity could do with a rebrand, given that the current name does have some unfortunate associations these days.

However, it is surely not alone in considering this mooted Jacobean moniker to be potentially one of the great linguistic and marketing crimes of the modern era. The day this magazine gets renamed Clarity Equity International is the day that First Round hangs up its laptop and goes back to making balloon animals at birthday parties. Please, Tony – just think of the children! n

James: clarity schmarity

First rounD

$2bnAmount of capital Carlyle returned to investors in 2012 from 19 China deals

$800mFund raised by African GP Ethos, exceeding its $750m target

$5.2bnCapital raised across seven distressed funds for Asia in 2012 (PEI Research & Analytics)

$2.2bnCapital raised across six distressed funds in 2011

multiPles

“The size of the deal is not a trend. It’s very specific to this deal. You have an owner with a massive amount of money he can roll over, and there’s the Microsoft connection” An anonymous senior private equity professional tells PEI the Dell buyout will not spark a wave of mega-deals

“The West – particularly Western media – doesn’t seem to be able to discuss [the Middle East] in any other way than to suggest it is simply one big war zone” The Abraaj Group’s arif naqvi bemoans a lack of understanding about the opportunities available in the Middle East, on CNN Money

“Once track-records are established, it will be possible to assess the risk of [social finance bonds] and to show there is scope for [both] a financial return and a social return” Sir ronald cohen tells an EVCA Summit in Brussels that social investing has the potential to become its own asset class

Moment of clarity

QUARTILIUM IS ONE OF THE PIONEERS OF THE PRIVATE EQUITY FUND OF FUNDS IN EUROPE Managing €1.4 billion, Quartilium selects and invests globally in leading private equity funds operating in buyout, venture/technology, mezzanine, secondaries, distressed and infrastructure. Since our foundation, we have backed 80 talented managers.

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Where would First Round – nay, the whole of private equity – be without the wit and wisdom of David Ruben-stein? The Carlyle co-founder excelled himself again recently at the Credit Suisse Financial Services forum, when he compared the US Congress to one of his favourite things: giant pandas who aren’t very good at mating.

The issue with pandas, he explained (according to The Hill), is that because they don’t get much practice at … you know … “their parts don’t go where they are sup-posed to go”. And it’s a similar story with Congress, he said. “They know what they are supposed to do [but] they don’t quite know how to do it.”

(Ruby added that when he made this analogy to House Minority Leader Nancy Pelosi recently, she suggested that the comparison was a bit unfair to pandas.)

Rubenstein is, as First Round has previously noted, a big supporter of giant pandas – or, to be more precise, of getting giant pandas to make little pandas. He sponsors a programme at the National Zoo, which looks to encourage these famously fumbling fornicators to procreate by, inter alia, showing them panda porn.

So by extension, perhaps his next philanthropic effort should involve an equivalent programme for politicians.

Inglorious Congress

Pandas: like Congress, only less so

Wall-to-wall episodes of ‘The West Wing’ on Capitol Hill, perhaps?

P.S. Speaking of Carlyle … At the BVCA’s 30th year anniversary dinner recently, current chairman Robert Easton (a Carlyle MD) was emphasis-ing the importance of growth policies.

“Back in 2011,” he proclaimed, “I clicked into Google and typed the words ‘UK government growth agenda’ in the search field. Astound-ingly I got a blank screen – and the words ‘no matches found’.”

Now First Round hates to be a cynic about such matters. But seriously? The world’s most intrusive search engine failed to come up with even a single suggestion? In First Round’s experi-ence, Google tends to offer a plethora of suggestions – on everything from new jumpers to esoteric dating sites (look, 2011 was a tough year) – with-out you even asking for them.

Either way, the good news is that the same search now yields 22,400 results. Problem solved, then? n

-13%The decrease in US private equity deal values in 2012, according to the PEGCC

$1bnAmount that retirement system MassPRIM intends to commit to private equity in 2013

$2.1bnKKR’s economic net income for 2012 (including realised and unrealised investments) worldwide

$751m The equivalent figure in 2011

multiPles

First rounD

“Private equity has unique characteristics that may make the industry more susceptible to fraud” At PEI’s CFOs & COOs Forum in New York, bruce karpati, chief of the US Securities and Exchange Commission enforcement division’s asset management unit, warns about fraud risks

“I really like investing in the United States [because] America is America. It possesses a set of inherent advantages that have existed for a long time” In a new podcast, Carlyle co-founder bill conway explains why he thinks the US is the best place to invest in the world right now

“Private equity apparently doesn’t have as attractive a marketing name as ‘activists’” During a conference call, stephen schwarzman, chief executive of the Blackstone Group, suggests private equity can take rebranding lessons from activist investors – who were known as corporate raiders in the 1980s

This announcement appears as a matter of record only

17Capital LLP 7 Curzon Street London W1J 5HG+44 (0)20 7493 2462 www.17capital.com

17Capital Fund 2 LP€208 million

Preferred capital for limited partners and secondary buyers

is pleased to announce the closing of

December 2012

17CAPITAL FUND2LP Advert v4 - 12166.indd 1 18/02/2013 16:07


There’s just so much to like about the $23 billion 3G Capital/Warren Buffett/Heinz buyout.

Of course, First Round speaks not of such quotidian things as favour-able price/earnings ratios, solid free cash flows, established distribution networks or even – to utilise one of Buffett’s favourite phrases – ‘durable competitive advantage’. Oh no. It’s thinking more about pure comedy value.

For one thing, there’s a degree of Victor Kiam-esque wonderfulness about a billionaire who famously loves nothing better than a good hamburger going out and buying his favourite ketchup brand.

But First Round’s favourite bit of the whole story emerged in the subsequent press conference. Heinz’s chairman, president, chief executive, commander-in-chief and Supreme Leader* William Johnson revealed that when the 3G Capital team first asked for a meeting, he assumed they wanted to complain – since in their capacity as owners of Burger King (which 3G bought in 2010), they’re

On the sauce one of his biggest ketchup customers.

But rather than whingeing about under-powered ketchup sachets – a very real First World problem, First Round is sure you’ll agree – they instead offered to buy his entire company (presumably making him considerably richer in the process). “Turns out they were a very happy customer,” the Heinz boss said, in admirably understated fashion.

Let’s hope he was joking. After all, First Round is clearly no stranger to serious lapses of professional judge-ment (wearing that Borat costume to the office last Halloween was defi-nitely a mistake, in hindsight). But this little anecdote doesn’t exactly suggest that Johnson has his finger on the pulse of his biggest customers.

Then again, given that he’s just managed to sell his company to one of the world’s richest men at a 20 percent premium to its previous share price, it seems unlikely that his shareholders will hold it against him for long. n

* two of these may be made-up

haiku oF the month

Mega deals are back?Unless you’re friends with BuffettOnly mega-Dells

$25bn2012 secondary market volumes, matching 2011’s record level, according to Cogent Partners

$800mHard-cap hit by Energy Capital Partners on its debut energy mezzanine fund

9%Average MBO gross IRR in Asia, according to CEPRES

31%Average MBO gross IRR in North America

multiPles

“When you have a fund, whatever size it is, you are committed to invest 25 percent of the fund every year, putting a huge amount of pressure on the team” Philippe robert, one of the founders of OceanBridge Partners, explains the benefits of a non-traditional structure

“We are confident that over the medium term, alternative asset classes in absolute terms and as a proportion of total pension fund assets will increase” mark calnan, global head of private equity at Towers Watson, tells PEI that allocations are moving in the right direction

“The idiots you deal with make you feel good about yourself and the way you can transform a business is remarkable” Better Capital’s founder Jon moulton tells students at a lecture at Cass Business School in London turnarounds can be “enormous fun”

First rounD

Ketchup: can’t complain

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MEP Advert.pdf 1 15/02/2013 15:26

private equity international march 201310

lonDon Findus finds horsemeatLion Capital was dragged into the UK’s horsemeat scandal after beef lasagne products from frozen food business Findus Group, a company in which Lion Capital holds a 33 percent stake, were found to contain horse-meat. Findus Group withdrew its beef lasa-gne “as a precautionary measure” after its French supplier, Comigel, raised concerns about the type of meat used in the product.

ontario calPers’ argüelles moves to otPP Jesús Argüelles, a California Public Employ-ees’ Retirement System private equity port-folio manager since 2002, has taken a role with Teachers’ Private Capital, the private equity arm of the Ontario Teachers’ Pension Plan. Argüelles will be responsible for fund investments with a focus on Latin America. CalPERS declined to comment on the move, but the system recently hired Harshal Shah as a private equity portfolio manager.

new Jersey Prudential builds in-house private equity arm Prudential Financial is searching for a senior investment professional to help run its $3 billion private equity portfolio. Prudential is working to manage an influx of alterna-tive assets from corporate pension liabilities that it took over from Verizon and General Motors. Last autumn, the financial services giant hired former AIG executive Jackie Jenkins to lead its alternative assets group.

braZil Gávea’s r$1bn credit fundGávea Investimentos has raised R$1 billion (€372 mil-lion; $503 million) for its Crédito Estruturado FIDC fund, falling short of the R$1.25 billion target it had set in the vehicle’s prospectus, according to a Valor Eco-nomico report. The credit vehicle is designed to address lending deficiencies in Brazil’s private sector by providing long-term debt financing to Brazilian private companies.

san Francisco silver lake seals biggest post-lehman buyoutTechnology-focused firm Silver Lake set a new post-crisis benchmark with an auda-cious $24.4 billion take-private of PC manufacturer Dell Computers. A group of banks are believed to have supplied a debt package worth $15 billion to finance the deal. Microsoft is also providing a $2 billion loan, reportedly in the form of a mez-zanine tranche or other convertible loan instrument, which would be amongst the largest mezzanine deals ever (p. 12).

columbia altra hits hard-capColombia-based Altra Investments has closed its second flagship fund on about $356 million, north of its $300 million target and more than triple the size of its $105 mil-lion debut fund. Fund II will back mid-market companies primarily in Colombia and Peru in a variety of sectors, investing between $35 million and $50 million per transaction.

Silver Lake seals blockbuster Dell buyout; Cerberus in $1.7bn Japan exit; Ontario Teachers poaches Argüelles; Lion dragged into horsemeat row; Asia Growth Capital Advisors completes spin-out; Gavea closes R$1bn credit fund

The most-read stories on privateequityinternational.com

1. silver lake seals biggest post-lehman buyout

2. calPers’ argüelles heads to ontario teachers

3. aPG hires wP Global executive for private equity

4. energy capital hits $800m hard-cap for mezz fund

5. lion capital exposed to uk’s horsemeat scandal

6. 3G capital quietly hires Goldman executive

7. Park hill hires coller exec for restructurings

8. Distressed investing gathers steam in asia

9. uk gets extra aiFm compliance year

10. oaktree eyes chilean pensions for fundraising

most reaD this month

march 2013 private equity international 11

lonDon hamilton lane hires 3i execVeteran 3i partner Paul Waller

joined Philadelphia-based Hamilton Lane in a newly-created

leadership role in its London office. Waller, who was named a partner, will focus primarily on client development and overall marketing initiatives. He retired from 3i in December 2012 after 35 years, having been responsible for performance, fundraising activities and managing investor relations.

sPain blackstone strengthens spanish teamThe Blackstone Group has hired former Magnum Capital partner Inaki Echave as a managing director for its Iberian peninsula business. Echave will work alongside the firm’s chairman for Iberia, Claudio Boada. “Blackstone sees great opportunity in Spain,” said global head of private equity Joe Baratta. Blackstone has been active in the region in the past, having acquired Spanish packaging company Mivisa in 2010.

JaPan cerberus’ $1.7bn Japan exitThe US-based private equity firm sold its stake in Aozora Bank in one of the country’s largest private equity exits in recent years, totalling about JPY 146 billion (€1.2 billion; $1.7 billion), according to reports. Private equity is renewing its interest in the country: Joseph Bae, man-aging partner of Kohlberg Kravis Roberts Asia, has highlighted Japan as a key focus for the firm in 2013.

sri lanka ex-aureos exec forms first-ever sri lanka fundIndika Hettiarachchi, who pre-viously led emerging markets firm Aureos Capital’s Sri Lanka and Bangladesh efforts, has launched Jupiter Capital Partners’ debut fund for Sri Lanka. The fund is targeting $50 million to invest in the country’s small- and medium-sized enterprises, which Hettiarachchi said have been largely ignored in favour of real estate and hotel projects post-civil war. The fund expects a first close in Q1.

sinGaPore harbourvest, axiom back cs spin-outFunds of funds HarbourVest Partners and Axiom Asia have sponsored the acquisition of Credit Suisse’s Asian private equity assets for a sum close to $100 million, according to sources close to the matter, completing the long-rumoured spin-out of Asia Growth Capi-tal Advisors from the bank. HarbourVest and Axiom will not own any of the portfolio directly, instead operating as LPs of Asia Growth.

honG konG rrJ raises $3.5bn asia fundHong Kong-based RRJ Capital has reportedly raised $3.5 billion for its latest Asia-Pacific fund, which is likely to be one of the region’s largest. A source close to the firm said that the fund’s target was $4 billion. RRJ held a first close on $2.5 billion in September, after receiving “the biggest ever LP investment glo-bally into a single fund” from anchor investor Temasek.

inDonesia actis expands in southeast asiaEmerging markets firm Actis announced two hires in Southeast Asia: Ivy Santoso as Indonesia country head, and Arjun Oberoi as global healthcare sector head. Both will be based in Singapore, although Santoso will be spending most of her time in Jakarta. Actis aims to open a Jakarta office in March, reflect-ing the increasing private equity interest in Southeast Asia.

south aFrica ethos raises $800m for Fund viEthos Private Equity raised $800 million for its latest buyout fund, exceeding its $750 million target. Ngalaah Chuphi, the firm’s head of investor relations, said that the Africa-based firm, which started fundraising in 2011, attracted increased support from US corporate and public pension funds and sovereign wealth funds from the Far East. About 40 percent of Fund VI LPs are new.


news analysis

Down on DellSome in the industry are sceptical that Silver Lake can generate a private equity-style return in a typical private equity timeframe with a company as challenged as Dell, writes Graham Winfrey

meGa Deals

For investors in private equity, Feb-ruary felt like a flashback to the heady days of the boom era. First came confirmation of the $24.4 bil-lion take-private of PC manufacturer Dell, backed by Silver Lake Partners; then Warren Buffett’s Berkshire Hathaway partnered with Brazilian investment firm 3G Capital to buy Heinz for $28 billion.

The fact that two deals of this size got done certainly speaks to a renewed level of confidence in the debt markets. But for many in pri-vate equity, the bigger question is whether Silver Lake will be able to deliver a strong return on its Dell deal.

For some limited partners, there are certain aspects of this deal that might throw up red flags. For a start, it’s Silver Lake’s largest-ever equity cheque: the firm is contributing $1.4 billion, according to filings with the US Securities and Exchange Com-mission, most of which will come from the 2007-vintage $9.4 billion Fund III, sources say (not Fund IV, which is currently in market target-ing $7.5 billion but may go as high as $9 billion).

“It’s really difficult to know whether this is a good deal without being privy to what they expect to do with it,” says one LP. “Personally, I’m happy I’m not in it.”

Some general partners are strug-gling to see how Silver Lake will be able to generate a private equity-like return on the deal.

“This is a great example of the kind of investment that we would never be interested in,” says Rick Nathan, man-aging director at Toronto-based Ken-sington Capital Partners. “If you want to triple your money over a normal private equity timeline, you’re going to have to create $20 billion in new value or more over a three to five year period. [That’s] extremely difficult – there have not been many deals that have successfully executed that.”

Silver Lake declined to comment for this article. But judging by Dell’s recent acquisitions (and market chat-ter), its role may be to help the PC-maker become more of a software and services business, focused on small and medium-sized enterprises.

“They’re betting a lot of capital in absolute numbers on a single trans-action that is, in the best scenario, a complex reorganisation – which, by the way, several of these PC makers have gone through unsuccessfully,” says John Poerink, founder and man-aging partner of mid-market firm Linley Capital. “This by no means is a ‘slam dunk’ type of situation.”

While taking Dell private will allow the company to restructure without the pressures of quarterly reporting, it also means the business is saddled with a reported debt load of $15 billion.

“The debt on the balance sheet could potentially inhibit them from being more aggressive with respect to restructuring processes that they might have to go through,” says Poerink. “They’ve clearly analysed what their cash requirements would be – but what I can tell you is that reorganisation plans never go in the way that you expect them to go.”

Even if Silver Lake manages to turn Dell’s business around during a reasonable time period, the only viable exit route is likely an initial public offering, which brings signif-icant uncertainty and extends the exit process (due to lock-in periods).

“Maybe you make two times your money,” says the LP. “That wouldn’t be horrible. But I don’t think a lot of these big deals have translated to a lot of great multiples. Maybe Silver Lake and Michael Dell have plans that are not obvious.”

The firm certainly managed to surprise a few people with Skype. Maybe it will this time too. n

They’re betting a lot of capital on a single transaction that is, in the best scenario, a complex reorganisation

John Poerink

Dell: in need of a reboot

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news analysis

€1.5bn new fund closed€1.2bn exit proceeds€467m invested

Following our buy-out from Barclays in November 2011, Equistone Partners Europe has started life as an independent private equity company. Since then, we have closed a new €1.5bn fund and returned €1.2bn to investors as a result of six exits from earlier funds. We have also committed €467m in eight new investments across France, Germany and the UK. Today, with the emphasis on autonomy, transparency and sound governance, we will continue to source deals and build value with management teams in 2013.

Birmingham | London | Manchester | Munich | Paris | Zurich

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New lease of lifePark Hill recently hired an executive to focus specifically on helping GPs restructure older funds – a niche area that is becoming increasingly important, writes Christopher Witkowsky

restructurinG

There are a lot of funds and a lot of capital tied up in older vintages that are approaching the end of their lives

In February, Park Hill Group hired former Coller Capital executive Andrew Caspersen to focus on help-ing GPs restructure private equity funds that are at or approaching the end of their lives.

The hire wasn’t just big news for the firm; it also underscored a broader trend in the market of firms beefing up their fund restructuring capabilities.

More and more general partners have ageing funds that fall into this category – and this has created a large and growing opportunity. Fund of funds Pantheon estimates there are 250 funds that are at least 10 years old, with at least $100 million of net asset value remaining. All told, it reckons there could be up to $100 billion of overall net asset value in these end-of-life funds.

“There are a lot of funds and a lot of capital tied up in older vintages that are approaching the end of their lives or running through their exten-sions,” Caspersen tells Private Equity International. “They’re outliving their intended period and their LPs are looking for distributions as well as [to lower] their administrative burden, [so they’re] eager to wind those funds down.”

Park Hill, the placement agency and secondaries broker affiliate of The Blackstone Group, is not alone in dedicating resources to the strat-egy; most firms in this area have individuals or teams that explore potential fund restructurings.

Two deals last year outlined ways in which secondary firms could help restructure older funds. Landmark Partners, Vision Capital and PineB-ridge Investments helped structure a new fund to house three remain-ing portfolio companies from Willis Stein & Partners’ 2001 vintage third fund. And CPPIB anchored a deal that involved the formation of a new vehicle to house five portfolio companies from Behrman Capital’s 2000 vintage third fund.

These are not easy deals to do. LP cooperation is the key to suc-cess, and in both of those deals, some LPs expressed frustration at various aspects of the arrangements.

Of course, investors’ hands are usually tied – if they force the man-ager to liquidate the fund, they either lose assets at fire sale prices or end up with a bunch of shares in private companies that they don’t really want. And their only other option is to negotiate with the manager over

continued payment of management fees, or maybe even lowering the bar on preferred returns so that the manager still has a chance of hitting carried interest.

In these situations, a restructur-ing offers genuine hope of a way out. But finding consensus among frustrated investors who are out of patience with the GP in question is never easy.

The prospective secondary firm partner in a restructuring has to go in with eyes wide open, says Jason Gull, partner with fund of funds Adam Street Partners. “Often, but not always, there can be improprie-ties between the GP and the LP in the context of this restructuring – where the GP is looking to maintain a fee stream and business that would otherwise go away. In order to do so, they can be at odds with their existing LPs.”

Specialists who can consistently solve problems like this may be able to build a very lucrative line of busi-ness in the coming years. n

Gull: frustrated LPs

€1.5bn new fund closed€1.2bn exit proceeds€467m invested

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news analysis

The Alibaba showAlibaba’s tricky PE-led buyback of Yahoo! shares was China’s largest private deal ever – and the Chinese side delivered a stand-out performance before a global audience, writes Drew Wilson

FinancinG

We were executing five deals and all had to be coordinated with different parties with different interests in different jurisdictions

Last year, the Eurozone crisis inten-sified, China’s GDP growth slowed and the pumped up Facebook IPO deflated. Against that backdrop, rais-ing $7.6 billion in private capital for a Chinese internet business seemed like a big ask.

But Alibaba Group, China’s largest e-commerce company, did exactly that. Last September, it completed a private equity-driven $7.6 billion buyback of about half of Yahoo!’s 40 percent ownership stake.

The total deal actually involved $10 billion in transactions, and was composed of five distinct yet over-lapping parts, explains Alibaba’s CFO Joseph Tsai. The M&A component included a $2.5 billion take-private of Hong Kong-listed Alibaba.com (the B2B e-commerce subsidiary) in June 2012. Then there was the Yahoo! share buyback, which was being negotiated simultaneously.

Raising debt, convertible and equity tranches made up the other three parts of the deal. “Altogether we were executing five deals and all had to be coordinated with differ-ent parties with different interests in different jurisdictions,” Tsai says.

Alibaba wanted an investor group led by Chinese parties, so began talk-ing to private equity in early 2012. The group included CIC Interna-tional, Boyu Capital and CITIC

Capital, as well as CDB Capital, the equity investment arm of China Development Bank (existing inves-tors Silver Lake, Temasek and Digital Sky Technologies also participated).

“Part of the rationale for the buyback was to reduce the foreign shareholding and increase the level of shareholding by Chinese entities,” Tsai says. “The problem was, we had rounds of negotiations with Yahoo! the prior years and never really had a deal – but we couldn’t tell the PE guys we needed the capital until we had a deal locked up. So it was a chicken and egg problem.”

Concurrently, the company was moving to line up $2.5 billion from a consortium of banks to priva-tise its Hong Kong-listed subsidi-ary. (In Hong Kong, a take-private deal requires upfront capital com-mitments – unlike the US, where capital can be raised after the deal is announced).

Negotiating multiple financing sources came with complications. Some investors wanted special rights that were at odds with what other investors wanted, says Ali-baba’s general counsel Tim Steinert. In addition, the equity and convert-ible financing had to be piped into escrow in New York prior to the debt financing. Then it would all be released to Yahoo at one time.

“It was a complicated escrow structure because of the number and different types of investors,” Steinert says. “Among other things, different people had different views on what level of protection people paying in first should get as opposed to people paying in later.

The big lender was CDB, which provided $2 billion. “The practices of Chinese banks are different in a number of ways from what we’re used to with international com-mercial banks,” he says (although none of those differences could be considered show-stoppers).

The Chinese side, led by CIC, which was represented by Sullivan & Cromwell, and Boyu Capital, had “international class execution”, he adds.

The takeway from Alibaba’s financing feat is that Chinese inves-tors can execute large, complex international deals without major snags. This was the largest ever pri-vate financing for a private sector Chinese company, and it closed in roughly one year, which Steinert says is about standard for large M&A.

With founder Jack Ma due to step down as chief executive officer this year, rumours are rife that an IPO may be in the offing for the $40 billion-valued Alibaba. So stay tuned for the next installment of the show. n

Alibaba CEO Ma Yun: led $7.6bn buyback

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news analysis

A true reawakening?Prime minister Shinzo Abe’s radical $116tn stimulus package has injected some hope into Japan’s economy. But are private equity firms likely to reap the benefits? By Clare Burrows

JaPan stimulus

The stimulus package has made a huge difference

tamotsu adachi

Midwinter hasn’t been so bleak for private equity firms in Japan. In Janu-ary, three firms reported stellar exits in the country: Advantage Partners sold coffee shop franchise Komeda to MBK Partners for about $480 mil-lion, representing a 7x return on its 2008 investment, according to the firm; US-based Cerberus Capital reportedly sold its stake in Aozora Bank in a $1.7 billion deal; and small-cap firm J-STAR made 3x its money on the sale of clothing business Olive des Olive.

Japan’s economy has been in the doldrums for more than 20 years. GDP grew by a respectable 2.2 per-cent in 2012, but that was partly a rebound from the slump caused by the 2011 earthquake (which

hammered exports). The IMF is fore-casting growth of just 1.2 percent in 2012 – and with debts equivalent to 236 percent of GDP, the new govern-ment has limited wiggle room.

Nonetheless, newly-elected prime minister Shinzo Abe seems determined to do whatever it takes to spark some life into the country’s economy after two lost decades. And his radical $116 trillion stimulus package should actually aid private equity, according to Tamotsu Adachi, co-head and managing director of The Carlyle Group in Japan.

“The stimulus package has made a huge difference,” he says. “Stock prices have risen more than 15 per-cent since [it] was announced and so the comparable multiples of Japanese companies are much higher.”

Among the new measures is a monetary easing policy targeting a 2 percent interest rate, which has depreciated the yen, Adachi explained. “This is having a positive impact, especially on export-related companies – the values of our exist-ing portfolio companies are rising and at the same time Japanese stock prices are rising quite a bit. That is [allowing] us to exit within a very favourable environment.”

Carlyle took full advantage by listing restaurant operator Chimney Co on the Tokyo Stock Exchange in December, an IPO that it had delayed twice before.

Firms in Japan are bullish about investment opportunities too. In April, a law implemented after the 2011 earthquake, which required banks to extend the loans

of small- and medium-sized enter-prises, will expire. “There should be some subset of these companies that … will need to look to alternative financing, which could lead to private equity opportunities,” says Richard Folsom, co-founder and representa-tive partner of Advantage Partners (although most of these companies will be too small to interest Japan’s larger private equity groups).

Another opportunity lies in the ongoing restructuring of Japanese corporations that have struggled to compete with the growing dominance of international rivals such as Apple or South Korea’s Samsung – something the government is encouraging.

Advantage Partners will be one beneficiary: it is closing a deal to acquire the SANYO digital camera business from Panasonic for an undisclosed sum. “Panasonic, SANYO, Sharp, Fujistu and all the companies in that space have all been going through their own struggles. As a result, certain businesses are being divested and consolidated and some of that will come to private equity,” Folsom explains.

He expects the trend to continue, creating buyout opportunities worth around $500 million to $1 billion.

Although many of the new mon-etary and fiscal policies are yet to take effect, David Gross-Loh, man-aging director at Bain Capital Japan, says people are optimistic. “The [new government] had a clear enough win and made a strong enough statement about what they are going to do that people are assuming [the proposals] will translate into policy.” n

Abe: stimulating Japan’s ailing PE industry


Slower, but smarterChina’s slowing GDP growth is squeezing retailers’ profit margins. But certain subsectors are handling the change better than others – and private equity is keen to take advantage. Michelle Phillips reports

retail in china

The middle market is seen as high-quality goods, but within reach of the middle class

Derek sulger

Retail has been one of the sectors most obviously affected by the slow-down in China.

Although revenue and profit have both doubled in three years, accord-ing to Thomson Reuters figures, it has become increasingly difficult to maintain margin growth. UBS found that 45 percent of Chinese retailers surveyed fell more than 5 percent short of expected earnings in the first half 2012. And all of the large retail chains have revised growth plans to focus on profitability, according to William Shen, head of Greater China at Headland Capital Partners.

Shen says that retailers can no longer rely solely on China’s growth story. “It used to be that you open a store, and people would come – that’s no longer going to work,” he says.

But the slowdown hasn’t been bad news for everyone. As far as retailers are concerned, the salient statistic is not GDP growth but GDP per capita growth, explains Jie Gong,

Morgan Stanley Alternative Invest-ment Partners executive director. The average Chinese person now has more disposable income, and wants more than just the bare necessities. As such, certain subsectors of retail – like accessories, for example – have grown faster than those servicing basic needs.

An easy way to divide China’s $90 billion retail sector, according to Lunar Capital founding partner Derek Sulger, is by price range: high-end luxury, mid-market, and low-end generic goods. Slowing GDP growth is stifling both luxury and low-end sectors, since people are becoming more price-conscious and more suspicious of unbranded goods.

However, China’s mid-market sector is growing by an average of about 18 percent, Sulger says. “The middle market is seen as high-quality goods, but within reach of the middle class.” Some of Lunar Capital’s mid-market investments

have seen growth of more than 40 percent, he adds.

“Our challenge now is to con-vince our companies to stop wor-rying about growing so fast, and start growing smarter,” Sulger says.

Slowing growth has brought inefficiencies to the fore, explains Headland’s Shen. Given rising labour and rent costs, operational changes based on a long-term sales strategy become vital.

Hao Capital partner Elaine Wong believes private equity firms will also have to be more “creative” with business models. Changing furniture retailer Ju Tai Long to a directly-owned model from a fran-chise, for example, helped Hao grow the business from RMB 20 million (€2.5 million; $3.2 million) in sales to RMB 1 billion in just five years.

“Even the best companies have much room for improvement,” adds Gong. “Once they hit a certain scale, the founders see where the bottle-necks are, and most often know that they cannot solve the problems alone.”

Retailers are especially looking for private equity investors with extensive knowledge of the sector or experience solving specific prob-lems, Gong says. So the sector will not be open to any private equity firm – only those with strong links to the industry, she believes.

Nonetheless, both Shen and Wong insist they would still make another retail investment in China. Shen forecasts double-digit growth for the retail sector overall for the next few years, an opportunity few markets in the world can rival.

“The key,” he says, “is to find those companies that can outgrow the overall market growth.” n

news analysis

ProFit squeeZe

Source: Thomson Reuters

Retail profit slows in line with the economyYeAR ReVenue (RMB) PROfiT (RMB) PROfiT As A % Of ReVenue

2008 239bn 8.4bn 3.5

2009 299bn 10.7bn 3.6

2010 395bn 14.6bn 3.7

2011 533bn 17.3bn 3.2

Q1–Q3 2012 450bn 11.4bn 2.5


news analysis

The weakest linkFindus’s implication in the UK horse meat scandal has illustrated how damaging supply chain issues can be to a portfolio company’s performance and reputation. But to what extent can GPs mitigate these risks, asks Yolanda Bobeldijk?

risk manaGement

For most GPs, it’s a nightmare sce-nario: a portfolio company gets dragged into a burgeoning national scandal, with all the inevitable negative headlines and reputational damage that entails.

UK firm Lion Capital experi-enced this first-hand in February when Findus Group, a frozen food company in which Lion holds a 33 percent stake, was found to be sell-ing beef lasagne made out of horse meat (several big food retailers have had similar problems). Although there was no evidence of the prod-ucts putting consumers’ health at risk (tests ordered by the Food Standard Agency found no signs of the veteri-nary drug phenylbutazone), the howls of customer outrage suggest the brand damage could be substantial.

At press time, it still wasn’t clear exactly what went wrong at Findus; there has been some suggestion of foul play. (PEI asked Lion to contribute to this article, but the firm chose to go down the time-honoured PR route of declining to be interviewed).

Either way, however, it highlights the huge risks that complex supply chains can pose.

Usually, thorough checks are made during pre-investment due diligence. But that in itself is not enough, says

Mike Lander, founding director of Profitflo, a consultancy that special-ises in procurement. “What you need is reassurance throughout the invest-ment cycle that what you found in due diligence is still the case.”

That’s particularly true since most firms are rushed during the due diligence stage, according to Mark Simmons, managing partner at Argon Operation. “When there is a tiered supply chain, there should be a cascading of responsibility through the supply chain enforced through contracts and through processes [post-investment],” he said.

If anything, the macroeconomic climate has increased supply chain risk in recent years. “It’s logical that in the current climate, people are driv-ing to preserve their margins as best they can,” says Jon Gatfield, a senior director with Alvarez & Marsal. “But that increases the risk. And you have to compensate for that risk by being more diligent with your quality sys-tems – almost intrusive – to check those risks are being managed.”

Switching to cheaper suppliers abroad can be a false economy, says Simmons. “[PE houses] like the sav-ings ... but there’s a cost and effort to manage a global supply chain. You need to ensure that you are managing your

suppliers formally and informally. You need to visit them and audit them.”

Lander says his firm often advises clients to put a ‘change of control’ clause into suppliers’ contracts. “If a supplier company is bought by a third party, then the customer has the right to terminate the agree-ment. You wouldn’t want the supply chain being bought by companies that you saw as a competitor, or potentially increased the risk of supply chain failure.”

Firms will often have a partner on the board of the company who can flag up potential issues on a risk register, which is typically reviewed quarterly against a number of pos-sible scenarios. “For instance, could horse meat end up in the supply chain? You would then ensure that management give you confidence that the risks have been identified [and that] a mitigation strategy created in case it does happen,” says Lander. The trouble is, he admits, such risk registers “can often take second place to the urgent issues of the day”.

Leadership is key when it comes to risk management, according to Simmons. “Often in private equity, if

Lasagne: Findus caught on the hoof

(£241m)Findus’s operating loss in 2011, Lion’s last full year as its majority owner

100%The proportion of horsemeat in some of the lasagne recalled by Findus


Listing badly3i continues to shed staff and sell assets, and has given up on the idea of raising another buyout fund any time soon. These are anxious times for one of the UK’s oldest and best-known private equity groups, writes Yolanda Bobeldijk

PerFormance

People are driving to preserve their margins as best they can. But that increases the risk

Jon Gatfield

In February, 3i Group sold Cana-dian manufacturer Mold-Masters to trade buyer Milacron for CAD$ 975m (£615 million), netting the UK-listed firm a respectable 2.6x return.

Most firms would be happy with that in the current climate. But particularly 3i. Last year, according to its recent results, its realisation proceeds for the nine months to 31 December 2012 fell to £210 mil-lion, down from £741 million in the same period the previous year. Mean-while, as new chief executive Simon Borrows cut headcount by a third and closed a number of offices, its

investment activity totalled just £93 million, down from £366 million the previous year. (Not surprisingly, the firm had fewer resources available to work on deals.)

In the interim statement, Bor-rows insisted that 3i would be much more active in the coming months “with a number of key realisations as well as an increasing level of invest-ment activity”.

But while the Mold-Masters deal suggests the first part of his strategy is bearing fruit, the second will be more difficult. It can’t invest from its current funds, because they’re all past their investment deadlines. And

Borrows admits that he doesn’t see 3i raising a pan-European buyout fund again “for several years”.

The firm is making noises about investing from its balance sheet, or even trying to focus on managed accounts (which could tap into its strengths in infrastructure and debt). It’s also talking about raising a $500 million Brazil-focused fund, to target mid-market companies in the con-sumer and business services sector. But with its most recent buyout fund – Eurofund V, a €5 billion 2006 vin-tage – currently valued below cost, according to LP sources, it remains to be seen what investor appetite will be for any of this.

Clearly something has to give – and the success of its current realisation drive will undoubtedly be critical to 3i’s long-term survival prospects. Here’s hoping it has a few more Mold-Masters up its sleeve. n

Borrows: taking out cost

news analysis

you buy a company with the inten-tion to sell it, the focus is more on the turnaround of the business rather than leading from a cultural stand-point. Large food corporations, whose core business is food, have a culture of zero tolerance to compromising quality, from the top down. I think private equity firms can do more [to limit risks]. With their influence and their board positions, they can have a stronger influence on reduction of supply chain risks,” he argues.

But how do you exercise influence if you’re only a minority stakeholder?

Lion has been quick to brief that it is no longer the majority owner of Findus, while founder Lyndon Lea admitted in a recent interview with Sky News that he doesn’t sit on the Findus board.

Keeping an eye on things can be “pretty hard”, says Lander. “The best way of monitoring things is to raise issues with the board and to require operational data and risk assessments on a quarterly basis,” he says.

Of course, however many safe-guards a company has in place, it can never be completely safe. “Things

will always go wrong; you can’t miti-gate for every risk,” Lander admits.

And the good news is that most GPs are now pretty clued up about the importance of risk manage-ment, according to Gatfield. For those that aren’t, the Findus situa-tion is likely to serve as a very clear wake-up call – proof that invest-ing in risk management is never an unnecessary cost. “I think a lot of businesses and private equity owners are [now] really making sure that their processes and systems are robust,” he says. n


news analysis

Giddens: no trade-off required

Building BridgesIn the 10 years since the launch of Bridges Ventures, the UK group has witnessed a sea change in the way LPs think about social investment, writes James Taylor

If you select a business that has part of the solution to a difficult social challenge, you can find some really special growth opportunities

Last year, Bridges Ventures, the UK-based social investment group founded by Sir Ronald Cohen, celebrated its 10th birthday. And to commemorate this milestone, in February this year it released a report looking back at how the firm – and the sector in which it oper-ates – has changed over the course of the last decade.

When Bridges started raising its first fund, in 2002, the idea was a tough sell, admits co-founder Michele Giddens. “When we started talking about investing for positive social impact as well as financial returns, the honest truth is there was a lot of scepticism,” she tells PEI. “It’s a reflection of the era – back then there was very little talk about the environmental or social aspects of investment. Those that were bold enough to come in were really buck-ing the trend; it was almost a leap of faith.”

As Giddens freely admits, the fund probably wouldn’t have got away had it not been for a £20 million cornerstone investment from the UK government – which reduced the risk and enhanced the potential upside for other investors.

These days, however, Bridges doesn’t need to be propped up by public money: the bulk of the money in its latest Sustainable Growth fund

(its third) comes from institutional investors. So what’s changed, exactly?

Three things, according to Gid-dens. “First, Bridges has a track record; it’s no longer a leap of faith.” As such, she argues, it’s now clear that there doesn’t have to be a trade-off between social and financial returns; in fact, if a business is solving a big social problem, the reverse may be true. “By Fund III, we realised that if you select a business that has part of the solution to a difficult social challenge, you can find some really special growth opportunities. And these days, in this economy, growth opportunities are what investors are looking for.”

The third key point is that inves-tors have started to take social, envi-ronmental and governance risks far more seriously. “Today many inves-tors agree that at the very least you need to be aware of these factors to mitigate risk,” says Giddens. “And the more enlightened are interested in how it might create opportunities.”

Politicians are also increasingly interested in this area, particularly in the UK: the government recently launched the first social investment bank (Big Society Capital) and is experimenting with social impact bonds.

So what’s next? Giddens believes social investment is still

capital-constrained. How do firms like Bridges persuade investors to commit more capital to this space in the next decade?

Time will help, says Giddens. “There are a huge number of impact-orientated fund managers now, but Bridges is one of the oldest. It takes time to build up a track record.”

But it’s also about education. One complication is that ‘impact invest-ing’ is also used to refer to funds that do actually make a trade-off between impact and financial returns (like Bridges’ own Social Entrepreneurs Fund). “That creates the danger that people misunderstand the term impact as [implying] a trade-off – which is definitely not the case for most of our investments. We have been able to show that social impact and financial returns can go hand in hand.”

One thing’s for sure: in the cur-rent economic climate, with deficits ballooning, governments are going to need all the help they can get. n

social investinG


slowinG Down

Source: Silverfleet Capital / mergermarket

European buy-and-build activity has slowed down in the last two years

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42008 2009 2010 2011 2012

No.160

140

120

100

80

60

40

20

0

MacDougall: buy-and-builds down 30%

A second lookA report suggests secondary buyouts actually deliver better returns than primary deals, with less risk. But M&A activity is crucial – and that’s not easy at the moment, writes Matthieu Favas

Secondary buyouts don’t always get great press. The practice of GPs buying companies from each other – something that’s becoming increasingly common as managers come under pressure to put money to work – is sometimes referred to dismissively as “pass-the-parcel” buyouts.

Some LPs argue that it’s hard for managers to get a good deal this way. As Paul Newsome, executive direc-tor and head of private equity invest-ments at Unigestion, puts it: “Due to the competitive nature of the private equity market, attractively priced secondary buyouts with room for material upside coupled with lim-ited downside are a rarity.”

Which is why the results of a new study by the Boston Consult-ing Group are interesting. The con-sultancy compared returns from a sample of 225 European private equity deals, and concluded that the median annual return on secondary transactions was actually higher than on primary deals – 24 percent com-pared to 20 percent. What’s more, these deals tended to be less risky, too.

The study also suggested that M&A was central to the success of a secondary deal. Within the sample set, the median return from secondary deals where there were add-on acquisitions was 25 percent

– compared with 15 percent when there was not.

This is not surprising, says Patrick Knechtli, partner at SL Capital Partners. As there may be less for secondary buyers to do in terms of ‘easy fixes’ or professionalisation, he argues, buy-and-build will often be part of their strategy to grow a business.

Helen Steers, head of European primary investment at Pantheon, agrees. “The downside of secondar-ies is that they can be businesses that are ‘too well run’, the ‘low-hanging fruit’ having been picked long ago.” Expanding the business through bolt-on acquisitions, as part of a broader transformation strategy, may therefore be the easiest way to take them to the next level, she suggests.

Pantheon is a big believer in “transformational” secondaries – for example where a larger pan-regional fund buys a business from a smaller GP and is able to transform it through M&A and other activities; these deals outperform both primary deals and other types of secondaries, the firm reckons.

The trouble is that these buy-and-build strategies are not as easy to pull off as they used to be. According to a report by Silverfleet Capital, also released in February, the volume of European add-ons was down 30 per-cent last year compared to 2011 – with average disclosed value declin-ing in a similar proportion.

Nor is there any indication that things will get hugely better in 2013, argues Neil MacDougall, manag-ing partner at Silverfleet. “With the way the European economy is going, buyers aren’t really confident, and sellers aren’t as likely to get a great price.” In addition, he says, healthier stock markets will prob-ably bring more trade buyers into auction processes, making good deals harder to find.

It’s easy to see how secondary deals might provide a better plat-form for buy-and-build strategies: since the supporting infrastructure is likely to be already in place, the new owner can come in and start doing add-ons from day one. How-ever, the fact is that the current climate is not terribly conducive to a buy-and-build strategy, as the Sil-verfleet figures show. GPs will keep doing secondary deals in the next few years, in part because they’ll have to. But they probably won’t be able to rely solely on M&A to create value. n

news analysis

seconDary Deals


news analysis

In search of green shootsThe after-effects of the Arab Spring continue to dampen private equity activity in North Africa – but local GPs tell Matthieu Favas the region will soon become a much more fertile hunting ground for deals

The funda-mentals for investing in North Africa have not changed ... When the time comes to exit in-vestments, I wouldn’t be surprised to see the economy grow at three to five percent

More than two years after a series of revolutions brought abrupt political change to the Maghreb, the region is still reeling. On February 6th, the killing of Chokri Belaid, a Tunisian opposition leader, unleashed a wave of violent protests across the coun-try. That followed a week during which Egypt’s army chief, amid renewed civil unrest, warned of the state’s possible ‘collapse’. Meanwhile, Libya remains mired in security issues, Algeria is dealing with the aftermath of a bloody hostage crisis, and Morocco watches anxiously in the wings.

All this turmoil has inevitably taken its toll on buyout activity in the region. According to Dealogic, the value of North African private equity deals stood at $755 million last year – well below the $1 billion total in 2011, and barely more than half the $1.4 billion figure for 2010. “The financial crisis has had a sobering effect on investment in North Africa. But the revolutions, and the political

turbulence that ensued, have had a much more negative impact,” says Chris Sioufi, a partner at Dechert.

Yet there are a few signs that North African private equity is – timidly – starting to find its feet again. A number of local GPs are cur-rently raising funds with heightened expectations: Mediterrània Capital, a Maghreb-focused Spanish fund, is aiming for €150 million (more than double its previous vehicle); Tuninvest-Africinvest Group, which operates in Morocco and Tunisia, is raising its biggest-ever fund with a target of €200 million; and Egypt’s first sovereign-backed buyout vehi-cle, Bedaya I, reached a final close in January.

Perhaps even more notable, how-ever, has been the recent arrival of the European Bank for Reconstruction and Development – an institution with no previous experience of the region. Better-known for being the largest private equity investor in the CEE and Central Asia, the bank made

its first foray in the Southern Medi-terranean last year, through a €20 million commitment to Tuninvest’s Maghreb Private Equity Fund III.

lonG term Play

Such moves are arguably a recog-nition of the fact that – notwith-standing the increased instability in the short term – the Arab Spring is helping to create a fertile ground for private equity in the Maghreb in the longer term.

In the first instance, says Anis Fathallah, a senior partner at Tunin-vest, buyout firms should see oppor-tunities arising in the many sectors previously protected from competi-tion by the ruling powers. “Interfer-ence and rent-seeking by the state meant that around two percent of growth disappeared every year – something the economy should soon be able to recoup.” In addition, he argues, most countries are now much more inclined to seek regional integration than they were under the

north aFrica

Tunisia: new port of call for private equity?


news analysis

old regimes – which should, in the long run, offer big expansion pros-pects for portfolio companies.

In the meantime, observes Medi-terrànnia managing partner Albert Asina, competition is low and valu-ations are attractive – with a huge potential for upside in years to come. “The fundamentals for investing in North Africa have not changed: an explosive growth in demographics – more than 50 percent of the popula-tion is below 25 years old – and huge growth of the middle classes. In five to six years, when the time comes to exit investments, I wouldn’t be surprised to see the economy grow-ing at three to five percent.”

And it’s not only incumbent GPs that see enhanced prospects in the region. Meltem Ankara, a senior banker at the EBRD, says that in-house investment arms of regional banks, aware of their new potential to attract ‘real’ LPs, are increasingly tempted to spin out from their parent groups.

Equally, GPs in nearby markets will soon be looking at the region with renewed interest, she argues. “Turkey has been actively diversi-fying its export destinations and the European crisis has further prompted companies from Turkey to look for growth elsewhere, so we’ve seen them very active at

building trade links with MENA. And as companies trade more with the region, and the GPs also start learning more about these markets, then perhaps they are going to be expanding there.”

a harD sell

One crucial group of stakehold-ers, however, still needs convinc-ing: potential LPs. “Private equity fundraising is getting bigger across emerging markets. But the MENA region is still a bit of a hard sell. International investors remain very focused on the political situation,” says Marwan Al-Turki, a partner at Debevoise & Plimpton.

Equally, explains Asina, local LPs are bound by restrictions on where they can deploy their cash. “Central banks are more concerned by how much foreign currency is getting out of the country than how good the dividends will be when the money comes back. So they prevent local investors from putting money in regional funds.”

Most GPs, as a consequence, have to rely on DFIs as their main – and often only – backers. Luckily, says Asina, their involvement has great potential to bring about change: as well as providing firms with the bulk of the capital they need, they can bring good governance and structure to local teams, as well as lobbying governments for more PE-friendly legislation. They could even help create funds of funds dedicated to the region, he says, to open addi-tional channels of capital.

But their most valuable contri-bution may be to convince other

FroZen Deals

Source: Dealogic

Buyout activity has slumped since 2010 2010 2011 2012

Total value 1353 1042 755

Total number 10 3 11

LPs to invest in the region, says Anne Fossemalle, director of equity funds at the EBRD. “It’s part of our role, when we talk to other inves-tors, to say ‘are you looking at North Africa? There’s a fund manager there’. Even if they don’t make an investment decision straight away, this puts the GP on their map – so that in five years time, when politi-cal uncertainty has receded and the GP raises its next fund, they can decide to invest.”

She admits that building a self-sustaining private equity industry will be a long-term play. Even if investors can be persuaded to have a closer look at the North African market, she says, they may balk at the lack of scalable acquisition tar-gets: the bulk of PE opportunities lie in the small and medium company space, typically below $5 million. Targets for larger buyouts, needed to attract the largest LPs and GPs, remain scarce and expensive.

But that’s precisely where the support provided by DFIs will eventually prove the most impactful, according to Hossam Abou Moussa, a director at Actis. “Financial inves-tors investing in smaller transactions help introduce proper governance and develop quality management teams, creating opportunities for larger investors. So they generate the dealflow for us, and we provide them with the exits.”

It will be some time before the Arab Spring is followed by an Indian summer for private equity. But those willing to play the long game are likely to be rewarded handsomely for their patience. n

Fossemalle: beating the drum for North Africa


TrimCo in 2005 was a small Hong Kong-based supplier of care-and-content labels to apparel brands that manufactured in Southern China. It was a 30-year-old, family-owned shop that had reached a plateau – just the kind of busi-ness that appeals to Navis Capital Partners, a small-cap buyout firm based in Malaysia.

TrimCo was well-run by the founder, explains Bruno Seghin, senior partner at Navis. Cash flow was steady, but revenue growth and margins were little more than flat despite the surge of garment manufac-turers setting up in China.

In 2005, Navis bought a majority stake in TrimCo for an equity cost of $11.1 million. During a seven-year holding period, top-line revenue grew 3.1x and EBITDA grew 3.3x. The firm divested TrimCo in 2012 in a sale to Partners Group, reporting a 10x exit.

The exit result came in part from buying well, Seghin says. But the critical ingredi-ent was the relationship between TrimCo’s founder and Navis.

“Some founders say they agree with you, but inside they do not agree,” Seghin says. “But with TrimCo it worked perfectly. She saw we could help the business. We could find people, make acquisitions, talk to banks, things she didn’t do before.”

He believes the key to operational change is the receptivity of the entrepre-neur. “We could give the best of ourselves because we felt that what we were doing was being recognised and we could add value. Then it becomes a virtuous circle.”

So what value did Navis add, exactly?

1exPanDinG out oF honG

konG

The small care-and-content tag attached to clothes and sport shoes

may seem trifling, but it actually helps to regu-late the entire global garment industry. The tag, which is more difficult to copy than the garment itself, verifies product authenticity.

Tags are produced by TrimCo for brand name clients in specific numbers that match a spe-cific apparel production run. One tag goes to one item, giving the brand some control over outsourced production.

The trouble was, TrimCo was manufac-turing only in Hong Kong and shipping to Southern China factories – while garment manufacturing was popping up all over Asia. Navis, which is well-established in South-east Asia, did some research to help identify the most relevant locations. It ended up bringing TrimCo into Thailand, Singapore, Malaysia, India and China, using its local channels to identify acquisition targets and recruit employees. As a result, employee numbers went from 83 in 2005 to 288 in 2011. Production output also grew by 1.62x during the same period.

2brinGinG in a seconD tier

oF manaGement

Like most family-owned busi-nesses in Asia, TrimCo had no

second line management. In order to grow, particularly in the new markets it was entering, the business required profes-sionals in key positions.

Navis brought in a chief financial officer and worked with her (all of TrimCo’s man-agement are women) on developing a finan-cial control system to track KPIs, explains Agnes Lee, Navis’ investment director. Pre-viously, TrimCo had an external accountant and the company looked only at total sales and profits. The financial control system Navis introduced looked at product type and profit by region, which helped support board-level decisions, Lee says.

A marketing manager was also recruited to review how to improve service offerings to clients and sell to new markets. “TrimCo had a good margin and a good product, and we believed there must be more clients who liked what they do,” Seghin says.

Deal mechanic unDer the bonnet oF a recent Deal

Tag teamnavis caPital Partners/trimco

Over a seven-year period, Navis’ operational work with TrimCo grew EBITDA by 3.3x and helped turn a small family-owned labelling business into a global player – resulting in a 10x return. Drew Wilson reports

Seghin: aligning with the founder

TrimCo had a good margin and a good product, and we believed there

must be more clients who liked what they do


Deal mechanic

Private equity’s role in recruiting manage-ment is crucial – but tricky, he explains. “The chemistry between new people and a com-pany that has been running its own way for 30 years has to click in the first two minutes of the interview. It can be frustrating sometimes. You can introduce very good quality people, but the meeting goes badly and you have no recourse. We know there is no point to insist. We have to accept that the entrepreneur is very instinctive and thinks very quickly based on experience. We are the opposite.”

Management retention is also important, adds Lee. Both the CFO and marketing man-ager were put on incentive programs linked to performance targets, and as a result both women have stayed on at TrimCo.

3imProvinG service via

technoloGy

TrimCo manufactures millions of tags per day, which go to dozens

of different orders. At the same time, labels are becoming more complex. One mistake on the label and the shipment is blocked at customs, raising TrimCo’s costs.

Navis saw that mistakes sometimes came from the tag ordering process, which was manual and clumsy. Customers would look at various websites for the constantly changing labelling regulations required by each desti-nation country, then download the informa-tion and email it to TrimCo.

The founder had an idea to make the ordering process more efficient through technology, but plans were not concrete and management was hesitant. Discussions with Navis led to the idea of implementing an information management system that centralised and simplified the whole supply chain, from order to delivery, including tracking. On this project, Navis acted as a supportive partner, encouraging manage-ment to realise the idea and backing them with expertise as needed.

“Most entrepreneurs are risk-averse when we first meet them because all their eggs are in one basket,” Seghin says. “After Navis buys a controlling stake, they are able to de-risk and try new things because less is at stake – and they are not alone. That’s what we’ve brought, rather than the specific technical expertise.”

The IT system was the first in the label industry and it shored up TrimCo’s competi-tive advantage, Seghin believes. Big competi-tors were slow to do the same because only a small portion of their business was garment labels – while the small players competed on cost, not service. The IT platform was part of the reason some large brand name garment makers became TrimCo clients.

“We took the business away from the big guys,” he says.

4builDinG a PlatForm For

Growth in euroPe

In April 2012, as Navis was about to exit TrimCo in a secondary sale

to Partners Group, it closed the acquisition

of a large UK-based label manufacturer it had been talking to for two years. On exit, Partners bought the company together with TrimCo.

The add-on acquisition brought TrimCo a presence in the UK, Turkey, Romania and Bangladesh – key garment manufacturing markets. In addition, the integration will bring the UK manufacturer significant cost structure savings by using TrimCo’s Asia-based manufacturing, Seghin says.

Navis had already done full due diligence on the UK manufacturer, so Lee provided the buyer with a detailed integration plan that laid out the growth strategy.

“The UK target was totally complemen-tary to TrimCo and gave the buyer reserve growth for the coming 2-3 years,” Seghin says.

The double acquisition increased the potential for problems. But Seghin says Navis was able to complete them together because it had built trust with the seller, which the Navis team had been in talks with, and the buyer, having worked with Partners Group for many years. n

TrimCo: boosted production by 1.62x under Navis’s ownership


Privately sPeakinG

Seated at a small conference table 11 miles southeast of the art galleries and cafes that line Santa Fe’s downtown – past the vacant motels, the McDonalds and the Jiffy Lube – Vince Smith, deputy state investment officer of the New Mexico State Invest-ment Council, is angry.

Smith is angry because he believes his predecessors in the state investment office abandoned their sacred fiduciary duty to a state that is thousands of miles away – literally and figuratively – from the economic advantages that benefit financial hubs like New York and Los Angeles.

But behind that anger, there is pride. “I was just reading stories [about New

Mexico], and I couldn’t stand it; so I threw in,” says Smith, who speaks with a calm drawl. “When I was in college, I specifi-cally [focused] on public fund manage-ment. Fixing things that are broke is what I like to do.”

The New Mexico State Investment Council certainly was ‘broke’ when it hired Smith and his boss Steven Moise in 2010, shortly after the 2009 discov-ery of a massive pay-to-play scandal that had torpedoed the $16.6 billion public

endowment’s credibility (for more on the scandal, see p. 32).

With public confidence at a low ebb, the duo knew that fixing the NMSIC – which manages assets from the Land Grant and Severance Tax Funds along with the invest-ments of 17 other government clients – would require a full-bore effort from staff, advisors and the state legislature.

That effort entailed dramatic changes to the Council’s investment programme, internal governance policies and fund manager contracts. Importantly, it also restored a culture of ethics, something PH

OTO

GR

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Y B

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SIG

HT

FOTO

, In

c.

The FixersOnly a few short years after it was torn apart by a pay-to-play scandal, the New Mexico State Investment Council has re-established itself as one of the most important limited partners in the industry, delivering top quartile returns. Sam Sutton meets state investment officer Steven Moise and deputy Vince Smith to find out how they turned things around

››



that had apparently been lacking during the pay-to-play years.

Less than three years later, the NMSIC’s flagship Land Grant Permanent Fund gen-erated a 14.45 percent return for 2012, placing it in the top 15 percent in the coun-try among public funds with $1 billion or greater, according to Wilshire Associates.

“We moved extremely quickly. I’ve done this [for] 26 years, and public funds don’t move like this,” says Smith. “We’ve done in two, two and a half years what most plans might take five or 10 years to do. Hundred percent turnover in managers, almost 100 percent turnover in consultants; that stuff just doesn’t move that quickly.”

the new brooms

Back in 2009, the NMSIC was in crisis. Its private equity advisor – Saul Meyer-

led Aldus Equity Partners – had been implicated in New York State Common Retirement Fund’s pay-to-play scandal. And it quickly became clear that Meyer had perpetrated a similar scheme in New Mexico – allegedly in collusion with state investment officer Gary Bland and certain other ‘politically-connected individuals’ (NB. Bland has denied all the charges and last year launched a counter-claim against NMSIC for damages).

“The main problem that the old SIC had was a concentration of power, where you had one individual or two individuals – one of those being the governor, who appointed the state investment officer – who had the abil-ity to call the shots and … to push through investments if they wanted to,” says long-time NMSIC spokesperson Charles Wollman.

According to court documents, Bland, Meyer and longtime Richardson advisor Anthony Correra allegedly used that abil-ity to direct commitments to funds that had hired Correra’s son Marc and other political associates as placement agents, even though many of those individuals had nothing to do with the commitment process.

››

Privately sPeakinG


Privately sPeakinG

In the belief that concentration of power had exposed NMSIC to abuse, New Mex-ico’s State Legislature took one of the first steps towards reform by reconstituting the Council and granting it the authority to appoint its own state investment officer.

After Bland resigned in 2009, the NMSIC found a permanent replacement in Steven Moise, formerly of New Mexican law firm Sutin, Thayer & Brown. At the time of his appointment, he held a seat on the state’s board of finance.

Although he has experience in merchant banking, Moise does not have the sort of investment background one would expect from the head of a $16.6 billion permanent endowment.

“They called me and asked me whether I would do this [and] I had no interest. I had no idea that it was anything I’d ever do,” says Moise. “I thought about it for a couple weeks, visited with my wife about it and said, ‘You know, I’ve never really made a contribution to public service in New Mexico and I think this would be a nice way to do it’.”

Moise believes that his abilities as a man-ager and attorney made him an intriguing candidate for the position. The state invest-ment officer’s responsibilities demanded familiarity with state laws and institutions, since the necessary institutional and cultural reforms would require the NMSIC to engage with the Legislature on a regular basis.

The first step was to introduce a code of ethics and mission value statement, which reasserts the staff’s duties as fiduciaries and caretakers of the permanent funds.

“It’s signed once a year to remind them that this is important to us,” Moise says. “We needed to develop a better culture in the office that emphasised excellent investment performance, reasonable risk and achieving both ethically and professionally.”

Along with trying to improve NMSIC’s culture, Moise also set about instituting some of the reforms suggested by fiduciary

consulting firm EnnisKnupp, which had been brought in to examine NMSIC’s gov-ernance policies and practices. The firm’s final report returned 82 recommendations, many of which – such as “explicitly state in contracts that consultants work for the Council” and “develop and adopt a Council charter” – were deemed high priority.

Several of EnnisKnupp’s recommenda-tions focused on the level of power the state investment officer wielded over the invest-ment process.

Moise insists he only took the position on the condition that he would have less authority than Bland, under whom the role had been “way too sweeping, way too broad”, according to Moise.

For example, it effectively included all due diligence on private equity investments. “From what I’ve seen, it was Gary [Bland] and Aldus [Equity Partners]. They had to go through our private equity investment committee – they had to get those invest-ments through there – but the diligence process at the staff level was really Aldus and Bland,” says Smith.

In its report, EnnisKnupp found that the NMSIC was “limited” in the following due diligence best practices: track record review; internal rate of return calculation; benchmark IRRs, multiples and distribu-tions and independent analysis of perform-ance by strategy.

The lack of adequate due diligence proved to be problematic. However, it also may have been exacerbated by inadequate governance practices and an under-involved Council.

“The Council has approved, but not actively participated in certain critical policy-making and monitoring functions. Two exam-ples are asset allocation, and the approval of the due diligence process and criteria to be used for manager selection and retention,” the EnnisKnupp report suggested.

Furthermore, although private equity commitments had to pass through an advi-sory committee (separate from standard ››

“There was no investment

committee, there was no audit committee, there was no governance committee ... So we have now put in place a governance structure that has several levels”steven moise


investment committees), the NMSIC lacked many of the additional safeguards that are considered best practice for insti-tutional investors, it said.

“There was no investment committee, there was no audit committee, there was no governance committee,” says Moise. “So we have now put in place a governance struc-ture that has several levels … It’s a huge number of filters.”

hittinG reset on investments

The addition of those filters became even more important as the NMSIC undertook a drastic overhaul of its investment pro-gramme. This included firing all its invest-ment advisors, with the exception of Sun Mountain Capital, which manages NMSIC’s

$369 million in-state programme (the money NMSIC sets aside for local private equity and venture capital investments).

One of Moise’s conditions for step-ping in as state investment officer was the recruitment of “the best investment man-agement professional we could hire”, he says. Smith – who had been with the Kansas Public Employees Retirement System – was the NMSIC’s first choice.

“I was interviewed in-depth, and they really picked me apart,” says Smith. “Through that process, they made it very clear what the situation was. So I knew what was happening when I got here. And yeah, we came in with a plan.”

Before Moise, the state investment officer had managed Council governance

Privately sPeakinG

››

insiDe the Pay-to-Play scanDal

In 2009, staff at the New Mexico State Investment Council uncovered a ‘pay-to-play’ scheme – allegedly per-petrated by State Investment Officer Gary Bland, private equity advisor Saul Meyer, members of then-governor Bill Richardson’s inner circle and others – that facilitated the distribution of private equity placement agent fees to individuals who had nothing to do with the NMSIC’s commitment process, according to court documents.

The scheme is alleged to have started in 2003, when Richardson appointed Gary Bland to the role of the NMSIC’s top investment officer. The search com-mittee that had recommended Bland for the position included Anthony Correra – a long-time friend and advisor to Richard-son, according to court documents.

After Bland’s appointment, Correra is alleged to have established himself up as a “gatekeeper” of sorts to the NMSIC investment staff. He used that role to direct

Bland and Aldus Equity Part-ners founder Saul Meyer – at that time the NMSIC’s private equity advisor – to funnel pri-vate equity commitments to funds that had hired Anthony’s son Marc Correra and other politically connected individu-als as placement agents.

Meyer eventually plead guilty to participating in a similar pay-to-play scandal at the New York State Common Retirement Fund, though he avoided jail time at his December sen-tencing. In his allocution, Meyer admit-ted to similar wrongdoing in New Mexico (Bland, however, denies all charges and is counter-suing the NMSIC).

Meyer’s involvement in New York’s pay-to-play scandal proved to be a catalyst for NMSIC staff’s investigation into its own private equity programme, at which point it was determined that a similar scheme had been plotted through Santa Fe.

“We rapidly figured out we had issues in early ’09 when Aldus, who was our private

equity advisor at the time, got mentioned as part of the – in relation to – the arrest of Hank Morris and a couple of other indi-viduals in New York,” says Wollman.

NMSIC staff responded by collecting information from their fund managers to determine what funds may have delivered fees to Correra or other illegitimate place-ment agents. According to New Mexico, Correra was listed as a placement agent on funds managed by Fenway Partners, Vicente Capital and Trilantic Capital Partners, among others. However, it is unclear whether any of the GPs were aware of the nature of Cor-rera’s relationship to the NMSIC.

New Mexico has sued placement agents found to be involved with the scan-dal, in an effort to recover placement fees, and also to ascertain whether there was knowledge of impropriety on the part of the GPs, Wollman says.

The NMSIC’s efforts to recover fees distributed to illegitimate placement agents are ongoing through litigation. To date, there have been no criminal charges filed in relation to the scandal.

Meyer: plead guilty

We’ve done in two, two and a half years what

most plans might take five or ten years to dovince smith


Privately sPeakinG

issues along with the NMSIC portfolio. With Smith’s appointment as deputy state investment officer, the Council separated these responsibilities between the two positions.

“I could see the things that were most wrong with the portfolio, and I could see that Steve was fixing a lot of the things outside investments, [which let] me focus just on the investment process,” Smith says.

Beyond the governance issues brought to light by the pay-to-play scandal, investment performance had also suffered through the economic downturn: NMSIC’s total fund composite returns were below market medi-ans for public plans in both 2008 and 2009.

Smith attributes NMSIC’s struggling returns at the time of his appointment to three factors. First, New Mexico’s 8.5 percent return target had led to an equi-ties-heavy portfolio, which would only per-form in above average GDP growth and low-to-falling inflation. The second factor was the weak manager selection process (which had allowed pay-to-play to happen). Finally, approximately 40 percent of the total portfolio – namely fixed income and a large portion of the equity portfolio – was being managed in-house, which created a drain on resources.

After adjusting the overall return target to 7.5 percent and moving the NMSIC’s portfolio away from equity and in-house strategies, Smith turned his attention to the private equity portfolio, which had grown “pretty weedy”.

“In the private equity [portfolio], the goal is to reduce the number of relation-ships – we had around 80 or so relationships … across 120 or so funds. We’d like to halve both of those numbers,” he says. “That’ll take us years and years of course; the older managers sort of have to run off.”

Although the private equity portfo-lio had performed “OK” prior to Smith’s arrival – it underperformed against the 80/20 Cambridge PE Index by 1.15 ››


Privately sPeakinG

percent in 2009 – the manager selec-tion process under Bland had clearly been lacking. Commitment sizes tended to fall in the $25 million to $30 million range, with commitments granted seemingly every month, according to Wollman.

Under Smith, the NMSIC has made larger commitments to a smaller number of managers – while retaining its 10 per-cent allocation to the asset class. The 2013 private equity plan calls for $350 million to $450 million in commitments across six to eight managers, which would equate to approximately $44 million to $75 million per commitment, according to documents. That total would be similar to the $450 million New Mexico committed last year across six managers.

Recently, the Council has focused its com-mitments on funds with ties to the energy industry, picking vehicles managed by Pine Brook Partners, EnCap Investments, Riv-erstone Holdings and Natural Gas Partners.

“We’re less fund-specific than strategy-specific, so we’re looking at strategies that we think are going to be long run winners,”

says Smith. “We’ve been starting to look in Europe; we just committed to the Nordic fund [Nordic Capital Fund VIII, which will invest in the Nordic and German-speaking countries]. Of course, that’s the place in Europe right now, the German-speaking countries. We’re getting our toe in the water that way.”

touGheninG uP

The high standards New Mexico has applied to its governance policy are also evident in the improvements it has made to its invest-ment processes – which now demands greater transparency both from GPs and the Council itself.

One of EnnisKnupp’s key recommen-dations was that Council members should receive a more structured education on alternative asset classes, along with annual fiduciary training.

As a result, GPs who walk into Coun-cil meetings these days can expect to get “grilled”, says Smith. “We’ve had GPs walk out the door and say, ‘Wow, those guys are engaged’,” he adds.

A tougher board has also led to a tougher transparency and disclosure regime for pri-vate equity general partners. “We believe we are as strict or more strict than most states,” says Moise.

However, despite the board getting more strict, one NMSIC GP told Private Equity International that the new transparency policy is much clearer than those offered by many states, where the guidelines on what information GPs need to provide tend to be less specific.

“There have been a set of changes that have been made to the transparency dis-closure statement to … help capture any placement agent usage – in order to assure transparency about who the placement agents are, whether they’re credentialed and [whether] they work for credible firms,” adds Brian Birk of Sun Mountain Capital.

Although the new requirements have contributed to a lengthier due diligence process, Birk does not view this as a hin-drance to fund managers seeking a com-mitment from the Council.

“It really doesn’t add much cost. Our belief is that New Mexico is one of the groups that is leading reform in this area, and we’re going to see this sort of report-ing become standard across every public limited partner in the US.”

Of course, most public limited partners in the US haven’t had to go through what New Mexico did. The NMSIC demands greater transparency from its fund man-agers because it has to – and the Council recognises that the citizens of New Mexico demand similar clarity and transparency from the Council itself.

“If you want to rebuild the trust that has been lost, you have to be able to show the good, the bad and the ugly,” says Wollman.

Ultimately, Smith and Moise’s goal is for New Mexico to set a precedent for respon-sible, safe investment practices that deliver strong returns. After two and a half years of rapid reforms, they’re already well on their way.

“When all is said and done, which will be years from now, we hope that we have an investment process here that is repeat-able, and is much less dependent on any one individual here in the SIC,” says Smith.

“We really want to put those walls up; we want to put those hard processes in place that won’t let one or two people turn this thing on its head.” n

›› If you want to rebuild the trust that has been

lost, you have to be able to show the good, the bad and the uglycharles wollman

DiminishinG returns

Source: NMSIC

The pay-to-play scandal took an obvious toll on New Mexico’s returnsSince Inception IRR*

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turkey rounDtable

PEI: if someone asked why they should

invest in Turkish private equity today, what

would you tell them?

Kerem Onursal: If you look at Turkey, the fundamentals are there. Over the next few years Turkey is expected to be a trillion-dollar economy. There are a lot of large companies that were established many decades ago, so you can see their track records. They were founded mostly with entrepreneurs and now need the support of institutional partners, so the right elements are there – it’s a perfect mix for private equity firms to come and bring their

value added capabilities, to help Turkish companies grow and institutionalise.

Kerim Turkmen: For Turkey, I think the biggest change came a decade ago with the new government and ensuing political and economic stability. Prior to that, when we had considered investing in Turkey, it was always a very interesting and attractive growth market – but it was also more volatile, with major ups and downs. In the last 10 years, Turkey has become much more stable, which is evident in the macro fundamentals such as inflation, interest rates, public debt and

sPOnsOReD BY AKOL AVuKATLiK BüROsu, BRiDgePOinT, TuRKVen PRiVATe equiTY & MiD euROPA PARTneRs

Maturing nicely?turkey rounDtable

Turkey has been tipped for some time to become a hotbed of private equity activity, given its geographic position between Europe and Asia and its strong supply of founder- and family-owned companies ripe for expansion. Now, nearly a decade since Turkish private equity got its start, and with GDP growth forecast to hit 5% in 2013, PEI talks to four of the market’s key players to find out if Turkish private equity is finally set to take off

MeLTeM AKOL AKOL AVuKATLiK BüROsuMeltem Akol is a partner at Akol Avukatlik Bürosu in Istanbul. Her firm, an

affiliate of White & Case, is among the top ranked M&A advisors in Turkey. She has over 15 years’ experience in mergers and acquisitions, joint ventures, privatisations and real estate transactions. She is a graduate of the University of Istanbul’s Faculty of Law and has an LLM from Harvard Law School.

JAsOn McgiBBOn BRiDgePOinTJason McGibbon is the partner overseeing Bridgepoint’s investment activities in Turkey and

also leads its consumer team. He currently sits on the board of TüvTurk and has completed investments in companies including Safestore, Infinitas Learning and Hobbycraft. He has a degree from the University of Strathclyde Business School and is a qualified chartered accountant.

KeReM OnuRsAL TuRKVen PRiVATe equiTYKerem Onursal is a director and investment committee member

at Turkven. Onursal has been closely involved with the firm’s investments in Roma, Pronet, Mavi, Migros, Golf and Doğtaş/Kelebek. Previously he was with McKinsey & Co. in its Berlin office. Kerem has a degree in industrial engineering and economics from Northwestern University.

KeRiM TuRKMen MiD euROPA PARTneRs Kerim Turkmen is a partner at Mid Europa and head of its Istanbul

office. Prior to joining Mid Europa in 2007, he was a principal with GMT Communications Partners. Turkmen received his B.Eng. in mechanical engineering from Imperial College and his M.Sc. in accounting and finance from the London School of Economics.

meet the rounDtable

››


budget balances. All of these indicators have stabilised and improved.

With this positive macro backdrop, Turkey is basically fulfilling its potential. It is a big market. We look at the entire Central & Eastern European region with over 15 countries, and Turkey within this region is the largest market both in terms of popula-tion and economy. It is a very diverse market with a wide range of investment opportuni-ties. We also like Turkey because it sits at the centre of Europe, CIS, and MENA regions, which have low correlation with each other. So to the extent you have a slowdown in one of these regions, you can make up for it with activity from one of the other regions. For us, Turkey offers good diversification.

Jason Mcgibbon: When we started to look at Turkey a few years ago and made the decision to open the office here, we felt Turkey had had a great 10 years – a great run from a macroeconomic stability perspective. The number of businesses where private equity can make a difference is increasing. There is a great deal of openness to international best practice.

I think we are talking about a location that probably is already – or is certainly on the way to becoming – one of the world’s major economies. Meltem Akol: What’s puzzled me in the past was all the attention that CEE got.

And with all due respect, looking around at various jurisdictions and benchmarks, I thought Turkey deserved just as much focus and attention as CEE did, if not more. I agree Turkey is fulfilling its potential. There are setbacks temporarily; some political instability may come here and there, every now and then. But absent major setbacks, the positive trend is going to continue.

The Turkish people have an entrepre-neurial spirit, that’s for sure. So the combi-nation of that independent entrepreneurial thinking and spirit with the desire to grow a business, to do more with it, to become more international, to widen the horizons, the scopes, etc., has created this fertile environment for private equity investors. And I see quite a lot more eagerness and openness from Turkish entrepreneurs to listen to the terms offered by private equity firms.

PEI: How is that progression comparing to

other regions?

Kerim Turkmen: I think the development of private equity in Central and Eastern Europe and Turkey have been somewhat similar, although the Turkish market has probably taken off a little later in terms of activity and the acceptance of private equity within the region. We started our activities in CEE in 1999, and in Turkey we have been looking at opportunities for about five or six years.

Deal activity was slow to develop at first, but accelerated over time, due both to increasing macro stability and the accept-ance of a partnership with private equity as a concept amongst business owners and entrepreneurs. There has been a positive feedback loop – because as deals get done, as people see certain levels of success and know more about private equity and how it works, then more opportunities become

turkey rounDtable

››

As deals get done, as people see certain

levels of success and know more about private equity and how it works, then more opportunities become availablekerim turkmen

››

Experience, local knowledge, speed and solution oriented approach

Akol Avukatlık Bürosu has a great team dedicated to private equity transactions with a vast experience gained in various transactions involving numerous sectors such as healthcare, transportation and financial services.

This team harmonizes its experience, local knowledge, dedication, ability to deal with complexities and its client oriented approach in order to create solutions and accommodate the needs of its clients and what the transactions require in the rapidly growing and changing Turkish market.

Akol Avukatlık Bürosu

Representing private equity firms.


available. Also, as Turkey’s economy and the companies within it continue to grow, the universe of sizeable companies we can invest in also grows. It’s been a quick development in recent years.

PEI: Are deal types here different from

other markets?

Jason Mcgibbon: In every market that we are in, we have to be flexible and adaptive to open up the largest portion of attractive dealflow. I think here that means considering a wider range of deal sizes. It means flexibility around 50-50 stakes, minority stakes with the right governance conditions and actually, in most of the cases, it is about finding the right partner.

Pei: LPs say they need proof of concept

before considering commitments; have

they got it in Turkey?

Kerem Onursal: I think the proof of concept is in the exits and returns, and now that we’re nearing an 11-year history we’re showing results for the last five years. So far we have done five exits, of which four [were] to strategics. We have managed to return more than five times in these investments in dollar terms.

Pei: Playing devil’s advocate, could an

investor have made similar returns during

the same period investing in Turkey’s stock

market or other asset classes?

Kerem Onursal: If you are comparing to the index, the index did not return 5x. Of course you could have made an investment in real estate, or picked a certain stock that could return five times. But it’s not ‘either/or’; most investors would consider all strategies.

Jason Mcgibbon: I think some of the challenge and possibly misperception [around ‘proof of concept’] comes from the fact that when you look at the absolute numbers – one of the more accurate industry surveys that came out for 2012 said on the widest definition there were 50-60 private equity deals – when you dig into that, a large number of them were small growth capital transactions that wouldn’t be representative of the firms in this room, which are all looking to write cheques larger than $10-20 million.

That same study said there were around 10 or so private equity exits. So therefore one or two transactions have a high impact on perceptions. We are seeing an explo-sion in the development capital area. You’ve then got the mid-market base, where we are seeing good consistent progress and we are starting to see a much stronger pipeline of secondaries. And then at the top-end are the LBO funds that are coming in and out of the market for one or two $1 billion transactions a year.

Meltem Akol: If the lifespan of private equity in Turkey is 10 years, the last four years when you would have expected more exits to take place has not been the best environment globally for exits. But I am not aware of many Turkish private equity investments that are ready to exit and yet cannot because of factors other than global

It very much helps to have done a lot of

deals – because you can tap into a network of existing executives you have good relationships withkerem onursal

turkey rounDtable

››


economic conditions. There are exceptions – a couple of investments where perhaps the acquisition price was not the right price, maybe the business was overvalued a little bit – but mostly people seem to be pleased enough with their valuations. So it is more about waiting for the right time for exit.

Pei: How does Turkey’s risk/reward profile

compare to other markets?

Kerim Turkmen: We think that on average Turkey offers higher growth and because of this you generally need lower leverage to achieve returns. Having said that, we do think that on average Turkey has a higher risk profile compared to some other central European countries such as Poland for example, which is also a large growing market with a large population. So the question is whether you have incremental growth and return prospects in Turkey that would compensate the incremental risk.

Pei: Why do you assign slightly higher risk

to Turkey vs. Poland?

Kerim Turkmen: Because in Poland the institutional and regulatory environment matches or is closer to European norms, and the level of exogenous risk is probably lower in Poland compared to Turkey, which needs foreign capital flows to fund growth and is also located next to the MENA and CIS regions. Having said that, Turkey is also in the process of becoming an investment-grade country, and proximity to MENA

and CIS regions provide upside and useful diversification.

Pei: How much are changing regulations

impacting day-to-day operations?

Jason Mcgibbon: There are things we can do today that were not readily deliverable 12 months ago around corporate restructuring. The flexibility of the toolkit and depth of legal framework is quite important if you want to create a level playing field versus other countries.

You can now sit in a room with your tax, your legal, your financial advisors and they can [discuss potential structures and] say actually that has been done in three or four cases, that has been validated. That is huge progress.

Pei: Where do things stand with ongoing

regulatory changes and updates to Turkey’s

commercial code?

Meltem Akol: Since last year we’ve been in a transition period. The purpose of all these changes was to upgrade and improve the regulatory environment to get us much closer to what’s standard in the EU. So what’s been created should look a lot more similar to foreign private equity firms familiar with European jurisdictions. Most of it isn’t ‘new’ to us, because most of it, [for] those of us who are local and have been doing transactions here for a long time, actually we had been applying all those tools, but through more creative methods, let’s say, to make deals happen. Now we do not need to be perhaps as creative to get to those straightforward structures – but have more tools to work with.

Obviously it takes time for people to get used to working with a new set of rules; but there is certainly a push by all key players to play by the new rules. We all have to. ››

I see quite a lot more eagerness and

openness from Turkish entrepreneurs to listen to the terms offered by private equity firmsmeltem akol

turkey rounDtable


PEI: What are some of the issues where

there’s now greater clarity?

Meltem Akol: The introduction, for example, of conditional capital increases; or the squeeze-out rule, the ability to buy out minority shareholders in certain cases; those have just been introduced. Conditional capital increases – if a couple of other tax factors and the macro-economic conditions are right – will give rise to convertible bond issuances. Convertible bond issuances were crippled because of the absence of commercial code provisions, which have now been introduced. This was something that a number of investment banks were pretty eager to market, but had not been able to. I expect that to be introduced where you can actually issue those bonds and have them converted into shares. The problem [before] was that you could not guarantee that the shares would be there at the time of the conversion; now you can.

Employee stock options, different classes of shares are now available… the capital markets law has also just changed… So pieces of the puzzle are just being put together. I could make a list of 50 material items that you can do now and that you could not do in the past. Having said that, we were doing maybe 50 percent of them anyway, it was just more [of a] grey area and with less clarity.

PEI: Are any of those 50 items already making

a difference in day-to-day operations?

Kerem Onursal: Yes. Now, for example, companies can become board members. In other words, the company becomes the board member and you can represent the company and reduce your personal liabilities.

Jason Mcgibbon: Really, there is no silver bullet within the 50. But they all go to improving cost, efficiency, ease of operation,

relationships. I think changes around shareholders agreements are making it easier – and I say this as a Western European-based fund – to deliver the sort of structure and concepts that people are very comfortable and familiar with. You could create them here in the past, but in a way that was time consuming, and with questions of time over effectiveness and costing.

So that’s [improving] in a market where we sometimes talk about a completion gap. A fair criticism I think of Turkey would be [that] it is a high-growth market, but the flipside of that is the entrepreneurs often don’t have to sell. So often processes take an extended period, and often for positive rea-sons – the business is growing fast, everyone is very happy to continue as shareholders. Straightening out some of the technical complexity just gives you a better chance of getting to the finish line.

Kerim Turkmen: I think one additional benefit will be the increased transparency and reliability of financial reporting, because of the independent auditor requirement and requirement to follow IFRS. The initial draft of the new commercial code was somewhat draconian, however, because there was no size threshold for companies who had to comply with the various requirements. Companies below a certain size should not have to comply with all requirements due to costs. We will see to what extent all these rules are implemented in practice, although I do hope to see significant improvements

turkey rounDtable

››

We are talking about a location that probably

is already – or is certainly on the way to becoming – one of the world’s major economiesJason mcGibbon


turkey rounDtable

in transparency and corporate governance practices.

PEI: What other challenges are there?

Jason Mcgibbon: I don’t think Turkey’s that fundamentally different. Its private equity market is at a very different place on the curve, but having worked across a number of markets for Bridgepoint over the last 12 years, they tend to face the same types of challenges as other markets.

Kerim Turkmen: I would agree with [some criticisms] that in Turkey processes do take longer, and are generally not as well organised or structured. I also think on average you will see more growth capital or 50-50 or minority deals in Turkey, as opposed to leveraged control buyouts. I think this is reflective of the nature of the market, which very entrepreneurial, is at an earlier stage of development and much more dominated by growing family-owned businesses.

Meltem Akol: Going back to that culture shift… We come from an era where it was extremely difficult to convince a majority business owner or founder that he needed to appoint a CEO. Things have come a long way; but I still think it is difficult for the Turkish entrepreneur to let go, maybe a

little bit more difficult compared to other jurisdictions…. Yet private equity has built confidence with Turkish entrepreneurs to a large extent in that respect. I do not think Turkish entrepreneurs who have given up minority or majority control to private equity partners have any regrets.

PEI: is talent a key focus or concern for

portfolio companies?

Kerem Onursal: I think that’s the most important part of value creation. Our primary focus when we do a deal is to have the right management team – and often we have to recruit the first management team of the company, because an entrepreneur grows a company to certain extent and our role is to institutionalise the way things are done.

I think for all the deals we’ve done, we have actively looked for a CEO and then also mid-management roles. It very much helps to have done a lot of deals – because you can tap into a network of existing executives you have good relationships with. We also do events for managers and educate them about private equity. So it is probably the core of our business –because once you have the right management team in place, then you can build on that and start bringing in best practices from other markets.

PEI: is there sufficient talent locally for

portfolio companies?

Kerem Onursal: Yes. In Turkey, you find companies such as Nestle, Deutsche Bank, etc. that have been present here for over 100 years. We have many industries where you’ve had many multinationals present for more than 50-60 years, so you can actually recruit people who have worked for, for example, P&G or Unilever, who are used to reporting to a multinational company and understand corporate governance.

Kerim Turkmen: There is definitely a good deal of managerial talent in Turkey. I think what is also critical is that a lot of these managers are very receptive to working with private equity, because the professional environment and our equity incentive packages generally offer a step-up from other alternatives. The equity packages we use to align the mangers’ incentives with our own as shareholders do not usually exist in other settings. On top of that is the benefit of working in a professional and transparent environment where goals and performance benchmarks are clearly defined. Generally, private equity hasn’t had any trouble attracting good managers; managers are normally looking for private equity opportunities. n

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FunDs oF FunDs

Evolving to surviveFunDs oF FunDs

Talk to people in the funds of funds world and it won’t be long before the word

“bifurcation” crops up. The sector is quickly polarising into two camps: those who can raise funds in this environment, and those who can’t.

Then again, you could apply that to the whole of the private equity industry. Fund-raising is hard across the board for firms of all types at the moment, and has been for some time. The industry’s biggest traditional backers – US pension funds – remain enthu-siastic about the asset class, but have become increasingly choosier and taking a harder line on fees when it comes to making tra-ditional commitments. Regulatory changes aren’t helping GPs on the fundraising trail, either: capital requirements of Basel III and the likely strictures of the Volcker Rule have made it much more difficult for banks to invest in the asset class, while Solvency II has made it similarly tricky for insurance companies. Reduced targets and protracted roadshows have become the norm, with the time to get to a first close seemingly length-ening with each passing month.

But things are even worse for funds of funds, according to Alexander De Mol, a partner in Bain & Company’s Dubai office. To start with, he says, there is “increased pressure on fund terms” – and because funds of funds impose an extra layer of fees, they have been feeling the impact of this more than most.

Secondly, “Investors want more direct control and interaction with their fund investment … [they] increasingly look for transparency on their private asset own-ership, for example for the purposes of monitoring risk”.

A further problem is that investors are waiting to see some cash back from their

last round of investment before they pump any more money in.

So are funds of funds going out of fash-ion? In 2012, just $9.6 billion dollars were raised by funds of funds, according to fig-ures compiled by Private Equity International. That’s well below the glory days of the first half of 2008, when this was about the run rate for a single quarter. And early signs suggest that there won’t be any massive rebound in the first quarter of 2013: at press time, funds of funds had raised about £100 million between them in the year to date. By way of comparison, buyout funds raised about $88 billion – nearly nine times as much. Performance has also been disap-pointing in recent years, according to most independent metrics.

Unsurprisingly, there has been some consolidation in the funds of funds world, as managers look to build scale and trim overheads. Last year BlackRock made head-lines when it acquired Swiss Re’s funds of funds business to create the $15 billion BlackRock Private Equity Partners.

“In an environment where yields are low and volatility is high, clients around the world are embracing alternatives which offer higher return potential and the ability to mitigate risk,” Matthew Botein, manag-ing director and head of BlackRock’s alter-native investment group, said in a state-ment at the time. The deal instantly gave BlackRock a bigger footprint in Europe and Asia and extended its capabilities into infrastructure investing.

BlackRock hasn’t been the only one bol-stering its geographic presence and product lines via acquisitions. Other recent deals include AlpInvest Partners’ absorption by The Carlyle Group, boosting the latter’s assets under management by some $45

Funds of funds found it even harder to raise capital last year, as cash-strapped investors baulked at the extra layer of fees and the extra degree of separation from the underlying assets. What can fund of funds managers do to stay relevant in a changing world? By Jeremy Hazlehurst

››

uPhill battle

Source: PEI Research & Analytics

Aggregate capital raised by private equity funds of funds has steadily decreased over the past five years

2008 2009 2010 2011 2012 Q32012 2013ytd

$bn

(73)

(67)

(46)(57)

(31)

(3) (3)


FunD oF FunDs review

billion. US group FLAG Capital Man-agement also bought Hong Kong-based Squadron Capital (see box on p. 48), while Parish Capital was snapped up by StepStone Group (which is also now managing $4 bil-lion in former Citi fund of funds assets as part of a secondary transaction). Previ-ously, Hermes and Gartmore merged their funds of funds businesses, while Deutsche Bank merged its funds of funds with that

of one of its acquisitions, the Sal. Oppen-heim Group, and Russell Investments sold Pantheon to NYSE-listed asset management group Affiliated Managers Group. The list goes on.

a lonG-term Play

It’s not all gloom for funds of funds. Graeme Gunn, a partner at SL Capital, which in October held a $75 million first close ››

››

insurance Policy

A new wave of competition is coming from China. Global funds of funds are seeing China’s insurance companies gear their organisations to offer fund of funds products within and ultimately outside China.

One industry source explained, “The same way that JPMorgan, Deutsche Bank or Morgan Stanley have a [fund of funds] offering, which get to a nice size because they sell it to their own [banking] network, Ping An and China Life have made noises that they want to have funds of funds.”

About 18 months ago, Ping An Insur-ance Group hired Beijing-based director Zhao Peng from global asset manager Part-ners Group in a move to strengthen its global capabilities. “[They] already have a team of 17 in the fund of funds space and 80 people in private equity. The Chinese insurers have very large teams trying to do fund of funds, initially in China and RMB, but very shortly in China in US dollars, then globally in US dollars.”

In October 2012, the China Insurance Regulatory Commission released regula-tions that allow Chinese insurance com-panies to invest in private equity in 45 countries and regions. The CIRC spelled out the regulation and its requirements in the newly-released Implementing Rules,

which now extend permitted investments by Chinese insurance companies to foreign private equity.

A new tranche of funds of funds with access to huge amounts of capital and international capabilities presents new competition to the global funds of funds operating today, the source said.

“[Insurance companies] are already [offering funds of funds] within China, but the products they are designing are to invest overseas. Within a year or so, the insurers, which have big balance sheets, will be able to invest internationally and that will give an additional line of capital to their teams.”

However, China’s regulatory landscape is not always clear. Recently, Ping An was prevented from investing in two domestic private equity funds, in accordance with a Chinese regulation that forbids insurers from investing in domestic funds that are not co-managed by the insurers themselves.

A spokeswoman for CITIC Private Equity, one of the funds, explained earlier that although China’s insurance industry was cleared for investing in domestic pri-vate equity in 2012, regulations tend to work on a case-by-case basis with insur-ance companies.

This could be the case for offshore investment, too.

We are seeing a switch away from many

traditional sources of capital to new ones such as sovereign wealth fundsGraeme Gunn

P o t e n t i a l . D e l i v e r e d .

Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited, SL Capital Partners LLP and Aida Capital Limited. Standard Life Investments Limited is authorised and regulated by the Financial Services Authority. Calls may be monitored and/or recorded to protect both you and us and help with our training. www.standardlifeinvestments.com © [2011] Standard Life, images reproduced under licence.

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on its latest fund, says that managers are just seeing “churn” in their investor base; in other words, there is still money there, but it’s coming from different sources. “We are seeing a switch away from many traditional sources of capital to new ones such as sov-ereign wealth funds, and other large Asian and developing market institutions,” he says.

“Money that first time round was invested locally now has a global outlook. For exam-ple, the private equity opportunity in China has been disappointing recently – but their institutions are investing heavily in [more developed private equity markets].”

Philippe Poggioli, managing partner at Paris-based Access Capital Partners, agrees that as Asia’s institutional investor base matures, funds of funds and mid-market managers will eventually experience a trickle-down effect. But at the moment, he argues, the story is very much about large sovereign wealth funds investing directly or in mega-funds. “As a broader set of insti-tutions in those countries develops, with more banks, insurers [and] pension funds, they will potentially start to invest in the smaller part of the market.”

However, De Mol cautions against funds of funds managers relying on Asian money to ‘save’ them – because these LPs may have very different aspirations. “As more inves-tors come from emerging markets, they actually largely pass on funds of funds and are more inclined to invest directly.”

And for those investors who might con-sider fund commitments, funds of funds’ slow-and-steady reputation might actu-ally make them less attractive to Asian LPs, many of which have come to expect outsized returns in short time periods – a legacy issue stemming from the success of prior private equity funds predicated on pre-IPO strategies. “Funds of funds have a lower risk/lower return profile,” says De Mol, “but as investors are looking to

increase their overall return profile, they are keen to take a pass on them.”

As for the more traditional sources in terms of geography or investor type, even though capital in-flows may have slowed for funds of funds, LPs are by no means backing away from the asset class. “Pension funds and endowments have no choice but to remain in the asset class,” says Poggioli.

“And when you look to the US you see that on average pension fund and endowments actually increased exposure to private equity last year. So I don’t see that there is a slowdown in interest from that category. On the contrary.”

The long-term attractions of the asset class are still compelling, according to Eric Warner, head of investor relations at Altius Associates, which last year reached a first close of $50 million for its latest fund of funds after three months. “Many pension funds are still very much in deficit and the main markets are not producing the sorts of return they need,” he says. “Therefore, longer term, that is probably good news for private equity and alternatives in general.”

What’s more, there are plenty of reasons for them to put their money into funds of funds – even in Europe.

FinDinG alPha

“The economy in Europe is clearly under-performing, but the investment framework is still there,” says SL Capital’s Gunn. “[So] on a five-year view, where do you want your money to be? Do you want to be buying where value lies? Pricing on deals is look-ing more attractive today – so we take a longer term view and don’t worry about Europe. Germany, Switzerland, France and the Nordics are large economies and will remain relevant markets for private equity.”

Tycho Sneyers, a managing partner at fund of funds manager LGT, points out that the macro issues don’t necessarily ››

››You take on some risk by being

with other people in a structure, and if you are a very large investor you can avoid that risktycho sneyers

Sneyers: Eurozone crisis provides excellent opportunities

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insiDe squaDron’s sale


How does squadron’s sale to us-

based fLAg Capital benefit

squadron?

Anyone that’s trying to approach [Asian] markets intelligently requires a large team on the ground in Asia. So what an addi-tional resource [FLAG Capital] brings is two more professionals, who will join the team in Asia that’s already in place at Squadron. Also, the larger platform does give us some additional benefits of scale, particularly in the back office of compli-ance and regulatory areas [because] capi-tal for our funds comes from all around the world – Europe, Middle East, Japan. Squadron has been a Hong Kong-based company from the beginning, and that works really well in terms of covering the market. But in terms of business devel-opment and investor relations, a Hong Kong base is challenging. We’re traveling constantly to visit investors and look for new investors. With FLAG based in the United States, constantly in contact with particularly the North American and European investor base, it will be much more efficient.

Will squadron’s Asia strategy

change?

One of the reasons we’ve come together with FLAG is because over the last couple of years we’ve realised that our two firms have a very similar philosophy, a very simi-lar approach to the markets of Asia. So I think the answer is no, actually, it won’t change our investing strategy at all. We’re going to keep the same strategy, which

is to really focus on deep due diligence, hard-to-identify and access funds, coun-try-specific funds where we really have value to add with the local nature of our team. No one can say for certain, but I think those are the kinds of funds where the outsized returns will come from, and both the current FLAG Asia team and our Squadron team have a very similar view about this. We’ve looked at the same funds, and we’ve come to the same conclusions over the years, so I think it will be more of the same. This is a strategic combina-tion for us, not a shake-out, making the proverbial “1+1=3”.

Are funds of funds in Asia

becoming less relevant as private

equity firms mature and relations

between gPs and LPs become more

solidified?

Actually, I think the need is becoming greater, in a way, because we have so many more funds to understand. And the market’s becoming actually more complicated, not less. So yes, some of the more established Asian general partnerships now have developed some strong direct relations with investors. But one of the issues facing private equity is the geographical challenges of looking at markets outside of your home country. If we think about smaller foundations or family offices or even public pension funds, while they may have a lot of money under management, they generally won’t have the human resources to send off and look at markets outside of their home turf. And Asia’s an enormous region, so I think the funds of funds model actually works very well for the Asian market. There are always new groups emerging, and just in the last year some of the famous names have shed people. So the dynamism of the market suggests that we have a role to play as a fund of funds. That’s probably truer in Asia than in some other places because of the diversity of cultures. A well-resourced fund of funds – comprised of several nationalities, speaking numbers of languages, having local people from all the key markets – will be in high demand for many years.

David Pierce, CIO of recently rebranded FLAG Squadron Asia, discusses what the sale of Squadron to FLAG means to his firm and to the funds of funds industry in Asia

Pierce: FoFs are getting more relevant

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� Significant asset base – USD 25 billion in private equity and hedge fund assets under management

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impact individual companies. “The eurozone crisis provides some excellent opportunities for private equity to buy good companies with recession-tested revenues, and good management teams at attractive prices. Finding the right managers is at the heart of private equity, of course, and that’s still the key to performance.”

And if you are looking for small, local firms, a fund of funds that knows the local terrain is arguably the best way to access the best of them. “Any investor no matter what their sophistication level can figure out Carlyle or KKR as a good marquee house.,” says Michael Abouchalache, CEO of Quilvest Group, which runs a number of small, focused funds of funds. “They don’t need professionals to tell them that investing in those large buyout houses makes sense. Specialisation is where funds of funds work; where local knowledge of

particular businesses and managers is needed.”

Furthermore, Abouchalache believes that small- and mid-cap managers will outper-form large and mega-cap firms. “We’ve been in this asset class for 40 years so we have enough empirical evidence to say that usu-ally, if you do your job properly in the mid-cap space, you will certainly outperform the mega-cap space.” And while it’s easy to work out which are the mega-caps “sitting in an office 5,000 miles away”, says Abouchalache, local knowledge is essential to find these high-performing mid-cap players.

Aside from in-depth specialist and local knowledge, one of the other ‘tra-ditional’ reasons to invest via funds of funds remains access. Putting a team in place to establish such relationships isn’t impossible for investors – but it can be expensive and inefficient, particularly ››

As more investors come from emerging

markets, they actually largely pass on funds of funds and are more inclined to invest directlyalexander De mol

››



for smaller pension authorities, family offices and the like. “That is where the added value of a fund of fund is,” insists Abouchalache.

Daniel Allen, CIO of the State Uni-versities Retirement System of Illinois (SURS), previously told PEI that funds of funds make a lot of sense for LPs like SURS. “We have a small staff and so we don’t have the private equity knowledge in-house to oversee a direct programme.” The pension uses Pantheon and Adams Street as its two primary advisors to make investments. “And access has become more of an issue with some of the challenges that Illinois public funds have experienced [related to state legislation around Sudan investments].”

While the specific situation in Illinois is not being faced by all LPs, the issue of restricted access has not gone away, despite fundraising having got tougher, Elly Living-stone, Pantheon’s global head of secondaries, previously told PEI. There will continue to be LPs shut out on the primary and second-ary sides by exclusive GPs who only take on one or two new LPs per fundraise or limit the number of pre-approved buyers of secondary stakes. The access issue isn’t just about marquee GP names either; niche smaller funds can be equally if not harder to get into.

Often these opportunities will be far-ther afield, the result being that some LPs choose to invest directly in their home market, but hire a fund of funds to gain exposure to other geographies.

Petra Salesny, COO of Zurich-based Alpha Associates, says that’s the case for the firm’s CEE-focused fund of funds, which can be a “stepping stone for investors who want to get to know a region”. Some LPs will invest with Alpha for four or five years in order to accumulate the knowledge required to go it alone afterwards, she says.

evolvinG anD customisinG

It’s obvious that the traditional funds of funds model continues to make sense for certain types of investors and investment programmes. But equally, it’s clear that fund of funds managers need to expand their offerings to stay relevant as investor needs change.

Specialised funds have multiplied with some managers branching out into other strategies or asset classes such as second-aries or infrastructure. Private debt, for example, has become a big growth area

– with groups including Access Capital Part-ners, HarbourVest Partners, WP Global and Golding Capital offering credit vehicles and more expected to join suit.

Co-investing alongside GPs is another massive growth area, says Access Capi-tal’s Poggioli. “This has become a natural development of the fund of funds offering. That is on the ramp up, and if you look at the offering of the big guys you will see that a lot of growth has been in the co-investment side. That will also trickle down to the mid-market funds of funds

– most of them will be also pursuing that sort of strategy.”

Separate accounts are booming, too. “There’s a generation of investors that came into the asset class in the last decade – they started small, were not very sophisticated and funds of funds offered an entry into the asset class,” says Poggioli. “But as these investors got more sophisticated [and] increased their allocation to private equity, they started to look for separate accounts – to be able to outline the strategy they want to pursue, but also to reduce costs. Simply putting bigger tickets on the table on a commingled basis couldn’t achieve that.”

LGT’s Sneyers also sees several addi-tional advantages to separate accounts.

“One is that the investor controls the struc-ture. After the Lehman bankruptcy, many

››Specialisation is where funds of funds work

– where local knowledge of particular businesses and managers is neededmichel abouchalache

Abouchalache: mid-caps will outperform


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001_021101_alpha_Inserat_205x135mm_2012_E.indd 1 20.11.12 10:34

people who were invested in a co-mingled fund worried that if other investors don’t honour their capital calls then the structure has a problem. And as a large investor you can avoid that risk by setting up your own fund.” Sneyers stresses that LGT has never had an investor fail to honour a cash-call

– but some people prefer to be safe rather than sorry.

Separate accounts also allow for a more bespoke tax/regulatory structure, Sneyers points out. “The separate account typically is a fund – a fund with one investor but nevertheless a fund – with a domicile, and you can really think about whether it is best to have a vehicle in Delaware, Ireland, Luxembourg, Guernsey or any other juris-diction based on what is optimal in terms of regulatory and tax considerations. There is more customisation.”

Tailored reporting is also an attrac-tion of separate accounts, as far as LPs are concerned. “Investors can really say how

they want the reporting to look, and also [specify] the investment pace,” says Alpha Associates’ Salesny. “A fund of funds has a certain strategy that all the investors sign on to – but with a managed account, we sit with them and review the strategy every half year and consider portfolio and market developments. So there is a lot more flex-ibility and more ways to tailor your offering towards the client.”

So things are not totally bleak for funds of funds. But as managers look to evolve by branching out into new strategies and building more separate account type rela-tionships, it’s important they don’t lose sight of their key strengths. As Bain & Co’s De Mol puts it: “The core skill set of funds of funds is to identify great fund managers, and track their performance well to inform future investments.”

As long as they can keep doing this, it’s unlikely that funds of funds are going to disappear anytime soon. n

$15bnBlackRock PEP’s AUM after purchasing Swiss RE, double its previous total

1:9Ratio of funds raised by FoFs relative to buyout managers YTD (PEI)


PEI: given the political tensions,

China is not the easiest place for

Taiwanese investors. so why have you

adopted such a China-centric strategy?

Direct investing in domestic Chinese com-panies has been a new thing to most Tai-wanese venture capitalists – [but] China has not been a foreign place to us. In fact, 66 percent of what China exports is made by Taiwanese operators, and of the top 30 exporters in China, 17 are from Taiwan. [CDIB Capital’s] strategy is very simple: we take what worked for us in Taiwan, and say, ‘Hey, Taiwan cannot possibly be the only country that can be benefited in this way.’ So the 14 investments that we have today are all in what we call “three corridors”: Taiwan-China, Korea-China, and US-China.

Our core competence arises from knowing how to work in China, without necessarily investing in Chinese companies. And it’s not like we figured it out because we were smart – we had to figure it out because we’re Taiwanese. We were not allowed to do it the way everyone else did.

q: What is it about China that

pushed you to ‘figure it out’?

China has served – and continues to serve – as a great export base for us. But increasingly China is becoming a market for Taiwanese consumer products and services. Taiwan has been the beneficiary of a lot of American and Japanese influence, so the quality of its consumer products and service has been high. The problem has been a lim-ited domestic market – [even if ] everyone uses your product, it’s still a small business.

With the opening of China as a con-sumer market, that has really changed. China first coupled with the Taiwan IT industry, and really penetrated the 3C [computer,

communication and consumer electron-ics] products for re-export. But now, when you look at the consumer side, it becomes a lot more multifaceted – and that’s actually changing the Taiwan economy mix.

q: Why has the bank chosen to raise

RMB vehicles?

Because of [Taiwan law], [the bank is] only allowed to invest 15 percent of our net worth in China. For us, that would translate to about $1.5 billion. So raising an RMB fund gives us more leverage on our capital, and allows us to do bigger deals. We’re now rais-ing three 65-35 joint venture RMB funds in China (we’re [the] 65 [percent]) with locali-ties in China – and each is RMB 1 billion, rather than [having] one RMB 3 billion fund. And I think we’re the only ones doing this.

We believe if you’re Blackstone or Car-lyle, it’s OK to raise a national RMB fund; but in our business, because the bank has always been focused on venture to early-stage growth capital, the nature of our dealflow is very local. So if a Shanghai deal travels to Beijing, you know something’s wrong with [it] – most good deals will never be able to leave the city limits.

q: Which areas will you target?

All three strategies are really focus-ing on industry integration between the two sides [of the Taiwan Strait]. A lot of it is going to be Taiwan technology [or] Taiwan products with a China distribution or manufacturing base – so some leverage on export, some lev-erage on having domestic channels in China. And one of the good things is that it seems we don’t have much competition. It’s a very proprietary sector: 75 percent of [the group’s] dealflow comes from our existing network of 325 active portfolio companies.

Foot in the doorchina & taiwan

Founded more than 50 years ago, Taiwan-based China Development Industrial Bank has now launched a private equity arm, CDIB Capital International, which already has 14 investments based on a mainland China ‘corridor’ strategy. Paul Yang, president and chief executive of the Bank and founder and chairman of CDIB, explains their different approaches

We had to figure it out because we’re Taiwanese. We’re not allowed to do [China

investments] the way everyone else did

Yang: no stranger to China

on the recorD


brieFinG: braZil

Cooling off periodbraZil

These days, Brazil is generally considered to be the premier destination in Latin America for private equity. But it did not have the happiest of years in 2012. Anti-inflationary measures have contributed to a rapid decline in annual gross domestic product growth, which has in turn led to a lot of hand-wringing about whether Bra-zil’s economy has overheated (even though the country’s budget and planning minister Miriam Belchior reportedly admitted that such a cooling-down was a possibility as early as July 2011).

To be sure, Brazil’s stunning 7.53 per-cent GDP increase in 2010 – way ahead of the European Union’s meagre 2.06 percent and the US figure of 2.39 percent – was arguably not a sustainable annual rate of growth.

But at the time, private equity firms were quick to sing Brazil’s praises. While the US and developed Europe were endur-ing an historic economic slowdown, Brazil offered a rapidly growing middle class, an expanding consumer sector and an extremely underpenetrated private equity

market – all of which made it ripe for pri-vate equity fund managers.

LPs liked what the country had to offer as well. One Coller Capital and Emerg-ing Markets Private Equity Association (EMPEA) survey in 2011 even suggested that private equity investor appetite for China-focused funds was waning in favour of Brazilian vehicles.

But as growth has slowed, Brazilian deals have become less attractive – deal volumes have fallen, while total deal value, at $4.38 billion, was lower last year than in 2010, according to EMPEA. With fun-draising totals also down markedly, there’s some speculation that Brazil’s private equity market grew too big too fast.

As Ralph Keiter, the International Finance Corporation’s head of private equity in Latin America and the Caribbean, puts it: “The question over whether there is a little bit of a bubble building in Brazil has been around for over a year.”

risinG multiPles

Latin America and Brazil had a small but not insignificant private equity market prior to the recent boom.

Private equity funds raised more than $10 billion in capital for the region between 2008 and 2009, according to PEI’s Research & Analytics division. Local deal volume was a fraction of what was transacted in the US, Europe or Asia at the time, but also consid-erably more than in Middle Eastern-North African or Sub-Saharan African markets, according to EMPEA data.

Surprisingly, despite being the largest economy in the region by a distance, Brazil made up a relatively small fraction of Latin America’s overall deal volume. Between 2003 and 2008, Brazil’s percentage

The slowdown in Brazil’s economic growth – and a possible over-supply of capital – has led some to question whether the country is still a viable destination for private equity investment, writes Sam Sutton

››Fortaleza: still underpenetrated by PE


braZil

of Latin American deal volume broke 50 percent only once – in 2007 (by com-parison, Brazilian deals constituted 88.4 percent of regional deal volume in 2012, according to analysis of EMPEA data).

As Brazil’s GDP growth began to out-perform that of the region between 2007 and 2010, the country’s share of local pri-vate equity deal volume began to increase. That coincided with a spike in Brazil and Latin American-focused fundraising, peak-ing in 2011 when a record $11.2 billion was raised for Brazil and Latin American focused vehicles, according to PEI figures (so more than twice as much as the current annual dealflow).

Of that total, more than $8 billion was dedicated to Brazil-focused funds, accord-ing to Latin American Private Equity and Venture Capital (LAVCA) president Cate Ambrose.

Unfortunately, the spike in available pri-vate equity capital – coupled with growing competition for deals – has led to swollen multiples on large market deals, sources say.

“Valuations for large-cap deals [$100 million-plus tickets] are high compared to five years ago,” says Ambrose. “Managers are having to work harder to identify propri-etary dealflow and focus on the mid-market, or less developed parts of the country such as the northeast.”

Part of this is due to overcrowding, as many of Brazil’s traditional mid-market firms “graduated” to large-cap deals with their latest funds, says Maureen Downey of Pantheon.

The resulting pressure on valuations and multiples could have consequences on returns when those firms try to exit their holdings over the next few years.

“If you’re buying companies at multiples of 10x -12x, it’s unclear how you will gen-erate an IRR of 30 percent, particularly if you’re not taking out leverage,” says Keiter.

“You’re relying on company growth; you’re relying on GDP growth.”

And generating those sorts of returns will be especially difficult if GDP growth continues to flag. Even though the IMF expects Brazil’s economy to grow at a healthy 3.95 percent in 2013, it’s important to remember that this is only an estimate. As a cautionary tale, the IMF’s September 2011 projections had Brazil’s GDP growing by more than 3.6 percent in 2012 – but it actually grew by less than half of that (1.47 percent).

Go (north)east, younG man

However, a continued economic slowdown does not necessarily mean doom and gloom for Brazil-focused fund managers.

The mass influx of large-cap firms and funds into Brazil has actually led to a dearth of players in the lower and mid-markets, sources say. While multiples have ballooned to as much as 10x or 12x EBITDA for big businesses in Rio de Janeiro and São Paolo, the mid-market remains underpenetrated by private equity.

“The slowdown in GDP growth may mean that Brazil sees a decrease in inflows from more speculative PE investors, which would translate into lower valuations and a more realistic assessment of the over-all state of the Brazilian market,” says Ambrose.

“Managers are having to work harder to identify proprietary dealflow and focus on the mid-market, or less developed parts of the country such as the northeast. But there is still great growth potential in the Brazilian market in the mid to long term.”

Although the private equity fundraising boom may have led to a rather daunting wall of capital, many sources are also quick to point out that the bulk of private equity investment to date has taken place in large-cap deals in Rio and São Paolo, which

a mixeD year

Source: EMPEA

2008 2009 2010 2011 2012

$bn

Latin America Brazil

Deal values were up on last year, but not back to previous levels

If you’re buying companies at multiples of

10x-12x, it’s unclear how you will generate an IRR of 30 percentralph keiter

››

››

FlatlininG

Source: International Monetary Fund

2008 2009 2010 2011 2012 2013 2014 2015

$bn

Brazil Latin America/Caribbean

The IMF doesn’t expect GDP growth to return to 2010 levels any time soon

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Untitled-4 1 19/11/12 18:00


braZil

ignores the bevy of (smaller) deals avail-able in Northeast Brazil.

“Despite being a very large area with low population, [Northeast Brazil is] still a very large market compared to other Latin American markets,” says Javier Arocena of emerging markets investment group Gramercy. “The Northeast has a lot of infrastructure deficits [as well as consumer related sectors] – you’ll get a lot of deals where there isn’t a lot of competition.”

Private equity has yet to seize on this opportunity fully. One source estimates that $9 of every $10 invested in Brazil is directed at the country’s most developed regions, suggesting that GPs typically cite difficulties commonly associated with investing in underdeveloped areas – a lack of infrastructure (financial and physical), inexperienced deal professionals and lack of a local presence – as reasons for avoiding less penetrated regions.

“If you ask many of the established GPs why they’re not investing outside the big areas, they’ll say that they still see signifi-cant opportunities … in the markets that they know [or] the regions that they know,” says Keiter.

With so much of its geography still untapped, Brazil remains relatively under-penetrated by private equity (EMPEA estimates that private equity investment constituted only 0.18 percent of Brazil’s GDP, compared to 0.86 percent in the US). But as deals in more established Brazilian markets dry up, expect a greater number of firms to start trekking beyond their comfort zones – geographically as well as financially.

As a development finance institution, the IFC’s investment mandate includes manag-ers that focus on Brazil’s underpenetrated markets. Fortunately, it is starting to see a few private equity firms move beyond the cities. It recently committed $29 million

to Gávea Investimentos R$1 billion (€372 million; $503 million) Crédito Estruturado FIDC fund, which will provide long-term debt financing to Brazilian private compa-nies. The idea is to address “the deficiency of long-term lending from private sector entities in Brazil, which exposes many strong companies to refinancing risks and reduces their efficiency and competitive-ness”, according to an IFC release.

“It is exactly that sort of capital market development we have [in mind] when we invest in that sort of strategy,” says Keiter.

“[We hope] that it will have a knock-on effect, and encourage other groups to do similar things.”

A powerful incentive could also come from two sporting events: the 2016 Olym-pics and the 2014 FIFA World Cup both create a tantalizing opportunity for fund managers looking to cash in on the much-needed development of Brazil’s northeast. The latter, in particular, involves a number of venues along the northern and eastern coasts.

“The combination of two upcoming high-profile sport events and outdated infrastructure means that the country will need significant investments in this regard,” says Arocena. “[Though this] will not neces-sarily affect the competitive landscape in the long run, [it] could indeed increase the funds raised.”

However, even if the World Cup and Olympics boost fundraising, Ambrose

says that we shouldn’t expect another year where fundraising outpaces dealflow.

“We’re seeing a reversal in that trend this year, with preliminary 2012 data showing higher deployment of capital than capital raised,” she says. “This is a natural part of the fundraising/investing cycle, and we are in the moment where firms are using the record-breaking fundraising during 2011 to do deals in a more stable market envi-ronment.”

still hot enouGh

Even with slowing GDP growth, some firms continue to like what they see in Brazil (and Latin America in general).

In January, Kohlberg Kravis Roberts appointed Jorge Fergie – previously the head of McKinsey & Company’s Latin American private equity practice – to lead the firm’s São Paulo office, which it opened in 2012.

The Carlyle Group, which raised $1 bil-lion for Brazilian and South American deals in 2011, has also been very active in the country over the last year. Carlyle invested in three deals in 2012, two of which ranked in mergermarket’s top-10 largest Brazilian deals of the year.

LP enthusiasm for the country also hasn’t disappeared. A Probitas Partners survey released earlier this year found that LPs are still broadly supportive of Brazil-focused funds: 33 percent of respondents said that they believed Brazil to be one of the two most attractive emerging mar-kets, up from 28 percent the previous year (Brazil placed second behind China).

It’s clear that private equity in Brazil is – perhaps not surprisingly – going through a bit of a cooling-off period, after a couple of red-hot years. But there’s still plenty of heat there for investors – particularly if they’re willing to go a bit off the beaten track.

The Northeast has a lot of infrastructure

deficits – you’ll get a lot of deals where there isn’t a lot of competitionJavier arocena

››


sPonsoreD q&a: hcl technoloGies

Information technology can play a key role in operationally transforming a company, as Avago Technologies, a $2.4 billion Singapore and San Jose-based semiconductor company, discovered. Avago had been owned by Kohlberg Kravis Roberts and Silver Lake Partners until it was spun out of parent company Agilent Technologies and publicly-listed in late 2009.

Avago had a flexible and innovative culture, and its management made a bold decision aimed at reducing the cost structure of the organisation. The company decided to move full scale into cloud computing for non-core activities during a time when the corporate world viewed IT implementation as more of a cost than a productivity enhancer. Top management believed the move would prove the reverse of conventional wisdom – productivity would improve while the IT spend would drop.

Avago needed a like-minded partner to drive the initiative and they chose HCL Technologies, a global IT services provider. The choice of HCL as a partner turned out to be instrumental in achieving Avago’s goals. Andy Nallappan, chief information officer of Avago, explains.

What were the objectives of the

partnership with HCL?

The overall objective was a full migration to cloud computing for all of Avago’s back office functions. In accomplishing that, we asked HCL for three main goals. One, keep the lights on. Operations had to continue during the IT system implementation. No outages, no security issues. Two, partner with us to explore new (as opposed to conventional) technology solutions to provide higher productivity and bring down

the cost. Three, align with our operating model. That means build a relationship that allows us to bring HCL to the table and negotiate. So far, for four years, HCL has met those goals well.

It was especially important to make sure HCL had flexibility and cultural alignment with Avago. We operate in the cyclical semiconductor market and we wanted someone to support us through all the ups and downs. We also wanted to avoid service problems that we had with our previous IT partner, so we pointed that out. HCL was able to align with what we wanted.

How did HCL respond to Avago’s

decision to adopt google’s

platforms for cloud computing?

When we told our previous IT partner we wanted to move full scale to Google services, their attitude was unsupportive. They said if you do it, you’ll bear the consequences. Others said Google is for consumers and college students, not large corporations.

But by the time HCL was brought in, we had already made the decision internally to move back office functions to Google. The difference was that HCL supported the move and partnered with us. They knew corporate services were moving to the cloud, and although they were new to the IT implementation involved in our spe-cific transition, they wanted to be a pioneer with us.

So HCL had its skin in the game. They became pioneers as they supplied and supported the cloud applications, bringing in their tools, processes and people to help manage it, and they learned along with us.

HCL helped Avago to become one of the first large corporates that adopted

Change through technologyAvago Technologies reduced operational costs and increased efficiency through an IT initiative with partner HCL Technologies

Nallappan: lower cost, higher productivity ››


sPonsoreD q&a: hcl technoloGies

Google cloud services and adopting office automation tools such as calendars, messaging, email, documents, sites – the whole suite.

We signed a three-year agreement with Google to host our back office services, which resulted in $1.6 million cost savings. We’ve recently renewed for another three years.

What kind of overall cost structure

savings were you aiming for and

what did you reach?

When HCL came in 2009, our IT budget was 5.8 percent of the total company’s revenues. Over four years, they helped us bring it down to 1.3 percent, which had a positive effect on the company’s operating margin. The IT budget reduction wasn’t entirely HCL’s contribution, but they played a critical role. The HCL partnership actually helped decrease IT spend while at the same time increased productivity across the corporation. Now the goal is to bring the IT budget down to less than 1 percent of the total revenues in the next two years.

What is the main takeaway from the

Avago-HCL partnership?

An IT migration like ours is not only about technology but also involves a change in business culture, and you need a technology partner who understands more than just the software and hardware. After we moved to the cloud, the whole Avago culture began to change. Earlier, there were doubts about how well IT could add value to the corporation, particularly in terms of reliability. We did a recent corporate survey and asked how well employees trusted Avago’s IT system. The result was very positive, with the trust component reaching 4.7 on a scale of 5. So a major part of building that trust is in choosing the right technology partner like Avago did with HCL.

suPPortinG Pe

What is HCL’s procedure

when it goes into a

company and what value do

you bring?

Typically, a company runs an IT budget at 3–7 percent of its total revenues, depending on its verticals and we aim to bring that down with the same or higher quality of service levels. We evaluate current cost structure and current service levels, baseline and benchmark their IT and understand their expectations from a business perspective. We draw up a target operating model for the transformation that’s required, seek directional approvals with PEs and their portfolio companies on their end goals and then deploy our experience, delivery models and platforms to reduce costs.

What is HCL’s impact on cost

savings?

Every client situation is unique. On an average we are able to bring 30–35 percent savings to the existing cost structure, keeping the current or improving service levels to their businesses.

At what stage does HCL usually get

involved with a private equity-

owned company?

Previously, M&A teams used to work with us post acquisition. However, now that we have worked in so many portfolio companies, we have built trust through experience and have been asked to work in the pre-acquisition stage as well. Our tools and processes are used to baseline

and benchmark the current opportunity at hand and potential value gets baked into their portfolio value creation. We don’t get involved in all post-acquisition work, but for the ones we do, we stay through the holding period and plan for our role post-exit.

What’s an example of a

challenging initiative for a

private equity-owned company?

One example is our work with a private equity-owned media organisation that was going through a major business culture transition, moving its publications online. We helped them reduce costs while simultaneously helping them with the transition. Another example is a leading retailer, which is private equity-owned. The issue they faced was that 80 percent of their revenues came in the time period between Thanksgiving to New Year’s. It’s a huge spurt of buying in three months. For the rest of the year, they wanted certain IT support that, of course, would be different. So the question was, how does IT support the retailer in burst and non-burst periods? We optimized, standardized and consolidated their IT systems and moved the variable dynamic loads to innovative delivery solutions including cloud and “as-a-service” model. They continue to be our clients after seven years – the savings funded the much needed transformation. We continue partnering in similar initiatives for manufacturing, media/entertainment, healthcare and consumer goods companies too.

HCL has worked closely with private equity-owned companies to deliver cost efficient operations. Anubhav Saxena, senior VP and global head, business marketing & strategic alliances, HCL Technologies, provides some details

››

Saxena: HCL in pre-acquisition phase


During a lively discussion recently with a limited partner, our chat led onto an issue that I’d always considered a serious threat to private equity’s future prospects, but one that was still a way out on the horizon: the rise of defined contribution pension schemes.

But the issue is not so distant, according to this LP. US public pensions are already undergoing what he describes as an “inev-itable shift” away from a ‘defined benefit’ model, where a retiree is guaranteed a specific pension, to a ‘defined contribution’ model, where the retiree’s pension is based solely on what he or she has paid into their personal retirement account.

The move towards ‘DC’, as industry insiders typically refer to it, stems from pensions’ inabilities to meet rising liabilities. In the US, a number of city authorities have gone bankrupt in part due to liabili-ties related to defined benefit plans they can’t afford.

Last year, at least eight states made structural changes to their retirement plans, according to a report from Pennsylvania’s state office of the budget. Pennsylvania governor Tom Corbett has proposed clos-ing the state’s defined benefit programme to new employees, who would participate instead in a 401k-style offering (a type of retirement savings account controlled by the retiree and typically associated with private company pensions).

The change that’s taking place appears to be a gradual shift from a purely DB model to a hybrid structure that leaves intact the benefits promised to existing members, but puts more responsibility on future workers to fund their own retirements. That’s why this shift requires such a long horizon; it’s not going to take place overnight. But the seeds are being planted.

Rhode Island is perhaps one of the most notable cases so far. The state’s retirement system was woefully underfunded for many years until Gina Raimondo was elected state treasurer in 2010 on a platform of pension reform. Under Raimondo’s lead-ership, the state put into place a hybrid model that shrank the defined benefit portion while requiring employees (other than those retiring by June 2012 who saw no change in their benefits) to contribute more to their own retirements. Raimondo’s reform also tied cost-of-living adjustments to the fund’s investment performance.

This new system has rapidly improved the fund’s financial position: it’s estimated unfunded liability has fallen from about $7.3 billion as of 30 June 2010 to $4.5 billion as of 30 June 2012, according to a study from consulting firm Gabriel Roeder Smith & Company.

Other states made changes last year, too. Michigan, for example, is now offering defined contribution plans to new enroll-ees in the public school employees’ system. Florida’s state legislature has been working on a proposal to close the defined benefit programme to new employees, who would instead be given a defined contribution plan (currently workers can choose between either, with the traditional defined ben-efit plan not surprisingly the most popular choice). Virginia also plans to close defined benefit plans to new employees at the end of 2013, and replace them with hybrid models that include defined contributions.

All of this should be ringing some alarm bells for private equity – because it may leave traditional private equity funds with-out their major source of funding in the not-too-distant future.

US public pension funds accounted for about 43 percent of all capital raised for

Ill-defined commitmentsPensions

Private equity firms and funds of funds that aren’t already thinking about

solutions to this problem – and how to make their products accessible in other formats – are going to end up behind the curve

christoPher witkowskythe worlD accorDinG to limiteD Partners

The shift from defined benefit to defined contribution models is already underway at US pension systems – which means alternative asset managers need to start offering different structures and relationships

lP raDar


private equity funds globally in 2011, according to the Private Equity Growth Capital Council. However, defined contribution plans put more investment decision control into the hands of the employees – and given their requirements for portability, regular pricing and redemption, they’re far less compatible with the private equity model.

Private equity firms and funds of funds that aren’t already thinking about solutions to this problem – and how to make their products accessible in other formats – are going to end up behind the curve.

Possible structures do exist. Europe has had a long tradition of publicly-listed investment trusts that invest alongside private equity funds. Some of these vehicles have struggled in the aftermath of the financial crisis, constantly bat-tling with big discounts to net asset value. But they offer a degree of transparency and tradea-bility that privately-held closed-end funds do not.

Last year, Kohlberg Kravis Roberts opened up two of its funds (although not its private equity funds) to retail clients of US brokerage Charles Schwab. Investors could choose from a high-yield fund with a minimum contribu-tion of $2,500, or a distressed vehicle with a minimum commitment of $25,000.

It remains to be seen how attractive these funds will be to retail investors and whether they’re also workable within DC-style public pension models. But at least it shows that KKR is thinking about these issues and experiment-ing with new ways to access capital (not least of which was the NYSE-listing of its manage-ment company). Every firm is going to have to go through a similar process soon enough

– because it might not to be too long before the big pool of long-term pension fund capital, which has sated the industry for such a long time, starts drying up. n

e: [email protected]

investor base

Two major LPs have been busy strengthening their traditional fund commitment operations

In the last few years, some institutional investors have been actively building up their direct investment arms – often at the expense of their tradi-tional fund commitment divi-sions. The big Canadian pen-sion funds have often been in the vanguard of this trend; for instance, last year The Ontario Municipal Employees’ Retirement System held a large private equity sale and parted company with its fund com-mitments expert, Martin Day, as part of its move to concentrate on direct investing.

However, in recent months, some big LPs have been bucking this trend by strengthening their fund commit-ments business.

Dutch pension administrator APG has quietly been building up its internal team, recently hiring former AlpInvest Partners executive Iain Leigh as global head of private equity in its New York office. Earlier this year, it also recruited Greg Jania, a former executive with Chicago-based fund of funds WP Global, as head of private equity fund investments.

APG and fellow Dutch pension administrator PGGM sold fund of funds manager AlpInvest (which ran private equity for the two institutions) to The

Carlyle Group in 2011. After the sale, PGGM said it would build up its own internal capa-bilities around the asset class. But APG declined to discuss its strategy – until recently, when it revealed that it was building its own internal pri-vate equity team in New York.

“In the future, APG will address some segments of the private equity market using its internal manage-ment team, but will continue to partner with AlpInvest for other parts of the programme,” an APG spokesperson told PEI. APG has already committed the €10 billion it promised to AlpInvest as part of the Carlyle deal.

In addition to APG, there’s also the Abu Dhabi Investment Authority, which this year recruited Craig Nickels, the former head of private equity at the Washington University Investment Management Company, as head of US fund investments in its private equities department.

The trend of big institutions bol-stering their direct (and co-)investment capabilities is likely to continue. But as these recent hires prove, even those institutions with the scale and resources to do direct investing still believe in the benefits of being a traditional private equity LP. n

Direct reportstalent

ADIA: Craig Nickels’ new home


caPital watch

Items in bold represent new additions to the list.FUNDS IN MARKET/COMING TO MARKETGlobal funds firm fund Headquarters strateGy tarGet (m)

abbott Capital management abbott Capital Private equity Vii united states funds of funds / Co-investment $1,000Actis Capital Actis Global 4 United Kingdom Buyout / Corporate Private Equity $3,500Adams Street Partners Adams Street Global Secondary Fund 5 United States Secondaries $750AEA Investors AEA Investors Fund V United States Buyout / Corporate Private Equity $1,500Altius Associates Altius Associates Private Equity Fund II United Kingdom Funds of Funds / Co-Investment $150Alvarez & Marsal Capital Partners A&M Capital Partners United States Buyout / Corporate Private Equity $500Apollo Global Management Apollo Investment Fund VIII United States Buyout / Corporate Private Equity $12,000Aquiline Capital Partners Aquiline Financial Services Fund II United States Buyout / Corporate Private Equity $2,000Avista Capital Partners Avista Capital Partners III United States Buyout / Corporate Private Equity $2,000Bain Capital Bain Capital Fund XI United States Buyout / Corporate Private Equity $6,000Battery Ventures Battery Ventures X United States Venture Capital / Growth Equity $650Cartesian Capital Group Pangaea Two United States Venture Capital / Growth Equity $1,300Cerberus Capital Management Cerberus Institutional Partners, Series V United States Distressed / Turnaround $3,750Cordiant Capital Cordiant Emerging Loan Fund IV Canada Mezzanine / Debt $1,000Corsair Capital Corsair IV Financial Services Capital Partners United States Buyout / Corporate Private Equity $1,500Delta Partners Group Delta Partners Emerging Markets TMT Growth Fund II United Arab Emirates Venture Capital / Growth Equity $350DN Capital DN Capital – Global Venture Capital III United Kingdom Venture Capital / Growth Equity € 150Fosun Capital Group China Momentum Fund China Venture Capital / Growth Equity $1,000Franlin Templeton Templeton Strategic Emerging Markets Fund IV United States Venture Capital / Growth Equity $300GI Partners GI Partners Fund IV United States Buyout / Corporate Private Equity $1,500Goldman Sachs GS Vintage Fund VI United States Secondaries $5,000Greenbriar Equity Group Greenbriar Equity Fund III United States Buyout / Corporate Private Equity $1,250Greenpark Capital Greenpark Emerging Markets Secondaries Fund United Kingdom Secondaries $500HarbourVest Partners HarbourVest Partners IX United States Funds of Funds / Co-Investment $3,000Headway Capital Partners Headway Investment Partners III United Kingdom Secondaries € 280H.I.G. Capital H.I.G. Bayside Loan Opportunity Fund III (Europe-US) United States Distressed / Turnaround $1,000IDFC Capital (Singapore) Pte. Ltd. Emerging Markets Private Equity Fund of Funds Singapore Funds of Funds / Co-Investment $500J.C. Flowers & Co. J.C. Flowers III United States Buyout / Corporate Private Equity $7,000Kennet Partners Kennet IV United Kingdom Venture Capital / Growth Equity $350Landmark Partners Landmark Equity Partners XV United States Secondaries $2,500Lexington Partners Lexington Co-investment Partners III United States Funds of Funds / Co-Investment $1,500Lone Star Funds Lone Star Fund VIII United States Mezzanine / Debt $5,000Mandarin Capital Partners Mandarin Capital Partners II Luxembourg Buyout / Corporate Private Equity € 1,000Mithril Capital Management Mithril United States Venture Capital / Growth Equity $1,000Neuberger Berman NB Distressed Debt Fund United States Distressed / Turnaround $1,000New Health Capital Partners New Health Capital Partners Fund II United States Mezzanine / Debt $500Oaktree Capital Management Oaktree Emerging Market Opportunities Fund United States Distressed / Turnaround $500Pantheon Ventures Pantheon Emerging Markets Fund United Kingdom Funds of Funds / Co-Investment $500Pantheon Ventures Pantheon Global secondary fund V united Kingdom secondaries $3,000Paul Capital Paul Capital Partners X United States Secondaries $2,000Platinum Equity Platinum Equity Capital Partners III United States Buyout / Corporate Private Equity $3,750Pomona Capital Pomona Capital VIII United States Secondaries $1,300Portfolio Advisors Portfolio Advisors Private Equity Fund VII United States Funds of Funds / Co-Investment $900Providence Equity Partners Providence Equity Partners VII United States Buyout / Corporate Private Equity $5,000Samena Capital Samena Special Situations Fund II United Kingdom Distressed / Turnaround $700Sarona Asset Management Sarona Frontier Markets Fund II Canada Funds of Funds / Co-Investment $250Siguler Guff Siguler Guff BRIC Opportunities Fund III United States Funds of Funds / Co-Investment $1,000Silver Lake Partners Silver Lake Partners IV United States Buyout / Corporate Private Equity $7,500Sun Capital Partners Sun Capital Partners VI United States Buyout / Corporate Private Equity $3,000TA Associates TA Atlantic & Pacific VII United States Venture Capital / Growth Equity $1,750The Blackstone Group GSO Capital Solutions Fund II United States Mezzanine / Debt $4,000The Carlyle Group Carlyle Strategic Partners III United States Distressed / Turnaround $1,500The Carlyle Group Carlyle Global Financial Services Partners II United States Buyout / Corporate Private Equity $1,100TPG Capital TPG Opportunities Partners II United States Distressed / Turnaround $1,500TPG Capital TPG Partners VII United States Buyout / Corporate Private Equity $12,000Vestar Capital Partners Vestar Capital Partners VI United States Buyout / Corporate Private Equity $200Virgin Green Virgin Green Fund II United Kingdom Venture Capital / Growth Equity $300Warburg Pincus Warburg Pincus Private Equity XI United States Buyout / Corporate Private Equity $12,000

Global funds subtotal $138,307

ameriCas fundsfirm fund Headquarters strateGy tarGet (m)

3i 3i Brazil Fund United Kingdom Buyout / Corporate Private Equity $500Acon Investments ACON Equity Partners III United States Buyout / Corporate Private Equity $600Adveq Management AG Adveq Opportunity III Switzerland Funds of Funds / Co-Investment $300Apollo Global Management Apollo Credit Opportunity Fund III United States Mezzanine / Debt $750Ares Management Ares Special Situations Fund III United States Distressed / Turnaround $650Arsenal Capital Partners Arsenal Capital Partners III United States Buyout / Corporate Private Equity $750Augusta Columbia Capital Augusta Columbia Capital Fund United States Buyout / Corporate Private Equity $750Balderton Capital Benchmark Capital Partners VII United Kingdom Venture Capital / Growth Equity $425Blue Wolf Capital Partners Blue Wolf Capital III United States Buyout / Corporate Private Equity $275Burrill & Co. Burrill Brazil Fund I United States Venture Capital / Growth Equity $200BV Investment Partners BVIP Fund VIII United States Venture Capital / Growth Equity $400Capital Dynamics CD Brazil Switzerland Funds of Funds / Co-Investment R$500Catterton Partners Catterton Partners VII United States Buyout / Corporate Private Equity $1,200Cerberus Capital Management Cerberus Levered Loan Opportunities Fund II United States Mezzanine / Debt $1,500Chatham Capital Chatham Investment Fund IV United States Mezzanine / Debt $500Chicago Growth Partners Chicago Growth Partners III United States Venture Capital / Growth Equity $500Commonfund Capital Commonfund Capital Private Equity Partners VIII United States Funds of Funds / Co-Investment $600Consonance Capital Partners Consonance Capital Partners United States Buyout / Corporate Private Equity $450Corinthian Capital Group Corinthian Equity Fund II United States Buyout / Corporate Private Equity $500Court Square Capital Partners Court Square Capital Partners III United States Buyout / Corporate Private Equity $3,000Crestview Partners Crestview Partners III United States Buyout / Corporate Private Equity $3,000Crown Capital Partners Norrep Credit Opportunities Fund Canada Mezzanine / Debt C$150CRP Companhia de Participações Fundo CRP Empreendedor Brazil Venture Capital / Growth Equity R$100DAG Ventures DAG Ventures V United States Venture Capital / Growth Equity $500DGF Investimentos DGF Capital III Brazil Venture Capital / Growth Equity $200DRI Capital Drug Royalty III Canada Venture Capital / Growth Equity $1,000Elevation Partners Elevation Partners Fund II United States Venture Capital / Growth Equity $1,000Endeavour Capital Endeavour Capital Fund VI United States Buyout / Corporate Private Equity $600EdgeStone Capital Partners EdgeStone Capital Venture Fund III Canada Venture Capital / Growth Equity C$150Equity Group Investments Zell Opportunities Fund II United States Distressed / Turnaround $1,000Excel Venture Management Excel Medical Fund II United States Venture Capital / Growth Equity $150Falcon Investment Advisors Falcon Strategic Partners IV United States Mezzanine / Debt $850Frazier Healthcare Ventures Frazier Healthcare VII United States Venture Capital / Growth Equity $400Foundation Capital Foundation Capital VII United States Venture Capital / Growth Equity $400FTV Capital FTV IV United States Venture Capital / Growth Equity $500GCP Capital Partners GCP Capital Partners III United States Buyout / Corporate Private Equity $700GenNx360 Capital Partners GenNx360 Capital Partners II United States Buyout / Corporate Private Equity $800Genstar Capital Partners Genstar Capital Partners VI United States Buyout / Corporate Private Equity $1,000Goode Partners Goode Partners Consumer Fund II United States Buyout / Corporate Private Equity $300Gryphon Investors Gryphon Partners 3.5 United States Buyout / Corporate Private Equity $350GTCR GTCR XI United States Buyout / Corporate Private Equity $3,250Hamilton Lane Hamilton Lane FIP Co-Investimento United States Funds of Funds / Co-Investment R$300HarbourVest Partners Dover Street VIII United States Secondaries $3,000HealthCor Partners HealthCor Partners Fund II United States Venture Capital / Growth Equity $300H.I.G. Capital H.I.G. Capital Partners V United States Buyout / Corporate Private Equity $1,000Highland Capital Management Highland RCP II United States Distressed / Turnaround $400Horsley bridge Partners Horsley bridge X Growth buyout united states funds of funds / Co-investment $250

Each issue, we publish ‘Capital Watch’, a selection of private equity funds in market and those coming to market. This proprietary list is taken direct from our sister service – Private Equity International’s data division – which profiles funds, fund managers and investors from around the world on a daily ba-sis. For more information visit www.privateequityconnect.com. Where possible, we seek to confirm our information with the fund managers themselves. If your fund is missing from our list or needs updating, please email us at [email protected].


caPital watch

Horsley bridge Partners Horsley bridge X Venture united states funds of funds / Co-investment $800ICV Partners ICV Partners III United States Buyout / Corporate Private Equity $600Ignition Partners Ignition Partners V United States Venture Capital / Growth Equity $250Incline Management Corp. Incline Equity Partners III United States Mezzanine / Debt $300insight Venture Partners insight Venture Partners Viii united states Venture Capital / Growth equity $1,750Irving Place Capital Irving Place Capital Partners IV United States Buyout / Corporate Private Equity $2,000J.H Whitney & Co JH Whitney VII United States Buyout / Corporate Private Equity $800Juggernaut Capital Partners Juggernaut Capital Partners II United States Buyout / Corporate Private Equity $300Kainos Capital Kainos Capital Partners United States Buyout / Corporate Private Equity $400Kohlberg & Company Kohlberg Investors VII United States Buyout / Corporate Private Equity $1,500Kohlberg Kravis Roberts (KKR) KKR North America Fund XI United States Buyout / Corporate Private Equity $10,000KPS Capital Partners KPS Special Situations Fund IV United States Distressed / Turnaround $3,000KRG Capital Partners KRG Capital Fund V United States Buyout / Corporate Private Equity $2,000Lake Capital Lake Capital Partners III United States Buyout / Corporate Private Equity $500LBC Credit Partners LBC Credit Partners III United States Mezzanine / Debt $650Leopard Capital Leopard Haiti Fund Hong Kong Venture Capital / Growth Equity $75Lexington Partners Lexington Middle Market Investors III United States Secondaries $750LLR Equity Partners LLR Equity Partners IV United States Buyout / Corporate Private Equity $800McCarthy Capital Corporation Fulcrum Growth Partners V United States Buyout / Corporate Private Equity $300MHR Fund Management MHR Institutional Partners IV United States Distressed / Turnaround $2,750Milestone Partners Milestone Partners IV United States Buyout / Corporate Private Equity $350MPower Ventures MPower Ventures III United States Venture Capital / Growth Equity $50MSW Capital MSW Capital Fip I Brazil Buyout / Corporate Private Equity R$300Nautic Partners Nautic Partners VII United States Buyout / Corporate Private Equity $800Neuberger Berman NB Secondary Opportunities Fund III United States Secondaries $1,600new mountain Capital new mountain Partners iV united states buyout / Corporate Private equity $3,000Northgate Capital Northgate V United States Funds of Funds / Co-Investment $1,000Olympus Partners Olympus Growth Fund VI United States Buyout / Corporate Private Equity $2,500Palladium Equity Partners Palladium Equity Partners IV United States Buyout / Corporate Private Equity $800Pamlico Capital II Pamlico Capital II United States Buyout / Corporate Private Equity $500PC Capital Partners Mexico Development Fund I Mexico Venture Capital / Growth Equity $50Peak Rock Capital Peak Rock Capital Fund United States Buyout / Corporate Private Equity $400Pegasus Capital Advisors Pegasus Partners V United States Distressed / Turnaround $1,500Portland Private Equity Portland Caribbean Fund II Barbados Buyout / Corporate Private Equity $300RCP Advisors RCP Secondary Opportunity Fund II United States Secondaries $300RFE Investment Partners RFE Investment Partners VIII United States Buyout / Corporate Private Equity $300Rio Bravo Rio Bravo Nordeste III Brazil Venture Capital / Growth Equity R$300Riordan Lewis & Haden RLH Investors III United States Venture Capital / Growth Equity $250Saybrook Capital Saybrook Corporate Opportunity Fund II United States Mezzanine / Debt $350Sierra Ventures Sierra Ventures X United States Venture Capital / Growth Equity $200Siguler Guff Siguler Guff Small Buyout Opportunities Fund II United States Funds of Funds / Co-Investment $600Sterling Investment Partners Sterling Investment Partners III United States Buyout / Corporate Private Equity $700Sterling Partners Sterling Capital Partners IV United States Buyout / Corporate Private Equity $1,000Stratus Group Stratus Capital Partners Brazil Buyout / Corporate Private Equity $300Swander Pace Capital SPC Partners V United States Buyout / Corporate Private Equity $450technology Crossover Ventures tCV Viii united states Venture Capital / Growth equity $2,500The Carlyle Group Carlyle Partners VI United States Buyout / Corporate Private Equity $10,000The Carlyle Group Carlyle Peru Fund United States Buyout / Corporate Private Equity $125The Riverside Company Riverside Capital Appreciation Fund VI United States Buyout / Corporate Private Equity $1,500thomas H. lee equity Partners thomas H. lee equity Partners Vii united states buyout / Corporate Private equity $4,000Top Tier Capital Partners Top Tier Venture Capital VI United States Funds of Funds / Co-Investment $200TorQuest Partners TorQuest Partners Fund III Canada Buyout / Corporate Private Equity C$550Tower Three Partners Tower Three Partners Fund II United States Buyout / Corporate Private Equity $400Tribeca Asset Management Tribeca Fund III Colombia Buyout / Corporate Private Equity $400Trilantic Capital Partners V Trilantic Capital Partners V (North America) United States Buyout / Corporate Private Equity $2,000Veronis Suhler Stevenson VSS Communications Partners V United States Buyout / Corporate Private Equity $1,000Versa Capital Management Versa Capital Fund III United States Distressed / Turnaround $750Voyager Capital Voyager Capital Fund IV United States Venture Capital / Growth Equity $125W Capital Partners W Capital Partners III United States Secondaries $750Wayzata Investment Partners Wayzata Opportunities Fund III United States Distressed / Turnaround $2,500Wicks Group of Companies Wicks Capital Partners IV United States Buyout / Corporate Private Equity $560Willowridge Partners Amberbrook Fund VI United States Secondaries $350Windjammer Capital Windjammer Senior Equity Fund IV United States Buyout / Corporate Private Equity $700Yucaipa Companies Yucaipa American Alliance Fund III United States Buyout / Corporate Private Equity $1,650Z Capital Partners Z Capital Special Situations Fund II United States Distressed / Turnaround $500

ameriCas funds subtotal $113,249

euroPe funds firm fund Headquarters strateGy tarGet (m)

3i Vintage II 3iDM United Kingdom Mezzanine / Debt $4003TS Capital Partners 3TS CEE Fund III Czech Republic Venture Capital / Growth Equity € 200A Capital A-CAPITAL China Outbound RMB Fund China Venture Capital / Growth Equity RMB3,000Abris Capital Partners Abris CEE Mid-Market Fund II Poland Buyout / Corporate Private Equity € 450ACG Private Equity ACG Europe V France Funds of Funds / Co-Investment € 250Adveq Management AG Adveq Europe V Switzerland Funds of Funds / Co-Investment $300Akina Euro Choice V Switzerland Funds of Funds / Co-Investment € 720Alcuin Capital Partners The Third Alcuin Fund United Kingdom Venture Capital / Growth Equity £100ALPHA Associates Alpha CEE III Switzerland Funds of Funds / Co-Investment € 300Alven Capital Alven Capital IV France Buyout / Corporate Private Equity € 100Apax Partners Apax VIII United Kingdom Buyout / Corporate Private Equity € 9,000Ares Management Ares Capital Europe II United States Mezzanine / Debt € 1,500August Equity August Equity Partners III United Kingdom Buyout / Corporate Private Equity £180Avenue Capital Avenue Europe Special Situations Fund II United States Distressed / Turnaround € 1,500AVG Capital Partners AVG CIS Agricultural Opportunities Fund Cayman Islands Buyout / Corporate Private Equity $1,500AXA Private Equity AXA LBO Fund V France Buyout / Corporate Private Equity € 2,000Axxess Capital Emerging Europe Accession Fund Romania Mezzanine / Debt € 150Babson Capital Europe Limited Almack Mezzanine III United Kingdom Mezzanine / Debt € 500Butler Capital Partners France Private Equity 4 France Distressed / Turnaround € 500Butler Capital Partners WB Debt Partners France Distressed / Turnaround € 250CapMan CapMan Russia II Fund Finland Venture Capital / Growth Equity € 175CapVest CapVest equity Partners iii united Kingdom buyout / Corporate Private equity € 400Cinven The Fifth Cinven Fund United Kingdom Buyout / Corporate Private Equity € 5,000CVC Capital Partners CVC European Equity Partners VI United Kingdom Buyout / Corporate Private Equity € 9,000Darby Overseas Investments Darby Converging Europe Fund III United States Mezzanine / Debt € 250Doughty Hanson & Co. Doughty Hanson & Co VI United Kingdom Buyout / Corporate Private Equity € 2,500Dragon Capital The Europe Virgin Fund Ukraine Buyout / Corporate Private Equity $120Dunedin Dunedin Buyout Fund III United Kingdom Buyout / Corporate Private Equity € 250Elbrus Capital Elbrus Capital Fund II Russia Buyout / Corporate Private Equity $500EMSA Capital CEE Special Situations Fund United States Distressed / Turnaround € 200Enterprise Investors Polish Enterprise Fund VII Poland Buyout / Corporate Private Equity € 650EQT Partners EQT Credit Fund II Sweden Mezzanine / Debt € 750First Eastern Investment Group UK China Fund Hong Kong Venture Capital / Growth Equity $500Glovoc Inc. ESDEV-I India Venture Capital / Growth Equity $335GMT Communication Partners GMT Communications Partners IV United Kingdom Buyout / Corporate Private Equity € 350Goldsmith Capital Partners Whitesmith Private Equity Investors Cayman Islands Distressed / Turnaround € 1,000Greenpark Capital Greenpark International Investors IV United Kingdom Secondaries $1,200Haymarket Financial HayFin Special Opportunities Credit Fund United Kingdom Distressed / Turnaround € 500Herkules Capital Herkules Private Equity Fund IV Norway Buyout / Corporate Private Equity NOK7,500HgCapital HgCapital 7 United Kingdom Buyout / Corporate Private Equity £1,750Lyceum Capital Lyceum Capital Fund III United Kingdom Buyout / Corporate Private Equity £275Mezzanine Management Central Europe Accession Mezzanine Capital III Austria Mezzanine / Debt € 350MezzVest MezzVest III United Kingdom Mezzanine / Debt € 600Mid Europa Partners Mid Europa Fund IV United Kingdom Buyout / Corporate Private Equity € 1,500Neovara Neovara European Mezzanine 2011 United Kingdom Mezzanine / Debt € 400Nordic Capital Nordic Capital VIII Jersey Buyout / Corporate Private Equity € 3,000PAI Partners PAI Partners VI France Buyout / Corporate Private Equity € 3,000Palamon Capital Partners Palamon European Equity Fund III United Kingdom Buyout / Corporate Private Equity € 750Palio Capital Partners Superflex Fund I United Kingdom Mezzanine / Debt £250Parcom Deutsche Private Equity DPE Deutschland II Germany Venture Capital / Growth Equity € 300Pemberton Capital Advisors Pemberton European Services Fund I United Kingdom Buyout / Corporate Private Equity € 500Permira Advisers Permira V United Kingdom Buyout / Corporate Private Equity € 6,500Enterprise Investors Polish Enterprise Fund VII Poland Buyout / Corporate Private Equity € 650Prometheus Capital Partners Prometheus Capital Partners Fund I Russia Venture Capital / Growth Equity $350


Qualitas Equity Partners Qualitas Equity Partners Fund II Madrid Buyout / Corporate Private Equity € 150Rockley Group Rockley Follow-on Fund United Kingdom Venture Capital / Growth Equity € 100Siguler Guff Russia Partners Technology Fund United States Venture Capital / Growth Equity $250SL Capital Partners SL Capital European Smaller Fund I United Kingdom Funds of Funds / Co-Investment € 300Steadfast Capital Steadfast Capital Fund III Germany Buyout / Corporate Private Equity € 250Syntaxis Capital Syntaxis Mezzanine Fund II Austria Mezzanine / Debt € 250TDR Capital TDR Capital III United Kingdom Buyout / Corporate Private Equity € 1,750The Riverside Company Riverside Europe Fund V United States Buyout / Corporate Private Equity $600Triton Partners Triton Fund IV United Kingdom Buyout / Corporate Private Equity € 2,400Weinberg Capital Partners Weinberg Capital Partners II France Buyout / Corporate Private Equity € 400

euroPe funds subtotal $93,993

asia PaCifiC fundsfirm fund Headquarters strateGy tarGet (m)

Aavishkaar Venture Management Aavishkaar India II India Venture Capital / Growth Equity $150Access Asset Managers Access India Fund I India Venture Capital / Growth Equity $150Actis Actis India 4 United Kingdom Venture Capital / Growth Equity $400Adveq Management AG Adveq Asia III Switzerland Funds of Funds / Co-Investment $300Affinity Equity Partners Affinity Asia Pacific Fund IV Hong Kong Buyout / Corporate Private Equity $3,500Agricultural Bank of China AgBank (Wuxi) Private Equity Fund China Venture Capital / Growth Equity RMB15,000Alternative Investment (AI) Capital AIC Asia Opportunity Fund Japan Secondaries $200Ambit Pragma Ventures Ambit Pragma Fund II India Venture Capital / Growth Equity $150anchor equity Partners anchor equity Partners fund i south Korea Venture Capital / Growth equity $500Ant Capital Partners Ant Bridge No.4 Private Equity Secondary Investment Fund Japan Secondaries $150Apollo Global Management / ICICI Venture AION Fund I United States / India Distressed / Turnaround $500ARC China Liaoning Huayuankou Investment Fund China Venture Capital / Growth Equity RMB1,000Ares Management Ares Corporate Opportunities Fund Asia United States Buyout / Corporate Private Equity $500Arka Capital Advisors Pvt. Ltd. Arka Capital Fund India Buyout / Corporate Private Equity $400Aureos Capital Aureos India Fund II United Kingdom Venture Capital / Growth Equity $200Aureos Capital Aureos South-East Asia Fund II United Kingdom Venture Capital / Growth Equity $200Avendus Capital Avendus Special Situations Fund III India Venture Capital / Growth Equity $200AXA Private Equity AXA Capital Asia III France Funds of Funds / Co-Investment $600Baer Capital Partners Beacon India Private Equity Fund II United Arab Emirates Venture Capital / Growth Equity $250Bagan Capital Myanmar Transition Fund Hong Kong $75BanyanTree Finance Pvt. Ltd. BanyanTree Growth Capital II India Venture Capital / Growth Equity $175Blackstone/ Pudong Government Blackstone Zhonghua Development Investment Fund United States Venture Capital / Growth Equity RMB5,000BOC International Holdings Limited China Culture Industrial Investment Fund China Venture Capital / Growth Equity RMB20,000Boyu Capital Consultancy Co. Ltd. Boyu Capital Fund I China Venture Capital / Growth Equity $1,000Brighttrust PE Japan Brightrust Fund of Funds Japan Funds of Funds / Co-Investment ¥20,000CCB International Holdings Limited (CCBI) China Aviation PE Fund China Venture Capital / Growth Equity RMB20,000CdH investments CdH fund V Hong Kong Venture Capital / Growth equity $2,000China Development Bank Guochuang Fund of Funds China Funds of Funds / Co-Investment RMB60,000China Development Financial Holding Shanghai Taiwan Industry Private Equity Fund Taiwan Venture Capital / Growth Equity RMB2,000China Development Industrial Bank CDIB Kunshan Industrial PE fund Taiwan Venture Capital / Growth Equity RMB2,000China Enterprise Capital (CEC) Management CEC Fund III Hong Kong Buyout / Corporate Private Equity $300China Machinery Industry Federation Shanghai Automotive Industry Fund China Venture Capital / Growth Equity RMB30,000China Merchants Securities Xiangjiang Industrial Investment Fund China Venture Capital / Growth Equity RMB2,000China Renaissance Capital Investment China Harvest Fund III China Venture Capital / Growth Equity $750China Science & Merchants Investment (Fund) Management Co., Ltd. CSM USD Fund China Venture Capital / Growth Equity $1,000Chinatrust Venture Capital Chinatrust Venture Capital Fund Taiwan Venture Capital / Growth Equity $300CITIC Capital CITIC Capital Venture Partners Hong Kong Venture Capital / Growth Equity $150CITIC Private Equity Funds Mangement CITIC Mezzanine Fund I China Mezzanine / Debt RMB5,000CLSA Capital Partners The Clean Resources Asia Growth Fund China Venture Capital / Growth Equity $200Cowin Capital Cowin Capital USD Fund China Venture Capital / Growth Equity $100Creador Creador Capital fund ii malaysia Venture Capital / Growth equity $350Crescent Capital Partners Crescent Capital Fund IV Australia Buyout / Corporate Private Equity A$500CX Partners CX Partners Mezzanine Fund India Mezzanine / Debt $500CX Partners CX Partners fund ii india Venture Capital / Growth equity $600Dabur Group Asian Healthcare Fund India Venture Capital / Growth Equity INR10,600Daiwa Quantum Capital Daiwa Quantum Capital Partners I Japan Venture Capital / Growth Equity $300Decheng Capital Decheng Capital China Life Sciences Fund I China Venture Capital / Growth Equity $125Deutsche Bank DB Private Equity Asia Select Fund IV Germany Funds of Funds / Co-Investment $150Diverso Management Diverso Management Fund II China Venture Capital / Growth Equity $250Doran Capital Partners / Eurasia Capital Korea Mongolia Resources Fund South Korea / Mongolia Venture Capital / Growth Equity $100Dragon Capital Dragon Capital 3rd Wave Fund Vietnam Venture Capital / Growth Equity $250DRC Capital JLP DRC II Japan Venture Capital / Growth Equity $100DT Capital Partners DT Yinke 2 China Venture Capital / Growth Equity RMB500Dymon Asia Capital Dymon Asia Private Equity Fund Singapore Venture Capital / Growth Equity SGD300Eight Capital Eight Capital Mezzanine and Special Situations Fund India Mezzanine / Debt $250Evolvence Capital Evolvence India Life Sciences Fund II India Venture Capital / Growth Equity $150Exponentia Capital Exponentia Opportunities Fund India Venture Capital / Growth Equity $400Falcon House Partners Falcon House Partners Indonesia Fund I Indonesia Venture Capital / Growth Equity $200Fortis-Haitong Private Equity Fund Management Co.,Ltd. China-Belgium Direct Equity Investment Fund II China Venture Capital / Growth Equity RMB3,000Franklin Templeton Investments Franklin Templeton Darby Private Equity RMB Fund United States Venture Capital / Growth Equity RMB2,000frontier investment & development Partners ClmV opportunities fund Cambodia Venture Capital / Growth equity $100Frontline Strategy Clove Route Fund Singapore Venture Capital / Growth Equity $150Fujian Provincial Investment Development Group (FPIDG) Fujian Provincial VC Fund China Venture Capital / Growth Equity RMB600Gen2 Partners Gen2 Capital Partners Fund II Hong Kong Mezzanine / Debt $200Globis Capital Partners Globis fund iV Japan Venture Capital / Growth equity ¥15,000Goldman Sachs Broad Street (Beijing) RMB Fund United States Buyout / Corporate Private Equity RMB5,000GoldStone Investment CITIC Buyout Fund China Buyout / Corporate Private Equity RMB10,000GoldStone Investment CITIC GoldStone Investment Fund China Buyout / Corporate Private Equity RMB10,000GP Capital Shanghai Financial Sector Investment Fund China Buyout / Corporate Private Equity RMB20,000Halcyon Halcyon Special Situations India Fund India Distressed / Turnaround $200Helmsman Capital Helmsman Capital Fund III Australia Distressed / Turnaround A$200Huiou (Chongqing) Education Equity Investment Company Huiou (Chongqing) Education Equity Investment Fund China Venture Capital / Growth Equity RMB5,000IDG Ventures India IDG Ventures India Fund II India Venture Capital / Growth Equity $175IL&FS Tara India Fund IV India Venture Capital / Growth Equity $300India Equity Partners India Equity Partners Fund II United States Buyout / Corporate Private Equity $500IndiaVenture Advisors IndiaVenture Advisors Healthcare Fund India Venture Capital / Growth Equity INR10,000IndiaCo Ventures India Growth Opportunity Fund India Venture Capital / Growth Equity $500Infinity Group Chongqing Infinity RMB Fund Israel Venture Capital / Growth Equity RMB6,000Infinity Group Chongqing Infinity USD Fund Israel Venture Capital / Growth Equity $1,000Intel Capital Intel Capital India Technology Fund II United States Venture Capital / Growth Equity $250Iwakaze Capital Iwakaze Capital II Japan Buyout / Corporate Private Equity $200Jiangxi Hongcheng Waterworks Co., Ltd Nanchang Hongtu New Capital Venture Investment Co., Ltd China Venture Capital / Growth Equity RMB200JPMorgan Asset Management JPMorgan Asia Private Equity Fund United States Funds of Funds / Co-Investment $750JS Private Equity Management JS Private Equity Fund II Pakistan Venture Capital / Growth Equity $150Jupiter Capital Partners Jupiter sri lanka Growth fund sri lanka Venture Capital / Growth equity $50Kaiwu Capital Kaiwu Capital China Venture Capital / Growth Equity $150Kaizen Global Kaizen Education Fund India Venture Capital / Growth Equity $150Kedaara Capital Kedaara Capital Fund India Buyout / Corporate Private Equity $500Keytone Ventures Keytone Ventures II China Venture Capital / Growth Equity $300Kleiner Perkins Caufield & Byers KPCB China Fund II United States Venture Capital / Growth Equity $250Kotak Private Equity Group Kotak India Private Equity Fund India Venture Capital / Growth Equity $200KV Asia Capital KV Asia Capital Fund Singapore Venture Capital / Growth Equity $250l Capital l Capital asia ii france Venture Capital / Growth equity $800Leopard Capital Leopard Bangladesh Fund Hong Kong Venture Capital / Growth Equity $100Leopard Capital Leopard Cambodia-Laos Fund II Hong Kong Venture Capital / Growth Equity $75lighthouse funds india 2020 fund ii united states Venture Capital / Growth equity $125LotusPool Capital LotusPool Capital Fund India Buyout / Corporate Private Equity $250Lunar Capital Lunar Capital Partners III China Venture Capital / Growth Equity $150Maui Capital The Maui Aqua Fund New Zeland Buyout / Corporate Private Equity NZD$250Matrix Partners China Matrix China RMB Fund China Venture Capital / Growth Equity RMB300MBK Partners MBK Partners III South Korea Buyout / Corporate Private Equity $2,250Mekong Capital Mekong Enterprise Fund III Vietnam Buyout / Corporate Private Equity $150Morgan Creek Capital Management Morgan Creek Capital Partners Asia United States Funds of Funds / Co-Investment $400Morgan Stanley Investment Management Morgan Stanley Private Equity Asia IV United States Buyout / Corporate Private Equity $1,500Morgan Stanley Investment Management Morgan Stanley RMB Fund United States Venture Capital / Growth Equity RMB1,500

caPital watch

Items in bold represent new additions to the list.FUNDS IN MARKET/COMING TO MARKET


caPital watch

Motilal Oswal Venture Capital India Business Excellence Fund II India Venture Capital / Growth Equity $350Myo Capital Advisers Myo Capital Special Situations Fund I China Distressed / Turnaround $300Ncubate Capital Partners Ncubate Capital Partners Fund India Venture Capital / Growth Equity $200New Hope Group New Hope Industrial Fund II China Venture Capital / Growth Equity $200New Margin Ventures XPCG NewMargin Private Equity Investment Fund China Venture Capital / Growth Equity RMB1,000Next Capital Next Capital Partners II Limited Partnership Japan Buyout / Corporate Private Equity ¥15,000Olympus Capital Holdings Asia Olympus Capital Asia IV Hong Kong Venture Capital / Growth Equity $750OrbiMed Advisors OrbiMed Asia Partners II United States Venture Capital / Growth Equity $300Pacific Equity Partners Pacific Equity Partners V Sydney Buyout / Corporate Private Equity A$3,500Phoenix Media Fund Advisory (HK) Limited Phoenix Media Fund Hong Kong Venture Capital / Growth Equity $300Pinnacle Private Equity Pinnacle Private Equity Fund Australia Buyout / Corporate Private Equity A$200Pravi Capital Pravi Capital Fund I India Venture Capital / Growth Equity $200Pravi Capital / ASK Group ASK Pravi Capital Advisors Fund India Venture Capital / Growth Equity $250Prax Capital Prax Capital China Growth Fund III United States Venture Capital / Growth Equity $300PT Wellington Capital Advisory PT Wellington Capital Advisory Fund I Indonesia Venture Capital / Growth Equity $350Quadria Capital Investment Management Quadria Capital Fund Singapore Venture Capital / Growth Equity $300Quvat Management Pte Quvat Capital Partners III Singapore Buyout / Corporate Private Equity $350Rabo Equity Advisors India Agri Business Fund II India Venture Capital / Growth Equity $250RRJ Capital RRJ Capital II Hong Kong Buyout / Corporate Private Equity $5,000Sagamore Investments Sagamore China Partners III Hong Kong Funds of Funds / Co-Investment $150SAIF Partners SAIF China Growth RMB Fund II Hong Kong Venture Capital / Growth Equity RMB5,000Sailing Capital International Sailing Capital International Fund China Mezzanine / Debt RMB50,000Samena Capital Samena Special Situations Fund II United Kingdom Distressed / Turnaround $700SBI Holdings SBI Ven Capital Japan Venture Capital / Growth Equity $80Sequoia Capital Sequoia Capital China Venture Fund IV China Venture Capital / Growth Equity $325Shaanxi Culture Industry Investment Holding Group Shaanxi Culture Industry Investment Fund China Venture Capital / Growth Equity RMB5,000Shanghai Chengtou Shanghai Chengtou Fund of Funds China Funds of Funds / Co-Investment RMB10,000Sinopharm Capital Shanghai Sinopharm Private Equity Fund China Venture Capital / Growth Equity RMB1,000Sonoma Management Partners India Buyout Fund II India Buyout / Corporate Private Equity $100Southern Cross Venture Partners Renewable Energy Venture Capital Fund Australia Venture Capital / Growth Equity A$200Squadron Capital Squadron Asia Pacific Fund III Hong Kong Funds of Funds / Co-Investment $400STIC Investments STIC Asia Mid-Market Private Equity Fund II South Korea Buyout / Corporate Private Equity $500Suzhou Gaohua Venture Investment Management Suzhou Quam-SND Venture Capital China Venture Capital / Growth Equity RMB800Tasly Group Huajin International Pharmaceutical and Medical Fund China Venture Capital / Growth Equity RMB5,000Tasman Capital Partners Tasman Capital Partners Fund Australia Buyout / Corporate Private Equity A$200The Blackstone Group Shanghai Blackstone Equity Investment Partnership United States Venture Capital / Growth Equity RMB5,000The Carlyle Group Carlyle Asia Partners IV United States Buyout / Corporate Private Equity $3,500The Carlyle Group Carlyle Beijing RMB Fund United States Venture Capital / Growth Equity RMB5,000The Riverside Company Riverside Asia-Pacific Fund II United States Buyout / Corporate Private Equity $150TPG Capital TPG China Partners I United States Venture Capital / Growth Equity RMB5,000TPG Capital TPG Asia Partners VI United States Buyout / Corporate Private Equity $4,000Tsing Capital China Environment Fund IV China Venture Capital / Growth Equity $350TVS Capital Funds TVS Shriram Growth Fund IB India Venture Capital / Growth Equity INR5,000United Overseas Bank (UOB) UOB PA Pan Asia Select Fund III Singapore Funds of Funds / Co-Investment $300VenturEast VenturEast Life Fund III India Venture Capital / Growth Equity $200Violet Arch Capital Violet Arch Strategic Themes India Venture Capital / Growth Equity $500Vietnam Pioneer Partners Vietnam Pioneer Fund Vietnam Venture Capital / Growth Equity $100Warrants Capital Sdn. Bhd. Huatai Von Malaysia Fund New Zeland Venture Capital / Growth Equity $500WestSummit Capital WestSummit China Capital Growth Capital II China Venture Capital / Growth Equity $400Yanchang Petroleum Group National Guantian Industrial Fund China Venture Capital / Growth Equity RMB10,000Yawadwipa Cos. Java Fund Indonesia Buyout / Corporate Private Equity $1,000Yellow River Delta Industry Fund Management Yellow River Delta Industry Fund China Venture Capital / Growth Equity RMB20,000YourNest YourNest Angel Fund India Venture Capital / Growth Equity INR1,000Zephyr Management Zephyr Peacock India Fund III United States Venture Capital / Growth Equity $150Zero2IPO Investment Zero2IPO Investment Fund China Funds of Funds / Co-Investment RMB5,000

asia PaCifiC funds subtotal $115,927

middle east afriCa fundsfirm fund Headquarters strateGy tarGet (m)

8 Miles 8 Miles Fund I A United Kingdom Venture Capital / Growth Equity $750AcceleratorTech Capital Partners Accelerator Technology and Innovation Capital Partners Jordan Venture Capital / Growth Equity $75Actera Group Actera Partners II Turkey Buyout / Corporate Private Equity $1,007African Capital Alliance (ACA) Capital Alliance Private Equity III (CAPE) Nigeria Venture Capital / Growth Equity $350Africa Health Systems Management Company Investment Fund for Health in Africa II Netherlands Venture Capital / Growth Equity $250Africa Private Equity Fund Managers (Pty) Ltd Batian Fund South Africa Venture Capital / Growth Equity $100amethis finance amehtis africa finance france Venture Capital / Growth equity $300Angola Capital Partners Fundo de Investimento Privado de Angola Angola Venture Capital / Growth Equity $100Avendus Capital Avendus Special Situations Fund III India Venture Capital / Growth Equity $200BNP Paribas Private Equity (BNP Paribas Capital) MENA Private Equity Fund France Venture Capital / Growth Equity $300BTG Pactual BTG Pactual Africa Fund Brazil Buyout / Corporate Private Equity $1,000Business Partners International Business Partners International Southern Africa SME Fund South Africa Venture Capital / Growth Equity $40Capital Trust Group EuroMena III United Kingdom Venture Capital / Growth Equity $300Cerberus Capital Management / Garanti Cerberus Garanti Turkey Fund United States Venture Capital / Growth Equity $1,000Citadel Capital MENA and Africa Joint Investment Funds Egypt Buyout / Corporate Private Equity $500Decorum Capital Partners New Africa Mining Fund II South Africa Venture Capital / Growth Equity $300Development Partners International African Development Partners II United Kingdom Venture Capital / Growth Equity $500Dragon Capital Dragon Capital 3rd Wave Fund Vietnam Venture Capital / Growth Equity $250Duet Private Equity Duet-TLG Growth Capital Fund United Kingdom Venture Capital / Growth Equity $150Emerging Africa Capital Emerging Africa Capital Fund Kenya Venture Capital / Growth Equity $100Fairview Capital Partners FMO Fairview Africa Fund United States Funds of Funds / Co-Investment $200FIMI FIMI Opportunity V Israel Mezzanine / Debt $800Foursan Group Foursan Capital Partners 1 (FCP) Jordan Venture Capital / Growth Equity $200Global Investment House Bosphera Private Equity Partners Kuwait Buyout / Corporate Private Equity $350Gulf Capital Gulf Credit Partners Fund United Arab Emirates Venture Capital / Growth Equity $300I&P Management I&P Capital III Mauritius Buyout / Corporate Private Equity € 75IFC Asset Management Company IFC MENA Fund United States Funds of Funds / Co-Investment $100Invest AD (Abu Dhabi Investment Company) Invest AD MENA Partners 2 United Arab Emirates Venture Capital / Growth Equity $400Investcorp Gulf Mezzanine Fund Bahrain Mezzanine / Debt $500investec asset management investec africa Credit opportunities fund 1 united Kingdom mezzanine / debt $350Islamic Development Bank / Robeco Food and Agriculture Fund Saudi Arabia / Netherlands Venture Capital / Growth Equity $600Ithmar Capital Ithmar Fund III United Arab Emirates Venture Capital / Growth Equity $1,000Kuramo Capital Management Kuramo Africa Opportunity Fund United States Funds of Funds / Co-Investment $300LotusPool Capital LotusPool Capital India Buyout / Corporate Private Equity $250ManoCap ManoCap Frontier Fund Sierra Leone Venture Capital / Growth Equity $100Mediterra Capital Management Mediterra Capital Partners I Turkey Buyout / Corporate Private Equity € 300Medu Capital Medu Capital III South Africa Venture Capital / Growth Equity $300NBK Capital NBK Capital Equity Partners Fund II Kuwait Buyout / Corporate Private Equity $350Pera Capital Partners Pera Capital Partners Fund I Turkey Venture Capital / Growth Equity € 120Pitango Venture Capital Pitango Venture Capital Fund VI Israel Venture Capital / Growth Equity $350Rasmala Investments Rasmala MENA Private Equity Fund II United Arab Emirates Venture Capital / Growth Equity $350Rohatyn Group TRG Africa Catalyst Fund I United States Mezzanine / Debt $300Sango Capital Management Sango Capital Partners South Africa Funds of Funds / Co-Investment $200Satya Capital Satya Capital Africa Fund II United Kingdom Venture Capital / Growth Equity $500Schulze Global Investments Schulze Global Ethiopia Growth and Transformation Fund I China Venture Capital / Growth Equity $100Siraj Fund Management Company Siraj Palestine Fund I Palestine Venture Capital / Growth Equity $80Sphinx Capital Corporation Sphinx Turnaround Fund British Virgin Islands Distressed / Turnaround $100Swicorp Capital Partners Intaj Capital II Saudi Arabia Venture Capital / Growth Equity $400The Carlyle group Carlyle Sub-Saharan Africa Fund United States Buyout / Corporate Private Equity $500Trade Bank of Iraq Trade Bank of Iraq Private Equity Fund Iraq Buyout / Corporate Private Equity $500Trinitas Private Equity Trinitas Private Equity Fund South Africa Buyout / Corporate Private Equity ZAR750Tuninvest-Africinvest Group Maghreb Private Equity Fund III Tunisia Venture Capital / Growth Equity € 200UBS GAM / MerchantBridge MerchantBridge-UBS Private Equity Switzerland Venture Capital / Growth Equity $500Vital Capital Investments Vital Capital Fund I Switzerland Buyout / Corporate Private Equity $500

middle east / afriCa funds subtotal $19,264

total $480,740

Items in bold represent new additions to the list.FUNDS IN MARKET/COMING TO MARKET


Exclusive figures from Private Equity International’s Research & Analytics division show that private equity fundraising was up last year – but investors were less inclined to back managers with a purely European or emerging markets remit

for further information, please see our website www.privateequityconnect.com

euroPe takes smaller share oF wallet

Global FunDs ProFit as lPs Play it saFe

latin america takes a hit

seconDaries Players PrePare For the wave

FOCUS ON... 2012 FUNDRAISING





Data room

Happily, despite the tough climate, the global fundraising total jumped 10.4 percent last year to $265 billion – largely due to the big global funds, which managed to corral about $118 billion between them (a 79 percent rise). However, the number of funds reaching a final close actually fell, pushing up the average size of closed funds. This suggests a flight to quality: investors are, on the whole, choosing to make fewer, larger bets on trusted managers. Good news for the chosen few; not so good for first-timers ...

Emerging markets fundraising fell in 2012: the combined total for Asia-Pacific, Latin America, the Middle East, North Africa and Central and Eastern Europe was 30 percent lower than in 2011. Latin America and Asia-Pacific were particularly hard-hit, down 47 percent and 26 percent respectively. And while the former saw several large fund closes in 2011, which was always going to skew the figures in such a relatively small market, that excuse doesn’t wash for Asia – where there are more managers seeking more money than anywhere else in the world.

Proof, if it were needed, of how difficult it was for European managers to raise capital in 2012: the proportion of global capital committed to Europe-focused funds slumped to 11 percent, its lowest level since the crash. Reports from the fundraising front line suggest that many big LPs – particularly in North America – were largely steering clear of Europe. Some Europe-focused funds did enjoy conspicuous success, including the likes of DBAG, Equistone and BC Partners. But for most, it was – and continues to be – a pretty hard slog.

Last year, secondaries managers raised more money than ever before: almost $21 billion (albeit over a third of this came from AXA Private Equity’s record-breaking $7.1 billion fund plus $900 million sidecar). It’s a strategy that clearly resonates with investors at the moment, and no wonder – with regulatory change forcing some of the industry’s biggest LPs out of the asset class, there’s likely to be a once-in-a-generation buying opportunity as they try to sell up. So it’s a good time to have a very big war-chest.

$bn

$bn $bn

%

2008 2009 2010 2011 2012

2008 2009 2010 2011 2012 2008 2009 2010 2011 2012

2008 2009 2010 2011 2012

Europe as a % of total capital raised globally Asia-Pacific CEE Latin America Middle East/Africa

18% 13% 13% 19% 11%

(721) (476) (571) (525) (457) $7.7 $19.7 $10.1 $9.6 $20.8


Marc Wilson’s recent project ‘The Last Stand’ docu-ments the physical remnants of war in the 20th century in the UK and Northern Europe. By pho-tographing remaining man-made military defence structures situated around coastal areas, Wilson has created a permanent photographic record of the past. Some remain proud and strong, some are gen-tly decaying; many now lie prone beneath the cliffs where they once stood, but through the effects of the passing years, all have become part of the fabric of the changing landscape that surrounds them.

Eyestorm is a London based online gallery and retailer of limited edition contemporary art. Having published signed editions with some of the most established names in the art world, Eyestorm also takes pride in showcasing work by emerging talent, offering collectors an opportu-nity to invest in an artist early on in their career.

www.eyestorm.com+44 (0) 845 643 2001

this month’s cover

in this issue

3G Capital 8,123i 21Abraaj Group 4Abu Dhabi Investment Authority 61Access Capital Partners 46, 50Actis 11Adam Street Partners 11,50Advantage Partners 18Affiliated Managers Group 44Akol Avukatlık Bürosu 35Aldus Equity Partners 30, 31, 32Alibaba 16Alpha Associates 50,51Alpinvest Partners 43,61Altius Associates 46Altra 10Alvarez & Marsal 20,21Aozora Bank 11,18APG 61Argon Operation 20,21Asia Growth Capital Advisors 11Aureos Capital 11Avago Technologies 57, 58Axiom Asia 11Bain & Company 43, 51Bain Capital 18Behrman Capital 11Berkshire Hathaway 11Better Capital 8Big Society Capital 22BlackRock Private Equity Partners 43, 51Blackstone Group, The 4,6, 11,14,52Boston Consulting Group 23Boyu Capital 16Bridgepoint 35Bridges Ventures 22Burger King 8CalPERS 10Carlyle Group, The 4,6,18, 43,49,52,56,61CDB Capital 16CDIB Capital International 52CEPRES 8Cerberus 11,18Charles Schwab 61China Development Bank 16China Development Industrial Bank 52CIC International 16CITIC Capital 16Cogent Partners 8Coller Capital 11,53Comigel 10CPPIB 11Credit Suisse 11Debevoise & Plimpton 25Dechert 24Dell 1,4,8,10, 12Deutsche Bank 44Digital Sky Technologies 16EnCap Investments 34Energy Capital Partners 8EnnisKnupp 31, 34Ethos Private Equity 4,11European Bank for Reconstruction and Development 24

EVCA 4Fenway Partners 32Findus 10,20,21FLAG Capital Management 44, 48Gabriel Roeder Smith & Company 60Gartmore 44Gávea Investimentos 54GMT Communications Partners 35Golding Capital 50Hamilton Lane 11Hao Capital 19HarbourVest Partners 11,50HCL Technologies 57, 58Headland Capital Partners 19Heinz 1,8Hermes 44International Finance Corporation 53, 56JPMorgan 44J-STAR 18Jupiter Capital Partners 11Kansas Public Employees Retirement System 32Kensington Capital Partners 11KKR 49Kohlberg Kravis Roberts 6,11,56, 57, 61Landmark Partners 11LGT 46, 50,51Linley Capital 11Lion Capital 10,20,21Lunar Capital 19MassPRIM 6MBK Partners 18McKinsey & Company 35, 56Mediterrània Capital 24Microsoft 4,10Mid Europa Partners 35Mivisa 11Mold-Masters 21Morgan Stanley Alternative Investment Partners 19,44Natural Gas Partners 34Navis Capital Partners 26, 27New Mexico State Investment Council 1,28, 30, 31, 32, 33, 34New York State Common Retirement Fund 30, 32Nordic Capital 34OceanBridge Partners 8Olive des Olive 18Ontario Municipal Employees’ Retirement System 61Ontario Teachers’ Pension Plan 10Pantheon 11,23,44,50,54Parish Capital 44Park Hill 11Partners Group 26, 27,44PEGCC 6PGGM 61Pine Brook Partners 34PineBridge Investments 11Ping An Insurance Group 44Profitflo 20,21Prudential Financial 10Quilvest Group 49Riverstone Holdings 34RRJ Capital 11Russell Investments 44

Sal. Oppenheim Group 44Silver Lake Partners 1,10,12,16,57Silverfleet Capital 23Skype 11SL Capital Partners 23,44Squadron Capital 44,48State Universities Retirement System of Illinois 50StepStone 44Sullivan & Cromwell 16Sun Mountain Capital 32, 34Swiss Re 43Teachers’ Private Capital 10Temasek 11,16Towers Watson 8Trilantic Capital Partners 32Tuninvest-Africinvest Group 24Turkven Private Equity 35Unigestion 23Vicente Capital 32Vision Capital 11Washington University Investment Management Company 61White & Case 35Willis Stein & Partners 11Wilshire Associates 30WP Global 50,61Yahoo! 16

comPanies

PeoPleAbe, Shinzo 18Abouchalache, Michael 49Adachi, Tamotsu 18Akol, Meltem 35, 36, 37, 38, 39, 40Allen, Daniel 50Al-Turki, Marwan 25Ambrose, Cate 54, 56Ankara, Meltem 25Argüelles, Jesús 10Asina, Albert 25Baratta, Joe 11Birk, Brian 34Bland, Gary 30, 31, 32, 34Boada, Claudio 11Borrows, Simon 21Botein, Matthew 43Buffett, Warren 8,12Calnan, Mark 8Caspersen, Andrew 14Chuphi, Ngalaah 11Cohen, Sir Ronald 4Conway, Bill 6Corbett, Tom 60Correra, Anthony 30, 32Day, Martin 61De Mol, Alexander 43, 46, 49, 51Downey, Maureen 54Easton, Robert 6Echave, Inaki 11Fergie, Jorge 56Folsom, Richard 18Fossemalle, Anne 25

Gatfield,Jon 20, 21Giddens, Michele 22Gong, Jie 19Gross-Loh, David 18Gull. Jason 14Gunn, Graeme 44,46Hettiarachchi, Indika 11James, Tony 4Jania, Greg 61Jenkins, Jackie 10Johnson, William 8Karpati, Bruce 6Keiter, Ralph 53, 54, 56Kiam, Victor 8Knechtli, Patrick 23Lander, Mike 20, 21Lea, Lyndon 21Lee, Agnes 26, 27Leigh, Iain 61Livingstone, Elly 50Ma, Jack 16MacDougall, Neil 23McGibbon, Jason 35, 36, 37, 38, 39, 40Meyer, Saul 30, 32Moise, Steven 1, 28, 31, 32, 34Morris, Hank 32Moulton , Jon 8Nallappan, Andy 57Naqvi, Arif 4Nathan, Rick 12Newsome, Paul 23Nickels, Craig 61Oberoi, Arjun 11Onursal, Kerem 35, 37, 39, 40Pelosi, Nancy 6Peng, Zhao 44Pierce, David 48Poerink, John 12Poggioli, Philippe 46, 50Raimondo, Gina 60Richardson, Bill 30, 32Robert, Philippe 8Rubenstein, David 6Salesny, Petra 50, 51Santoso, Ivy 11Saxena, Anubhav 58Schwarzman, Stephen 4,6Seghin, Bruno 26, 27Shah, Harshal 10Simmons, Mark 20, 21Sioufi, Chris 23Smith, Vince 1, 28, 30, 31, 32, 33, 34Sneyers, Tycho 46, 50,51Steers, Helen 23Steinert, Tim 16Sulger, Derek 19Tsai, Joseph 16Turkmen, Kerim 35, 36, 38, 39, 40Waller, Paul 11Warner, Eric 46Wollman, Charles 30, 32, 34Wong, Elaine 19Yang, Paul 52

‘the last stanD. cramonD islanD,

Firth oF Forth, scotlanD’, 2012

by marc wilson

LAMBDA C-TYPE PRINT51 x 61 CMEDITION OF 20£550 (INCL. VAT)


I’ll say this for the Greeks: they may be entirely incapable of running a semi-large modern mixed economy, but they certainly know how to throw a close party. My ground-breaking olive oil deal finally signed at the end of January, and we cel-ebrated by going out to paint Athens red.

My boss (who came out for the signing along with another of the partners – glory hunters) seemed to be under the impression that he was a sailor on shore leave, and thoroughly disgraced himself. It’s a good job I was there to keep an eye on them and be the respectable face of the firm – at least until about 9pm, beyond which all details of the evening have been lost in a fug of ouzo and tsipouro.

I got a shock the next morning, though: at 9am I got a call on the Blackberry from my boss, who wanted to know why I wasn’t at our meeting. I’d seen this meeting in the diary, but I naturally assumed it had been put in by mistake (who has meetings at 9am the morning after a party? I think it might actually be illegal on mainland Europe) and as such had ignored it completely.

But when I got downstairs, still feeling incred-ibly nauseous and still wearing the same suit I’d gone out in the previous night, I found my boss sitting at the breakfast table, immaculately dressed and looking fresh as a daisy – whereupon he promptly demanded to know what my value creation strategy was for our new asset.

“Sorry? My what?”He sighed like a man whose heart has never

known anything but pain.“Value creation, Nicky. Everyone has to do it

these days. You know what Henry says, right: any

old fool can buy a company; it’s what you do with it that matters.”

I laughed. Then I realised that he wasn’t actu-ally joking.

“I know Henry said that, boss, but he wasn’t talking about the likes of us, right? We’re buyout guys. We’re asset buyers. We make carefully judged macro bets at a micro level, backing proven win-ners. That’s what I call value.”

“Listen, Pye, this is not 2006. You can’t just buy and hold and hope for the best any more. This is Europe, 2013. The economy’s flatter than a roadkill pancake. Do you have any idea what kind of pressure we’re under? Unless I have a memo on JTL’s desk within the month explaining exactly how we’re going to turn this filthy bedraggled sow’s ear into a Hermes silk purse, he’ll be on the next plane over to pummel my face. Have you learned nothing in the time you’ve been here? Actually don’t answer that. But stop giving me that face, Pye. That is not the kind of face I want to be looking at right now.”

Feeling a slight tide of panic rising up in the back of my throat (although it may just have been ouzo), I racked my alcohol-ravaged brain, des-perately trying to dredge up every last vestige of the experience, know-how and genuine operat-ing excellence that I’d gleaned from the fantastic people I’ve had the privilege of working alongside during my 20 glorious months at Big Shop.

“Erm, I suppose I could give McKinsey a ring?”My boss gave me a long hard look. There was

a pregnant pause, as he weighed up next steps.“Yeah, ok then,” he said, relaxing back into

his chair. “That’ll do. Hey, are you going to eat those eggs?” n

Who has meetings at 9am the morning after a party? I think it might actually be illegal on mainland Europe

Added value

Illus

trat

ion

by:

Ed

Gra

ce

www.backbaycommunications.comBoston ~ London ~ New York

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