Invest Europe’s Professional Standards · Procedures to ensure the management and disclosure of conflicts should be in place at all firms, and conflicts of interest should be

Invest Europe’s Professional Standards An Overview of the Handbook and Its Applications Presented by William R. Watson October 2017

Strictly private and confidential 1

The opinions expressed in this presentation and on the following slides are solely those of the presenter and not

necessarily those of V4C. V4C does not guarantee the accuracy or reliability of the information provided herein.


• Invest Europe is private equity’s only pan-European association bringing together GPs, LPs and associated professions (1,200 members)

• Invest Europe incorporates different platforms, representing the industry’s diversity and giving a voice to all constituents

• Membership is voluntary but brings an obligation to follow the Code of Conduct • Invest Europe represents the industry at the European political level, interacting with legislators,

regulators and other stakeholders to represent the industry’s interests

• It works closely with the national private equity and venture capital associations, including PSIK, to ensure a coordinated approach

• Invest Europe seeks to promote industry standards that will support the long-term sustainability of our

activities, and further the overall development of the industry in today’s environment

Invest Europe: The Voice of Private Capital in Europe

In the beginning PE was a simple, private system


The Private Equity Fund

Investors Investors

Investors

A few investors….

…Created a partnership with a manager….

Investors Investors

Portfolio Companies

The General Partner

…to buy and then sell a few private companies.

With success came growth and public attention


Int’l Investors (pension

funds, insurance, FoF, SwFs

IFIs GPs Own Capital

Domestic Investors -

HNWs

The Private Equity Fund The

General Partner

Portfolio Companies

Suppliers

Clients

Employees

Community

Suppliers

Clients

Employees

Community

Diversified pool of investors...

….With objectives beyond profit.

Increased regulation and structural complexity.

Bigger and visible targets, themselves more subject to stakeholder issues.

And then, we (and the world) were not so private


Int’l Investors (pension

funds, insurance, FoF, SwFs

IFIs GPs Own Capital

Domestic Investors -

HNWs

Portfolio Companies

Suppliers

Clients

Employees

Community

Suppliers

Clients

Employees

Community

Press

Social Media

Unions

NGOs

Reg

ula

tors

Government

Size and success – or is that excess?

Availability of information and the power of image

Do we want the “Barbarians at the Gate?”

Advent of corporate responsibility

The Private Equity Fund The

General Partner

How do we procure our societal “License to Operate”?


Obligations

Contractual

Regulatory

Legal

Expectations

Personal

Society

Industry

Professional Standards

We decide what kind of investors we want to be

• Many of us own and are responsible for our businesses and the decisions our portfolio companies

make

• Even at junior levels, the private equity model provides enormous opportunities to influence decisions and outcomes

8

• Our business models provides enormous leverage to have an impact

•  €7.6bn of investment by private equity in Polish companies 2007 to Q1 2017

•  765 companies backed by private equity in Poland during this period

•  450 Polish companies currently in the portfolios of PE funds

The Handbook is our clear commitment and benchmark


Wydanie: Listopad 2015

KODEKS STANDARDÓW PROFESJONALNYCH

Wersja polska: Polskie Stowarzyszenie Inwestorów Kapitałowych

10

The Handbook - Overview




By the Industry for the Industry

• The Handbook is maintained by Invest Europe’s Professional Standards Committee, composed of practising members of Invest Europe:

• By the industry for the industry

• Building on a long tradition of guidance to members

• Its aim is to state the principles of ethical behaviour that members of the Invest Europe abide by:

• To assert on behalf of the membership of Invest Europe the view that high standards of commercial integrity and just and equitable principles of trade and investment should be observed

• Failure to abide by the Code of Conduct can result in a firm’s expulsion from Invest Europe

• Expulsion is at the firm, not individual, level

• The Handbook’s guidance seeks to strike a balance between accepted good practice and emerging standards

• PSIK is the first national association to translate it into the local language

Trust and ethical behaviour underpin our success


“Ethical behavior is fundamental to the success of our

industry. Industry participants operate in an environment of

trust. Invest Europe members are entitled to expect their

peers to act in accordance with the highest ethical and

professional standards and are expected to behave in a

similar manner towards portfolio companies, service

providers and other stakeholders. Further, in order to ensure

sustainable, equitable and positive conditions for the

industry across Europe, it is in members’ best interests to

promote confidence in the industry for the public at large. “

Introduction to the Invest Europe Professional Standards Handbook

Limited Partners

General Partners

Portfolio Companies

TRUST

Covering the full private equity cycle

• The Handbook covers the full cycle of private equity activities

• It sets out the basis for the industry’s views on and behaviour in relation to:

• Responsible investment

• Accountability

• Governance

• Transparency

• The Handbook also includes more technical standards:

• IPEV Valuation Guidelines: incorporated as Invest Europe adopted guidance

• Invest Europe Reporting Guidelines: providing examples not templates

• Guidance for Placement Agents: applying the Code of Conduct to placement activities

Fundraising

Investing Divesting

Portfolio Management

Fund and LP Management

GP Management

• AIFMD has made PE in Europe (basically) a regulated industry

• The Handbook is not a compliance guide for AIFMD

• But, AIFMD does set the benchmarks for many Handbook topics including risk management and remuneration

• The extra-territoriality of many legislative initiatives impacts practises everywhere

• The SEC is increasingly addressing PE topics

• All governments are promulgating “Anti” legislation: money laundering, terrorist financing, tax

avoidance, bribery and corruption

• A range of other regulations and guidance also impact our activities, such as:

• UN Principles for Responsible Investment (April 2006)

• Walker Guidelines in the UK (2007), BvK’s Transparenz-Richtlinien in Germany (2008)

• ILPA: Private Equity Principles (2009), Fee Transparency Template (2016)

• IOSCO Conflicts of Interest (2009)

• EU Green Paper: also looking at Corporate Governance for non-listed companies (2011)

• The Handbook is not a guide to compliance with all regulations and all standards

Reflecting the wider regulatory framework

• The Handbook focuses on private equity’s core

relationships:

• LPs and the GP

• GPs and portfolio companies

• The industry and society • These relationships are fundamental because:

• PE is a partnership, not a trade or deal.

• The GP/LP partnership is established for the long term

• GPs are typically highly active and impactful owners

• The companies are typically private, without the regulatory framework that defines the public company relationship

• Through its LPs and portfolio companies, PE touches an enormous range of stakeholders

Focusing on the key relationships

GP

GP

LP LP

LP

LP LP

LP LPs

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Cos.

. . . .

Stakeholders

. . . .

Stakeholders

. . . .

Stakeholders

. . . .

Stakeholders

Building on core principles

• The Handbook is composed of three sections:

• The Code of Conduct

• The Commentary on the Code

• Guidance on the Application of the Code of Conduct

The Handbook aims to cater for the diversity of the industry and the Invest

Europe membership by explaining, guiding and recommending: not by prescribing rules for every situation.

1. Act with integrity

2. Keep your promises

3. Disclose conflicts of interest

4. Act in fairness

5. Maintain confidentiality

6. Do no harm to the Industry

The Code of Conduct

Handbook, page 8

• Simple principles that transcend the industry’s relationships

• Derived from the IOSCO “Model Code of Ethics”

• Applicable to all segments of the industry and all participants

• An easy mental checklist for responsible, professional behaviour




4. Act in fairness



Applicable to all our relationships and activities

Zbyszek is in full flow. Meeting his largest LP, he boasts of the 5x offer just in on the fund’s largest investment.

Cheetham, a buy-out shop, has just closed

the purchase. They announce layoffs of 20% of the workforce,

effective 25/12.

Marta, an LP, just got approval on a co-investment in SuperCarry

with Harry Buyout Shop. She calls SuperCarry’s current owner, a GP of another fund with which Marta

is also invested to celebrate.

“Sign now or you can call me a taxi!” screams Jacek

“Hey, what he doesn’t know can’t hurt him, right?”

Providing the context

• The Commentary provides the key messages and context for interpreting the Code of Conduct

Handbook, page 12-13

Key Messages from the Commentary on the Code of Conduct

Act with integrity Integrity is the fundamental building block of trust in business relationships.

Keep your promises Ethical business behaviour implies keeping promises regardless of whether or not there is a legal obligation to do so.

Disclose conflicts of interest

Procedures to ensure the management and disclosure of conflicts should be in place at all firms, and conflicts of interest should be diligently identified and disclosed to all parties concerned.

Act in fairness Fairness means “playing by the rules,” whether legislative or not, based on facts and circumstances. Fairness must also take account of the impact of decisions and actions on others, both as individuals and groups, and how these actions would be perceived.

Maintain confidentiality

The GP will treat portfolio company or LP information as confidential in so much as they are made aware that, or should expect that, it is confidential or commercially sensitive. Any usage of such information should be restricted to what has been agreed with the owner of such information or may be mandated by law or regulation.

Do no harm to the industry

The pursuit of competitive advantage is not in itself harmful to the industry. Industry members should, however, conduct their business in a responsible manner and not engage in practices that are foreseeably damaging to the public image and general interests of the industry and its stakeholders. All participants in the industry should promote best practices for the wider benefit of long-term, sustainable investment, economic growth and value creation.

1. Would your actions stand up to public scrutiny?

2. Would you find it acceptable if other parties were to pursue the same course of action?

And now for the detail…

Explaining, Guiding and Recommending

• Primarily oriented to a General Partner perspective

• Future updates are expected to add more specific guidance to specialist areas

• Follows a Question, Explanation, Recommendation format

• The guidance reflects common and good market practice

• A consensus of GPs and LPs, which gives added credibility to the Guidance

• There is no stand alone ESG / RI section: it is an integrated part of all aspects of the Guidance

Handbook, page 20


Fundraising and Fund Formation

Key Messages

1. Plan, plan and plan again

2. Good structuring helps avoid conflicts

3. Disclosure helps manage conflicts

4. Pay attention to regulation: AIFMD, AML

5. Define the Terms: including fees (sharing)

6. Consider the documents: track record, forecasts, ESG

Fundraising & Formation

3.1 Fund formation

3.1.1. Early stage planning

3.1.2. Fundraising and regulation

3.1.3. Structuring

3.2 Fundraising

3.2.1. The Fundraising process

3.2.2. Target LPs

3.2.3. Know Your Investor

3.2.4. Structure of the Offer / Terms of Investment

3.2.5. Fundraising Documents

3.2.6. Terms in the Fund Documents

3.2.7. Presentations to LPs

3.2.8. Responsible Investment

3.2.9. Track Records

3.2.10. Forecasts

3.2.11. Time period for Fundraising

Fundraising has been difficult. The CEO believes that offering a lower

management fee to a key cornerstone investor can secure an early

commitment. The IR Director objects pointing out that the same fee should

be offered to all investors. This would materially reduce the firm’s resources

to execute its strategy.

Applying the Principles

• All LPs should be treated equally, fairly and transparently.

• But, preferential treatment can be justified.

• Disclosure is essential.

Handbook, Section 3.2.4, page 21


Investing the Fund

Key Messages

1. The right process for reaching the decision

• Diligence

• Senior involvement and attention

2. Integrate ESG in all aspect of the process

3. Execute ownership responsibilities

• To the company and other shareholders

4. Manage the company strategy

5. Exit before entering

Investing the Fund

3.3 Investing

3.3.1. Due diligence

3.3.2. Approach to responsible investment

3.3.3. Investment decision

3.3.4. Structuring investments

3.3.5. Responsibilities to other shareholders in the same or other classes of shares and to bondholders

3.3.6. Investment Agreement

3.3.7. GP’s consent to Portfolio Company actions and board appointments

3.3.8. The Portfolio Company’s corporate strategy

3.3.9. Co-operation with co-investors and syndicate partners

3.3.10. Co-investment and parallel investment by the GP and its executives

3.3.11. Co-investment and parallel investments by LPs and other third parties

3.3.12. Divestment planning

Easy VC LLP is negotiating a Shareholders Agreement. Erika, the

managing partner, is resisting expanding the text of the agreement.

The other investors are particularly concerned what will happen in a

future financing round. Her answer is a simple 2/3 shareholder

approval for any capital raising: a financing proposition is made, and

accepted or not. Easy VC will hold 60% of the shares. Separately,

Erika is completing negotiations to acquire the GP of another VC

fund, which has in its portfolio a 15% stake in the target.


• Negotiations should be conducted openly and with clarity among investors

• Due consideration should be given in advance to potential areas of conflict



Managing the Investments

Managing the investment often poses the biggest challenges

• Time and resource intensive

• Largest exposure to diverse range of stakeholders

• The GP often has no direct relationship to many of the key value drivers

• ESG risks and opportunities are extensive

• Its where the financial returns are made

Key Messages

1. Dedicate sufficient time and resources

• Senior time and attention

• Sufficient information and experience

2. Reflect Environmental & Social Issues

3. Corporate Governance is crucial

• Appoint appropriate directors

• Ensure decision making is clear and duties separated

4. Fairness in co-investment arrangements need

5. Follow-ons should be planned

Managing the Investment

3.4 Management of an investment

3.4.1. Investment monitoring

3.4.2. Environmental factors

3.4.3. Social factors

3.4.4. Governance factors

3.4.5. Board structure

3.4.6. Board membership

3.4.7. Exercise of GP consents

3.4.8. Exercise of influence on responsible investment factors

3.4.9. Responsibilities in relation to other stakeholders

3.4.10. Follow-on investments

3.4.11. Underperforming investments

3.4.12. Factors particular to investing in distressed assets

3.5 Disposal of an investment

3.5.1 Implementation of divestment planning

3.5.2 Responsibility for divestment decision-making

3.5.3 Warranties and indemnities

3.5.6 Cash vs. shares/earn-outs on realisation

3.5.7 Sale of a portfolio company between funds managed by the same GP

3.5.8 Managing quoted investments

Private Equity is distinguished by active investment and long term value creation

Green & Co, a mid-market growth investor, has commissioned an

Environmental Due Diligence on one of its portfolio companies. The

diligence reveals that the soil of the factory site is contaminated by

oil and other chemicals, although the current business has ceased to

use these products in its processes several years ago as standards

changed. The investment committee has been convened to consider

the firm’s response.


• Diligence should include an environmental assessment

• GPs are expected to actively manage environmental risk factors in portfolio companies



Tomasz, the buy-out shop Quick & Easy’s associate, has been appointed to the Board of the

newly acquired portfolio company. Q&E has also appointed a retired industry executive,

Frank, and the firm’s managing partner, Marcin, to the five member board. The CEO and CFO

of the company are the other two board members. Marcin has yet to attend a Board meeting

due to fundraising commitments. The industry executive has told Tomasz that at 75 years

old, this is his last appointment.

At a Board meeting about 6 months after investment, the CEO opens with a presentation

proposing to launch a new product and cut prices on the old one by 50% as they are “getting

clobbered” by a competitor’s ad campaign. Somewhat surprised as this is the first he has

heard of a new product, Tomasz turns to wake Frank (who has nodded off during the

presentation) while SMSing Marcin to see if he has any instructions.

• Appointments made in the best interest of the portfolio company

• A director should devote sufficient time

• Consider the right level for consents for significant developments in the business

Handbook Section 3.4.5, page 35 (& 3.3.8)

Managing the Fund and LPs

Key Messages

1. Distribute as agreed in the terms

2. LP relations bring responsibilities

• Good processes are the key to success

• Reporting, Transparency, and Conflict Management are the cornerstones

3. The LPAC: a key tool for both LP and GP

4. Conflicts mean disclosure and discussion

Managing the Fund and LPs

3.6 Distributions

3.6.1. Distribution provisions

3.6.2. Timing of Distributions

3.7 LP relations

3.7.1. Reporting obligations to LPs

3.7.2. Transparency to LPs

3.7.3. LP relations generally

3.7.4. LP conflicts of interest

3.7.5. LP Advisory Committee

3.7.6. Key Person Provisions

3.8 Secondaries

3.8.1. LP Secondary Transactions

3.8.2. Secondary Direct Transactions

3.9 Extension and Winding up of a Fund

3.9.1.Fund Extension

3.9.2 Liquidation

3.9.3.Fund documents

3.10 Management of Multiple Funds

3.10.1. Conflicts of interest

3.10.2. Establishment of new Funds


Jacob is not pleased. Every annual meeting, the same investor, the same

question: “when will you return my money?” Again he explains what was written

in the last three Annual Report: when we are ready. Jacob also feels trapped

because the confidentiality agreement he just signed with the strategic buyer for

the sale of the fund’s biggest investment prohibits disclosure until closing. Big

mouth investor would blab it for sure, reflects Jacob. Maybe he should just agree

to go into liquidation as the LPAC recommended when they met last week. But

the lawyers can’t assure him he would remain in control of the Fund.

• Follow Invest Europe reporting guidelines

• A GP should not breach confidentially but should seek to be released if it impedes reporting

• The LPAC should advise and not make decisions

• The Fund documents should include provisions on liquidation

Handbook Section 3.7.1, 3.7.2, 3.7.5, and 3.9

Managing the Firm

Managing the Firm

3.11 GP’s internal organisation 3.11.1. Management are responsible for establishing

the control environment 3.11.2. Management are responsible for establishing

procedures for risk assessment and management

3.11.3. Management are responsible for control activities

3.11.4. Human resources 3.11.5. Incentivisation 3.11.6. Financial resources 3.11.7. Segregation of Fund assets 3.11.8. Procedures and organisation 3.11.9. Internal reviews and control 3.11.10. Management are responsible for the

organisation’s information and information systems and for communications within and outside the organisation

3.11.11. External communication 3.11.12. Market Transparency – EVCA Research and

Data 3.11.13. External assistance 3.11.14. Considerations relating to monitoring of

governance – GP governance

Key Messages

1. A much bigger (and more complicated) issue with AIFMD and national regulations

2. A GP must ensure it has adequate resources

• Investing / Management / Divesting and adding value

• Fundraising / LP relations

• Compliance

3. Practice what you preach to the portfolio

• Governance

• Communication

• Controls and Systems


It is bonus time and Kasia’s firm are all waiting for their numbers. It was

tough deciding, but she made her mind up last night and will make the

announcements today. A big cash bonus is going to Rafal; Kasia hopes it will

help motivate him to take on the added role of Investor Relations as well as

CFO. Luckily Kasia’s son is set to become the compliance officer and take

that load from Rafal. She had to put him somewhere after he nearly blew the

big exit by forgetting to get the LPAC sign-off to sell it to another LP.

Oh yes, there is an IC meeting later today too that she must dial into. Better

skim through the papers, she thinks. Its Robert’s deal so it should be well

prepared; not much to worry about there. And he knows the sector– his

family has been in it for generations.

• Governance should incorporate elements of independence

• Have staff with appropriate skills

• Ensure suitable remuneration for its staff

• Procedures for investment decision making include senior time and attention

Handbook Section 3.11.1, 3.11.5. 3.11.6, 3.11.9


Invest Europe Reporting Standards

Reporting Guidelines

Strictly Confidential

• Not an accounting but a reporting guideline

• Focus on transparency and the key disclosures needed to underpin the relationship between GPs and LPs

• Updated to reflect current thinking and practice on non-financial disclosures such as fee calculation and ESG issues

• Based on the former IPEV Guidelines, brought back to Invest Europe in 2015

• Builds on long tradition of reporting guidance from Invest Europe and its consensus driven approach of LP and GP input

• Consists of “requirements” and “other possible disclosure”

• Following the required disclosure allows a fund to claim compliance with the Guidelines

• An example, not template, driven document

42

Reporting Guidelines: detailed issues

• The Guidelines contain enhanced clarity on reporting metrics

• Paid in Capital, Capital Calls (including return of capital calls), Distributions (including recall of distributions)

• DPI, RPI, TVPI

• Gross IRR, Fund Net IRR vs Net IRR to an individual LP, etc.

• Fee calculation and disclosure

• A different, but complimentary, approach to the ILPA template

• Emerging issues:

• Use of leverage at the fund level: “drawdown facilities”

• Reporting on the impact of leverage on returns

43

44

Summary & Conclusion




Fundraising

Investing Divesting

Portfolio Management

Fund and LP Management

GP Management

Summary & Conclusions

• Private Equity professionals face a diverse set of demands and challenges…



GP

GP

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Co.

Port Cos.

LP LP

LP

LP LP

LP LPs

. . . .

Stakeholders

. . . .

Stakeholders

. . . .

Stakeholders

. . . .

Stakeholders

• ... With a range of interests and duties to address.






4. Act in fairness



• The Code of Conduct provides a framework for making the right choices on how we operate

• The Handbook provides explanations, guidance and recommendations on how to conduct the business: it is there to be used

• It remains up to each of us what kind of a business (and professional) we want to be

• Professional Standards and the Code of Conduct provide a compass for our journey

What will you do?

The upside on this investment will be

generated by synergies and cost reductions.

In my view it will be achieved by implementing

an integrated ESG programme.

We have got to start by changing the management

team.

The company needs investment

in its IT and supply chain.

Can you imagine

how that

would read

in the press?

The risk assessment

is outdated; we need

fresh eyes on this.

Yea, their

IT is almost

as bad

as ours!


www.value4capital.com William R. Watson Managing Partner 47/49 ul. Wspólna 00-684 Warsaw, Poland Tel: + 48 22 627 4000 Fax: + 48 22 627 4001 [email protected]

http://www.value4capital.com/

mailto:[email protected]