Private Equity Guide

i

A Guide to Private EquityFund of Funds Managers

i-iv 20/4/05 11:51 am Page I

Funds of funds: a brief history 1

Kelly DePonte, Partner, Probitas Partners

Definition and rationale 1

At the creation: separate accounts 1

Multi-investor fund of funds 2

The late 1990s explosion: new funds and new structures 3

After the boom: capacity, access, sector vehicles,

and a return to separate accounts? 4

Summary 5

Why invest via a fund of funds? 7

Stewart Hay, Investment Director, Standard Life Investments

(Private Equity) Ltd

What is private equity? 7

How has private equity performed historically? 8

What is required to successfully invest in private equity? 8

What are the different ways to invest in private equity? 9

What is a fund of funds? 10

Attractions of a fund of funds 10

Perceived drawbacks of investing in a fund of funds 11

What should investors look for in a private equity

fund of funds manager? 11

Choosing your fund of funds: issues faced by

investors when selecting a fund of funds product 13

Dr. Stefan Hepp, CEO SCM Strategic Capital Management AG

Reasons for investing in fund of funds 13

Have return expectations been met? 13

Further challenges: liquidity and flow of information 14

How investors really choose funds of funds 14

Issues faced when selecting a fund of funds product 15

Due diligence – a detailed view 15

Role of Advisors and Gatekeepers in the selection process 17

Private equity fund of funds investment strategy 19

Hanneke Smits and Oliver Gardey, Adams Street Partners

Introduction 19

Investment strategy and process 19

Top-down analysis 19

Bottom-up analysis 21

Pre-transaction qualities 22

Post-transaction qualities 22

Organisational stability 23

Conclusion 23

iii

Contents

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iv

Beyond traditional fund of funds benefits 25

André Frei and Michael Studer, Partners Group

Traditional benefits of funds of funds 25

Relative value assessment 27

The relative value assessment for regions

and financing stages 28

The relative value assessment for investment styles 29

Conclusions 29

Legal issues on structuring a private

equity fund of funds 31

Solomon Wifa, Counsel, O’Melveny & Myers LLP

Introduction 31

Considerations that influence the choice

of a fund of funds structure 31

Common fund of funds structures 32

Regulatory issues 34

Principal terms and conditions 35

Specialist funds of funds 39

Guy Fraser-Sampson, Founder and Managing Partner,

Mowbray Capital LLP

What exactly are we discussing? 39

What are the issues to be considered? 40

What are the economic constraints faced

by a specialist fund of funds? 40

How can a specialist firm position itself competitively? 40

How does this mesh with the portfolio strategy of investors? 42

What is a typical investment proposition? 42

Issues specific to UK and other European pension funds 43

The misrepresentation of European venture returns 44

Conclusion 45

The fund of funds as an LP 47

Private Equity International

Five reasons to have a fund of funds as a LP ….. 48

….. and five reasons not to! 50

The dynamics of the private

equity fund of funds market 53

Luba Nikulina, London Business School

Market dynamics 53

Value proposition and performance 56

Terms and conditions 59

Where will the golden opportunities lie? 61

Ready to pass the baton? 63

Ranking of FoF managers 64

Summary of major findings 64

Appendix 67

Directory 71

Appendixes 227

Appendix One:

Private Equity International on funds of funds 228

Appendix Two:

Private Equity Manager on funds of funds 257

Appendix Three:

About Private Equity International 265

Appendix Four:

About Private Equity International Research Publications 266

Appendix Five:

Index to directory entries 268

Market Report A Guide to Private Equity Fund of Funds Managers

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2

for a fixed duration, or it can take the form of a fully structured fund of

funds vehicle that has a single investor. Even when structured as a formal

fund of funds, there is little information publicly available on separate

accounts as they are agreements only between the two parties and

generally include confidentiality provisions.

Many of the earliest fund of funds providers – including Adams Street

(previously Brinson), Crossroads and HarbourVest – actively provided

separate accounts to large institutional investors early in their careers. For

these large investors, separate accounts were a way to tap into third party

expertise and leverage internal staff at a point where private equity was

just beginning to develop as a market; experienced professionals with a

background in fund due diligence were very rare. For the separate account

providers, relationships with large institutional investors allowed them to

quickly increase assets under management – even though the fees on

separate accounts were usually lower than those on a multi-party fund of

funds because of the pricing power large investors commanded.

Multi-investor fund of funds

It was just this pricing dynamic – combined with an increase in private

equity investments by a number of new market entrants – that led to a

decline in the use of separate accounts and the beginnings of an increase

in both the number of funds of funds and the amount of money

committed to them in the early 1990s. This was growth from an

admittedly small base; it wasn’t until 1992 that more than a billion dollars

was raised for fund of funds in a single year (see Chart Two). Multi-investor

funds of funds provided several advantages to fund managers:

• Pricing

With multi-investor funds of funds, negotiating power shifted from

the investor to the fund manager.The ‘wholesale’ discounts available

to large investors were not usually available on multi-investor funds.

• Assets under management

By tapping into a number of smaller investors simultaneously, fund

managers were able to more quickly build their base of assets under

management.When combined with the better pricing margin available

on a fund of funds vehicle, overall profitability grew.


0

200

400

600

800

1000

1200

1400

1600

1800

2000Fund of Funds Primary Funds

Year

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: Thomson Venture Economics

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000Fund of Funds Primary Funds

Year

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

U.S

. $ m

illio

ns

Source: Thomson Venture Economics

Chart One: Number of private equity funds raised

Chart Two: Amount of private equity capital raised

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8

How has private equity performed historically?

Venture Economics report that the average ten-year internal rate of

return produced by buy-out and mezzanine managers in Europe has been

11% (based on a sample of 292 funds and calculated as at 30 September

2004). However, the top quartile managers have generated returns of 41%

over the same period, illustrating the crucial importance of selecting more

top quartile than median managers (see Chart One).

Chart One: Pooled IRR (%) for European buyoutsat 30.09.2004

What is required to successfully invest inprivate equity?

There are many diverse capabilities and resources required in order to be

able to successfully participate in the private equity asset class.The skills

required to invest in private equity are significantly different from those

needed for the listed markets. A few of the capabilities and resources that

an institutional investor looking to commit to the asset class must possess

are summarised below:

Skills

The lack of a public marketplace means purchases have to be privately

negotiated with the seller of the company. As the company is privately

held, there is generally limited information available from resources such

as the Internet, Reuters and Bloomberg. As such, the only way to find out

information about private companies is to go out and visit them, review all

available internal and external information and meet with the management

of that company. Investing in private equity is certainly not something that

can be done sitting behind a desk.

As a result, the process of investing in private equity is far more labour-

intensive than investing in listed markets or bonds and requires a number

of sophisticated investment professionals with diverse skills, such as

business strategy development, as well as accounting, tax and legal

expertise.

For an institution looking to invest in private equity this makes the process

of selecting the best managers all the more difficult. The institution will

have to ascertain that the manager(s) it is considering investing with have

all the necessary skills in order to achieve top quartile returns. An

institution used to picking managers for equities and fixed income

portfolios may lack the necessary experience to be able to adequately

gauge the skill set of a private equity fund manager in comparison to its

peers.

Access

Top private equity fund managers can more or less select their investors

by requiring ever-larger minimum commitments by new investors to their

funds. Managers give priority to their existing investors and investors who


-20

-10

0

10

20

30

40

50

7.8

1.0

24.7

-9.4

5.2

40.7

11.4

-6.5-7.8

3 years 5 years 10 years

Top quartile All buyouts Bottom quartile

Source: Venture Economics, 30/09/04

Pool

ed IR

R %

007-012 20/4/05 11:52 am Page 8

15

Supporting this view, SCM Strategic Capital Management AG, in its yearly

review of partnership terms and conditions, has consistently found that

the provisions for corporate governance are often weaker in funds of

funds as compared to direct partnerships.This in turn suggests that fund

of funds partnership documentation have been less negotiated than has

been the case with direct partnerships.

Issues faced when selecting a fund of fundsproduct

When conducting a due diligence on a fund of funds one has to be clear

about the purpose for investing in the product. Is one looking for a broadly

diversified fund that will give access to multiple vehicles across stages and

sectors? Alternatively, is a specialist product that has a narrower

geographical or stage focus required? How many funds of funds that are

expected to invest in broadly the same vintage years are going to be held?

Based on such an initial description of the required characteristics of the

product one can then establish a list of suitable vehicles in the market that

fulfil the requirements with regard to proposed investment strategy. As the

quality of any selection is a function of the quality of the underlying sample,

it is important to have a comprehensive overview of the different

management groups active in the fund of funds market. In addition to our

clients’ direct partnership commitments, SCM is currently monitoring

more than 18 funds of funds, which enables us to get an unbiased picture

of the relative and absolute performance of various management teams.

This information is valuable in deciding which vehicles to include in a

shortlist of potential investments. It is equally important to be aware of the

forward calendar, i.e. management teams that may not actually be in the

market but plan to raise a new fund within a time frame that is relevant to

a client’s investment program.

Identifying potential funds as investment candidates is, however, just the

beginning of the process. Next comes the due diligence that tries to

establish facts that can support a positive investment decision.Among the

most important criteria for the selection of a fund of funds manager are:

➤ Proven access to top tier funds

➤ Proven investment discipline

➤ Quality of the team and experience in all aspects of the proposed

investment strategy

➤ Track record

➤ Economic terms

Due diligence – a detailed view

SCM Strategic Capital Management AG employs a detailed three-step due

diligence process that is fundamentally the same regardless of whether the

investment being considered is a commitment to a fund of funds or a

direct investment partnership. However, there are differences between the

two types of investments that translate into different issues to be

addressed and resolved in each stage of the due diligence process.

Initial review

The ‘initial review’ consists of reviewing the fund’s offering materials,

followed by initial conversations with placement agents or the vehicle’s

management, if warranted. Work is assigned to and performed by SCM

analysts. A standardised two-page fact sheet is prepared for each fund and

circulated to the entire SCM investment team (consisting of all investment

professionals) for discussion during its weekly meetings. Key elements that

are reflected in the fact sheet include management, strategy, track record

and key terms.All elements are entered into SCM’s database.

Pre due diligence review

If the investment team finds an opportunity attractive a more intensive

review is pursued. Such ‘further review’ activities typically include:

(i) An invitation to SCM’s offices for a manager presentation (typically 2

to 3 hours).

(ii) Conference calls to address specific issues or questions identified by

the investment team.

(iii) The first phase of verifying the manager’s historical investment cash

flows.This entails:

a. Analysing the performance parameters of existing unrealised

/realised investments; and

b. Recreating the manager’s IRR and multiple assertions.

In this context it is of particular importance to ascertain whether a fund

of funds manager has access to top tier funds and whether that access

Choosing your fund of funds

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20

exemplifies the impact of the public markets on the venture capital

community.

• Factors influencing the ability to invest, such as due diligence standards,

accounting and tax issues and the enforceability of legal rights

In many developing countries private equity investing remains

extremely risky due to the lack of transparency in financial reporting

or tax regulations. Furthermore, enforceability of legal rights

continues to be a major barrier for private equity investment

particularly in countries, which only recently adopted a free market

or some form of capitalism.

• The extent to which the market has accepted equity as a form of financing

and investment

Germany, for example, has been traditionally an economy with a strong

debt financing culture rather than a developed equity culture.

Entrepreneurs and family-run companies within the ‘Mittelstand’ sector

(i.e. mid market sector) used to have cost efficient access to debt

financing, which was typically offered by the ‘Hausbank’. In the past this

cost efficient access to debt made it difficult for private equity firms to

find attractive investment opportunities in Germany. However, due to

the continuing banking consolidation and the global competition for

capital it has become significantly more difficult for German banks to

offer ‘cheap’ corporate debt financing to the Mittelstand.


Chart One: Maturity of the World Private Equity Markets

➡➡➡ ➡➡➡➡➡ ➡➡➡➡ ➡➡➡➡➡➡➡➡ ➡➡➡➡➡➡➡➡ ➡➡➡➡➡➡➡➡ ➡➡➡➡➡ ➡➡➡➡ ➡➡➡ ➡➡➡➡ ➡➡➡➡➡➡ ➡➡➡➡➡

➯Public market exits

Enforceability of rights

Accounting, tax & legalissuesDisclosure & duediligence standards

Extent of equity culture

Extent of entrepreneurialcultureAvailability of attractiveinvestment opportunitiesAvailability ofexperienced investors

Developing

Africa ex-South Africa

Emerging Asia

Emerging Europe

Latin America

South Africa

Converging Europe

Developing Asia

IsraelW

estern Europe

U.K.U.S.

➯Emerging ➯Maturing Mature

Poor

Fair

Good

Excellent

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refute the promise of superior returns. Performance data from FoFs

(available from the websites of large US institutions due to Freedom of

Information Act legislation) seem to indicate that major FoFs neither stand

out as big winners nor as big losers2.

Portfolio diversification for the purpose of risk reduction

No risk-averse long-term investor would pick only one fund in a sub-

segment (such as US venture capital, vintage 2004), but choosing all

conceivable funds in a sector may circumvent top quartile returns

(‘leveling’). To determine the ‘golden mean’, we have analysed more than

2000 private equity funds tracked by Thomson Venture Economics.We have

performed a historical simulation to quantify the impact of portfolio size (in

terms of number of funds) on the volatility of a FoF’s final performance.We

selected a random fund portfolio over three consecutive vintage years3 and

calculated the volatility of the final performance of such portfolios. Our

analysis (see Chart One) shows that investors need approximately 15 funds

for a life cycle of three years in a given sub-segment (e.g. US buyout) in

order to diversify the unsystematic risk. Basically, one can more than halve

the volatility of the final outcome with the appropriate diversification. Given

the broad range of funds available, this number of funds can nowadays be

chosen without compromising on returns. Many investors, however, lack the

necessary size for appropriate diversification, and only FoFs will allow these

investors to reduce manager specific risk in selected segments.

Portfolio diversification for the purpose of return enhancement

Seeking portfolio diversification for the purpose of enhancing returns may

seem to be a contradiction for many investors, given that the principal

reason for portfolio diversification is to reduce risk. However, the following

pragmatic study illustrates that it is not. When we analyse the pooled

average performance of US venture capital, vintage years 1990 to 1999, we

observe that the pool of all funds (‘the most diversified portfolio for each

vintage year’) outperformed the top quartile in fifty percent of all cases.This

phenomenon occurs due to the significant right-skewness of private equity

return distributions – returns that significantly exceed the median are more

probable than returns that significantly undershoot the median. In fact, the

pooled average outperforms the median return per vintage year on all US

private equity funds of vintages 1990 to 1999 on average by more then 700

bps! In other words, it is likely that the performance of a single fund is lower

than the performance of a pool of funds. For an investor with a given return

target, it is wise to diversify the portfolio to increase the probability that this

return is actually achieved.

Negotiating terms and establishing a professional reporting

These are both further areas of expertise of a FoF manager. Negotiating

terms is an element of value creation that is often not recognised by

investors. FoF firms negotiate with private equity firms to ensure that

terms are in line with industry standards. Thus, these intermediates are

important ‘watchdogs’ to ensure proper downside protection and

alignment of interest between limited partners (LPs) and general partners

(GPs). Many GPs are even willing to accept more LP-friendly terms to get

a renowned investor in their LP register, which should ultimately attract

further investors.


2 We have compared the returns of FoFs to the pooled industry performance (as reported by Thomson Venture Economics).3 Limiting the number of vintages in a simulated multi-fund portfolio is necessary to realistically assess the risk of a traditional FoF portfolio.

Chart One: Volatility reduction

The above illustration is based on a historical simulation using Thomson Venture

Economics data for US buyout funds.The volatility of a FoF’s final performance can

thus be significantly reduced.

20

15

10

5

01 3 5 7 9 11 13 15 17 19 21 23 25

Number of Funds

Vola

tility

of P

ortfo

lio IR

R (

%)

Historic Simulation

Trendline

025-030 20/4/05 11:54 am Page 26

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"In the primary private equity market, FoFs represent from 10% to 15% of the

total capital invested; 85% is coming from other sources. This is a strange

equation for me. Fund of funds represent a perfect limited partner for direct

managers.We are quiet, knowledgeable, don’t demand heavy reporting… I do

not see why the share of fund of funds capital in the primary private equity

market will not increase in the future."

Many market participants see the potential for private equity FoFs to

increase the proportion of total private equity fundraising accounted for by

them. If funds of hedge funds control 35% of the hedge fund industry’s asset

base1, there is a good case for funds of private equity funds to achieve a

similar share.This will mean that the growth pace of the FoF industry can

outstrip the growth rate of the underlying asset class in the near future.

As far as the sources of capital are concerned, the major inflows are

expected from small and medium-sized investors.

"There is a ‘ceiling effect’ among large institutional investors that have already

reached a steady state in their asset allocation to the private equity asset class.

They have established relationships with certain FoF managers. Besides, they are

becoming more sophisticated and may move into private equity directly. But they

are not going to increase the share of FoF managers in their assets. Medium-sized

institutions, in contrast, are increasing the share of their assets allocated to funds

of funds. Small investors are poorly allocated to private equity all together.They

are only starting to enter this niche of the market, and funds of funds managers

are the only viable choice for them.They will stimulate growth in absolute terms."

However, some respondents express concern about the overall level of

optimism in the private equity market.

"I have the feeling that this market [private equity] is being hyped right now. Just

as everybody was interested in M&A six years ago, everybody is talking about

private equity today. Every day there are several stories in the Financial Times

about PE-backed deals. I am afraid that there might be a bubble in this market."

If opinions were more or less unanimous regarding the growth of the FoF

market in terms of capital under management, the picture is much more

diverse when respondents considered the likely number of players in the

future (see Chart Two).

Analysing the forecasted number of players by respondents’ assets under


Chart Two: Will the number of FoF managersincrease in the near future?

Increase 36%

Stay the same 39%

Decrease 25%

Chart Three: Will the number of FoF managersincrease in the near future? (analysed byrespondents’ assets under management)

0

10

20

30

40

50

60

70

80 Increase

Stay the same

Decrease64%

14%

21%

73%

27%

0%

19%

56%

25%

Small (<500M) Medium (<500-1,000M) Large (<1,000M)1Ineichen,Alexander (2005) "The Critique of Pure Alpha" UBS Investment Research

053-070 20/4/05 9:47 am Page 54

59

On the one hand, increased competition and the higher profile of the FoF

industry can be seen to help attract high quality professionals.

Competition and investors’ increasing competency force the top FoF

managers improve their professional standards. On the other hand, those

who feel that overall quality has fallen attribute it to the number of less

capable entrants in the market and high human turnover. The sharp

increase in the number of new players had led to dilution of

professionalism and quality.

A few limited partners have expressed concern that, as the industry

matures, FoF managers may become more risk-averse. LPs argue that funds

of funds should be at the forefront of identifying emerging primary fund

managers. FoF managers’ core competency is expertise in the due diligence

of primary funds, and ‘following the herd’ and investing in the managers

with proven track records will defeat one of their main value propositions.

"There is an increasing ‘process’ driven approach to fund of funds investing. I

think that as a group they will be middle of the road performers as most have

moved to a ‘follower’ role and are not as willing to be leaders on calculated bets."

Terms and conditions

The private equity FoF industry has borrowed from its underlying asset

class the conceptual terms and conditions it uses to define the

relationship with investors in its vehicles. However, the packages that FoF

managers are able to negotiate with their limited partners are much more

diverse than those of direct funds.What are expectations in the market

with regards to the evolution of the terms and conditions enjoyed by the

fund of funds industry?

FoF managers themselves perceive the double fee structure that investors

have to pay on private equity investments through a fund of funds as the

industry’s major weakness. However, there are certain values created by

FoF managers that investors are happy to pay a second layer of fees for.

Market participants’ opinions differ on whether terms and conditions will

become more standardised in the future or will retain their current

heterogeneity (see Chart Ten). Almost half of respondents believe that

terms and conditions will become even more diverse that they are now.

Slightly more than a quarter of respondents think that they will move

Survey

Chart Eight: The quality and level ofprofessionalism amongst FoF managers?

Can differ significantly Can differ somewhat Likely to be the same0

20

40

60

80

100Limited Partners

Placement Agents

%

60%

88%

34%

5% 6% 8%

Chart Nine: How has the quality and level ofprofessionalism amongst FoFs changed in thelast three years?

Has not changed much Higher than it was Lower than it was0

10

20

30

40

50

60Limited Partners

Placement Agents

%

47%

35%

40%

59%

12%10%

053-070 20/4/05 9:47 am Page 59

73The Directory

Assets under management / advisement

Year established

Contacts

Third party/co-mingled funds of fundsCustomised funds of fundsSeparate accounts

Undertakes secondariesUndertakes directs / co-investmentsInvests in debut funds

Approx. number of funds committed toApprox. capital committed

●

●

●

●

●

●

Services offered Regions invest in

Profile

Fund types invest in

c/o Alpha AssociatesInnere Güterstrasse 4ZugCH-6300Switzerland

Tel: +41 4 1726 7985Fax: +41 4 1726 7986 Website: www.5eh.ch

Branch Offices

Assets under management / advisementCHF 123 million

Year established1998

ContactsDr Peter Derendinger (Alpha Associates)Partner, CEO+41 43 244 [email protected]

Mr Peter RojicekPartner, CIO+41 43 244 [email protected]

5E Holding AG

North AmericaWestern EuropeCentral & Eastern EuropeAsia PacificLatin AmericaMiddle EastAfrica

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



Approx. number of funds committed to Approx. capital committed

●

Accession Mezzanine CapitalAdvent Private Equity Fund Central Europe, LPBaring Communications Equity (Emerging Europe)Emerging Europe Private Equity Fund IIIHungarian Equity Partners, LPInnova / 3Innova /98Polish Enterprise Fund IVPolish Private Equity Fund I

GeneralistBuyout / Later StageEarly Stage VentureLate Stage VentureSubordinated Debt / MezzanineFund of FundsTurnaround / DistressedSecondaries


Funds / GP groups committed to include: Profile


071-117 20/4/05 11:58 am Page 73

74 Market Report A Guide to Private Equity Fund of Funds Managers

747 Third Ave22nd FloorNew YorkNY 10017United States of America

Tel: +1 212 747 7474Fax: +1 212 355 9055Website: www.747capital.comEmail: [email protected]

Branch OfficesCuraçao, Netherlands Antilles+59 99 461 6261

Assets under management / advisement$50 million


ContactsMr Gijs F. J. van ThielManaging Partner

Marc J. M. der KinderenManaging Partner

Mr. Joshua C. SobeckPrincipal

Mr. Evert Rakers (Curaçao office)Director

Ms. Eva C. KuitInvestor Relations

747 Capital LLC


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



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

●

●

●

●

●

●

●

●

Brookside Pecks Capital PartnersCanaan PartnersCrescendo VenturesDW Health PartnersFrazier HealthcareHarvest PartnersLincolnshire ManagementNoro-Moseley PartnersNorthstar Capital Partners





071-117 20/4/05 11:58 am Page 74


Giselastrasse 4 80802MunichGermany

Tel: +49 89 3800 19900Fax: +49 89 3800 19436Website: www.allianz.comEmail: [email protected]

Branch OfficesNew York, United States of America+1 212 739 3400

Assets under management / advisement€3500 million


ContactsMs Wanching AngManaging Director+49 89 3800 [email protected]

Mr James Kester (New York office)Managing Director+1 212 739 [email protected]

Mr Elliot Royce (New York office)Managing Director+1 212 739 [email protected]

Mr Christian MayertBusiness Development+49 89 3800 [email protected]

Mr Peter Mayrl (Munich / Milan office)Investment Director+49 89 3800 19143 (Munich)+39 348 223 8192 (Milan)[email protected]

Allianz Private Equity Partners


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



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

●

●

●

●

●

●

●

●

●

●

●

●

●

●

●

●

●

Affinity AsiaAltor 2003 FundBain CapitalBarclaysBerkshire FundCharles RiverHIG Capital PartnersInvestitori AssociatiNmas 1Riverside Capital





071-117 20/4/05 11:58 am Page 86





Approx. number of funds committed toApprox. capital committed





4750 Owings Mills BoulevardOwings MillsMD 21117United States of America

Tel: +1 410 363 2725Fax: +1 410 356 9937Website: www.montagunewhall.com

Branch OfficesRedwood City, United States of America+1 650 632 4620

London, United Kingdom+44 20 7468 7405

Assets under management / advisement


ContactsMr Rupert A.S. Montagu (London office)General Partner & Co-founder+44 780 261 [email protected]

Mr C.Ashton NewhallGeneral Partner & [email protected]

Mr Kevin [email protected]

Montagu Newhall Associates

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

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Abingworth BioVentures III and IV;Accel Europe,LP;Atlas Venture VI;Aurora Ventures IV; BoulderVentures IV; Domain Associates; HealthcareVentures VII; InterWest Partners; New EnterpriseAssociates X and XI; Northbridge VenturePartners V; Oak Investment Partners; PolarisVenture Partners IV; Questmark Partners II;TCV(Technology Crossover Ventures);VenrockAssociates

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177The Directory


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Zugerstrasse 576341Baar-ZugSwitzerland

Tel:+ 41 41 768 8585Fax:+ 41 41 768 8558Website: www.partnersgroup.net

Branch OfficesLondon, United Kingdom +44 207 849 6362Singapore +65 6533 1586New York, United States of America +1 212 763 47 00Guernsey, United Kingdom +44 1481 711 690

Assets under management / advisement$7000 million


ContactsMr Philipp GyslerHead Private Equity Asset Management+41 41 768 [email protected]

Ms Sandra PajarolaHead Partnership Investments+41 41 768 [email protected]

Mr Stephan SchaeliHead Secondaries and Portfolio Management+41 41 768 [email protected]

Partners Group

Partners Group is one of the largest alternative asset managers worldwide focusing on Private Equityand Hedge Funds. On the private equity side Partners Group is involved in primary direct and co-investments, secondary transactions and publicly traded private equity investment vehicles.Vehiclesmanaged include Partners Group Europe LP, Partners Group Secondary LP, Pearl Holdings Limited,Partners Group Private Equity Performance Holding Ltd (P3), Princess Private Equity Holding Limitedand CSA Private Equity. Overall, Partners Group follows a diversified investment program and seeksboth primary and secondary fund investment opportunities globally, in all investment stages.The firmrecently opened an office in Singapore and is currently marketing its first dedicated Asian fund of fundsproduct.



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

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BC European Capital VII; Doughty Hanson & CoIV; Graphite Capital Partners VI; New EnterpriseAssociates X; Nordic Capital Fund IV; OxfordBioscience Partners IV; Polish Enterprise Fund V;Spanish Private Equity Fund II;Terra FirmaCapital Partners II;The Third Cinven Fund; andothers

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Coolsingel 120Postbus 973Rotterdam3011 AGThe Netherlands

Tel: +31 10 224 26 08Fax: +31 10 224 21 41Website: www.robeco.com/alternativesEmail: [email protected]

Branch Offices

Assets under management / advisement$500 million (in private equity)


ContactsMr Ad van den OuwelandManaging Partner+31 1 0224 [email protected]

Dr Harrie MeijersPartner+31 1 0224 [email protected]

Mr Andrew MustersSenior Investment Manager+31 1 0224 [email protected]

Mr Mikan van ZantenSenior Investment Manager+31 1 0224 [email protected]

Robeco Alternative Investments

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



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

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3i Europartners IV-A, L.P.Accent Equity 2003, L.P.Advent GPE IV-D, L.P.Barclays Private Equity Europe Fund, L.P.Capital International Private Equity Fund IV, L.P.Charterhouse Capital Partners VII, L.P.Exponent Private Equity Partners L.P.EQT IV, L.P.Green Equity Investors IV, L.PWellspring Capital Partners III, L.P.

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233Appendix One

and London-based global fund of funds manager, which aims to raise a

specific amount of new capital every year, in 2003 raised a total of $962

million, of which $553 million went into the group’s US fund and $409

million into the non-US partnership. The firm was able to round up the

capital quickly and by July of last year stopped responding to requests for

proposals from investors who hadn’t committed at that point.

Also successful last year was Pantheon Ventures, which closed its third

European fund of funds on €470 million – 50 percent above target.And in

January 2004, Standard Life Investments beat its original target by €90

million when closing its second fund of funds on €1.09 billion.

But while longer established and larger-scale managers are clearly hitting

the right spot with the buy side, for newer and smaller players the outlook

is considerably bleaker.

"The brand leaders are vacuuming up all the capital, and it’s becoming very

hard for smaller funds of funds," says Ray Maxwell, managing director of

the private equity division at Invesco Asset Management. "If you are a

relative newcomer, you need a large amount of cornerstone investment

and/or a very different type of approach to have any chance of success in

the fundraising market."

Flight to quality

There are obvious reasons why investors would wish to go with the larger

groups.After any period of market turbulence, a flight to perceived quality

is bound to occur. In this respect, the fund of funds segment is no different

from the direct investment market where in-demand general partners like

Permira, which last year were able to raise Europe’s largest-ever buyout

fund, are able to amass large amounts of capital while many of their peers

have less success. There is no getting around the fact that in turbulent

times, investors will head for safe havens.

Talking to investment consultants confirms the view that brand name fund

of funds are very much in favour. Phil Chesters, European partner at

Mercer Investment Consulting in London, says his organisation tends to

advise clients to place their capital with around "half a dozen big names"

and that smaller groups would "probably not" be considered. Chesters

says his primary consideration is always the quality of people in the

organisation and their experience as investors.

If Mercer’s strategy is widely replicated, it will undoubtedly lead to mega-

group dominance at the expense of smaller operators.

But if is true that, as one market source suggests, "fund of funds that don’t

raise at least $1 billion don’t seem credible" to a large part of the market,

the question arises whether this is necessarily to the benefit of investors.

Considering that a fund of funds’ performance will only be as good as that

of the underlying partnership it invests in, access to the best performers

is obviously key. As a result, long-established groups with a big footprint

have an advantage when it comes to allocating capital to the most in-

demand managers.Take Sequoia Capital’s most recent fundraising last year,

for instance: the group capped the fund at $395 million – 43 percent less

than the previous $695 million vehicle in 2000.The firm reportedly could

have raised billions, a reminder to investors, especially those lucky enough

to get in, of the value of long relationships with the industry’s star

performers.

It is worth noting that, as the case of Sequoia illustrates, funds don’t have

to be big to count among those that funds of funds ought to be selecting

for their clients. Attractive funds specialising in strategies such as mid-

market or venture are in fact often capped at levels that make it difficult

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235

Have it your way

March 2004

The maturation of the private equity market is creating a new class of

investors who are faced with a luxury of choices: in-house versus

outsourced investment staff; separate accounts vs. funds of funds, set

menus versus ‘Chinese menus.’ Be careful what you order. David Snow

reports

Christopher Wagner, the senior investment officer of alternative assets for

the Pasadena-based Los Angeles County Employees’ Retirement System

(LACERA), confirms what private equity advisors find attractive about the

separate accounts business – he likes separate accounts better than funds

of funds.

Wagner also points out something that private equity advisors don’t like

about the separate accounts business – his pension is on its third separate

accounts manager in 12 years.

Make no mistake – the $26 billion (€21 billion) LACERA has a long-term

commitment to the private equity asset class.The California pension has

had an allocation to alternatives since 1992, and its target currently stands

at 7 percent. But the firms LACERA has chosen to help manage its

allocation to private equity have had short- to medium term relationships

with the pension.

LACERA first dipped its toes in private equity through a separate account

managed by Invesco. In 1997, when its contract with the asset manager came

to an end, the pension switched to Bala Cynwyd, Pennsylvania private equity

advisor Hamilton Lane. In February 2001, Wagner noted the strong

performance of the pension’s diversified alternatives portfolio and

recommended a $540 million allocation increase to Hamilton Lane’s

account. But at the end of the year, Hamilton Lane was out as an advisor and

London- and Irvine, California-based Pathway Capital Management was in.

Wagner says there are "a lot of reasons" for changing separate account

managers, ranging from concerns about conflicts of interest to politics at

the pension board level. He notes that although LACERA has the option

of ‘firing’ a separate account manager, it has never done so. Instead, the

pension has sought fresh management teams with each contract

expiration.

The ability to switch managers is one reason Wagner says his pension finds

separate accounts so appealing.A parting of ways with a separate account

manager, although often accompanied by a penalty of some sort, is far

easier than getting out of a partnership in which investors are co-mingled.

Funds of funds, like single-GP private equity funds, require limited partners

to be committed for the life of the fund, which can be as long as 12 years

or more.The options for ‘firing’ a fund of funds manager are fairly grim.

Either the investor must sell its partnership interest at a discount on the

secondary market, or, more drastically, may cease honoring new capital

calls but risk facing draconian capital-account slashings, not to mention

gaining the reputation as a difficult LP.

More importantly, though, LACERA likes the fees for separate accounts

better than those associated with funds of funds. "If you want to put

money to work each year, and you do it through a fund of funds, after a

few years your management fees are going to be huge as opposed to what

you can negotiate as a separate account client," Wagner says. "That to me

seems to be the biggest point."

Outsourcing is in

Of course, every investor is different and has different needs, and there

are two crucial things to note about LACERA. First, it is a comparatively

large investor, in that it must put hundreds of millions of dollars to work,

as opposed to the mere tens of, or single-digit million found among high-

net-worth and small-institution investors. Second, it does not have the

budget to hire an extensive alternative investment staff. These two

qualities put the Los Angeles pension squarely in the middle of a trend that

private equity advisors are seeking to exploit – the continued growth of

private equity as an institutional asset class, and the continued need for

investors to outsource the process of selecting and monitoring good GPs.

Despite a several-year slump in private equity valuations, fundraising and

investing, the institutional outlook for the asset class remains strong.

According to a recent survey conducted by Goldman Sachs International

Appendix One

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Funds of funds have more fun

February 2005

Thousands of data points, divergent investor needs and fierce competition

have all conspired to make fund of funds administration an increasingly

frenetic endeavour. By David Snow, Editor

Managing a private equity fund of funds is like managing a regular private

equity fund, only more so.

Instead of a dozen portfolio companies, there are hundreds, if not

thousands. The same goes for limited partners – funds of funds tend to

have many investors, some more sophisticated than others.

The bigger numbers associated with funds of funds also increase the

complexity of administration exponentially. Not that fund of funds

managers are complaining – they take on the burden of vetting, investing

in and monitoring a private equity program so you don’t have to. But as

the fund of funds business has evolved and become more competitive,

funds of funds administrators have had to improve their operations,

especially with regard to reporting, client servicing and taxes.

Data in, data out

Leo Chenette, vice president of investor relations for secondary and

primary fund of funds manager Paul Capital, says one of the most

challenging parts of his job has been "the classic business challenge of

keeping the back office up to speed with the front office."

Chenette, based in New York, notes that in 1999 San Francisco-based Paul

Capital had only about $500 million under management. The firm now

oversees roughly $4 billion in assets. Chenette notes that Paul Capital chief

financial officer Philip Jensen joined the firm in 2001 to begin building out

back-office infrastructure and personnel to support the firm’s rapid

growth.

The main challenge in running a fund of funds, says Chenette, is "gathering

and tracking a huge amount of data. If you’re an LBO fund, you may have

five investments; if you’re a fund of funds, you could have 100 partnerships

with each having 15 investments."

Thousands of portfolio companies means thousands of capital calls and

distributions, as well as other administrative duties connecting the

investors with the underlying partnerships. Competition has led funds of

funds to offer more customised programs, and this has only compounded

administrative complexity.

For example, Darien,Connecticut investment advisor Portfolio Advisors

offers clients a single fund of funds, but within that the ability to pick and

choose among four specific sectors – buyouts, venture capital, special

situations and real estate. According to Portfolio Advisors’ chief financial

officer Hugh Perloff, all cash flows in and out of the fund of funds must be

reallocated to the LPs based on their respective levels of participation in

the four sectors. This customised allocation work applies not only to

capital calls and distributions but to mundane items like legal bills and

interest payments.

Many fund of funds firms have established mechanisms to accommodate

investors with specific tax needs, and this adds to the back-office burden.

For example, unrelated business taxable income (UBTI) has long been a

Appendix One

257

Appendix TwoPrivate Equity Manager onfunds of funds

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Documents

Private Equity Guide