Is Permanent Capital Structure Right for Your Fund?

February 23, 2016

Our Panelists

Bob Bartell, CFAGlobal Head of Corporate FinanceDuff & Phelps Securities, LLC

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Cliff BoothCo-Head of Investment BankingJanney Montgomery Scott LLC

Jay GouldCo-Chair, Financial Services Corporate Winston & Strawn LLP

Jennifer CavanaughPartner, Professional Practice Director – MidwestGrant Thornton LLP

Dave SwansonPartnerThe Compass Group

Chris ZochowskiChair, Permanent Capital Solutions PracticeCo-Chair, M&A/Securities/Corp. Gov.Winston & Strawn LLP

Introduction• Historically, permanent capital vehicles were niche

• Very distinct strategies and requirements with attractive alternatives

• Capital formation activities are evolving quickly• Diversified investment strategies

• Asset managers seeking opportunities in non-core areas

• Frustration over serial fund-raising process• Fee pressure and the need to effectively start over every five years

• Recognition of limitations of traditional models• Hold periods and the need to harvest the portfolio based on timing rather than economic factors

• Need for differentiation among peers• Gap between public and private regulation has narrowed• Desire to have an established portfolio foundation

• Goal perspective rather than structure perspective• Focusing on goals and objectives and working back to structure is preferable• Structure focus is limited:

• Advisors typically deeply channeled in particular structure

• The inertia of precedent impedes the progress of evolution

• Being structure-agnostic allows for broadest consideration of best alternatives for a particular investment strategy or focus

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• Yield vehicles, specifically BDCs, MLPs, and REITs, have seen substantial growth over the last decade• The BDC market has grown from an aggregate of $8.7 billion in

market cap in 2004 to $28.7 billion in 2015

• The REIT market has grown from an aggregate of $307.9 billion in market cap in 2004 to $896.2 billion in 2015

• The MLP market has grown from an aggregate of $46.5 billion in market cap in 2004 to $347.0 billion in 2015

• Alternative asset managers and SPACs have also seen significant growth over the last decade

REIT Industry Growth ($MM) (2) MLP Industry Growth ($MM) (3)

BDC Industry Growth ($MM) (1)

Industry Growth: BDCs, REITs, & MLPs

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Alt. Asset Manager/PTP Industry Growth ($MM) (1) Closed End Fund Growth ($MM) (2)

SPAC Growth & Capital Raised ($MM) (3) SPAC Summary ($MM) (3)

1) Source: FactSet. Alternative Asset Managers & PTPs Include: APO, ARES, BX, CG, CODI, FIG, KKR, MIC, OAK, & OZM2) Source: Investment Company Institute3) Source: SPAC Analytics; SPAC summary includes all 236 SPACs raised since 2003

Industry Growth: Alt. Asset Managers, CEFs & SPACs

Why Permanent Capital?• Longer Hold Period / Investment Horizon

• Access to Growing Capital Pools

• Lower Cost of Capital

• Ability to Avoid Serial Fund Formation / Raising

• Gap Between Public / Private has Shrunk

• Diversified Institutional and New Retail Investor Base

• Exit Platform for Existing Portfolio

• Liquidity without Redemption for Investors

• No Financing Contingencies for Transactions

• Recognized Public Buyer with Audited Financials

• Regulated SARBOX Compliance

• Management Compensation Options

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Overview of Structures• ’40 Act Structures

• Closed-End Fund• Interval Fund• Business Development Company

• Non-’40 Act Structures• Real Estate Investment Trust• Master Limited Partnership• Permanent Capital Acquisition Partnership• Special Purpose Acquisition Company• YieldCo

• Compare Other Structures • Hybrid Structures• Public Asset Manager• Offshore Vehicles

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Marketing Issues • Asset / Portfolio Composition

• Portfolio Size for IPO

• Management Team / Track Record

• Board Composition

• Distribution Requirements

• Investor Base

• Use of Proceeds

• Line of Credit Terms at IPO

• Leverage Pre-Post-IPO

• Management and Incentive Fee

• Diversification of Investment Strategy

• Differentiation Among Permanent Capital Vehicles and Other Alternatives

• Manager Skin in the Game

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Stand-AloneReturn

CumulativeExpected Return (1)

10-Year Treasury (Risk-Free Rate) (2) 2.22% 2.22%

Bond Premiums(B to CCC) 2.5% -5.0% 5.0%-7.5%

Equity Premium 3.0% -4.0% 8.0% -11.5%

Illiquidity Premium (Private Equity) 5.0% -6.0% 20.0% -30.0%

BDC Industry Yield / Total Returns 10.5% (3) 10.0% –15.0%

CODI Yield / Total Returns 8.7% (4) 20.0%-30.0%

Alternative Asset Manager Yield / Total Returns 6.4% (5) 15.0% -20.0%

MLP Industry Yield / Total Returns 6.3% (6) 10.0% -15.0%

REIT Industry Yield / Total Returns 3.8% (7) 10.0% –15.0%

Investor Return Expectations, Industry Yields, and Cumulative Expected Returns

Investor Expectations

Legal Issues • Corporate form will be driven by:

• Investment strategy and structure chosen• Public / private nature of structure• Certain structures and structural elements can be highly flexible

• ’40 Act Requirements Generally• Investment securities• Joint transaction / co-investment restrictions• Compensation requirements• Mark to market

• Management and Compensation Structure• Internal versus external• Performance fee• Management fee• Equity participation

• SEC Process• Tax Requirements

• 1099 versus K-1• 7704 qualifications• Distribution requirements for BDCs and REITs

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Tax and Accounting Issues• Tax Issues

• K-1 versus 1099• Corporation versus Partnership

• Accounting Issues• Treatment of Contingent Obligations / Performance Fee

• Financial Statements• Jobs Act Considerations• Acquisitions

• AICPA / PCAOB Audits• Time Periods• Pro Forma Presentations• Pushdown Accounting• Non-Controlling Interests

• Predecessor / Successor Auditor• Principal Auditor• PCAOB Registered• Consents• Independence

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Valuation Issues• Valuation Needs:

• Provide Investor / Shareholder Confidence

• Support Fiduciary Obligations of Board

• ’40 Act Structures• Quarterly Mark-to-Market Valuation

• Other Situations• Related Party Transactions

• M&A Valuation Services

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Take-Away Considerations

• Investment Strategy• Debt or Equity

• Domestic or International

• Diversified or Industry Vertical

• Minority or Control Positions

• Management Structure• Internal or External

• Management Fee Expectations

• Incentive Compensation• Equity or Performance Fee and Aligning Interests

• Investor Objectives• Distributions or Growth-Oriented

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Questions?