PE Income Trust

7/31/2019 PE Income Trust

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ListedListed PE interestPE interest firmfirm

January 2012January 2012


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Private and confidential Page 2

PreamblePreamble

This short paper aims to raise theThis short paper aims to raise thediscussion of listingdiscussion of listing aa PE firm, or listingPE firm, or listing

thethe economic interesteconomic interest hereinherein

The idea discussed hereThe idea discussed here should workshould work

structurally, however, certain issues needstructurally, however, certain issues need

to beto be sorted outsorted out Here goesHere goes


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What isWhat is llistedisted PEPE iinterestnterest firm?firm?

Listed PE firm or not?Listed PE firm or not? It is not, it isIt is not, it is about listingabout listing thethe GPs interestGPs interest

rather than listing the firm, therather than listing the firm, the

management company of the GPsmanagement company of the GPs


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Why?Why?

What goes wrong with the listed PE firms?What goes wrong with the listed PE firms? There are tangible benefits indeedThere are tangible benefits indeed

Evergreen capitalEvergreen capital

Realization of firmRealization of firms values value

Exit for founders / partnersExit for founders / partners

Incentives for talentsIncentives for talentsAcquisition currency andAcquisition currency and


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But the problem isBut the problem is

The interest can never be alignedThe interest can never be aligned betweenbetween

Strike a balance? No way unfortunatelyStrike a balance? No way unfortunately

Existing LPsNew public

shareholders

Long-term IRR driven

Short-term Share price focused


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Listed PE firmsListed PE firms historyhistory

1960s 1970s 1980s 1990s 2000s

1976 London 1985 Frankfurt

1987 Swiss

1987 Toronto

1987 JASDAQ

1995 Paris

1994 SGX

1997 NASDAQ

1996 London

1997 Stockholm

1994 LSE

2004 NASDAQ

2001 Paris

2005 Brussels

2006 AIM

2000 GEM

2006 AmsterdamNote: Eurazeo was formed by the merger ofEurafrance and Azeo (formerly Gaz et Eaux) in 2001


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Listed PE firmsListed PE firms recent pastrecent past

Billionaires madeBillionaires made

Wesley Edens, Peter Briger et al., following theWesley Edens, Peter Briger et al., following the

listing of Fortress in March 2007listing of Fortress in March 2007

Bonanza preBonanza pre--Lehman demiseLehman demise Lavish party of SchwarzmanLavish party of Schwarzmans 60s 60thth birthdaybirthday

before the IPO of The Blackstone Groupbefore the IPO of The Blackstone Group

... and then listings of... and then listings of

Apollo Global ManagementApollo Global Management11 and KKR & Co.and KKR & Co.Note 1: Apollo Investment Corporation, a business development company, was listed on NASDAQ back in April 2004, raising US$930 million


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andand current observationscurrent observations

Diversification and AUM growthDiversification and AUM growth To earn more fees and have more stableTo earn more fees and have more stable

income favored by public shareholdersincome favored by public shareholders

Share price volatilityShare price volatility

Subject to NAV writeSubject to NAV write--ups and downs, IPOups and downs, IPO

exits window and broader market sentimentexits window and broader market sentiment

Note: AUM stands for assets under management


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OK, what is the suggestion?OK, what is the suggestion?

Listing the economic interests of GPs inListing the economic interests of GPs intheir firm, in the form of income trusttheir firm, in the form of income trust

The economic interests are theThe economic interests are the

management fee and carry, to which GPsmanagement fee and carry, to which GPs

are entitledare entitled

The whole idea is to avoid losing controlThe whole idea is to avoid losing controlof the firm (i.e. the management company)of the firm (i.e. the management company)


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The structureThe structure

Partner A Partner B Partner C Partner D

PE Income Trust(Listco)

Trustee-Manager

Pools of management fee and carry

Unit holders

Distribution of economic interests to the Trust

Distributions to unit holdersHolding of units

Fees

Trustee and mgmtservices

Explanation: An income trust is an investment vehicle that may hold equities, debt instruments, royalty interests or real properties. The mainattraction of an income trust, a flow-through entity, is its stated goal of paying out consistent cash flows to investors (or unit holders).

The PE Income Trust (the Trust) will be constituted by a trust deed, under which the Trustee-Manager will hold all economic interests of GPs andacquire new economic interests on trust for unit holders. The Trustee-Manager will have the dual responsibility of safeguarding the interests of theunit holders and managing the Trusts economic interests.


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HowHow ddoes the Trustoes the Trust wwork?ork?

The economic interests of partners are pooledThe economic interests of partners are pooledtogethertogether

Such interests will be listed in the form ofSuch interests will be listed in the form of

income trustincome trust Investors will be subscribing for units at theInvestors will be subscribing for units at the

time of IPOtime of IPO

IPO proceeds will go to the partnersIPO proceeds will go to the partners

Distributions will be made regularly to investorsDistributions will be made regularly to investors

(or unit holders)(or unit holders)


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Viable structure?Viable structure?

The answer isThe answer is yesyes There is flexibility as toThere is flexibility as to whatwhat interestinterestss

will flowwill flow throughthrough the Trust and getthe Trust and get

distributeddistributed to the unit holders, e.g.to the unit holders, e.g.

Management fee and / or carryManagement fee and / or carry

All or a portion of GPs interestsAll or a portion of GPs interests Which period of GPs interestsWhich period of GPs interests

GPs interests in a particular fund, say Fund IVGPs interests in a particular fund, say Fund IV


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ValuationValuation

Primarily based on cash flow streams of (i)Primarily based on cash flow streams of (i)management fee and (ii) carry,management fee and (ii) carry, to be receivedto be received

by partnersby partners

ComplexityComplexity depends on whetherdepends on whether the Trustthe Trustincludes carry or notincludes carry or not

Listco - Management Fee2

Cash flows stable & predictable

Distributions to unit holdersgoverned by trust deed

Defensive play

Utilities-type trading PE multiple

Low discount rate for valuation

Listco - Management Fee & Carry

Cash flows unpredictable on carry

Payout ratio typically fixed

Growth play during buyout boom

Trading PE multiple similar to thatof other listed PE firms

Relatively high discount rate

Note 2: Assuming fund size of US$1 billion, 2/20 structure, 7-year life anddiscount rate of 10%, the Trust can raise US$97.4 million using DCFcalculation (without taking into account the carry contribution)


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Pros of this ideaPros of this idea

Having the same advantages as otherHaving the same advantages as other listedlisted

PE firms, namelyPE firms, namely

Monetization for GPsMonetization for GPs

Rewarding talentsRewarding talents Realization of firmRealization of firms value, to some extents value, to some extent

The keyThe key benefit is avoidance of conflict ofbenefit is avoidance of conflict of

interest, between existing LPs and publicinterest, between existing LPs and publicshareholdersshareholders


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Some issues to considerSome issues to consider

GPs perspective

Most PE firms dont allow transfer ofshares if partners leave or retire

A PE firm can borrow money to buyout departing partners

What if only some partners cash out?

Do GPs really want disclosures and

potential litigation from shareholders?

LPs perspective

Will LPs interests be aligned after theIPO?

Would GPs be focused and motivatedafter the monetization?

How may the LP/GP relationshipdevelop over time?

Investors perspective

IPO investors will worry about iffounders exit

Is the Listco a right vehicle from taxperspective?

Will the vehicle trade well given theuncertainty of cash flow streams?

Are shareholder rights protected?


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CriticsCritics

The Trust works best only when the cashThe Trust works best only when the cashflow streams are steadyflow streams are steady

The proposed idea does not lessen theThe proposed idea does not lessen the

potential conflict between LPs andpotential conflict between LPs and

shareholdersshareholders


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Some thoughts to answerSome thoughts to answer

If carry is included, valuation will be benchmarkedIf carry is included, valuation will be benchmarkedagainst other listed PE firms. Further, the Trustagainst other listed PE firms. Further, the Trust

may be structured to capture only themay be structured to capture only the

management feemanagement fee

The proposed idea is about listing the economicThe proposed idea is about listing the economic

interest, not the firm. Therefore, the Trust needsinterest, not the firm. Therefore, the Trust needsnot to please public shareholders by pursuingnot to please public shareholders by pursuing

shortshort--term performance and hence conflict ofterm performance and hence conflict of

interest will be lessenedinterest will be lessened


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A twisted structureA twisted structure

LetLets also think about its also think about it for the industryfor the industry

WCAS XI(2009)

Khosla Ventures III(2009)

SAIF Partners IV(2010)

Blackstone CP VI(2011)

PE Income Trust(Listco)

Trustee-Manager

Pools of management fee only

Unit holders

Distribution of economic interests to the Trust

Distributions to unit holdersHolding of units

Fees

Trustee and mgmtservices


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LastlyLastly

The trend of mega buyout firms going public isThe trend of mega buyout firms going public is

on the riseon the rise33 an evolutionary processan evolutionary process that thethat thePE industryPE industry will likelywill likely followfollow

As a result, one of the key success factors ofAs a result, one of the key success factors of

the industry is being challengedthe industry is being challenged safeguardingsafeguardingthe interests of LPsthe interests of LPs

The idea discussed here may be a solution, butThe idea discussed here may be a solution, but

has its own shortcomingshas its own shortcomings no eno evergreenvergreen

capital nor acquisition currencycapital nor acquisition currency

Note 3: The Carlyle Group announced on January 10, 2012 that it wouldseek an IPO on NASDAQ while TPG was widely reported in 2011 that itmight seek going public


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Thank You & Prepared ByThank You & Prepared By

Leo WongLeo Wongemail: wong_leoemail: [email protected]@yahoo.com

PE Income Trust

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