PRIVCAP REPORTS · Bridge Capital tell Privcap about the dos and don’ts of the allocation...

WITH DEEP MARKET ANALYSIS AND BEST PRACTICES FROM:AlpInvestGoldPoint PartnersCohesive CapitalNeuberger BermanFisher LynchTwin BridgeJLL PartnersThe Riverside CompanyVestar CapitalPrivate AdvisorsGoodwin Procter

The Co-investment Era

Plus:● Top 20 LP Co-investors ● Co-investment Fees Explained ● New Jersey & Wyoming Separate Accounts Compared

PRIVCAPREPORTS/ In-depth Analysis From

Privcap.comQ2 2014

On Privcap.c0m

Videos in This ReportRiding the Co-investment WaveWhy has demand for co-investment surged in recent years, and how should GPs and LPs structure deals to their advantage? With panelists from Private Advisors, AlpInvest Partners, and Twin Bridge Capital Partners.

Digging for the Perfect DealExperts from Private Advisors, AlpInvest Partners, and Twin Bridge Capital Partners tell Privcap how they source co-investments, what they look for in a deal, and the actions and attributes that are deal breakers.

Navigating the Allocation ProcessCo-investment experts from Private Advisors, AlpInvest Partners, and Twin Bridge Capital tell Privcap about the dos and don’ts of the allocation process.

Two IR Pros Tell How LP Co-investments Get DoneInvestor-relations experts from The Riverside Company and Vestar discuss how LP interest in co-investmentment has increased and how deals are structured.

Allocating LP Investments Allocation of co-investment opportunities involves transparency and building relationships with LPs, say IR experts from Vestar Capital Partners and The Riverside Company.

Finding the Right Co-investment PartnerTom Haubenstricker of GoldPoint Partners discusses the firm’s evolution from in-house investor for New York Life to a stand-alone co-investment power-house.

The Craft of the Co-investmentJLL Partners’ Paul Levy tells Privcap about how the firm crafts its co-invest-ments and how the process worked on its recent $2.65B investment deal for pharmaceutical group Patheon, now called DPx.

Top Tip for Co-investors: Don’t Embarrass the Lead SponsorBeing an excellent partner means doing your homework, saying no quickly, and being credible in front of a seller, say experts from Cohesive Capital and Neuberger Berman.

Adding Value as a Co-investorExamples of partners bringing due diligence and intelligence expertise to the deal-making process. With experts from Cohesive Capital and Neuberger Ber-man.

How Two States Got Into Co-investingThe evolution of direct investing now involves two state pension funds. Brett Fisher of Fisher Lynch Capital talks about the firm’s partnership with Oregon and Washington.

The Fine Print: Negotiating a Co-Invest PartnershipDavid Watson of Goodwin Procter explains the current trends and legal issues surrounding deal terms.

COMING SOON on Privcap

This special report includes the following new video programs. Watch them at Privcap.com

Pensions and Private EquityAdveq’s Sven Liden tells Privcap about his recent research in partnership with the London Business School, which examines what influences pension fund allocations have on private equity.

Managing the Information Exchange Panelists from MatlinPatterson, Gen II, and Castle Harlan discuss the wants and needs of communication between LPs and GPs.

UPCOMING REPORTSQ2 Energy Q3 Deal Flow Q4 PE Performance & Portfolio

On CameraPaul Levy, JLL Partners

http://www.privcap.com/co-investment-demand/

http://www.privcap.com/finding-co-investment-deals/

http://www.privcap.com/co-investment-allocation/

http://www.privcap.com/lp-co-investment/

http://www.privcap.com/lp-co-investment-allocation/

http://www.privcap.com/co-investment-partnership/

http://www.privcap.com/co-investment-success/

http://www.privcap.com/co-investment-tips/

http://www.privcap.com/value-add-co-investment/

http://www.privcap.com/co-investment-state-pension-funds/

http://www.privcap.com/co-investment-agreement-tips/

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In Case You Missed It...

Colombia’s Growing Appetite for PE Francisco Jose Arboleda of HarbourVest Partners talks about the growth of Colombia’s private equity industry and its talent.

Must-see thought leadership from Privcap.com

On Privcap.com

About Privcap Special ReportsPrivcap Special Reports are exclusively for subscribers to Privcap, the definitive channel for thought leadership in

private capital. Each month Privcap focuses on a critical theme and produces a “bundle” of thought-leadership

content in multiple formats—a digital report, video interviews and panel discussions, and audio programs. We

capture the market intelligence of leading authorities, whose expertise forms the core of each report. Privcap

Special Reports help market participants better understand opportunities and practices in private capital, as well

as gain deep insights into the people with whom they may become long-term investment partners.

Are Monitoring Fees Actually Dividends? The IRS is looking at whether moni-toring fees paid to private equity spon-sors should be treated as dividends and not fees for service. A change might not be good news for PE taxpayers, say experts from New Mountain Capital and McGladrey.

In Troubled Times, Ramping Up IR In the wake of the financial crisis, The Blackstone Group increased its IR staff and the granularity of information it reports to LPs, says the firm’s Matthew Pedley.

PE’s Influences in Colombia Alejandro Rodriguez of PineBridge In-vestments discusses the appetite for pri-vate equity from the country’s pension funds, and their challenges in building a portfolio.

An “Infant” Industry Grows MAS Equity Partners and ColCapital’s Patricio D’Apice tells Privcap about the rapid evolution of the Colombian PE mar-ket since its formal start in 2005.

Accuracy: Challenging but Imperative Providing accurate information to LPs has never been more important or challeng-ing, given the huge demands from inves-tors and increased complexity of running a PE firm, say pros from MatlinPatterson, Castle Harlan, and Gen II Fund Services.

http://www.privcap.com/colombia-pe-growth/

http://www.privcap.com/monitoring-fees-private-equity/

http://www.privcap.com/monitoring-fees-private-equity/

http://www.privcap.com/blackstone-ir/

http://www.privcap.com/colombian-pension-funds-private-equity/

http://www.privcap.com/investment-evolution/

http://www.privcap.com/accurate-information-lps/

http://www.privcap.com/accurate-information-lps/

PRIVCAP SPECIAL REPORTS

05

PRIVCAP SPECIAL REPORTSPrivcap Media David Snow Co-founder and CEO Gill Torren Co-founder and President Matthew Malone Editorial Director

ContentZoe Hughes Editor, PrivcapRE Ainslie Chandler Senior Journalist Andrea Heisinger Associate Editor Kathleen O’Donnell Media Coordinator Cameron Faulkner Media Coordinator

Design Cecilia Salama Design Coordinator

Contributors Judy Kuan

Contacts

Editorial David Snow / [email protected] / 646.233.4558

Matthew Malone / [email protected] / 203.554.7261

Sponsorships & Sales Gill Torren / [email protected] / 646.233.4559

For subscriptions, please call 855-PRIVCAP or email [email protected]

Copyright © 2014 by Privcap LLC

Commentary Privcap CEO David Snow on the new normal of investors wanting PE in their portfolio, but on their own terms.

The Co-investment Bandwagon Institutional investors have paid more attention to direct investing since Fisher Lynch Capital began the practice with Oregon and Washington’s pension funds, says Brett Fisher.

Achieving Balance in LP Co-investing Panelists from Private Advisors, AlpInvest Partners, and Twin Bridge Capital Partners discuss the different ways they deploy capital directly into deals.

Co-investment: In Depth • The Top 20 LPs: a list of those with the strongest appetite for direct and co-investment. • Allocation Policies: how distribution of deals to LPs is handled. • Fee Breaks, Deconstructed: how do you quantify the benefit of co-investment for an LP’s PE portfolio? • The Research on Returns: three performance analyses of co-investing, compared. • Separate Account Case Studies: three case studies of PE separate account programs that provide benefits to LPs. Jll Founder: The Craft of the Co-investment Co-investing gives JLL Partners access to capital for large deals while building their portfolio companies, says the firm’s Paul Levy.

Getting the Partnership Right Goodwin Procter’s David Watson on trends in the co-investment market.

Choosing the Right Co-invest Partner Tom Haubenstricker of GoldPoint Partners on what qualities GPs and LPs consider the most important in forming a solid investing partnership.

Managing a Rising Tide of Direct Investments LP demand for co-investing has climbed, leading to a need for deal and allocation policies, say IR experts from The Riverside Company and Vestar Capital Partners.

Don’t Embarrass the Lead Sponsor Direct investment experts from Cohesive Capital Partners and Neuberger Berman share tales from the trenches and tips on adding value.

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Privcap Special Report • Co-investment | Q2 2014 / 5

he private equity world is entering a “new normal,” one characterized by a more complex and flexible flow of investor capital into specific deal op-portunities. The result? The best GPs will continue to control the best op-

portunities, but their control of the capital itself will be less lucrative.

The point of private equity was never about fund management; rather, it’s about the investment of capital into private businesses with an eye toward increasing the value of that capital. The fund, typ-ically a limited partnership, became the dominant format for getting private equity done because it was the format that worked best for the parties involved. Indeed, blind-pool, commingled limited partnerships have many advantages: they clearly delineate who’s in charge of the deals; they grant the GPs guaranteed capital to draw down as oppor-tunities arise; they lock in all capital partners for 10 years or more to allow focus on long-term value creation and let passive investors have experienced private equity deal-doers allocate on their behalf. But the limited partnership ancien régime is being gradually overthrown by a more complex network of capital providers who have higher expectations and greater sophistication. They form the van-guard of what I’ll call “the new era of co-invest.”

One can sense a new private equity market emerg-ing in which the general partner raises a fund and locks in the participation of a population of capi-tal partners but the fund is somewhat of a “down

payment” vehicle. During the investment period, the equity for each deal comes only partly from the fund. The rest is sourced strategically and in an in-creasingly sophisticated pass-the-hat exercise in which each potential capital provider determines how much “extra” they want of that particular in-vestment.

GPs will typically go first to their own LPs for cap-ital as a reward for investing in the fund. Ideal-ly these LPs, either with in-house co-invest teams or relying on specialist advisers, perform due dili-gence on each opportunity and give a quick yes or no. In some cases, GPs will set up a “sidecar” vehi-cle for LPs who can’t possibly vet each deal them-selves. The sidecar automatically co-invests in all deals on a low-fee basis. For larger relationships, a GP may operate a separate account in which the GP does the co-invest picking and choosing on behalf of the LP.

Where necessary and strategic, GPs may also look beyond their own LP networks to co-investment specialist vehicles, as well as to investors who are not in the current fund but with whom the GP would like to do business.

Funds and fundraising will always be a huge part of the market, but the role of the fund as a placeholder for future co-invest opportunities is already clear-ly established among the largest LPs. This has im-plications not only for the way capital gets formed but for the economic support of GP entities. Fees from funds will serve to support the investment program of GP teams, but the full sum of capital in private equity deals will no longer pay the same fixed “toll” to the GP. As such, GPs will need to rely on fund fees for nothing but lean protein, and use the carry for the champagne. ■

L Follow David Snow on Twitter @SnowsNotes

Market analysis by Privcap CEO David Snow

The limited partnership ancien régime is being gradually overthrown by a more complex network of capital providers who have higher expectations and greater sophistication.

Co-investment / Snow’s Notes

The New Era of Co-investSophisticated investors want more private equity, but on their own terms. How are GPs managing the transition? Even as the population of private equity firms shrinks, the demand for experienced direct investors will remain strong

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Click to watch this video at privcap.com

Co-investment / Pension Funds

The Co-investment Bandwagon

. CONTINUES ON NEXT PAGE

Privcap: Your firm advises institutional investors on PE, and co-investment has become an impor-tant part of both your business and the asset class. How did co-investment start in 2003, when you were founded, and how has it evolved?

Fisher: The genesis was from work we’d done with the Government of Singapore Investment Corpo-ration [now GIC Private Limited], a big sovereign wealth fund. It had a meaningful co-investment practice, which is profitable for the organization.

When we set up Fisher Lynch, part of the idea was to bring co-investing to a wider audience. It’s something that we thought made sense from the beginning but not enough LPs were taking advan-tage of. It’s interesting because today co-investing is so popular, you would think it would happen in an instant. But back in ’03, just after the Iraq war and the recession, things were slower and LPs were more careful. Eventually we found Oregon and Washington and set up a partnership with them to co-invest on their behalf. Our first fund for co-in-vesting was $500 million, which started investing in 2006. Oregon and Washington are basically the sole LPs in that fund. They’re also in our second fund of $1 billion, which started investing in 2011. These state pensions are our biggest clients.

Privcap: What are other signs you see that LPs have a different mindset now than they did in 2003?

Fisher: In the early days, I remember, there would be two to four LPs that the GPs could call in any giv-

Institutional investors haven’t historically paid much attention to co-investment. Brett Fisher of Fisher Lynch Capital explains how that changed in 2003 when the firm partnered with Oregon and Washington’s pension funds.

Bio

Brett Fisher is a managing director at Fisher Lynch Capital. Previously, he was a senior VP of the private equity arm of the Government of Singapore Invest-ment Corporation, director of corporate development at AirTouch Communi-cations, a VP at Genstar Investment Corp., and worked at Marakon Associates. He received degrees from Stanford Graduate School of Business and Yale University.

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Co-investment / Pension Funds

ed to make sure Oregon and Washington know that they’re being offered a co-investment. They’d call or email the states, which would quickly turn that around and ask for the deal to be sent to Fisher Lynch. After that hap-pens once or twice for any given GP, they start working directly with us.

Privcap: A comment I’ve heard frequently from advocates for pen-sions not doing co-investing themselves is that it can be politically embarrassing to have shares in a private company that goes to zero. I would assume that having something take place in your partnership is a less visible reminder of a deal going sideways.

Fisher: Absolutely. There is insulation from headline or career risk. In most of the partnerships they invest in, there are 15 to 30 different investments, and it’s the success of that program on which the LP should be evaluat-ed. A lot of GPs have had investments go to zero—and if, every time that happened, somebody on the LP side got in trouble, there would be a lot of LPs in trouble.■

en fund that had a co-investment capability. Then people in the industry began to understand how profitable it was, because of the lower fees and the window into the GP’s deal selection and execution processes that you don’t get as a regular LP.

Privcap: How much time is the investment staff of each organization spending embedded in your organization?

Fisher: With Oregon and Washington, we have two meetings a year where we take a full dive into the portfolio. We also have monthly calls with staff members at those institutions who are assigned to cover us on a day-to-day basis, to make sure they’re aware of all our deal flow, and we exchange infor-mation about GPs that might be coming into the portfolio.

Privcap: Do they have veto rights on a deal?

Fisher: Generally, no. If the deal comes from a GP that’s in their fund portfolio, then the deci-sion-making is all with Fisher Lynch. We mutually decided that was the right way to set it up in order to have an efficient time schedule for evaluating co-investments.

Privcap: When there’s a direct deal opportunity from a GP in the Oregon or Washington portfo-lio, how does it get to you?

Fisher: In the early years of the program, GPs want-

“In the early days, I remember, there would be two to four LPs that the GPs could call in any given fund that had a co-investment capability. Then people in the industry began to understand how profitable it was.” -Brett Fisher, Fisher Lynch Capital

Brett Fisher, Fisher Lynch Capital and Privcap CEO David Snow


Achieving Balance in LP Co-investing

Participants

Chris Stringer Partner Private Advisors

Richard Dunne Principal AlpInvest Partners

Brian Gallagher Partner Twin Bridge Capital Partners

Co-investment is an increasingly important private equity tool. Three specialists discuss how they deploy capital directly into deals.


GallagherStringer

Co-investment / Expert Panel

Dunne

Bios

Chris Stringer is head of PE investments at Private Advisors. He was previously a vice president at Jefferson Capital Partners. He received degrees from Florida State University and the University of Virginia Darden School of Business.

Richard Dunne is responsible for sourcing, executing, and monitoring North American equity transactions. Prior to joining AlpInvest, he was in the financial institutions group at Citigroup Global Markets. He received a bachelor’s degree from Boston College.

Brian Gallagher co-founded Twin Bridge. Previously, he was responsible for U.S. PE investments at UIB Capital, and was a partner at PPM America Capital Partners. He received degrees from the University of Notre Dame and Northwestern University. He is a CFA and a certified public accountant.



about $1.5 billion. We invest exclusively in mid-dle-market buyout funds in North America. So one asset class, one geography. Unlike a lot of our peers, we manage structured separate accounts, and we put funds and co-investments into the same vehi-cle. And it’s about a two-third, one-third split right now.

You mentioned that now about one-third of the capital you put to work is in direct situations. How did your co-investing evolve from the in-ception of your firm?

Gallagher: It can vary. Right now purchase prices are quite high, so co-investment deal flow is not robust. We invest with sponsors—my colleagues do as well—that are experienced, and they know when prices are too high and you have to underin-vest. And there were times post-crisis where there was some interesting deal flow, and it was a great time to put money to work. You try to overinvest in the down markets. You can’t market-time, and we know that.

There are some obvious reasons to co-invest. There are the economics. There’s the minimization of the J curve, which is meaningful. But we ascribe a lot of value to the qualitative benefits. When you can work with a sponsor and see how they source, struc-ture, manage, and position for exiting a deal, it’s invaluable information when you’re getting ready to do the re-up decision. So the qualitative should never be underestimated. A lot of people are getting into co-investment under the guise that it’s embed-ded deal flow and it’s easy. It’s not easy. You have to think through how you’re building your portfolio. You have to mine exceptional deal flow. You’ve got to work with the best sponsors. It’s a relationship business, and you can screw up a relationship pretty quickly if you can’t get there in time, move in lock-step with the sponsor.

Co-investment has evolved and matured a lot in the last five years. LPs want it. GPs need to provide it. It’s a constant topic on the fundraising trail.

Chris and Rich, do you agree that having a co-in-vestment platform allows you to also be better primary fund investors?

Dunne: Certainly. It’s been a big help to our due diligence process, particularly because, in a lot of the cases where we’re co-investing, we’re taking some sort of role at the board level. Not only are we seeing the full deal-making process as it relates to the GP, the kind of work they do in due diligence, the focus

Privcap: I’d love to hear your perspectives on how to structure the right co-investment. Let’s start with brief descriptions of the various platforms the three of you have built, starting with Chris.

Chris Stringer, Private Advisors: We manage $5.3 billion in assets. We focus on hedge funds and private equity investments, specifically on behalf of endowment foundations, pension funds, etc. We fo-cus on growth equity—buyout and turnaround-ori-ented investors operating in the lower end of the middle market in North America. What do I mean by that? Sub-$150-million enterprise value, typi-cally funds of $750 million and below. We’ve made over 90 fund investments since the late ’90s since we were founded in that target market, and that’s exactly where we co-invest. We offer our co-invest-ments through distinct funds. And we invest in 15 to 25 companies over a three-year period on behalf of investors.

Rich, how have you structured your co-invest-ment platform?

Richard Dunne, AlpInvest Partners: AlpInvest is a global funds-to-funds manager dedicated completely to private equity. We’re essentially the private equity fund-to-funds platform of the The Carlyle Group, and we operate on an independent basis.

We serve on behalf of mostly large pension funds from our client base. Our former owners are still our primary source of capital, but over the last few years we’ve been successful in bringing some new inves-tors to our programs, particularly with the second-aries fund, and then also on the broader platform. And in co-investment, the way we go to market is our business is really defined by product. We’ve got a very large primary funds program, a team of about 25 professionals who are investing on that platform globally, a similar-sized team in secondary invest-ments and then in co-investments.

Brian, can you talk about the platform you’ve built at Twin Bridge?

Brian Gallagher, Twin Bridge Capital: We manage

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Co-investment Structures

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they have, and also what sort of discipline they have when pricing a transaction at the end of the day—but then, once a transaction’s closed, we’re there to see their role in creating value and driving strategy. Is it the case that many GPs are noticeably different once you get into the actual deal with them?

Dunne: You see a clear difference between how large buyout GPs operate versus middle-market GPs. That makes sense for the types of businesses that they’re running. The large buyout side is buying companies that are more mature in their growth profile. Chances are, if you’re striking a deal, you’re buying a company that you believe to be undermanaged, so there’s more to do from an operational perspective and getting involved in some of the key functions of the company. In the middle market, it’s usually you’re partnering with a management team and trying to help them take their company to the next level, and so it’s a softer level of interaction. But both have their role.

Stringer: I agree. Our portfolio is lower-end-mar-ket- and midmarket-focused, and we’re assem-bling a collection of specialists for our investors

“ This industry’s gotten mature and competitive. It’s not easy to make money on the buy. You make most of your money over the term of owning that investment.” -Brian Gallagher, Twin Bridge Capital Partners

on the primary side of business. So we are looking for actively sector-and strategy-focused manag-ers who can build better businesses, buy from a founder/owner, from a family, and systematically improve a business. And that’s what the mar-keting spin is during the fundraise process. You get into co-investment deal flow, and can get underneath how specialized they are, how they approach these management teams, can they systematically recycle them and improve these businesses? It’s tremendous information flow. We, in fact, entered the co-investment business directly for the information flow, ahead of trying to actually offer a marketable product. It was an idea of getting information edge and augmenting returns a little bit.

Gallagher: This industry’s gotten mature and competitive. It’s not easy to make money on the buy. You make most of your money over the term of owning that investment. And we spend a lot of time with our sponsors at inception: “What are your plans with this business?” And then we see how they measure against that original plan. Deals don’t always go the way you think they will, and sponsors will sometimes give a CEO who doesn’t seem to be performing, two years when they should give him or her two quarters. Being able to make the quick decisive action is impor-




“What we do to improve

our position is participate in transactions

before they’re announced.

Getting involved in a

deal at the first management

meeting, or right when the

GP gets the information memo on a

transaction—it really

helps you to secure better allocations.”

Richard Dunne,AlpInvest

Video 2

Deal Flow and GP Relations Is it the case that many GPs are noticeably differ-ent once you get into the actual deal with them? Dunne: You see a clear difference between how large buyout GPs operate versus middle-market GPs. That makes sense for the types of business-es that they’re running. The large buyout side is buying companies that are more mature in their growth profile. Chances are, if you’re striking a deal, you’re buying a company that you believe to be undermanaged, so there’s more to do from an operational perspective and getting involved in some of the key functions of the company. In the middle market, it’s usually you’re partnering with a management team and trying to help them take their company to the next level, and so it’s a softer level of interaction. But both have their role. Brian, how does it work at Twin Bridge? Gallagher: We invest on the co-investment side only with sponsors that we’re invested with on the primary side. We spend a lot of time mon-itoring and mining what are the best GP rela-tionships in the middle-market buyout space in North America. The most important criterion to success in co-investing is quality of sponsor. So we want to make sure that when we’re investing in a co-investment, it’s a sponsor we know ex-ceedingly well and have fully underwritten. Once you underwrite that sponsor, then it’s a constant dialogue. And that constant interaction is what unearths interesting deal flow, and you can get on the front lines some interesting opportunities. Is it the case that many GPs are noticeably differ-ent once you get into the actual deal with them? Dunne: You see a clear difference between how large buyout GPs operate versus middle-market GPs. That makes sense for the types of business-es that they’re running. The large buyout side is buying companies that are more mature in their growth profile. Chances are, if you’re striking a deal, you’re buying a company that you believe to be undermanaged, so there’s more to do from an operational perspective and getting involved in some of the key functions of the company. In the

middle market, it’s usually you’re partnering with a management team and trying to help them take their company to the next level, and so it’s a softer level of interaction. But both have their role. Chris, how does deal flow work at Private Advi-sors? Stringer: We co-invest with managers whose primary funds we’ve been in and also with those where we haven’t invested in their primary fund, and it’s about a 60 percent, 40 percent split. The majority of what we do is with our underlying primary fund managers. We’ve invested 90 funds historically in a tight part of the market, lower end of the middle market in North America—growth equity, buyout, and turnarounds. We’re on the advisory board in over 90 percent of the funds there. We have a systematic calling effort with our existing relationships, to be top of mind for co-investment flow. Aside from that, we cover a 900-to-1,000 fund-manager universe, and we live and breathe the lower end of the middle market. We do see a lot of opportunities for co-investment with hedge fund managers or with managers, where they’re looking to build a relationship with private advisors ahead of a fundraise. We look at quality of sponsor first and foremost when we underwrite a co-investment. Number two, we’re underwriting the fundamentals of the direct deal. And number three, we look for the fit of the sponsor. What are some initial reasons for giving a quick no to an opportunity? Stringer: Fit with sponsor is an easy no. If we see a retail consumer group show us a healthcare-ori-ented deal, we’re going to say no quickly. There are other reasons around valuation, around the deal, to the point made earlier: the deal’s significantly larger than the typical deal a sponsor’s used to doing, we’re worried about adverse selection, and we may say no fairly quickly in that scenario. What are some initial reasons for giving a quick no to an opportunity? Dunne: Fit with sponsor is an easy no. If we see a retail consumer group show us a healthcare-ori-ented deal, we’re going to say no quickly. There are other reasons around valuation, around the deal, to the point made earlier: the deal’s signif-

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http://www.privcap.com/finding-co-investment-deals/


icantly larger than the typical deal a sponsor’s used to doing, we’re worried about adverse selection, and we may say no fairly quickly in that scenario. Gallagher: Feel of sponsor matters a great deal. Portfolio construction matters an awful lot. And any co-investor has to be thoughtful on how they’re constructing their portfolio. You need to be diversified across time, industry, geography, deal type, etc. Sponsors putting a lot of debt on a deal and using lenders who are not relationship-driven gives us discomfort.

The Tricky Allocation Game Brian, as a longtime co-investor, have you witnessed any particularly good allocation methods used by GPs? Gallagher: There are policies that people are starting to put in place. The key is you need to have co-investors who are responsive, and the GP needs to have flexibility in how they allocate, because ultimately they’re trying to put capi-tal together to get the deal closed, and they need LPs who can get across the finish line. AlpInvest has shown a lot of co-investment opportuni-ties. Do you have a view on allocation policies? Dunne: Some GPs have gone to every LP in their fund and allocated transactions on a prorate basis. To us, that doesn’t work very well. Many of the LPs can’t respond to the deadlines, and aren’t interested in co-investment to begin with. What we do to improve our position is partic-ipate in transactions before they’re announced. Getting involved in a deal at the first management meeting, or right when the GP gets the information memo on a trans-action—it really helps you to secure better allocations. Stringer: The ideal allocation policy is at the GP’s discre-tion, and that’s what it says in their limited-partnership agreement. We write small checks and raise small co-in-vestment funds. We get disappointed when the lenders offer more leverage, the check size shrinks at the end of the deal and we’re only there as a co-investor, and we get cut out of the situation. I’m glad you mentioned LPs gaming the system. Will that create more situations where you have LPs clamoring to be part of a co-investment, making the allocation process more difficult for a GP to show discretion? Gallagher: Some GPs have gone to every LP in their fund and allocated transactions on a prorate basis. To us, that doesn’t work very well. Many of the LPs can’t respond to the deadlines, and aren’t interested in co-investment to

Video 3 �

begin with. What we do to improve our position is participate in transactions before they’re announced. Getting involved in a deal at the first management meeting, or right when the GP gets the information memo on a transaction—it really helps you to secure better allocations. There are a lot of co-investors who say they want to do deals but can’t get there in time. If you are a good and serious co-in-vestor, you should be able to move in lockstep with the sponsor from time zero. We always get in on the ground floor. We do diligence alongside the sponsor. If one of us has an issue with the deal, we’ll pull out and usually they’ll pull out, because we’re seeing things the same way. We want to be adaptive, because capital structures, circumstances, and purchase prices change. The way you distinguish yourself as a co-investor is to be timely, responsive, flexible, adaptable. There are certain rights that we need, legal and otherwise, but they’re fair and reasonable, and our sponsors understand that. Some co-inves-tors do, and that’s to their detriment long-term. Are the side letters that are popping up now, granting guaranteed access to a certain level of co-investing, bad for co-investing because it might give greater muscle to an LP that shouldn’t have it? Gallagher: We don’t see many side letters seeking out co-in-vestment, because most of the sponsors will say I’m giving it to everybody. Side letters still exist, but most GPs—and even most LPs—are trying to get away from that process, because it can consume a lot of time, money, and effort with attorneys. Early in a fundraise or to get a first close, there can be some things done through side letters. What are your views on GPs offering co-investment to LPs who are not currently their LPs? Gallagher: On the part of most sponsors, there’s more than sufficient demand among their LP base. The corollary to that would be, a sponsor of a $500 million fund has a deal that requires $110 million of equity; they want to hold $50 million. Instead of going to their LPs, they will go to another sponsor and share the deal. Dunne: From a commercial perspective, you’re trying to be a good and flexible partner to your GPs. If they’re toward the end of the life of a fund and see the need to bring in new investors or potential new investors to help the next fundraise along, you can put up a fight. But you’re not going to win, and it’s not going to benefit you or the GP or the relationship. Stringer: From a commercial perspective, you’re trying to be a good and flexible partner to your GPs. If they’re toward the end of the life of a fund and see the need to bring in new investors or potential new investors to help the next fundraise along, you can put up a fight. But you’re not going to win, and it’s not going to benefit you or the GP or the relationship.■


http://www.privcap.com/co-investment-allocation/

Privcap Special Report • Co-investment | Q2 2014 / 13Privcap Co-Investment Report / May 2014 / 1

Co-investment Report 2014 � Privcap

• Up-and-Coming Co-investors• Allocation Policies Examined• The Inside Scoop on Fee Breaks• Is Co-investing Worth It? A research review• Case Studies: Separate Accounts

The Top 20 Co-investing LPs

Co-investment In-depthComprehensive research on the changing dynamics of the GP-LP relationship, including:


The Top 20 LPs

THE TOP 20 / By The NumbersRanking Name Country Total Assets (US$B) Est. PE Allocation (%) Est. Co-invest Allocation

(as % of PE)

1 ADIA UAE 627.0 8 25

2 CIC China 575.2 16 43

3 SAFE China 567.9 5 10

4 KIA Kuwait 386.0 14 2

5 ABP Netherlands 372.9 5 25

6 NPS South Korea 368.5 3 4

7 HKMA China 326.7 2 Opportunistic

8 GIC Singapore 285.0 11 Undisclosed

9 CalPERS U.S. 281.7 11 Up to 50

10 CPPIB Canada 188.9 19 13

11 CalSTRS U.S. 180.8 13 6

12 PFZW Netherlands 177.3 6 25

13 EPF Malaysia 175.7 2 20

14 Temasek Singapore 173.3 27 90

15 QIA Qatar 170.0 Undisclosed Undisclosed

16 NYSCRF U.S. 150.1 9 5

17 NYCRS U.S. 143.9 6 Varies by underlying plan

18 FRS U.S. 140.0 6 8

19 OTPP Canada 130.8 9 50

20 GEPF South Africa 125.0 5 80

These days, GPs raising new funds know that they can pretty safely assume at least half of their LPs (by number; likely more by capital commitments) will want access to

co-investments. Both Coller Capital and Probitas Partners have released survey data in recent months, pointing to LPs’ ever-growing appetite for co-investments. To highlight the biggest players in the co-investment world, we present the inaugural Privcap Top 20 Co-investors League Table. � ese big leaguers in-clude the largest LPs with known co-investment activities. � ey are the stewards of more than $5.5T of total assets. � ese players have more than $150B in existing and potential co-investment portfolios, according to Privcap calculations. Not surprisingly,

we note a large presence of sovereign wealth funds, taking six of the top 10 spots. We estimate that more than 70 percent of co-investment capital resides in Asia and the Middle East. � e U.S. is represented primarily by the California and New York public pension systems. We also uncover a couple of relative newcomers to the private equity asset class, including the Hong Kong Monetary Authority and South Africa’s GEPF. As well as looking at the players who dominate the sector, we take a look at the potential up-and-comers in the realm of private equity co-investing: the largest LPs who are investing in PE but not yet in co-investments, and notable LPs who have announced that they are expanding their co-investment activities.

21 TRS U.S. 124 11 20

22 ATP Denmark 110 9 5

Privcap shines a light on the LPs with the strongest appetite for direct and co-investment

Runners Up:




Largest LP and Co-investment Programs (Top 20 with PE Co-invest, by Total AUM)

1 Abu Dhabi Investment Authority (ADIA)

• Investor Type: Sovereign wealth fund• HQ: UAE• Total Assets: $627B• Estimated PE Allocation: 8 percent• Estimated Co-investment Allocation: 25 percent of PE allocation

Commentary: Our estimate of co-investment allocation is based on ADIA’s use of external managers for 75 percent of its assets in 2012. ADIA typically co-invests alongside GP relationships, includ-ing as a strategic investor alongside Apollo following the 2007 purchase of 10 percent of Apollo’s management company. The SWF continues to grow its internal PE investment team, including the recruitment of professionals with co-investment experience. The hiring of Pascal Heberling as senior portfolio manager of principal investments in February 2014 is an example; Heberling was previ-ously a partner at U.K.-based buyout shop Cinven Limited where he had worked for 12 years. ADIA as yet to fi ll the CIO position following Jim Kester’s departure in mid-2013.

2 China Investment Corporation (CIC)

• Investor Type: Sovereign wealth fund• HQ: China• Total Assets: $575B• Estimated PE Allocation: 16 percent• Estimated Co-investment Allocation: 43 percent of PE allocation

Commentary: Our estimate of co-investment allocation is based on CIC’s use of external managers to manage 57 percent of its assets. Established in 2007 to manage a portion of China’s foreign exchange reserves, CIC’s AUM grew from $200B when founded to

$575B currently. Its internal investment sta� is 443 globally, according to its 2012 annual report; the number of dedicated PE/direct investment team members was not disclosed. With the planned retirement of Gao Xiqing, who has served as president of CIC since its founding in 2007, his successor Li Keping was recruited as CIO in 2011 and recently appointed vice chairman and president in February 2014. Gao and Li previously worked together at the Chi-nese state pension fund—the National Social Security Fund (“NSSF”). Notable investments include a separate account with J.C. Flowers to co-invest in distressed fi nancial institutions during the fi nancial crisis, as well as direct investments in South Africa-based Shanduka Group in 2011 and the U.K.’s Thames Water Utilities in 2012.

3 State Administration of Foreign Exchange (SAFE)

• Investor Type: Sovereign wealth fund• HQ: China• Total Assets: $569B• Estimated PE Allocation: 5 percent• Estimated Co-investment Allocation: 10 percent of PE allocation

Commentary: SAFE holds approximately 10 percent of its total assets in direct investments outside of China. The key regulator of China’s foreign reserves began investing in PE during the fi nancial crisis. Notably, it made a $2.5B fund commitment to the 2008-vin-tage TPG buyout fund that invested in Washington Mutual; SAFE also reportedly co-invested a large (undisclosed) sum alongside TPG into the collapsed U.S. lender. SAFE’s CIO Zhu Changhong report-edly left the organization in January 2014; he had joined SAFE in 2010 having previously serv1ed as a hedge fund manager at PIMCO for ten years. The reason for Zhu’s departure has not been disclosed, and SAFE has not announced his replacement.

The Top 20In-depth





4 Kuwait Investment Authority (KIA)

• Investor Type: Sovereign wealth fund• HQ: Kuwait• Total Assets: $386B• Estimated PE Allocation: 14 percent (estimate)• Estimated Co-investment Allocation: 2 percent

Commentary: Since its founding in 1953, KIA has been respon-sible for managing Kuwait’s oil revenues. KIA’s PE allocation is not disclosed, but we estimate it to be roughly half of KIA’s 28 percent exposure to alternatives. The fund is a recent entrant into co-invest-ments, and the PE allocation estimate is based on a $1B co-invest-ment program managed through its PE advisor StepStone Global, according to market sources.

5 Stichting Pensioenfonds ABP (ABP) / APG Asset Management (APG)

• Investor Type: Public pension fund• HQ: Netherlands• Total Assets: $373B• Estimated PE Allocation: 5 percent • Estimated Co-investment Allocation: 25-30 percent of PE allocation

Commentary: ABP, the Dutch public pension fund for government o� cials and education employees, historically has been managed internally. In 1999, ABP and Dutch healthcare/social worker pension PGGM (now PFZW) formed the predecessor to AlpInvest to increase their PE exposures including co-investment. In 2007, a new pension law mandated Dutch pensions to hand over their asset manage-ment to independent fi rms, thus the creation of APG Asset Man-agement. Since 2008, APG has managed ABP and has added fi ve other pension plans to its client list. In 2012, APG began building own in-house PE team, including direct investment talent, and launched investment activities during 2013. It has opened a New York o� ce with investment professionals focused on fund and direct investments.

6 National Pension Service of Korea (NPS)

• Investor Type: Public pension fund• HQ: South Korea• Total Assets: $368B• Estimated PE Allocation: 3 percent• Estimated Co-investment Allocation: 4 percent of PE allocation

Commentary: NPS was created in 1988 to manage South Korea’s equivalent of a social security fund. In its early years, NPS invested in more conservative asset classes. In 2002-2003, NPS fi rst began investing in VC/PE, and in 2006, it launched its overseas invest-ment team. NPS has made e� orts to increase its direct/co-investing activities in recent years, including through a co-investment partnership with Standard Life Investments Private Equity, and also by committing KRW400B to a foreign M&A fund along with other Korean LPs. The pension fund also recently co-invested in Colonial Pipeline Company alongside U.S. mega-buyout fi rm KKR. NPS is targeting to reach 11.3 percent allocation to alternatives in 2014, including increases to its PE allocation. NPS has expanded its global footprint, opening its New York and London o� ces in 2011 and 2012, respectively.

7 Hong Kong Monetary Authority (HKMA)

• Investor Type: Sovereign wealth fund• HQ: Hong Kong• Total Assets: $327B• Estimated PE Allocation: 6 percent of long-term growth portfolio (LTGP), or 2 percent of total assets• Estimated Co-investment Allocation: Opportunistic

Commentary: HKMA’s PE investments through funds and co-investments began in 2009 and are managed in the LTGP, which is capped at one-third of total assets. The purpose of the LTGP is to preserve the purchasing power of the fund over time. The other two-thirds of HKMA assets are housed in the backing portfolio, which is invested in highly liquid U.S. dollar-denominated securities. Though newer to PE, HKMA has aggressively pursued the build-out of its exposure to this asset class as a long-term infl ation-protection measure. HKMA uses external fund managers to manage all of its equity portfolios and other specialized assets, including PE.

The Top 20 In-depth




8 GIC (formerly Government of Singapore Investment Corporation)

• Investor Type: Sovereign wealth fund• HQ: Singapore• Estimated Total Assets: $285B• PE Allocation: up to 15 percent (including infrastructure)• Estimated Co-investment Allocation: Undisclosed

Commentary: GIC was incorporated in 1981 and, its website states, has the mission of generating “a reasonable risk-adjust ed rate above global infl ation over a 20-year investment horizon,” and thus preserve Singapore’s foreign reserves. In contrast to its more aggressive cousin Temasek, GIC’s direct investment program is focused on taking minority equity positions as well as providing mezzanine fi nancing in buyouts. GIC’s co-investment allocation is not disclosed.

9 California Public Employees’ Retirement System (CalPERS)

• Investor Type: Public pension fund• HQ: United States• Total Assets: $282B• Estimated PE Allocation: 11 percent • Estimated Co-investment Allocation: Up to 50 percent of PE allocation

Commentary: The largest public pension plan in the U.S., CalPERS has invested in private equity since 1990. Historically, CalPERS has relied on investment advisors and funds-of-funds to access and manage its PE portfolio. After severing ties with long-time PE advi-sor Pacifi c Corporate Group in 2010, it has taken on a more active role. In addition to rebalancing and restructuring its PE portfolio via secondary sales throughout 2011 and 2012, CalPERS has also expanded the scope of its PE investing to include more co-investment alongside GPs and direct investing. (See Up-and-Coming LPs section on page 23).

10 Canada Pension Plan Investment Board (CPPIB)

• Investor Type: Public pension fund• HQ: Canada• Total Assets: $189B• Estimated PE Allocation: 19 percent• Estimated Co-investment Allocation: 13 percent of PE allocation

Commentary: CPPIB can invest $100M to $500M per deal for co-investments, and $200M to $1B per deal for direct investments. There are two divisions that manage CPPIB’s PE allocations: 1) Fund/Sec-ondaries/Co-invest and 2) Principal Investments. The former division focuses on fund and direct investments involving CPPIB’s GP relation-ships and is sta� ed with 32 professionals. The latter division—with 68 investment professionals —operates as an independent principal in-vestment arm for natural resources, direct private equity, and private debt investments. ClearChannel, Avaya, Dollar General, TXU, Neiman Marcus Group, Asurion, NXP, and Nielsen are all examples of direct PE investments made through CPPIB’s Principal Investments division. The co-investments alongside GPs are small and fewer, including Brickman, Coway, Service Repair Solutions, and Alibaba Group (the exception to the smaller size generalization).

11 California State Teachers’ Retirement System (CalSTRS)

• Investor Type: Public pension fund• HQ: United States• Total Assets: $180.8B• Estimated PE Allocation: 13 percent• Estimated Co-investment Allocation: 6 percent of PE allocation

Commentary: CalSTRS has a 13 percent allocation to private equity, with actual allocation at 11.8 percent as of Feb. 28, 2014. The pen-sion’s portfolio includes more than 50 co-investments, representing about 6 percent of its $21B of PE assets under management. The public pension accesses co-investments through its GP relation-ships, and its co-investment policy requires a positive recommen-dation by both CalSTRS internal sta� and a third-party advisor/fi duciary. CalSTRS’ historical co-investment expo sure has included commitments to co-investment sidecars managed by Bain Capital, CVC Capital, and other notable GPs. In 2012, CalSTRS announced it intended to pursue more separate accounts and co-investments.

The Top 20 In-depth




12 Stichting Pensioenfonds Zorg en Welzijn (PFZW; formerly PGGM)

• Investor Type: Public pension fund• HQ: Netherlands• Total Assets: $177B• Estimated PE Allocation: 6 percent• Estimated Co-investment Allocation: 25-30 percent of PE allocation

Commentary: The Dutch healthcare/social worker pension, which is the country’s second largest, has a similar history to ABP/APG described previously. Its predecessor was formed in 1969. In 2008, the same regulatory forces that caused the structural changes with ABP/APG resulted in the separation of duties be-tween PFZW—which is a non-profi t foundation—and PGGM — which manages PFZW’s investment portfolio. The PE portfolio was historically managed by AlpInvest, which has invested PFZW’s capital in PE funds, secondaries, and co-investments. The AlpInvest contract will continue to 2015. However, PGGM has been building its own in-house PE and infrastructure teams.

13 Employees Provident Fund (EPF)

• Investor Type: Public pension fund• HQ: Malaysia• Total Assets: $176B• Estimated PE Allocation: 2 percent• Estimated Co-investment Allocation: 20 percent of PE allocation

Commentary: Malaysia’s EPF manages a compulsory savings and retirement plan for the nation’s private sector workers. EPF has publicly stated that plans to increase its PE allocation, though no new targets have been set. The fund has a particular interest in ASEAN and China opportunities, with local deals comprising about 20 percent of its PE portfolio. For example, in 2013, EPF co-invested alongside Johor Corporation and CVC Capital Partners to privatize QSR Brands Bhd and KFC Holdings Malaysia Bhd.

14 Temasek

• Investor Type: Sovereign wealth fund• HQ: Singapore• Total Assets: $173B• Estimated PE Allocation: 27 percent (exposure to unlisted assets)• Estimated Co-investment Allocation: 90 percent of PE allocation

Commentary: In contrast to its larger cousin GIC, Temasek focuses a larger proportion of its PE portfolio on lead or control inves-tor stakes, directly in its portfolio companies rather than through fund managers. Our co-investment allocation estimate is based on Temasek having less than 10 percent of its overall portfolio invested in third party-managed funds. As expected, Temasek has a much higher risk-return profi le than Singapore’s GIC and Central Provi-dent Fund, with investments made since March 2003 generating 20 percent annualized returns over the last 10 years. In compari-son, GIC’s 10-year annualized nominal returns—albeit on its entire portfolio and not just recent investments—were 8.8 percent; CPF’s target returns are in the low single digits.

15 Qatar Investment Authority (QIA)

• Investor Type: Sovereign wealth fund• HQ: Qatar• Total Assets: $170B• Estimated PE Allocation: unknown• Estimated Co-investment Allocation: Undisclosed

Commentary: Founded in 2005, QIA’s mission is to strengthen Qatar’s economy by diversifying into asset classes outside of natural resources. It has since grown to more than 110 investment professionals. Although public data on QIA’s PE and co-investment activities are di� cult to fi nd, QIA is known as being an active investor in PE funds and co-investments. Its PE allocation and co-investment allocation are not publicly disclosed.

The Top 20 In-depth




16 New York State Common Retirement Fund (NYSCRF)

• Investor type: Public pension fund• HQ: United States• Total Assets: $150B• Estimated PE Allocation: 9 percent• Estimated Co-investment Allocation: 5 percent of PE allocation

Commentary: NYSCRF states that it opportunistically invests in co-investments, which we interpret to mean zero to 10 percent of its PE allocation. Its co-investment portfolio includes a $250M sepa-rate account with emerging managers-focused private equity fi rm Farol Asset Management to make in-state investments. The NY state pension experienced some interruption to its PE investment program in the late 2000’s, but it appears to have recommenced its strategy.

17 New York City Retirement Systems (NYCRS)

• Investor type: Public pension fund• HQ: United States• Total Assets: $144B• Estimated PE Allocation: 6 percent• Estimated Co-investment Allocation: Varies by underlying plan

Commentary: NYC has fi ve separate public pension plans, each with its own investment board, policies, portfolios, and advisors. The fi ve plans include the New York City Employees’ Retirement System (NYCERS); the Teachers’ Retirement System of the City of New York (TRS), the New York City Police Pension Fund Subchapter 2 (POLICE); New York City Fire Department Pension Fund Subchap-ter Two (FIRE); and the New York City Board of Education Retire-ment System (BERS). The NYC Comptroller serves as the custodian and investment advisor to the boards of these fi ve pension funds. Most of the PE exposure is through the three larger plans—TRS, NYCERS, and POLICE, with NYCERS having close to 8 percent of its assets invested in PE. For the most part, the co-investment expo-sure for all fi ve plans is through sidecar vehicles or co-investment funds-of-funds.

18 Florida Retirement System Pension Plan (FRS)

• Investor type: Public pension fund• HQ: United States• Total Assets: $140B• Estimated PE Allocation: 6 percent• Estimated Co-investment Allocation: 8 percent of PE allocation

Commentary: The FRS is managed by the State Board of Admin-istration (SBA) of Florida. Its historical co-investments have been through commitments to Lexington’s co-investment vehicles. The market value of these commitments totaled about $650M as of mid-2013. The prior two Lexington co-investment vehicles were essentially two-LP separate accounts, with SBA and New York State Teachers’ Retirement System (NYSTRS) providing the committed capital. In addition, SBA committed $500M to Lexington’s third co-investment vehicle in 2013, which closed on $1.6B.

The Top 20 In-depth




19 Ontario Teachers’ Pension Plan (OTPP)

• Investor type: Public pension fund• HQ: Canada• Total Assets: $130.8B• Estimated PE Allocation: 9.4 percent• Estimated Co-investment Allocation: 50 percent of PE allocation

Commentary: OTPP’s private equity portfolio is managed by Teachers’ Private Capital, which was launched in 1991. Since then, TPC has grown to a team of 40+ investment professionals and invested in more than 300 direct and fund investments. As of Dec. 31, 2012, the pension had CA$12B allocated to private equity. TPC has a greater focus on direct and co-investments than most LPs its size, with approximately half of its historical PE investments allocated to direct or co-investments.

20 Government Employees Pension Fund (GEPF)

• Investor type: Public pension fund• HQ: South Africa• Total Assets: $125B• Estimated PE Allocation: 5 percent• Estimated Co-investment Allocation: 80 percent of PE allocation

Commentary: The largest pension plan in Africa, GEPF manages retirement assets on behalf of all public employees in South Africa. GEPF only recently added unlisted investments (including PE) to its investment strategy in 2012. For this bucket, the South African pension fund has a 15 percent aggregate allocation to PE, property, and developmental investments, of which we estimate one-third is focused on PE. GEPF is focused on direct investments, co-invest-ments, and fund investments, with 80 percent of its PE allocation managed through directs and co-investments.

Methodology: Ranking based on total assets, as provided in Tower Watson Top 300 Pensions Report 2013, the Sovereign Wealth Fund Institute website, or LP website. Only LPs with known PE co-investment exposure are included on this league table. Sources: LP websites, Tower Watson, Sovereign Wealth Fund Institute, news reports.

Runners up:

21. Teacher Retirement System of Texas (TRS) • Investor type: Public pension fund• HQ: United States• Total Assets: $124B• Estimated PE Allocation: 11 percent• Estimated Co-investment Allocation:

20 percent of PE allocation (target)

22. ATP Livslang Pension (ATP)• Investor type: Public pension fund• HQ: Denmark• Total Assets: $110Bå• Estimated PE Allocation: 9 percent• Estimated Co-investment Allocation:

5 percent of PE allocation

The Top 20 In-depth



Hong Kong Monetary Authority, #7 (China; ~$327B total assets):

HKMA’s private equity allocation is housed within the infl ation-mitigating long-term growth portfolio. Launched in 2009, HKMA’s PE investment activi-ties focus on the energy, healthcare, and telecommunications sectors. Due to the specialized expertise required for invest-ing in these sectors, HKMA uses external managers and deploys its private equity allocation through fund investments and co-investments. As of the end of 2012, PE comprised approximately $6B or 2 percent of the overall portfolio. Co-investments are not separately disclosed but appear to be skewed toward private equity real estate investments. As HKMA builds out its PE investment e� orts, we view it as likely that the organization will also seek to increase its co-investment activity.

California Public Employees’ Retire-ment System, #9 (U.S.; ~ $282B total assets):

CALPERS has opportunistically embraced co-investments. Including un-funded commitments, CalPERS has more than $51B exposure to private equity. In recent years, the U.S.’s largest pension fund has made several changes, includ-ing selling non-core assets through secondary transactions and changing its

model for private equity advisor rela-tionships and funds-of-funds. In 2013, the pension fund also broadened its co-investment policy. Co-investments are now allowed up to the amount commit-ted to fund manager, essentially allowing CalPERS to invest up to 50 percent of its PE portfolio through co-investments. CalPERS is actively recruiting for its PE co-investment/direct-investment team.

British Columbia Investment Management Corporation, unranked (Canada; ~$93B total assets):

BCIMC plans to commit CAD$1.2B to PE annually, as well as expand its existing co-investment activity. The organization has been investing in PE since 1995, with a 4.5 percent target allocation to the asset class. Its historical co-investment activities have included making commitments to co-investment funds managed by HarbourVest and Adams Street, as well as direct invest-ments (heavily weighted toward energy and infrastructure).

State of Wisconsin Investment Board, unranked (US; ~$86B total assets):

SWIB has a long track record of PE in-vesting, spanning several decades, in-

cluding a period when it had an internally managed co-investment pro-gram from 1986 to 2003. However, its $10B-plus exposure to PE has not in-cluded co-investments apart from cer-tain in-state investment programs and a relationship with Northwestern Mutu-al Capital that was discontinued in 2011. � is is changing, according to reports in 2013 that the Madison, Wis.–based pen-sion fund was seeking to build a co-in-vestment program. In early 2013, SWIB also began recruiting an experienced in-vestment professional who would be “re-sponsible for establishing, building and manag ing an internal private equity co-investment program” at SWIB. SWIB’s in-vestment policy permits co-investments but does not permit direct investments where SWIB is the lead investor.

North Carolina Retirement Systems, unranked (US; ~$83B total assets):

THE NCRS Investment Management Division manages assets of several NC public pen…sion plans, including the Teachers’ and State Employees’ Retire-ment System, the Consolidated Judicial Retirement System, the Firemen’s and Rescue Workers’ Pension Fund, the Local Governmental Employees’ Retirement System, the Legislative Retirement System, and the North Carolina National Guard Pension Fund. NCRS fi rst received


Up-and-Coming LPs

A number of notable LPs are taking the plunge into co-investments for the fi rst time or are signifi cantly expanding their commitment to the asset class




legislative approval to invest in PE in 1989, accumulating about $3B of PE NAV and another $2.5B+ of unfunded com-mitments, and it has co-invested locally through the North Carolina Innovtion Fund. However, the plan has yet to launch a full-fl edged co-investment pro-gram. Such a program has been on the plan’s agenda for discussion throughout 2013 and has slid into the 2014 initiatives.

Ohio Public Employees Retirement System, unranked (US; ~$80B total assets):

OPERS, with its $7B of PE NAV (not including unfunded commitments), has stated that it plans to continue building out its co-investment program. � e plan is permitted to invest up to the greater of 1 percent of private equity market value or $75M per co-investment. OPERS also committed $350M to Lexington Capital Group’s third co-investment fund last year.

Virginia Retirement System, unranked (U.S., ~$60B total assets):

VRS was seeking to hire a senior-level professional to head its co-investment activities last year, and Richard Wiltshire joined the pension fund’s investment team soon afterwards. Wiltshire comes from a direct-investment background, having most recently been at neighbor-ing middle-market buyout fi rm Quad-C Management. VRS has a hefty 12 percent new target allocation for PE. Most of the pension fund’s historical investments in private equity have been through limited partnerships.

Universities Superannuation Scheme, unranked (U.K., ~$58B total assets):

THE USS has a 10 percent allocation to PE and has set goals of investing $1B per year and reaching a balance of 50 percent funds/50 percent direct invest-ments. Its current PE portfolio has ap-proximately $5B of NAV ($10B including unfunded commitments). � e plan fi rst made a concerted e� ort to pursue PE co-investments in 2008. As of the end of last year, USS had co-invested $200M in more

than 20 transactions. Going forward, USS plans to invest at least $1B annually in PE and private debt co-investments, with a minimum investment size of $60M.

Alaska Permanent Fund Corporation, unranked (U.S., ~$50B total assets):

APFC has a 12 percent allocation to private markets (encom-passing PE, pri-vate credit, and infrastructure), including a 6 percent allocation to private equity. � e sovereign wealth fund only received permission to invest in PE in 2004, and in the past couple of years it has made a strong push into co-investing for both its PE and infrastructure investments. Last year, APFC announced its intent to in-vest $450M in co-investments during the 2014 fi scal year, through both third-party managed co-investment funds ($250M) and internal co-investment decisions alongside existing fund investments (up to $200M). To implement its internal co-investment strategy, APFC also sought to hire a senior portfolio manager who would “have responsibility for evaluating existing and prospective private market fund investments and developing the fund’s Private Equity Co-Investment program.” APFC announced at the outset of this year that it had hired Stephen Moseley to fi ll this position. Moseley previously managed co-investment for Pacifi c Corporate Group and PCG spinout StepStone Group.

Up-and-Coming LPs

TOP THREE

$327B HKMA total assets

$282B CAlPERS total assets

$93B BCIMC total assets




The AbstainersPrivcap looks at the four largest LPs—by total plan size—with active private equity programs but no disclosed active co-investment programs

State Teachers Retirement System of Ohio

ALTHOUGH Ohio’s public pension plan for its educators includes a hefty 7 percent allocation to private equity, the plan prefers to make investments directly into funds and does not appear to engage in co-investments.

National Social Security Fund

DESPITE having a 10 percent target allocation to the private equity asset class, NSSF does not have direct or co-investments. � e only assets that NSSF’s charter allows it to invest in directly are bank deposits and government bonds. Its mandate includes backing local private equity funds, and NSSF-backed funds to date include the China-Belgium Direct Equity Investment Fund formed in 2002 to invest in Chinese SMEs and managed by Fortis-Haitong Securities. NSSF has also backed notable local RMB funds, including those managed by CDH and Hony Capital.

Pension Fund Association

PFA is the largest public pension fund in Japan that does invest in private equity, with a 0.2 percent allocation to the asset class and no co-investments to date. As an aside, there have been calls for PFA’s larger brethren—Government Pension Investment, with $1.3T in total assets, and Local Government O� cials, with $201B in total assets—to diversify into higher risk-return asset classes. However, GPI and LGO continue to hold primarily public debt and equity securities.

BT Group

THE pension plan of the British communications behemoth has a 3 percent allocation to private equity. BT’s allocation is invested in commingled funds of funds managed by Hermes GPE. Although some portion of Hermes’ funds-of-funds may have co-investment exposure, BT Group itself does not have its own co-investment activities, nor does it appear to have direct control of its underlying exposure through Hermes.

$177BCHINA; total assets

$70B U.S.; total assets

$118B JAPAN; total assets

$60B UNITED KINGDOM; total assets



Co-Investment Report 2014 � PrivcapCo-Investment Report 2014 � Privcap

L P demand for co-investments continues to grow, with the latest data from Probitas Part-ners1 showing that 70 percent of LPs take part

in direct or co-investments. Of those, roughly half co-invest opportunistically; the others have active internal co-investment programs.

Such high demand presents a challenge for GPs: doing right by their LP co-investing partners and those who invest invanilla PE funds. To add to the pressure, regulatory authorities are keeping an eye on potential confl icts and violations of fi duciary duty. � e SEC has specifi cally highlighted its concerns about fee allocations for co-investing vehicles, the potential confl icts surrounding preferential terms in side letters, and the allocation of investment opportunities.2

� e ILPA Private Equity Principles, in the updated 2011 version, also weigh in on mitigating potential confl icts for GPs o� ering co-investments:

“� e GP should not invest in opportunities that are appropriate for the fund through other investment vehicles unless such investment is made on a pro-rata basis under pre-disclosed co-investment agreements established prior to the close of the fund.”

It’s possible that some GPs won’t follow recom-mended guidelines and will fail to adhere to a co-in-vestment allocation policy to guide their decisions. Luckily those instances are limited to GPs that aren’t considered “institutional-quality.” Private equity fi rms that are registered investment advisors are required to create and maintain compliance manuals that delineate their policies and procedures for co- in-vestments.3 Nonetheless, gray areas abound.

In the following tables, we present fi ve common approaches to allocating co-investments and evaluate their pros and cons, for the perspective on an LP. In each case, a clear trade-o� exists between e� ciency/transparency and satisfying infl uential LPs.

Approach Co-investment Sidecar: Fund-Specifi c

Co-investment Sidecar: Fund-Agnostic

Follow-on Co-investment Sidecar: Fund-Specifi c

Examples • THL Co-investment Fund• DRI Capital II• BCP V-AC• Encap VIII

• CVC European Equity Partners Tandem Funds• KKR Private Equity Fund (acquired by KKR & Co.)

• Denham Oil & Gas Co-investment Fund• TPG Strategic Partners Interim Fund, L.P. (raising)

How It Works Overfl ow by deal: the main fund receives its desired allocation for each deal; excess allocation goes to the sidecar vehicle

Overfl ow by deal: sidecar invests in excess allocation of one or more main funds

Overfl ow by fund or sub-strategy: deployed when main fund has deployed its capital for a particular strategy or all of the funds’ strategy; provides a bridge between the current main fund and the next fund

Decision-making Typically utilized at GP’s discretion, although in some cases LPs may be able to opt out of specifi c deals

1Probitas Private Equity Survey Trends 2014 2http://www.sec.gov/News/Speech/Detail/Speech/1365171490386#.UxD-qfRdU7Q 3http://www.pepperlaw.com/pdfs/PHWhitePaper_PrivateEquityCo_Investments_FINAL.pdf

Which Policy is Best?Sidecar approaches typically outsource co-investing function to GPs, at the expense of LP fl exibility

Allocation PoliciesNot all fi rms abide by a co-investment allocation policy. And those that do have distinct ways of determining allocations. We look at how various models work, which ones o� er the best terms for LPs, and policy gray areas.



Co-Investment Report 2014 � PrivcapCo-investment Report 2014 � Privcap

A look at fi ve common approaches to doling out co-investments, and the trade-o� s that must be made to maintain transparency and satisfy LPs

Allocation Policy, Pros and Cons

PROS CONS

Co-investment Sidecar: Fund-Specifi c

• Very clear allocation among co-investors; set at time of fund formation• Typically a discount on carried interest and potentially higher hurdle rate• Provides greater fl exibility• GP discretion over the amount to invest from the main fund versus the overfl ow fund; however, since the GP is rewarded for the overfl ow fund’s performance, interests are aligned• Administered and monitored by GP

• Typically charge management fee, albeit usually on drawn capital (rather than committed capital)• GP typically has a larger commitment to the main fund vehicle than to the sidecar(s)• Allows GP to circumvent hard caps on fund size and pursue larger deals• Depending on terms, sidecar may pay GP carry before main fund reaches hurdle, creating confl ict of interest

Co-investment Sidecar: Fund-Agnostic

• Can support older deals where the fund vehicle has run out of capital for follow-ons• Greater vintage-year diversifi cation within the sidecar• Administered and monitored by GP

• Similar to fund-specifi c sidecars, but with some added complexities in that co-investments may be spread across multiple funds with di� erent sets of LPs—and thus, di� ering interests• Creates complexities for attracting LPs seeking co-investment rights in new funds• Sidecar may pay GP carry before main fund reaches hurdle, creating confl ict of interest

Follow-on Co-investment Sidecar: Fund-Specifi c

• Greater visibility on strategy to be pursued if sub-strategy specifi c• Administered and monitored by GP• Strategy-specifi c sidecars allow GP to pursue attractive opportunities without exceeding concentration limits initially set for main fund

• Typically charge management fee and carry, albeit usually on drawn—and not committed—capital • GP typically has a larger GP commitment to the main fund vehicle than the follow-on fund, and thus less alignment of interest (e.g., use of follow-on fund to resuscitate underperforming main fund investments)

Deal-by-Deal Co-investing According to Pro-Rata Allocation Policy

• Transparent policy• Allows all LPs to access co-investment• Typically reduced or no fee/no carry

• Some LPs may have an information advantage and thus are able to move faster; LPs without info may not move quickly enough to meet deadline• LPs typically are responsible for the administrative aspects of the co-investment(s)

Deal-by-Deal Co-investing According to Side Letters

• May help GP with fundraising and attracting anchor/fi rst-close LPs• Typically reduced or no fee & carry• Typically requested by LPs with better co-investment capabilities

• Smaller LPs may lose out on co-investing in most attractive deals• May create complexities with Most Favored Nation clauses• LPs typically are responsible for the administrative aspects of the co-investment(s)




A handful of studies have taken a look at historical performance for private equity fund investing versus PE direct/co-investing. However, these studies are typi-cally plagued by survivorship bias, as well as the evolution in economics for both

funds and co-investments throughout the last three decades. To keep things simple, yet useful, Privcap has calculated the structural impact of co-

investment allocations on a PE portfolio. Among the assumptions we make are that the funds and no-fee co-investments have the exact same gross returns, so deal selection is not at issue. In fact, we note in our key observations below that the fee savings from co-invest-ing provide LPs with a substantial margin of error when selecting co-investment deals. However, we do not take into account the costs of accessing co-investments, be it by invest-ing in an internal team or hiring a funds-of-funds or PE advisor.

Key Observations:

• A portfolio that invests only in funds will achieve a net annualized return that is nearly 300 bps lower than a portfolio that splits its alloca-tions evenly between funds and co-investments. The latter scenario results in a fee savings of almost 60 percent in dollar terms.

• A co-investment-only port-folio has a 515 bps advantage on an annualized basis over a funds-only portfolio, and is not subject to fees or carry.

• Based on our assumptions, a co-investments-only portfolio can underperform the same investments in a funds-only structure by more than 20 percent cash-on-cash and still achieve the same net IRR.

• In a portfolio of 50 per-cent funds - 50 percent co-investment/directs, the co-investment/directs can underperform the funds’ performance by 24 percent cash-on-cash and the overall performance of the portfolio would be equiv alent to that of a funds-only portfolio.

Portfolio construction Net IRR (%)

Net TVPI (x)

Mgmt Fee ($M)

Carry ($M)

Estimated di� erential vs. fund investing only

100% Fund investing 9.7 1.6 11.60 26.67 Annualized Return (+bps)

Fees (%)

80% Fund investing 20% Co-investing

11.0 1.7 9.28 19.16 129 -26

50% Fund investing 50% Co-investing

12.7 1.8 5.80 9.88 295 -59

100% Co-investing 14.9 2.0 - - 515

As more LPs jump on the co-investing bandwagon, the question arises: how do you quantify the benefi t of direct investments for an LP’s private equity portfolio?

Estimated Performance and Fees Based on Fund vs. Co-investment Allocations

Notes: Model is not based on any actual portfolio, fund, or co-investment. Assumptions are based on what Privcap believes to be market terms for funds and co-investments. The same capital deployment and return schedule is used for funds and co-investments. Assumed Returns are for underlying portfolio companies on a gross basis, prior to the impact of fees. Net returns do not incorporate additional fees to advisory fi rms or funds-of-funds who may be managing these portfolios. Management fees are charged on committed capi-tal (funds portion only) during the commitment period, and on net invested capital (funds portion only, calculated as invested capital less returned capital) and do not consider the impact of fee o� sets and would likely be reduced by such o� sets. A European-style waterfall is assumed with 100 percent GP catch-up. Assumes no recycling or fund-level leverage.

The analysis below is based on the following assumptions:

• $100M aggregate portfolio size• Underlying portfolio companies of both funds and co-investments generate returns of 2.0x gross TVPI• Fund economics: 2 percent p.a. management fee, 20 percent carried interest, 8 percent hurdle rate, 5-year investment term• Co-investment economics: No fee, no carry (and thus no hurdle rate), 5-year investment term

Fee Breaks,Deconstructed



Empirical research into the role of co-investing in an institutional portfolio is scarce. Here are summaries of three important projects to date.

Research Roundup: Co-investment

Analysis by: AlpInvest INSEAD, Harvard University, NBER State of Wisconsin Investment Board1

Title “The Virtue of Co-Investments,” by AlpInvest Partners

“The Disintermediation of Financial Markets: Direct Investing in Private Eq-uity,” by Lily Fang, Victoria Ivashina, and Joshua Lerner

“Private Equity Co-Investments: Historical Performance and Strategy Opportunities,” by John Drake, Managing Analyst – Private Equity at SWIB

Date February 2014 January 2014 (draft) 2013

Background This white paper targeted at LPs examines the outperformance of co-investments in AlpInvest’s portfolio and presents the prerequisites for suc-cessful co-investment programs

The paper focuses on the cost/benefi t of disintermediation in the PE industry result-ing from LP direct investing

The paper is not available to the public and was used internally to make the case for an internally-managed co-investment program at SWIB

Co-investment Driver(s)

• Superior deal selection• Fee savings• Shorter J curve• Control of investment pace• Rebalances portfolios & builds diversifi cation

• Fee savings (higher net returns)• Greater control over deal selection and risk exposures• Reduces principal-agent problem by aligning LP-GP interests

• Fee savings

Data Set • Co-investment data: AlpInvest’s co-investments (15% of opportunities) between 1997 and 2012• Benchmark 1: 3,755 transactions, including all portfolio companies acquired by buyout funds managed by 102 GPs where AlpInvest is an LP• Benchmark 2: 1,840 transactions undertaken by 61 GPs from whom co-investments were sourced

• 391 direct PE investments by 7 large institutional investors over 20 years (1991-2011)• LPs were undisclosed but included large university, corporate, and government-a� liated entities based in North America, Europe, and Asia, with larger-than-aver-age PE exposures

• 231 co-investments from existing SWIB general partners

Assumptions & Methodology

• Includes investments made from 2001 to 2011• Weight of investments in declined-deals port-folio is determined by the potential investment amount per invitation

• Cash fl ows and valuations of the 391 di-rect investments through Q2 or Q3 of 2011• Takes into account the LPs’ internal costs of co-investing (e.g., sta� ng, legal costs)

• Undisclosed

Returns • AlpInvest co-investment portfolio: 1.6x gross TVPI in 138 deals• Realized: 2.2x gross TVPI in 61 deals• Declined co-investments: 1.2x gross TVPI in 105 deals• Realized: 1.1x gross TVPI in 33 deals

• On average, IRRs of co-investments are more than 8% lower than the overall fund performance; the di� erence for TV/PI was not economically or statistically signifi cant• Early co-investments more frequently outperformed fund investmentsIn later years, fund managers o� ered co-investments in larger transactions during market peaks. Information advantage may have disappeared with more industry competition

• “The average co-investment outperformed the fund it came from 72% of the time and only underperformed 17% of the time and met or exceeded top-quartile fund returns in every period reviewed”

Verdict Co-investments can outperform fund invest-ments, but only if scale and superior deal selec-tion skills are present

Co-investments underperform fund investments over time, despite fee discounts, due to adverse selection and underperformance of larger deals

Co-investments have a positive impact on PE portfolios

1 http://www.pionline.com/article/20130613/ONLINE/130619924/wisconsin-investment-board-plans-in-house-private-equity-co-investments


In recent years, questions have been raised about the e� ec-tiveness and alignment of interests for separate accounts. Large LPs have structured sizable separate accounts with

large publicly listed asset managers, including Texas Teachers’ $3B separate accounts with Apollo and KKR and New Jersey’s $1.5B package of commingled fund commitments and oppor-tunistic separate accounts with Blackstone.

In the case of Texas Teachers’ separate accounts, which were meant to invest in a mix of opportunistic investments and the managers’ commingled fund products, much of the capital has been committed to the commingled fund products at regular eco-nomics, with fee breaks only kicking in through special recycling provisions that allow Texas Teachers to reinvest distributions for lower fees. � e benefi ts of such special recycling provisions provide little assistance in mitigating the J curve at the beginning of the investment period—one of the reasons why fee breaks are desired—and only make an impact if recycling is required.

However, separate accounts can provide value to LPs when structured appropriately. Here, we highlight three case studies of PE separate-account programs that appear to do exactly what such programs were set up to do: provide additional resources and expertise to the LP, utilize the deal fl ow from both the LP and the adviser, and create customized portfolios and econom-ics that the LP would otherwise not be able to have in a com-mingled structure.

The e� ectiveness of separate accounts has been in question as LPs have taken up the practice, with some value when structured appropriately.

Case Study Summary Snapshot

Case Study 1 Case Study 2 Case Study 3LP State of Wyoming State of Wyoming State of New

JerseySeparate Account Manager

Hamilton Lane Neuberger Berman BlackRock

Mandate Size $200M $200M $800M (including follow-on commitments)

Mandate Start 2013 2013 2005

Status Investing Investing Investing

Separate Account Case Studies

Co-Investment Report 2014 � Privcap

THE FIRST TWO CASE STUDIES involve the State of Wyoming’s recent expansion of its private equity exposure through separate accounts. As background, the State of Wyo-ming has approximately $16B in its portfolio of permanent funds; recently Wyoming’s State Loan and Investment Board (SLIB) approved investing up to 5 percent of the $11B equities portfolio in unlisted securities. The State of Wyoming has been investing in private equity since 2003 and, until recently, had committed an aggregate of $260M to the asset class. The State of Wyoming is advised by R.V. Kuhns and Associates (RVK) and historically accessed private equity through just two GPs: Cheyenne Capital ($250M commitment from Wyoming) and Colorado-based Access Venture Partners ($10M commitment). The assets managed by the State of Wyoming are distinct from the $6.5B in assets managed by the Wyoming Retirement System.

The State of Wyoming began contemplat-ing diversifi cation of its PE exposure in 2011. While it considered expanding its exposure to PE through funds of funds or direct invest-ment into PE funds, RVK recommended the use of a discretionary separate-account structure for the following reasons:

• Greater portfolio customization and lower fees than investing in fund-of-funds• Fewer resources (investing and administra-tive) required than direct fund investingLater that year, Wyoming sought pro-

posals for one or more new private equity discretionary separate accounts. The speci-fi ed parameters included managers with at least $2B of AUM, exhibited strong historical performance, and met Wyoming’s minimum qualifi cations. Nineteen fi rms responded.

CASE STUDIES /

#1 & 2 Overview





The original recommendation from the state treasurer to SLIB was to select two managers to each manage a $250M separate account. � e state received board approval in 2013 to commit $600M to PE over the next three to fi ve years. Hamilton Lane Advisors (HLA) was awarded a $200M discretionary separate account with the State of Wyoming, as

was New York-based Neuberger Berman (NB). � e additional $200M will be managed by another fi rm to be selected by Wyo-ming and its advisor, with existing GP Cheyenne Capital in the running.

HLA BACKGROUND: HLA is a private equity investment fi rm founded in 1991. Headquar-tered in Bala Cynwyd, Pa., and with 10 additional o� ces globally, HLA has $141B of assets under advisement and $28B of discretion-ary assets under management. The fi rm’s four main business lines include separate accounts, specialized strategies (encompassing funds-of-funds, secondary funds, co-investment funds, and Taft-Hartley funds), advisory relationships (non-discretionary), and fund administration (i.e., monitoring and reporting).

MANDATE OBJECTIVE: “To provide diversity in private equity investments over types of investments and vintage years”

Mandate Size: $200M GP Commitment: $2M or 1.0 percentMandate Start Date: July 1, 2013Length of Mandate: 10.5-year term + two 1-year extensions with LP consentLength of Investment Period: 4.5 years, ending Dec. 31, 2017

INVESTMENT STRATEGY: Guidelines for investment to be determined annually with input from the Wyoming state treasurer’s o� ce. Required to invest in a mix of fund investments, secondary investments, and co-in-vestments. Notably, capital from the separate account may be al-located to other HLA-managed products, in which case the terms of those products would prevail.

ECONOMICS: Distinct fee structures for each of the following investment categories:• Funds:• Management fee: 1 percent p.a. on committed capital allocat-ed to co-investments during the investment period; thereafter, 1 percent p.a. on invested capital• Carried interest: 10 percent of proceeds after return of princi-pal, above 8 percent annually compounded hurdle rate

• Waterfall: American-style

CO-INVESTMENTS:• Management fee: 0.45 percent p.a. on committed capital al-located to fund investments• Carried interest: 10 percent of proceeds after return of princi-pal, above 8 percent annually compounded hurdle rate • Waterfall: American-style

SECONDARIES:• Management fee: 1 percent p.a. on committed capital al-located to secondary investments (0.85 percent or 0.75 percent if the portion of the committed amount exceeds $50M or $100M, respectively); decrease by 10 percent each year after the investment period • Carried interest: 12.5 percent of proceeds after return of capital, above 8 percent annually compounded hurdle rate• Waterfall: European-style EXPENSES: The State of Wyoming is responsible for all costs and expenses in-curred in connection with the purchase, holding, sale, or exchange of securities.

MOST FAVORED NATIONS STATUS: To the extent the mandate makes commitments to HLA’s commingled fund products (which also may make co-investments and secondary investments), the State of Wyoming will receive MFN provision where no other investor in such fund product with a commitment amount that is the same or less than the mandate’s commitment to that product shall receive more favorable terms than the mandate with respect to fees and liquidity in such product.

NO CAUSE TERMINATION FEE: The State of Wyoming would be responsible for paying HLA up to two years’ worth of management fees, depending on how far along into the investment period the mandate is at the time of termination.

Detailed Analysis: Wyoming-HLA Separate AccountCase Study #1





NB BACKGROUND: NB has approximately $242B of AUM, including $21B of AUM managed by its alternative-investments team (NB Alternatives) as of Dec. 31, 2013. NB Alternatives is also responsible for select-ing private debt, healthcare royalties, equity co-investments, and fund investments for Euronext Amsterdam—and the London Stock Exchange—listed NB Private Equity Partners Limited (� a Lehman Brothers Private Equity Partners Limited). Since the early 1980s, NB’s 200-person dedicated PE team (NB Private Equity) has grown to manage more than $20B of commitments to primary, secondary, and direct PE investments, and commits more than $1B to these strategies annually. Headquartered in New York, NB Private Equity also has four o� ces globally. Much of the NB Private Equity team was previously part of Lehman Brothers’ Private Fund Investments Group (PFIG).

MANDATE OBJECTIVE: Same as HLA separate accountMandate Size: Also $200MGP Commitment: $1M or 0.5 percentMandate Start Date: July 1, 2013Length of Mandate: Same as HLA separate accountLength of Investment Period: Same as HLA separate accountInvestment Strategy: Same as HLA separate account

ECONOMICS: Notably more LP-friendly than HLA’s separate account, with commingled economics for fund investments, co-investments, and secondary investments • Management fee: $720,000 (0.36 percent of committed capital) p.a. for 8.5 years + $100,000 (0.05 percent of committed capital) p.a. for the last two years of the mandate term • Carried interest: • Funds: 5 percent of proceeds• Co-investments and secondaries: 10 percent of proceeds• Waterfall: American-style• Hurdle rate: 8 percent annualized return•Waterfall: American-style

EXPENSES: Same as HLA separate accountMost Favored Nations Status: Does not explicitly extend to any commitments that may be made to other NB-managed products.No Cause Termination Fee: More aggressive than HLA’s separate account; State of Wyoming would owe a lump-sum payment equal to the entire remaining amount of management fees that would have been paid to NB through the end of the mandate (Dec. 31, 2023).

Detailed Analysis: Wyoming-NB Separate AccountCase Study #2

THE THIRD CASE STUDY focuses on the evolving sepa-rate account relationship between BlackRock and the New Jersey Division of Investment (NJDOI).

BlackRock was founded in 1988, and has grown to manage $4.3T of fi rmwide AUM. The fi rm’s private equity fund-of-funds and direct co-investment activities were originally launched in 1999 as part of the Merrill Lynch Investment Managers platform. Subsequently, Black-Rock acquired MLIM in October 2006, and the group was renamed BlackRock Private Equity Partners (BPEP). As of Sept. 30, 2013, BPEP had approximately $16.8B of total PE commitments under management, including assets taken on from the acquisition of Swiss Re’s PE and

infrastructure funds-of-funds business in 2012. In addition to its funds-of-funds products, BPEP has actively pursued separate-account mandates for large LPs, including the ones with NJDOI.

NJDOI is notable for having aggressively struck separate-account arrangements with several fund-of-funds and direct PE fund managers in recent years, led by Christine Pastore (co-head of alternative investments and head of private equity) and now spearheaded by Timothy Walsh following Pastore’s departure in 2013 to become head of IR at tech-buyout fi rm Vista Equity Partners. NJDOI’s private equity consultant Strategic Investment Solutions (SIS) is also

CASE STUDY/

#3Overview





ORIGINAL TERMS

SONJ II • $200M of committed capital • Make direct or indirect investments in operating companies and other business organizations; >50 percent in North America and >80 percent in buyouts • Co-investments to be sourced through NJDOI’s own GP re-lationships, GP relationships from BPEP’s other clients, and GPs una� liated with NJOI and BPEP • The state had veto right on all investments• 8 percent hurdle rate• 10 percent carried interest

SONJ SIDECAR • $200M of committed capital• Make direct or indirect investments alongside SONJ II in operating companies and other business organizations requiring larger co-investments, as well as in secondary funds (defi ned as being at least 40 percent committed to investments)• The state had approval right for all investments• 8 percent hurdle rate• 10 percent carried interest

REVISED TERMS

SONJ II Post-Restructuring• $400M of committed capital• 1 percent GP commitment• Variable management fee, not to exceed 0.85 percent p.a.• Permitted transactions include direct or indirect investments, buying secondary LP interests (>30 percent committed), and primary commitments to VC funds• The state had veto right on all investments• 8 percent hurdle rate• 10 percent carry on direct investments and secondary funds• Zero percent carried interest on primary funds

ADD-ON COMMITMENT TERMS• SONJ II Add-on Commitment• $400M of additional committed capital for $800M total vehicle size• 2 percent GP commitment• 0.25 percent p.a. management fee on VC funds• 0.75 percent p.a. management fee on co-investments/secondaries/etc.• 100 percent fee o� set• 8 percent hurdle across all investments• European-style waterfall• No-fault divorce clause

Detailed Analysis: Wyoming-NB Separate AccountCase Study #3

involved in the due diligence of proposed separate-ac-count commitments.

BPEP’s relationship with the New Jersey plan dates back to 2005, when the fi rst separate account—SONJ Private Opportunities—was formed to pursue PE co-investment opportunities sourced by NJDOI and BPEP. Successor separate accounts SONJ Sidecar and SONJ Private Opportunities II were created in 2007 and 2008, each with $200M of committed capital.

Due to signifi cant changes in the deal environment soon after their creation, SONJ Sidecar and SONJ II’s capital deployment was stunted. In 2011, NJDOI consoli-dated those two separate accounts into a single vehicle to adjust the strategy and more e� ciently manage the

large amount of unfunded capital ($310M out of $400M in total commitments) in SONJ II and SONJ Sidecar. The renegotiated terms of the consolidated vehicle provides a useful perspective of how to structure separate accounts for a more mature pool of capital.

A year following the restructuring, NJDOI elected to commit another $400M to SONJ II, in large part to maintain NJDOI’s co-investment capabilities. At the time the decision was made, the existing SONJ II investments had a 14.9 percent net IRR and 1.25x MOIC. The additional $400M of committed capital is structured with even better terms for NJDOI than the restructured terms.

The original and revised terms of SONJ II and SONJ Sidecar are shown in the detailed analysis below:

CASE STUDY/

#3Overview



Co-investment / GP Policy

Co-investing, Building Relationships


them as a black box to pay down debt. Consequent-ly, we’ve needed equity at times to keep the capitali-zation conservative but have the money to build the business. So we needed capital that was larger than the amount committed in our fund.

We like the idea of developing a closer relationship with our LPs. The LPs like it, too, for a couple of rea-sons. The primary reason is that when they invest with us as co-investors, they’re not paying fees. Overall, it can bring down significantly their overall fees in the JLL relationship. They like that.

Number two, they love working closely with us, because they work with people up and down the ladder in the organization. They see how we work, think about things, talk to them, and the kind of analytics that we do.

In the past three years, JLL has offered about $680 million of co-investment to its limited partners across two funds. That’s been something that they’ve liked—and fortunately, all of those deals have gone well.

Let’s talk about one recent deal, Patheon (now DPx Holdings BV). Discuss the capital required for that deal and how the allocation was spread among your limited partners.

Levy: JLL, in order to have 51 percent of the business, had to come up with $500 million of equity. We had $50 million from Fund V, $200 million from Fund VI, $100 million from JLL individuals and management, and then $150 million co-investment. And the $100 million from management and JLL individuals served a specific purpose in a deal that had cross-fund activity—to show an alignment of interest.

Co-investment gives JLL Partners access to capital to do big deals while building their portfolio, says the firm’s Paul Levy. It also gives LPs a view of how JLL works, pushing the firm to scrutinize its decision-making.

Bio

Paul Levy is managing director at JLL Partners, which he founded in 1988. He is a former managing director of Drexel Burnham Lambert, CEO of Yves Saint Laurent in New York, VP of administration and general counsel at Quality Care Inc., and an attorney at Stroock & Stroock & Lavan LLP. He received degree from Lehigh University and the University of Pennsylvania Law School.

Privcap: How does JLL approach co-investment opportunities with its LPs?

Levy: We’re a middle-market firm, and our fund is about $1 billion in size. Over the years, we’ve had a number of large opportunities. We’ve also had a predisposition to build our companies, not just run

http://www.privcap.com/co-investment-success/

http://www.privcap.com/programs/144-defining-and-being-responsible


People are impressed by that.

We put together a comprehensive presentation on the company: a financial model on what we thought we could do with the company and the time frame in which we thought we could do it. We presented that to a host of people that we knew had interest. We had existing LPs who have expressed interest; we had non-LPs with whom we have worked; we had prospective LPs who have said they like co-investment and [it would] give them a taste of working with us—which is another reason why co-investment could be a good marketing tool. So we went out to them. It wasn’t that big a group. We tell people in the co-investment process, “Do us a real favor—if it’s a ‘no,’ tell us quickly.”

The traditional GP role is making decisions on

Co-investment / GP Policy

behalf of your investors, but in this case you’re actually reselling a deal that you’ve already decided upon for yourself. How does your firm handle that?

Levy: We had a team of five people working on the deal, one of whom was really leading the charge on the financing, so that took the burden off some of the other people. We have one guy who’s devoted fully to capital markets, and he really gets in there and rolls up his sleeves. It was part of the process, and it’s not all bad to be challenged and to have to sell the concept. You learn a lot about what you’re doing by having to think about what you’re present-ing to a third party. They ask a lot of good questions, and that’s terrific.■

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Getting the Partnership Right

Private equity co-investment usually involves the establishment of a long-term partner-ship - the co-investment itself - that is governed by another long-term partnership, the LP agreement. Making sure that all parties agree on the way co-investments work when negotiating the main fund terms is essential, says David Watson, a fund formation attorney with Goodwin Procter.

Finding 1

More groups are developing an in-house capacity to manage co-investment

“For years investors have said they always want to co-invest, but they actually haven’t been doing a lot of it. Now we’re seeing more of them interested in it,” Watson says. “The key is having people in-house that

Co-investment / Legal

Bio

David Watson is managing Watson is a partner in Goodwin Procter’s business law department and chair of its private investment funds practice. He also participates in the firm’s capital markets, real estate capital markets, and private equity/venture capital practices. He holds degrees from the University of Maine and Harvard Law School.


A fund formation lawyer says that solid co-investing begins when the LP agreement is being negotiated

know how to do it.” That doesn’t have to mean making the investment decision, he notes. “It might be a programmatic structure where they go into every deal or almost every deal,” he says.

Finding 2

Key negotiating points tend to come down to economics and control

Investors are focused on how much they need to pay to make a co-investment, but that tends to be decided when the investor initially puts mon-ey into a fund. This means investors play hard-ball when they are coming into a fund, negoti-ating on fees and carry. “I don’t think you could actually say there’s a market for fees and carry,” Watson says, “but there certainly are a range of alternatives. We see sometimes there’s actually no fee and carry. Sometimes they’ll come in with as much as half of the fees and carry you’d pay in the fund.”

Finding 3

Bigger LPs and first closers get top access to deals

“When you think about co-investment, it usu-ally goes to the larger investors as an incentive for them to come into the fund, and it also some-times will go to the smaller investors as a first closer,” Watson says. Waiving fees for a period or discounts are also popular enticements to get LPs into a fundfigure out the reimbursement end of the equation—and here again, the government plays a heavyweight role. Neff pointed out that the federal government now provides 45 cents out of every healthcare dollar spent—and predicts that spending is very difficult.

“Our experience has been that you’re pushed

http://www.privcap.com/co-investment-agreement-tips/



PE fund managers who have registered under the Investment Advisors Act are required to have an investment allocation policy, which has intensi-fied pressure on managers to introduce clear rules.

Finding 5

Investors are focusing on GP co-investment allocation policies

In the past five or six years, investors have started calling on their GPs to implement co-investment policies, hoping to stop them from cherry-picking the best opportunities. “From the perspective of the investor that’s coming into the fund, into the co-investment, they want to know that they’re being offered, on a fair basis, the things that come up,” he says. “But more importantly, from the investors in the fund, they want to know ‘I’m getting all the deals in accordance with the fund document— you’re only offering the excess.’ ”

PE fund managers who have registered under the Investment Advisors Act are required to have an investment allocation policy, which has intensi-fied pressure on managers to introduce clear rules.

Finding 6

It’s nearly impossible to develop a policy to cover all situations

“You can come up with a policy, for example, that rotates opportunities among those who have cap-ital available for it. You can come up with a policy that says only the excess goes to certain investors. There’s all kinds of ways to do that, but inevitably there’s something [else] that comes up along the way,” Watson says. He notes that there is usually an ability to get approval from investors, or a sub-set of investors, to do investments that lie outside the manager’s policies.■

“ From the perspective of the investor that’s coming into the fund, into the co-investment, they want to know that they’re being offered, on a fair basis, the things that come up.”–David Watson, Goodwin Procter

Co-investment / Legal

into the consulting world, maybe with former administrators, et cetera, to give you a sense of what it was like when they were there,” he said. “But it’s a new game, and I’m not sure that an-ybody’s crystal ball, in terms of the next two or three years on the federal level, is going to be



Co-investment / Relationships


Haubenstricker: We hear from many GPs, and it’s a very common thread in their comments, that there is a lot of interest expressed in co-investment, much more so than actually gets executed upon. And I think that there are really three things that you need to have in place, and they’re kind of inter-related, if you’re going to be successful and really committed to the co-investment business. First, you really need a strategy. You need to have a strategy that matches your resources and capital as well. But how are you going to go about this business? How are you going to source the opportunities? How are you going to select the opportunities you invest in? And that leads to the second point, which is process. You have to have a process so that you can evaluate the opportunities and approve the opportunities, re-ally, on a timely basis. And finally, you need a team to go ahead and execute on that process. And this is a deal business, so the deal flow is not consistent or even. You have to decide how much activity you want to do in this area, and do you want to staff up to handle multiple deals at one point in time.

So you talked about what the LPs need to do this well and to execute on these opportunities.

Bio

Tom Haubenstricker is CEO and co-founder of GoldPoint Partners. He is responsible for the day-to-day management of the firm and its investment ac-tivities, as well as managing the firm’s mezzanine business. Prior to the forma-tion of GoldPoint, Haubenstricker joined New York Life, where he had various positions, including co-head of the private finance group. He received degrees from Michigan State University and The Wharton School of the University of Pennsylvania.

Privcap: There’s plenty of interest in the private equity world in co-investment, but some would say that it’s not necessarily matched by activity. What are some of the particular opportunities and challenges one faces when co-investing?

Tom Haubenstricker of GoldPoint Partners discusses what qualities GPs and LPs consider the most important in forming a solid investing partnership

Choosing the Right Co-invest Partner

http://www.privcap.com/co-investment-partnership/


Co-investment / Relationships

What are some of the challenges that are faced by LPs in marshaling their resources and putting this sort of organization in place? Are they better relying on some partners to help them?

Haubenstricker: It really comes down to the re-lationships that they have already, the amount of resources in terms of people they want to commit to it, and also the amount of capital they want to commit to it. Clearly, for those groups that are just starting out, they don’t have the same number of relationships or the same depth of relationships. And also, there are many different ways to approach the market in many different parts of the market. There are the large-end transactions, where we saw a lot of co-investment in the 2005–2007 period. Then there’s the area where we’re more active in, which is more middle market, upper middle market. And the dynamics in those two sectors are different. In the larger one, typically, those transac-tions were closed and underwritten by the private equity sponsors and then syndicated out almost like a banking process to the investors. When I talk about the middle-market aspect, often you have a situation where you’re working right alongside the private equity GP in each step of the way as they go through the bid process, win the bid, and go to close the transaction. So certainly two different approaches there. Also, you have some large players who are acting not as a sponsor but almost as a co-sponsor in some transactions.

Let’s talk about the GP piece here, starting from an LP’s perspective. So they’ve committed to co-investing. They’ve built the resources and strategy. What, to them, makes a good GP part-ner? What do GPs look for in an LP partner?

Haubenstricker: The insurance companies were early participants in the private equity sector. So that is a great starting point. In addition, certainly the large insurance companies have a lot of capital and have fairly large staffs of investment people. So you have nice ingredients there. In addition to that, many times they can be “patient” capital. They have very large portfolios, so they have the ability to meet their liquidity needs in other parts of the portfolio. And finally, they have had a very robust process in terms of valuing the opportunities, and that’s allowed them to let their investment people be very creative and seek out perhaps something that’s not traditional. So the ingredients were quite good in terms of being able to execute on co-investment op-portunities; they had the relationships, they had the staff, and they had the ability to absorb the illiquidi-ty of those investments.■

“There is a lot of interest

expressed in co-investment, much more so than actually gets executed

upon.”

Tom Haubenstricker,GoldPoint Partners


Co-investment / Investor Relations

Managing a Rising Tide of Direct Investments


Privcap: You both oversee investor relations. I’m interested in your perspective on co-investment and how your firms are managing the increasing demand of LPs to be direct investors in deals alongside GPs. Erick, can you talk about evidence you’ve seen that LPs are more interested in co-investing alongside Riverside than they used to be?

Erick Bronner, Riverside: I’ve been head of fund-raising at Riverside for more than two years. When I first joined, we had a little bit of co-invest interest. In the last 18 months, a number of investors who hadn’t co-invested all of a sudden put programs together. Either they outsourced it to a third-par-ty provider or hired a team to work in-house. Our co-investment activity has increased significantly, and we’ve adjusted to that. A large percentage of our LPs are interested in it in ways they weren’t a couple years ago.

Ken, you’ve been doing this for a while. Can you talk about evidence that co-investing is at a different level than it has been?

Kenneth O’Keefe, Vestar Capital Partners: If you look at two of our more mature funds—the Vestar

LP demand for co-investment has climbed in the past two years, say IR experts from The Riverside Company and Vestar Capital Partners, leading to the formulation of allocation and deal policies

Erick BronnerRiverside

Bios

Kenneth O’Keefe is managing director, COO, and head of investor relations at Vestar Capital. His previous posi-tions include executive VP and CFO at Pyramid Communications, CEO and president of AMFM, Inc., and president and COO at Clear Channel Radio Group. He received a degree from Brown University.

Erick Bronner is global head of fundraising and investor relations at Riverside. Previously, he was founding part-ner at Mercury Capital Advisors, managing director of the equity funds group and VP of the com-munications group at Merrill Lynch, and in communica-tions at Citicorp Securities. He received degrees from American University, Emory University, and Lehigh University.

Kenneth O’KeefeVestar Capital Partners

Videos: This article is based on a two-part panel session with Kenneth O’Keefe and Erick Bronner ➊ Allocating LP Co-investments➋ Two IR Pros Tell How LP Co-investments Get Done



http://www.privcap.com/lp-co-investment-allocation/

http://www.privcap.com/lp-co-investment/



which was a 2006 vintage we finished in 2011—sta-tistically we had about 25 percent co-investment in Vestar IV and well over 50 percent in Vestar Five. Vestar VI, which is a relatively new fund, has three investments, two of which have co-invest participa-tion.

Are they going as far as frequently calling each of you, or your deal partners, to remind them that they have an appetite to co-invest?

O’Keefe: It would not be unusual for LPs to have touched points with at least four or five other senior partners in our firm, and they have no problem pick-ing up the phone to call them.

Bronner: Same here. We have a seven-person IR team to manage the co-investment process. But we’re getting increasing numbers of LPs indicating their ability to co-invest. A number of our LPs have just started programs, whether it’s a third party acting on their behalf or a team that they’ve hired in-house.

How are your firms structuring the co-invest-ment process? How do you interact with the person who leads the deal, and the team on the LP side, to coordinate the dollars coming into the deal?

Bronner: It’s important as an IR person that you have a single point of contact who takes the infor-mation and identifies who on the deal team is the right person. The investor will come to us, we’ll put together some kind of teaser that we’ll send to the LP, and if there’s interest, we’ll call the deal team and let them run with it.

O’Keefe: Our LP base has exposure to many of the partners at the firm. As we invest in an opportunity and determine that co-invest is appropriate, we will reach out proactively. Then we’ll introduce them to the deal team that will take them through the process.

You both send out information when a co-in-vestment opportunity becomes available. What goes into that initial share or teaser? Is it literally a paragraph that says, “Call me if you’re interest-ed.”?

O’Keefe: First of all, realize that any time we have an interaction with an LP, that’s an opportunity for us. We raise funds every three to five years, and we view the co-investment process as a unique opportunity

to let an LP look at what Vestar does—interact with the deal partners, with the deal team, and see that process. When we send out co-investment opportunities, we’ll normally put together 10, 15 pages with exhibits to give them an executive summary.

The deal is pretty much baked at that point; 99 percent of the time we’ve already committed the equity and concluded that this is an appropriate co-invest opportunity.

Bronner: I hear LPs say that integrity, transparency of the team, is impor-tant. These investors requesting a co-investment opportunity are doubling down with us in a lot of cases. They have an LP commitment, but they’re also substantially increasing their exposure to us, and that’s a validation that the partnership is important to them.

Has the process by which you reach out to your LPs for a specific opportunity evolved? Have there been lessons learned that led you to refine the process by which you allocate?

Bronner: When you have a co-investment opportunity, making sure you understand the landscape of your limited partners to make sure they’ve been offered the investment is one lesson. A second thing is making sure you have a team whose focus is on identifying these folks and managing that process. Third is being transparent with the investors about the good and the bad you’re seeing in a deal so that, at the end of the process, they felt like they were treated fairly.

Has there been any suggestion among your LP base or those who ad-vise them that there should be clear policies written down? And if so, is there a downside to being overly prescriptive about how an alloca-tion might work for a specific deal?

Bronner: Our industry is moving to something that feels more thematic. And because so many investors are looking at co-investment and you have to have some kind of process, I’m seeing more requests to have something put in writing up front.■

Erick Bronner, Riverside; Kenneth O’Keefe, Vestar Capital Partners



Don’t Embarass the Lead Sponsor


Privcap: Let’s talk about the level of coordina-tion that needs to exist between your team and the GP doing the deal. How do you make sure it’s seamless and that you’re getting full transpar-ency?

David Stonberg, Neuberger Berman:We have to make sure we’re selecting the best and most attrac-tive risk-reward opportunities from the GP commu-nity for our investors.

A midmarket firm is going to do 10, 12 deals in a fund, maybe two or three a year. They haven’t done one in four or five months. They have one they’re really excited about, and they want to make sure they lock down that asset. They want a co-investor to work side by side with seamlessly, not slow them down. At the same time, we have to make sure we’re getting all the information we need to make the right investment decision.

John Barber, Cohesive Capital: The cardinal sin in this business is to leave them at the altar. You can-not do that; it will get around and you will be dead. So we’re incredibly careful to make sure that we’re getting what we need, we’re telling them what we’re thinking.

Direct investment experts from Cohesive Capital Partners and Neuberger Berman share tales from the trenches and tips on adding value

David StonbergNeuberger Berman

Bios

John Barber is managing director, COO, and head of in-vestor relations at Vestar Capital. His previous positions include executive VP and CFO at Pyramid is the managing partner at Cohesive Capital Partners. Previously, he was a managing partner at Citi Private Equity and held positions at Salomon Smith Barney, Kidder Peabody & Co., and Drexel Burnham Lambert. He received a degree from Tufts University.

David Stonberg is a managing director and global co-head of PE co-investments at Neuberger Berman. He has worked for Lehman Brothers and the M&A group at Lazard Freres. Stonberg holds degrees from the Stern School of Business at NYU and The Wharton School.

John BarberVestar Cpital

Videos: This article is based on a two-part panel session with John Barber and David Stonberg ➊ Adding Value as a Co-investment➋ Don’t Embarrass the Lead Sponsor



http://www.privcap.com/value-add-co-investment/

http://www.privcap.com/deals-direct-investment/



In addition to leaving people at the altar, have you seen other LP co-investors who have made things more difficult in the due diligence pro-cess? What are the things that you’ve seen that are not recommended?

Stonberg: What we’ve heard from the GPs is that they want folks who have a desire and a bias to put capital to work in co-investment. Some want an opportunity to invest and co-invest, not with the intent of putting capital to work but to go behind the scenes and see the GP in action. A management team may say they’re only comfortable with you bringing two or three co-investors to meet them. If one of those persons never has an intention to get there, then they use up a valuable spot on behalf of the GP.

What is different in the way your teams do due diligence into a potential co-investment oppor-tunity versus some of the GP sponsors?

Stonberg: We get the benefit of seeing the reports and the analysis that they’ve done. Then we get to kick the tires on the reports and the analysis and speak to their experts, if that’s what we want.

Barber: One of the things I learned at Citi was that who you partner with is often as important as the deal. We want to see a good, stable private equity firm. We want to know that in four years, if this deal is not doing well, there’s somebody out there work-ing hard to get it back to 1X, because every dollar is a carry dollar. Most importantly, we want to make sure it’s a deal that firm should be doing. You don’t do a healthcare deal with an oil and gas firm.

So will you do a deal with a GP group that you haven’t known? Would you be willing to do due diligence and then consider the opportunity?

Stonberg: We’re opportunistic, but I don’t think we’ve ever done that. We really want to know who we’re partnering with. We’re passive. The lead PE firm wants to swap out the CEO four years from now—they can do that. We can call and scream at them as much as we want about a particular topic. They may choose to listen to us, and may choose not to.

Barber: We work hard to have relationships with a broad array of PE firms. I’d say we talk to 125 to 135 private equity firms on a regular basis. That has an element of making sure that you’re top of mind with them, but a lot of it is a form of diligence: What deals have they done?

Have either of you or your teams uncovered information during due diligence that the GPs did not, and that shaped the outcome of the investment?

Stonberg: There was a one transaction; it was a distribution company. Earnings had risen quite nicely over the last few years, and one of our partners had owned a distribution business in this exact industry. What he knew from owning it was that profitability was highly tied to commod-ity prices. As commodity prices rose, their profits rose. The lead GP wasn’t aware of this. We brought it to their attention. They did their own due diligence, came back to us a few days later, and said, “Thanks for the heads-up—we’ve dropped out of the process.” They’ve since called us on a number of co-investments.

The deal is pretty much baked at that point; 99 percent of the time we’ve already committed the equity and concluded that this is an appropriate co-invest opportunity. ■

John Barber, Vestar Capital; David Stonberg, Neuberger Berman


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Please contact Philippe Leroy at [email protected] • www.ey.com

How does EY help a private equity backed port-folio company prepare for the exit process?

Management has little time to manage a business and a sales process simultaneously,

so you want to ensure that you have consistent information. Consistent information will expedite the process, create competitive tension, and really support the value story that will be mone-tized when you do a sale.

How do you compile the information?It’s time that you should spend up front to reduce diligence time later. So it’s a lot of

interviews with management, a lot of data compilation, and a lot of understanding the story. The time we spend is typically rewarding for the fund, as well as for management.

How is your team and its work additive to the sales process?

We know what to prepare, we know what’s going to be accepted or not accepted, and we

work closely with the investment bankers to help with the numbers. What you end up with is a story that is supported, anchored to numbers that are believable and make sense, and this is the value of this preparation for sale.■

Co-investment / Sponsored Content

Philippe Leroy, Partner Transaction Advisory Services, EYemail: [email protected] Web: www.ey.com

with Philippe Leroy, Partner, Transaction Advisory Services, EY

Expert Q&A/

Snapshot

Experience: Partner for EY’s Transaction Advi-sory Services team with over 15 years of transaction experi-ence. Philippe Leroy originally joined EY in 2002.

http://www.privcap.com/philippe-leroy-ey/

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http://www.ey.com/GL/en/Industries/Private-Equity

PRIVCAP REPORTS · Bridge Capital tell Privcap about the dos and don’ts of the allocation...

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