BarnellanEquityAdviceLtd-GeoffBurns私募股权

BarnellanEquityAdviceLtd,1,SOUTHERNAFRICAPRIVATEEQUITYROUNDTABLE,October2010GeoffBurnsBarnellanEquityAdviceLtd,BarnellanEquityAdviceLtd,2,PRIVATEEQUITY(PE)FUNDSGLOSSARY,CarriedInterestshareofthegainontheFundpaidtotheManagerBlindPoolwherethereislimitedvisibilityontheportfoliotobeacquiredExitrealisationoftheholdingsinaninvesteeGeneralPartner(GP),PEManagermanagementcompanythatraisesPEfundsGrossIRRIRRoftheinvesteeportfolioonly.NetIRRisthereturntoInvestors(seebelow)HurdlerateanannualpercentagereturnreceivedbyInvestorsbeforetheGPgetsthecarriedinterestPrivateEquity(PE)generictermforinvestinginprivatecompaniesofwhichVentureCapital,MBOsandDevelopmentCapitalaresubsetsInterimIRRIRRoftheFundmeasuredonactivitytodate,egactualcashflows+NAVInvesteeportfoliocompanyofaPEFundIPEVCInternationalPEandVentureCapitalGroup,establishedmainvaluationguidelinesIPOInitialPublicOffering(orlisting)onarecognisedstockexchangeIRR=InternalRateofReturn,thediscountrate/%agereturnwhereNPViszeroLimitedpartner(LP)Investor-surrendersdecisionmakinginreturnforlimitedliabilityand(usually)taxbreaksMBOmanagementbuyoutNetIRRtheIRRactuallyreceivedbytheinvestor,afterallcostsofmanagementandfundexpensesNetPresentValuethepresentvalueoffuturecashflowswhendiscountedatasetrateSMESmallandMedium-sizedEnterprisesSystemicriskrisktothefinancialmarketsorsystem,asopposedtoaparticipant,whichcannotbediversifiedawayVintageofFundtheyearinwhichafundfirstcloses,WHOLEAGENDAPRIVATEEQUITY(PE)RISK?,SESSION1:PEasanassetclass:history,definitions,use,riskandreturn,summaryriskcontrolHowdoPEfundswork?UsingstructurestomitigateriskSESSION2:HowPEisimplemented?UsingdisciplinestocontrolriskManagerselection,BarnellanEquityAdviceLtd,3,SESSION1.EmergingMarketPrivateEquity(EMPE)ASANASSETCLASS,1.1HistoryandbackgroundIntroductionandHistory,RiskperspectiveUseofPEinportfoliosReturnsBreaktodrawbreathandanswerquestions!1.2.ControllingRiskthroughthefundstructureFundstructureHowtheyworkRiskmitigationAlignmentandconflictsJcurve,BarnellanEquityAdviceLtd,4,BarnellanEquityAdviceLtd,5,INTRODUCTIONANDHISTORY,EARLYHISTORY14thcenturyMoravianProtestantmovementCEurope15thcenturyFlorencedeMediciMORERECENTHISTORY19thcenturyIntroductionofinvestmenttrustsFinancingofUSrailroadsMODERNHISTORY1975onwardsGlobalexpansionfromUS,thenUK,thenEuropeIntroductionoflimitedpartnerships1970/80sEmergingmarketPEfromearly1990s,Definitionofaprivateequityinvestor-someonewithdeeppocketsbutveryshortarms!,BarnellanEquityAdviceLtd,6,WHATISPRIVATEEQUITY?,EquitiesnottradedonpublicmarketsPEisgenerictermcoveringVentureCapital(earlystage/startups),ExpansionandBuyOutcapitalHighergrowthsmallercompanies,agility/flexibilityHigherrisk(smallerfirms,cyclicalexposure,lessdefensiveness,managementdepth)CanincludesomelargecompaniesaswellasSMEsHoldingperiodsof3-7yearsEMPEisquiteanewassetclass,BarnellanEquityAdviceLtd,7,OVERVIEWOFGENERALINVESTMENTRISKSCommontoALLinstitutionalequityinvestment,Systemic:uncontrollableexternalitiesAlphaexposuretoupsideanddownsideStrategic:failuretoachievepolicyobjectives(desiredexposure)Financial/Counterparty:lossofmoney/underperformancevbenchmarkduetoinvestmentactivityand/orfraud,causedbyfailingsinthemanagement(ofcompanyorfund),organization/processLiquidity:mostlydifficultinsmallcaporfrontiermarketsReputation:riskacceptedinthelistedarena?,BarnellanEquityAdviceLtd,8,POTENTIALADDITIONALPERISKHEATMAP,BarnellanEquityAdviceLtd,9,PERISKPERSPECTIVE,Whatgreaterrisksarewetaking(comparedtootherassetclasses)?Liquidity.Cannotrealiseinvestmentatwill.MediumSystemic.CycleSMEsensitivitytoeconomicandmarketcycles=morevolatilereturns.MediumFinancial:executioninPEmoredifficult.HighInfrastructure(financial,bureaucratic,judicial)canbemoredifficultforprivatefirms.Medium/LowLitigation:legalredresssoughtbycreditors,suppliers,governmentsetc.LowReputation:damagecausedbyissuesderivedfromtheabove.Low,BarnellanEquityAdviceLtd,10,WHYBOTHER?,ExploitmarketimperfectionsSMEgrowthpotentialLowcorrelationwithotherassetsReturnsreflecttherisk?Potentiallongtermhighrewardforadditionalrisk,BarnellanEquityAdviceLtd,11,RISK!,BarnellanEquityAdviceLtd,12,BarnellanEquityAdviceLtd,13,SPECTRUMOFRISK-INVESTMENT,JudgmentEvidenceCDOs/JunkPrivateEListedequitiesRealEstCorpbondsGovtbondsJudgementdependanton:?!Analysis!analysisandliquiditycreditratingsecurityvalueHIGHRISKLOWRISK,BarnellanEquityAdviceLtd,14,SPECTRUMOFRISK-PE,JudgmentEvidenceStartupsearlystageexpansionMBOassetbackedJudgementdependanton:ProjectionsmarketandtrackrecordanalysissecurityvalueHIGHRISKLOWERRISK,BarnellanEquityAdviceLtd,15,SPECTRUMOFRETURNINVESTMENT(net$based),12-25%7-15%5-12%3-7%2-4%PrivateEListedequitiesRealEstCorpbondsGovtbondsReturndependanton:Stagesector/geographysector/geogcreditcountryHIGHRISKLOWRISK,Returnsaretargetednettoinvestorsbasedonanapproximatehistoryofdevelopedmarkets,BarnellanEquityAdviceLtd,16,SPECTRUMOFRETURN(GROSS)-PEBYSTAGE,30-45%25-40%20-30%17-25%12-20%StartupsearlystageexpansionMBOassetbackedDependanton:ProjectionsmarketandtrackrecordanalysissecurityvalueHIGHRISKLOWRISK,Returnsaretargetedgrossportfolioreturnsbeforefundcosts,BarnellanEquityAdviceLtd,17,COMPANYLIFECYCLE,Earlystagefirmswithnegativecashflow.RequireR&Dandstartupcapital,highrisk.30%IRR,Growthstage,expansioncapital,mediumrisk20-30%IRR,Maturephase,buyoutandacquisitionfinance,exgrowth,cashgenerativewithdebtcapacity,lowerrisk.17-25%IRR,Highrisk,LowerRisk,BROADDEALTYPEDEFINTIONS,VentureExpansioncapitalBuyoutandacquisitionfinancingMezzanine(shareholderloanstoSMEs,orunsecureddebttomidsized/largefirms)Typesofinvestmentinstrumentequityandquasi-equityordebt/preferenceallusedPrivateInvestmentintoPublicEquity(PIPE)Fundsmayfocusononeareaorbequitegeneralistindealtypeorsector,BarnellanEquityAdviceLtd,18,WHYUSEPEINPORTFOLIOS?,CorrelationlowwithotherassetclassesLongtermasset,ratherlikerealestateStabilisingeffectoflessvolatilepricingovershorttermPotentialhigherreturn,BarnellanEquityAdviceLtd,19,MANAGERSELECTION,PErequiresspecialistskillsandresourceFormanyinstitutionsthisistooexpensiveIfso,subcontractmanagementrequiredusefundoffundsInSouthAfricaPEindustrywelldeveloped,favourableconditions,goodchoiceoffundsRestofSouthernAfrica,wherefundsareavailable,theninvestment/executionisthekeytosuccess,BarnellanEquityAdviceLtd,20,BarnellanEquityAdviceLtd,21,NETRETURNSACHIEVEDBYPEFUNDS,Returnsto31March20103year5year10yearEmergingMarketsPE&VC9.913.77.7WEuropeVC&PE(3.6)13.514.0MSCIEMindex(listedequities)5.516.010.1MSCIWorldindex(5.4)2.9(0.0)EMPEbetterthanWorldandclosetoEMlistedindicesReasonableresultgiventheCrunch(EMPEwastopin2007)Caveat-notastrongbenchmark.EMPEisonly307fundsAfricasamplesizetoosmalltobeincludedinthestatisticsWidedispersionofPEreturnsinternationallyandbetweenquartiles(EMPEtopquartilebeatsMSCIindex)Source:CambridgeAssociatespooledendtoend$netreturnsafterallcosts,SOUTHAFRICARETURNS,GrossreturnsofindependentlymanagedfundsinSAfrominceptiontoend2009(netreturnsnotavailable):,BarnellanEquityAdviceLtd,22,Source:KPMGandSAVCA2009SAPEsurvey,SOUTHAFRICARETURNS-CONCLUSIONS,Smallsamplebutindicates:2/3areproducingstrongindexbeatingreturns(20%grossIRR)Topquartile=stellarreturnsOnlyonemaybeafailureonpresentinformation(20%inAfrica/MENANetIRRtoDecember2009=18%(topquartile)SMEinvestmentsnotsignificantlyriskierthanlargeones,exceptwellbelow$2mdealsizeIRRofminoritypositiondealsnotsignificantlydifferentfrommajorityheldonesFirsttimefundsproducedsimilarreturnstononfirsttimeonesContrarytotraditionalviewonPEriskSource:IFC.TheCaseForEmergingMarkets,March2010,BarnellanEquityAdviceLtd,24,BUT.,AlthoughgoodPEfundreturnscanresultfromexcellentselectionWHATISTHEREQUIREDRISKPREMIUMOVERLISTEDS?Is15-18%netactuallygoodrelativetotheriskWhatisthepremiumrequiredtopersuadeWesternLPstoinvestinAfrica.Differentfromlocalriskpremium?RiskpremiumforAfricanLPstoinvestinWest?!(DuetorecentpoorreturnsinWest),BarnellanEquityAdviceLtd,25,Precrunch2006-25%netfromAfrica.Today?,BarnellanEquityAdviceLtd,26,Source:EMPEA,CURRENCYRISK,NotofcourseanissuefordomesticinvestorBalanceofexportersanddomesticbusinessesgoodRegionalfundslooktodiversificationandlongtermnatureoffundstomitigateFundsdonottrytohedge,duetocostoflongtermhedgesanduncertaincashflows,BarnellanEquityAdviceLtd,27,SUMMARYSESSION1.1,PEhasadditionalriskstothoseoflistedequitiesItisstillearlydaysfortheassetclassEMPEhasanimportantroleinaportfolioTheriskscanbeidentifiedandmitigated,tocapturehigherreturnOftenundertakenbysubcontractPEManagerRiskisconcentratedinexecutionsoselectionofrightPEFundManageriskey,BarnellanEquityAdviceLtd,28,SESSION1.PEASANASSETCLASS,1.1HistoryandbackgroundIntroductionandHistory,RiskperspectiveUseofPEinportfoliosReturnsBreaktodrawbreathandanswerquestions!1.2.ControllingRiskthroughthefundstructureFundstructureHowtheyworkRiskmitigationJCurve,BarnellanEquityAdviceLtd,29,BarnellanEquityAdviceLtd,30,FLOWOFFUNDSDRIVER,BarnellanEquityAdviceLtd,31,MOSTTYPICALFUNDTYPE,LIMITEDLIFELIMITEDPARTNERSHIPSFUNDSproventobemosteffective.WHY?InvestorsreluctanttocommitmoneytooneManagerformorethan10years,buthappywithsuccessivefundsongoodperformanceLimitedpartnershiporeasilyliquidatedcompanystructureCommitmentonwhichannualfeeispaid,butcapitaldrawndownasneeded(IRRefficiency)InvestmentonlyallowedforfourorfiveyearsThereaftercapitaltobereturnedasrealisationofinvestmentsoccurMinimumeconomicFundsizec$20mandsonotsuitableforPEdealsizesbelowc$200,000(fundeconomics)Partnershiphastaxtransparencyinmanyjurisdictionssocanpool(commingle)differentinvestortypes,STANDARDFUNDSTRUCTURE,BarnellanEquityAdviceLtd,32,Fees,Advice/mgt,Capital/expenses/returns,Investment/returns,AdvisoryCttee,BarnellanEquityAdviceLtd,33,HOWDOPEFUNDSWORK1Initiation,InvestorsapproachedbyManager(GeneralPartner/GP)withPrivatePlacementorInformationMemorandumNegotiateacommonshareholderandmanagementagreementInitialinvestorsmakecommitmentonasingleday=FirstClosing,butdrawdownisonlyasrequiredOtherinvestorsmayjoininsubsequentclosingsonequivalentbasisforuptoayearGPexpectedtoinvestatleast1%Organisationalexpensesoffundupto1%paidbyfund,HOWDOPEFUNDSWORK2Operation,DrawDownsagainstCommitmentasneededforupto5years(InvestmentPeriod)Normallyportfolioof8-15investmentscreatedoverthe5yearsCapitaltobereturnedbyyear10(Divestmentphase)ThiscanbeextendedwithpartnerapprovalTheGPcanraisesequentialfundwhencurrentfundisc75%invested,sotheyalwayshavecapitalavailableStructure(orregularfundraisings)ispotentiallywastefulinGPtime,buthelpsincentivealignment,andreducesblindpoolrisk,BarnellanEquityAdviceLtd,34,BarnellanEquityAdviceLtd,35,HOWDOPEFUNDSWORK3Expenses,CostsManagementfeespaidonCommitment(1.75to3%-dependantonsize)GPmaybeabletochargeinvesteescertainfees,75-100%ofwhichissharedwithfundFundcarriesallotherthirdpartycosts,eglegalcosts,auditingetcGPgetsacarriedinterest(shareofgain)of20%ofthereturnsafterInvestorsreceivedcostandhurdle(6-10%pa)back,HOWDOPEFUNDSWORK4Process,InvestmentCommitteemakesinvestmentdecisionsAdvisoryCommittee/Board(ofLPs)meetsuptoquarterlytoreviewconflicts/valuationsReportingquarterlyValuationsatleasttwiceayear,nowoftenquarterlyCapitalorincomereceivedreturnedtoInvestorsimmediately(subjecttominimums),BarnellanEquityAdviceLtd,36,BarnellanEquityAdviceLtd,37,TYPICALFUNDCASHFLOWFORINVESTORS,$100mFund,$90mdrawndown,IRR20%,2.25multiple,1.2HOWDOFUNDSWORKTOMITIGATERISKAGENDA,FlowoffundsThelimitedpartnershipstructureHowfundsworkHowfundsmitigateliquidity,systemic,infrastructure,litigationandreputationriskJCurve,BarnellanEquityAdviceLtd,38,STRUCTUREANDPROCESSTailormadetomitigaterisk,BarnellanEquityAdviceLtd,39,LIQUIDITYANDCYCLE/SYSTEMICRISKS,Closedendfundprotectstheilliquidassets5yearstoinvest,10yearlifegivesroomformanoeuvreCashstartstoflowbackyear4/5Orderlyinvestment/divestment=maximumopportunitytonegotiategoodentry/exitpricesDiversificationwithinthefundacrosssectors/stages(veryfewsectorspecificfundsinEM)5yearstoinvestspreadscycleriskacrossperiods,sameforexitManagerdoesnotsitoncashSecondarymarket(negotiatedbasis)IFCannounced$500mfundBut,Investormustacceptringfencingcommittedfundsforlongperiod,BarnellanEquityAdviceLtd,40,LIQUIDITYANDCYCLESPECIFICPROTECTIONS,InvestmentPolicyRestrictionsandProtectionsDiversificationrequirementsSetpolicyCountry/sectormaximumsInvestmentmaximumsperinvesteeOtherrestrictionsEnvironmental,SocialandGovernanceBannedsectorsChangeofpolicyrequiresinvestorsconsentQuarterlyReportingInvesteebyinvesteedetailsValuationseitherquarterlyorsixmonthly,BarnellanEquityAdviceLtd,41,INFRASTRUCTURE,Privatesectorfacilitation,strengthandfavourability:OwnershipprotectionLawofcontractJudicialredress,efficiencyandtransparencyCompanysactandlegalframeworkTaxincentives,governmentsupportLimitsonstateandbureaucraticinterventionEncouragementofforeigninvestmentAvailabilityofdebt,liquidityofpublicmarket,BarnellanEquityAdviceLtd,42,LITIGATION/REPUTATION,CORPORATEGOVERNANCEDelegatedinvestmentdecisionstoavoidinvestorliabilityGPhasInvestmentCommitteethatmayhaveindependentsonitGPtakestheliabilitybutindemnifiedexceptfornegligence/fraudAdvisoryBoardofInvestorscontrolsconflicts,valuationsandaudit,andchangetoinvestmentpolicyAbilitytofireGPwithoutcausesubjecttohighvotethresholdOtherdefaultsonkeymanretention,breachofinvestmentrestrictionsetcGPrestrictionsonabilitytomanagecompetingfunds,overcertaintypesofinvestment(bannedsectors)UndertakingfromGPonenvironmental,socialandgovernancecriteriatobefollowed,BarnellanEquityAdviceLtd,43,POTENTIALADDITIONALPERISKHEATMAP,BarnellanEquityAdviceLtd,44,BarnellanEquityAdviceLtd,45,OTHERMATTERS-JCURVE,IRRmeasuredeachyearinthelifeofaFund,Source:CalPERS,SUMMARYSESSION1,SubcontracttoprofessionalmanagementisneededspecialistskillsTocommitresourcetotheinvestmentprocess,managerneedscapitalbackingandlongertermstabilityFundpoolsinvestorsinterestsanddiversifiesexposureStructureworkstomitigaterisksSelectionofPEfundmanageriskey(widereturnrangebetweentopandbottomquartile),BarnellanEquityAdviceLtd,46,SESSION2.IMPLEMENTATIONANDRISKMANAGEMENT,BarnellanEquityAdviceLtd,47,WHOLEAGENDAPRIVATEEQUITY(PE)RISK?,SESSION1:PEasanassetclass:history,definitions,use,riskandreturn,summaryriskcontrolHowdoPEfundswork?UsingstructurestomitigateriskSESSION2:HowPEisimplemented?UsingdisciplinestocontrolriskManagerselection,BarnellanEquityAdviceLtd,48,RISKMITIGATIONREVIEW,Policyanddiversificationportfolioconstruction,diversificationandinvestmentlimits/allocationLiquiditydiversificationacrossvintages/fundtypeCyclediversificationacrossvintagesFundselectionpreandpostinvestmentdisciplinesandprocedures(thisSession)TaxandjurisdictionoffshorelocationsCurrencydiversificationbycountryifregionalLiabilityfundstructuresarelimitedliabilitypartnershipsReputationdelegateddecisionmaking,BarnellanEquityAdviceLtd,49,VIEWOFPERISKCHANGEDFROM,BarnellanEquityAdviceLtd,50,.TO?,BarnellanEquityAdviceLtd,51,POTENTIALADDITIONALPERISKHEATMAPNOWTHEHOTTESTBIT!,BarnellanEquityAdviceLtd,52,PEEXECUTION,HowPEisimplemented?Definitionofexecution/counterpartyriskThemainissuesforFundofFundsAlignmentandconflictsFundofFundlevelriskcontrolMainissuesforDirectPEDirectInvestmentriskcontrolPEFundManagerselectionFocusonthepeopleside,BarnellanEquityAdviceLtd,53,EXECUTIONORIMPLEMENTATIONRISK,OverallRiskdefinition:Thepotentialtomakepoorinvestmentdecisions,andtofailtonegotiatestrongfinancialpackages,addvalue,secureagoodexit,andsonotmakeariskadjustedreturnAppliesbothatfundoffundandattheportfoliolevel,BarnellanEquityAdviceLtd,54,THEMAINISSUESENCOUNTEREDFORTHEFUNDOFFUNDSINVESTOR,Finding:ExperiencedmanagerswithgoodandlongrecordsStableteamswithabalanceintermsofskills(entry,addvalue,exit),experience,andincentivesTeamswhoadapttochangebutstillstaywiththeircorecompetenceAlignedinterests,BarnellanEquityAdviceLtd,55,ALIGNMENTANDINCENTIVES,Principles:SomecashexposurefromManager,min1%?FocusthatcomesfromlimitedlifeFocusfromrestrictionsonotheractivitiesManagerincentivisedbyshareofgainafterallInvestorsmoneybackplushurdleInvestorsultimatelyhavecontrolthroughnofaultdivorce,BarnellanEquityAdviceLtd,56,GENERALALIGNMENTSOLUTIONS1,Keyalignmentissues:StrategyGPandLPstosharesameobjectivesbecause:-Feessetsomanagerisviablebutnotexcessivelyprofitable-nonewfundsuntilthisoneinvested,restrictotheractivities-nofaultdivorce.SupermajorityofinvestorscanclosethefundwithoutcauseRisksharing-CarriedinterestonlyafterInvestorscostisreturned-SignificantinvestmentinfundfromGPShortTermismdiscouragedby:-Alldealincomeofanysort100%tothefund-ProperstepdownofmanagementfeeafterinvestmentPeriod,BarnellanEquityAdviceLtd,57,GENERALALIGNMENTSOLUTIONS2,Staffingflexibilitylimitedby:-keymanclause.BreachofcontractifkeymanagersleaveGP-individualcarriedinterestallocation5.Costscontrolled:-caponorganisationalcosts,-fundadministrationcap-strictcontrolonManagerchargestotheFund6.Incentivesaligned:-economicsmostlygotokeyManagerswhodeliverforthefund-firsttimefundsthesponsorrole/backinginvolvesGPownership-laterfundsshouldseeGPownershipandcarryshifttoManagersHowever,alignmentrequirestherightattitudeandsenseofresponsibility,cannotbeachievedbyTermsonly,BarnellanEquityAdviceLtd,58,TWODECISIONLEVELS,BarnellanEquityAdviceLtd,59,1.Fundoffundlevel/fundinvestorlevelexecution,2.PEfundlevelexecution,Manager/fundselectionFoFlevel,InvesteeselectionPEFundlevel,Managerqualities,processes,Pipeline,fundstructure,terms,Investeequality:markets,competition,product/serviceUSP,management,reporting,valuation,dealstructuring,valueadd,LEVEL1.ADDRESSINGTHEFOFRISKS,BarnellanEquityAdviceLtd,60,BarnellanEquityAdviceLtd,61,SELECTIONPERFECTION!HowtoassessPEfundexcellence,OperationalRisk=Managementteam,competence,balance,incentives,alignment,trackrecord,processanddisciplines(50%weight?)MarketRisk=natureoftheopportunity,dealflow,pipeline,competition,networks(20%weight?)InfrastructureRisk(country/region)=contractandjudicial,liquidity,business,physical,political/economy,exitpotential(10%weight?)FundSpecificRisk=investmentpolicy/strategy,projectedreturns,fundterms,conflicts,structure,tax,currency(20%weight?),PEFUNDASSESSMENTPROCESS,PPMorInformationMemoreceivedQuestionnaireissuedbyInvestorInitialmeetingsorscreening(mayoccu