SII CPD Seminar: 4th October 2006

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SII CPD Seminar 4th October 2006
Private equity funds the new alternative
Stephanie Biggs, SJ Berwin LLP David Bailey
MSI, Augentius Fund Administration
SJ Berwin LLP, 10 Queen Street Place, London
EC4R 1BE
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Private Equity Funds the new
Alternative4th October 2006
David Bailey MSI, Augentius Fund Administration
and Stephanie Biggs, S J Berwin
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• Growth in Private Equity
• The Investment Process
• Fund Structures Used
• Where next?

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Some Basic Facts

• Private equity industry in Europe started in
  1980 few in the industry with more than 20
  years experience
• Since inception the Private Equity Industry has
  returned 10.3 net of management fees and carried
  interest (per EVCA)
• In 2005 71.8bn raised for investment in Europe
  and 47bn invested
• The UK raised 20.8bn for investment in PE but
  managed 45.6bn the UK is the European centre of
  PE and that is predominately London
• Data per EVCA

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The Evolution of Activity
billion
2005 European Private Equity Survey Conducted by
Thomson Financial and PricewaterhouseCoopers on
behalf of EVCA
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.and most of it happens in the UK/London
billion
Note US amount of 17 billion comprises
fundraising from US LPs to European funds
2005 European Private Equity Survey Conducted by
Thomson Financial and PricewaterhouseCoopers on
behalf of EVCA
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The Investment Process

• Fund is raised but committed capital not actual
  cash
• Manager then seeks to find investment deals 5/5
  per annum
• 15-20 deals per fund
• 5 years to invest and 5 years to divest 10 year
  fund life
• Cash called when investment made
• Cash distributed when investment sold
• Funds primarily use Limited Partnership
  structures

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The Limited Partnership Fund StructureStephanie
Biggs4 October 2006
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SJ Berwin LLP

• Founded in 1982
• A full service international law practice
• 150 partners and 600 lawyers
• Offices in London, Brussels, Frankfurt, Berlin,
  Munich, Madrid, Paris, Milan and Turin
• Relationships/associations across Europe, the
  United States and globally
• Commitment to excellence
• Highly commercial approach to solving legal
  problems

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Our Private Equity Team

• Over 150 dedicated lawyers across Europe
• Corporate team supported by Banking, Financial
  Services, Tax, Property, Pensions, Employment, EU
  and others
• We structure Buyout Funds, Venture Funds,
  Infrastructure Funds, Mezzanine Funds, PE Real
  Estate Funds, Funds of Funds, Secondaries Funds
• Clients include Apax, Candover, Bridgepoint, PAI,
  Terra Firma, TDR Capital, Nomura Phase4 Ventures,
  Coller Capital, Greenpark Capital, Macquarie,
  Benchmark

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Recent Awards

• "Law Firm of the Year" at the EVCA/Real Deals
  Private Equity Awards 2004 and 2005
• "Law Firm of the Year" at the European Venture
  Capital Journal Private Equity Awards 2004, 2005
  and 2006
• "Best Law Firm (Fund Formation)" by Private
  Equity Online and Private Equity International
  2004, 2005 and 2006
• "UK Firm of the Year" at the Legal Week Awards
  2005
• Jonathan Blake named Global Lawyer of the Year
  2005 in the Private Funds Category by the
  International Whos Who of Business Lawyers
  2005/06

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Structuring Objectives The Investor

• Limited liability
• Investors must be no worse off than for direct
  investments
• The fund must be tax exempt or tax transparent as
  regards capital gains and income
• Accommodate specific needs

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Structuring Objectives The Manager

• Tax efficient management charge - no VAT
• Tax efficient carried interest
• Suitable for all types of investors
• Capable of being marketed

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Why a limited partnership?

• Suitable for nearly all types of investor
• Flexible
• Limited liability for investors
• Tax transparent
• No permanent establishment in UK
• No VAT on management charge (2)
• Beneficial tax regime for carried interest (20)

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Basic limited partnership structure
Manager
Investors
Carried Interest Partnership
General Partner
Management Agreement
Limited Partnership
IHC
IHC
Portfolio Companies
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Key players

• General Partner
• Limited Partners
• Founder Partner
• Manager

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General partner

• Must have at least one general partner
• Unlimited liability
• Normally
• a 100 company
• (another) limited partnership

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Limited partners

• Anyone who is not a general partner
• Liability limited to amount of capital
  contributed
• PROVIDED THAT
• Does not take part in management

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Founder partner

• Carried interest vehicle
• Generally a Scottish limited partnership
• Executives are limited partners
• Preserves nature of receipts (income/capital)

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Manager

• Not a partner in the fund
• Either a company or an LLP
• FSA authorised

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Life Cycle of a Buyout Fund

• Issue of PPM and marketing
• First close - Final close within 12 months
• Investment period of 5 years
• Investments held for 2-4 years
• Realisation period of 5 years (can be extended)
• Manager can usually raise a new fund once 75-80
  invested

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Key Financial Terms

• Commitments drawn down as needed
• Management charge of 1.5 - 2
• Preferred return (or hurdle) of 8
• Carried interest of 20
• Fund as a whole
• Deal by deal

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Complexities

• Requirements of individual investors
• US ERISA investors
• Requirements of individual executives
• Pan-European issues
• Need for local presence
• VAT recovery
• Offshore structures

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Typical Pan European Fund Structure
Germanadviser
Advisers
GermanExecutives
Manager
French adviser
Guernsey Co
UK Co
UKExecutives
FrenchExecutives
KG
Italian adviser
General Partner
ItalianExecutives
General Partner(Scottish Limited Partnership)
Investors
Investors
General Partner
General Partner
LP I - ERISA (English LP)
LP 2 - Non ERISA (English LP)
Advisory Committee
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The Limited Partnership Fund StructureStephanie
Biggs4 October 2006
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PE makes a contribution

• PE managers roll their sleeves up and do things
  with their investments
• PE has helped in shaping UK economy
• PE backed companies in the UK employ approx 3
  million people 20 of UK private sector
  employees
• MBOs the freedom to innovate

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For further information contact

• David Bailey
• Augentius Fund Administration LLP
• david_at_augentius.com
• Stephanie Biggs
• SJ Berwin
• Stephanie.Biggs_at_sjberwin.com