SII CPD Seminar: 4 th 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

Private Equity Funds – the “new” Alternative 4 th October 2006 David Bailey MSI, Augentius Fund Administration and Stephanie Biggs, S J Berwin

 Growth in Private Equity  The Investment Process  Fund Structures Used  Where next?

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

The Evolution of Activity € billion 2005 European Private Equity Survey Conducted by Thomson Financial and PricewaterhouseCoopers on behalf of EVCA

€ 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 ….and most of it happens in the UK/London

The Investment Process  Fund is raised – but committed capital not actual cash  Manager then seeks to find investment deals – 5/5 per annum  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

The Limited Partnership Fund Structure Stephanie Biggs 4 October 2006

The Limited Partnership Fund Structure 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

The Limited Partnership Fund Structure 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

The Limited Partnership Fund Structure 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 Who’s Who of Business Lawyers 2005/06

The Limited Partnership Fund Structure 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

The Limited Partnership Fund Structure Structuring Objectives – The Manager Tax efficient management charge - no VAT Tax efficient carried interest Suitable for all types of investors Capable of being marketed

The Limited Partnership Fund Structure 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”)

The Limited Partnership Fund Structure Basic limited partnership structure Limited Partnership Carried Interest Partnership Investors General Partner Manager Management Agreement Portfolio Companies IHC

The Limited Partnership Fund Structure Key players General Partner Limited Partners Founder Partner Manager

The Limited Partnership Fund Structure General partner Must have at least one general partner Unlimited liability Normally: –a £100 company –(another) limited partnership

The Limited Partnership Fund Structure Limited partners Anyone who is not a general partner Liability limited to amount of capital contributed PROVIDED THAT Does not take part in management

The Limited Partnership Fund Structure Founder partner Carried interest vehicle Generally a Scottish limited partnership Executives are limited partners Preserves nature of receipts (income/capital)

The Limited Partnership Fund Structure Manager Not a partner in the fund Either a company or an LLP FSA authorised

The Limited Partnership Fund Structure 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

The Limited Partnership Fund Structure 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

The Limited Partnership Fund Structure Complexities Requirements of individual investors –US ERISA investors Requirements of individual executives Pan-European issues –Need for local presence –VAT recovery –Offshore structures

The Limited Partnership Fund Structure German Executives Typical Pan European Fund Structure Investors Advisers Manager General Partner (Scottish Limited Partnership) French adviser Italian adviser German adviser Guernsey Co General Partner French Executives UK Executives UK Co KG LP I - ERISA (English LP) LP 2 - Non ERISA (English LP) Advisory Committee General Partner Investors Italian Executives

The Limited Partnership Fund Structure Stephanie Biggs 4 October 2006

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

For further information contact David Bailey Augentius Fund Administration LLP Stephanie Biggs SJ Berwin