April 4, 2008 Glendale, AZ Heather M. Stone Partner; Head of Fund Formation Global Private Equity Investing Conference Structuring Winning Partnership Terms and Conditions

Structural Overview  Partnerships  Careful with other entities, particularly if you have non-U.S. activities (LLCs)  Multiple layers to accomplish multiple goals  Economics  Tax efficiency (U.S. and other)  Control

Very Basic Organizational Framework Fund Limited Partnership 2% Contract Management Company, LLC General Partner LP/LLC Class B Non-Manager Partner/Member GP/Manager Advisory Committee Limited Partner Class A Non-Manager Partner/Member Class A Non-Manager Partner/Member 20% Carried1% ($) $ $$

Fund X Organizational Structure

What Are Key Terms?  Capital commitment of GP  Investment limitations  Restrictions on the GPs or Manager(s)  Management fee  Key man provisions  Clawbacks (GP, individual GPs/Managers and LPs)  Distribution waterfalls  No fault remedies, removal of GP  Confidentiality/FOIA

Capital Commitment of the GPs  How much is it?  Increasing trend  How is it paid?  Cash or “other”?  As a GP or as an LP? Addressing risks and tax efficiency concerns

Investment Limitations  Single company  Public securities – how defined?  “Foreign” – how defined?  Other pooled vehicles  Coordinate with preferred investment structures  Hostile deals  Reinvestment  Caps (during and after commitment period)  Impact of UBTI/ECI and other restrictions

Restrictions on the GPs  Cross-fund investing  Co-investments  Conflicts generally  New fund restrictions  Any new funds?  new lines of business  Percent of commitments  coordinate with reserves, expenses, suspensions and terminations

Management Fee  How much?  How calculated?  Defaults?  After end of investment period  Ramp ups and step downs  Offsets  Capital contributions, deferrals  Budgeted fees and budgets generally

Key Man Provisions  Who are key? Individuals? Groups?  What is trigger?  Active involvement  Substantially all of business time  Criminal behavior – removal a cure?  Cease to be a member  Automatic, Advisory Board vote, LP vote, combination?  What is remedy?  Suspension  Termination  Impact on fees

Clawbacks - GP  Why necessary?  Amount  Net of taxes or tax distributions?  Carry forward and back?  Multi-tiered for preferred return?  Timing  Liquidation  Interim true-ups  Several vs. joint and several; caps  Escrows, guarantees, holdbacks  Not just an LP issue anymore  Departures, retention, etc.

Clawbacks - LP  When appropriate?  Limits  Amount  Timing  after distribution is made  after fund has liquidated

Distribution Waterfalls  Amount of carry – tiers in the marketplace  Preferred returns – true or vanishing?  When does GP get carry?  Commitments vs. contributions vs. other  Venture vs. buyout  Catch-ups  Hurdles  Coordinate with escrows, holdbacks, true-ups  Allocations of expenses

No Fault Remedies – Removal of GP  Circumstances – geographic differences  Triggers – lower trigger for cause?  What is remedy?  Termination of investment period  Termination of fund  Removal?  Coordinate with  Key man provisions  Time commitment restrictions, etc.

Confidentiality; FOIA  Where are we today?  Longer and more complicated side letters  Remedies for breach  Geographic differences  Start managing disclosure now

Tips for Effective Fund Raising  START EARLY  IT TAKES LONGER THAN YOU THINK…

Tips for Effective Fund Raising  Roles and responsibilities  Terms  Managing LP expectations  Companion funds  Managing the process  Timing  Avoid the traps for the unwary

Roles and Responsibilities  Establish the team  Assign responsibilities  Terms  PPM  Contacts with LPs  Due diligence requests  Document comments

Terms  Understand “market”  How does it relates to how you operate?  Review your positioning relative to market  Understand LP’s perspective  Determine what really matters

Managing LP Expectations  Plan ahead  Establish method for allocations  Understand expectations  Pre-sell terms

Friends, Family and Entrepreneur Funds  Purpose  Expand network of resources  Deal flow  Due diligence  Significant marketing effort to do correctly  Involves everyone in the firm  Split marketing among GP “sponsors”  Administratively time consuming

Managing the Process  Database  Current investors  Prospects  Rank likely prospects  Maintain detailed notes of each contact  Allocation system  Summarize LP comments  Respond in a coordinated way  Don’t negotiate against yourself

Timing  Set realistic expectations  Allow 1-1/2 to 2 months from documents to close  Talk to investors before they read the documents  Keep promises to a minimum until you have reviewed points with counsel – don’t negotiate against yourself

Timing  THE DAY AFTER CLOSING  START PLANNING FOR THE NEXT FUND…

Traps for the Unwary  Not being conservative – timing and performance  Not reporting performance consistently  Sweeping failures under the rug  Not disclosing all relevant information on valuations (assumptions, methodology, etc.)  Using performance data from a prior fund  Making off-the-cuff predictions  Publicity

THANK YOU! Heather M. Stone Partner Head of Fund Formation Group Edwards Angell Palmer & Dodge LLP (617)