DVCA Annual Meeting 2006

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DVCA Annual Meeting 2006

• Current Trends in Fundraising for European
  Private Equity Funds

Thursday, 6 April 2006
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Acanthus Advisers

• Firm profile
• Independent fund placement and corporate finance
  advisory firm focused on private equity, founded
  in 1998
• Fund advisory focus 100-500m providing
  fundraising, investor relations and strategic
  advice
• Corporate advisory focus UK Health Care and
  Education EV 10-150m
• Armando DAmico Managing Partner
• 20 years experience in private equity, banking
  and strategy consulting
• Senior banker at EBRD - 700m fund of funds
• Special adviser to Euro Private Equity Partners
  (FOF)
• Strategy consulting Europe/US (Bain, Alliance,
  Telesis)
• M.Sc. Civil Engineering, INSEAD MBA

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Fundraising trends in Private Equity
Source EVCA
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Investment trends in Private Equity
Amount invested by country 1996-2005
Source Venture Economics
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A daunting context

• 600 funds in the market
• 2000 investors worldwide
• A diverse and increasingly analytical LP universe
• Increasing due diligence depth/length
• Smaller funds find it difficult to get attention
• LP teams often under resourced
• Bifurcated fundraising outcomes

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The real questions

• What does it take to fundraise in the current
  environment?
• How do you raise funds outside your home market?
• What to look for? Pitfalls to avoid?
• What resource commitments?
• How long does it take?
• How to assess progress?
• When is it wise to stop?
• How to deal with over subscription?
• and many more

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What LPs look for in a GP

• Performance
• how achieved/value creation
• attributed
• realised/unrealised
• Team
• how long worked together
• relevant experience/individual TR
• depth/workload
• Strategy
• no strategy drift!/consistency
• positioning
• origination

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What does it take to raise a fund?

• You cannot change who you are be realistic
• venture/investor appetite
• your performance/your team/your strategy
• But you can significantly enhance your chances of
  success through
• Understanding your competitive position
• Understanding LPs strategies, views and
  perceptions
• Rigorous process
• Thorough preparation
• and a lot of hard work!

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A simple process?
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Fundraising internationally

• Start early!
• Analyse, understand and target your ideal LP base
• Be aware of investors perceptions of your
  country, segment, competition
• Understand your competitive position
• Raise your profile without overdoing it
• Meet investors when you are not in fundraising
  but ready
• Seek a base of support from domestic investors

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• Understanding the LP universe

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A very diverse LP Universe

Type/Country
Investment Strategy
Fund of funds Insurance companies Gatekeepers Fami
ly offices Banks Advisers Government bodies Asset
managers
Risk Profile
Opinion Leaders vs. followers
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Understanding the LP universe

• There are over 400 private equity investors in
  Europe
• Possible screening criteria
• Opinion leader vs. follower
• Current appetite for lower mid market/venture
• Current appetite for Denmark
• Ticket size

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An example of LP screening Spain

• Screening criteria
• Opinion leader
• Current appetite for lower mid market
• Current appetite for Spain
• Ticket size

Source Acanthus Advisers
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LPs perceptions example (UK LMM)
Volatile segment. Different risk reward
proposition. Almost all below 2x good guys have
moved up.
Boring no spark
Most GPs think 2x is a reason to invest. Why
should I go to the bother for 5-10m?
Crowded too much capital
Plenty of room down lower
Difficult to find exceptional players little
differentiation
We are under-weight - need to increase
Too many accountants
Now looking around the edges for the next
generation
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Nordic buy-out market growth

• Very high levels of activity, particularly in
  Denmark
• Emergence of a number of mega deals
• Active involvement from foreign investors
• Increasing levels of GP distributions

Source Unquote
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Nordic buy-out market LP perceptions

• Highly developed market
• Significant number of large deals
• Highly liquid debt market at the large end of the
  market from both international and domestic
  banks. Growing liquidity in mid market
• Vibrant mid market fuelled by corporate
  restructuring and succession issues
• Following shake out in 2000-2004, beginning of
  upswing in venture market
• Highly competitive
• Large end of market fought over by domestic and
  international firms (IK, EQT, Nordic Capital,
  Apax, BC Partners, Goldman Sachs, PAI, CVC, KKR
  etc)
• Mid market dominated by Nordic firms growing
  foreign interest
• Little proprietary deal flow at the large end of
  the market
• Investors issues
• Valuations
• Continued availability of debt
• Polarisation between large and mid sized funds
  opportunities for mid market funds

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• Understand
• your competitive position

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UK Mid Market Competition
Source Acanthus Advisers
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UK Mid Market - Competition (2)
Source Acanthus Advisers
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Your competitive position

• How many deals in your space every year?
• How many could be your deal?
• How do you source deals?
• What is unique about your firm?
• Who do you compete against?

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• Competition in fundraising

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Who is raising funds when? - Spain

• 2bn seeking investors over next 24 months
• Excluding pan European funds active in Spain

Source Acanthus Advisers
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Competing commitments!
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• Preparation and Process

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Process overview

• Detailed analysis portfolio, prior funds,
  competitors, deal
• sourcing, team, differentiation arguments
• Preparation legal aspects, due diligence
  questionnaire,
• data room, press releases, placement strategy

• Incisive Information Memorandum
• Compelling investor presentation
• Detailed due diligence packs

• Commitment from existing investors
• Targeted list of well primed potential investors
• Focused pre marketing

• Background conferences, rehearsals, arranging
  meetings,
• briefing notes
• Road show time effective, prioritisation, diary
  unblocking,
• focused meetings, prompt follow up, investor
  engagement

• Continual feedback
• Targeted meetings
• Investor engagement

• Due diligence questionnaires (time consuming,
  prompt turn
• around, multiple requests in short time
  space), extensive,
• consistency check, liaison
• Process control investor interaction, legal
  issues, side
• letters, terms conditions
• Closing strategy all party involvement,
  flexibility, precision

• Constant investor interaction
• Close attention to issues
• Momentum
• Successful close

Source Acanthus Advisers
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The DD Pack

• A very detailed document covering
• Performance
• Market/competition
• Team
• Fund structure
• Terms conditions

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The DD Pack

• Performance
• Realised performance/distributions vs benchmarks
• Unrealised portfolio expected returns
• Value creation
• Investment summaries
• Market/competition
• Strategy/positioning
• Origination/market perception
• Share of deals
• Team
• Individual TR, references
• Incentives, commitment, cohesiveness
• Workload, roles, depth

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Case study Acanthus client
Analysis of unrealised portfolio
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Trends in Terms Conditions

• Continuous tightening around the edges
• Increasing emphasis on corporate governance and
  protection against poor performance
• Corporate Governance issues
• No fault divorce clause have become absolutely
  standard on 100 of funds nowadays
• Keyman clauses are equally crucial
• Advisory boards conflict of interest
• Dominant investors

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• Focused fundraising

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Case study Acanthus client
Tailored and focused marketing
Summer 2003 Spring 2004
Screened Approached/IR PPMs circulated Initial
meetings held Due diligence Invested
Over 400 90 73 45 16 10

• 35 of investors moved from initial meeting into
  due diligence
• 62 of investors who undertook due diligence
  invested in the fund

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Conclusions

• Performance, Team, Strategy can change but not
  overnight
• Understand the LP universe, their investment
  strategies, approaches and perceptions
• Position yourself strongly in your market and
  communicate your position clearly
• Understand your competition in fundraising
• Prepare a complete but LP friendly DD Pack
• Be aligned with market standard TC
• Once ready meet investors when you are not in
  fundraising

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Conclusions (2)

• Prepare
• Prepare
• Prepare