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SII CPD Seminar: 4 th October 2006

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.

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SII CPD Seminar: 4 th October 2006

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  1. 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

  2. Private Equity Funds – the “new” Alternative4th October 2006 David Bailey MSI, Augentius Fund Administration and Stephanie Biggs, S J Berwin

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

  4. 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 Some Basic Facts

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

  6. ….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

  7. 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 The Investment Process

  8. The Limited Partnership Fund StructureStephanie Biggs4 October 2006

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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”)

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

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

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

  18. 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

  19. 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)

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

  21. 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

  22. 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

  23. 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

  24. The Limited Partnership Fund Structure Typical Pan European Fund Structure Germanadviser Advisers GermanExecutives Manager French adviser UK Co Guernsey 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

  25. The Limited Partnership Fund StructureStephanie Biggs4 October 2006

  26. 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 PE makes a contribution

  27. David Bailey Augentius Fund Administration LLP david@augentius.com Stephanie Biggs SJ Berwin Stephanie.Biggs@sjberwin.com For further information contact

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