Transcript of GP LP Structure
- 1. GP/LP STRUCTURE How Private Equity Firms are Formed
- 2. GP / LP Presenters
- June Dutta formerly of AIG Investments
- Justin Dupere formerly of GTCR Golder Rauner, LLC
- John Hennegan formerly of Henry Crown & Co.
- 3. Legal Structure of a Fund
- The Fund: This is the Limited Partnership formed for the
specific purpose of investing money (eg. Blackstone Capital
Partners VII, L.P.)
- The Manager: This is the Firm that structures the Partnership
and is responsible for managing the fund being raised. (eg.
Blackstone Capital Partners, LLC).
- The General Partner: The general partners of a fund will be
organized as a limited partnership controlled by the fund Manager.
The General Partner of each Fund will make all investment decisions
for the Fund.
- Term of a Private Equity Fund: Typically 10 years, with 2-3
year extensions with the approval of the Limited Partners.
- Investment Period: Typically 5-6 years.
- 4. General Partner / Limited Partner
- A Private Equity Fund comprises two parties: the General
Partner and the Limited Partner
- General Partner: The partner in a limited partnership
responsible for all management decisions of the partnership. The GP
has a fiduciary responsibility to act for the benefit of the
limited partners (LPs), and is fully liable for its actions.
- Limited Partner: An investor in a limited partnership. LP's
have limited liability and usually have priority over GP's upon
liquidation of the partnership. However, they have no control over
the daily management of the Fund.
- 5. Types of LPs
- Institutional Investors: Professional entities that invest
capital on behalf of companies or individuals.
- Fund-of-Funds: A fund created to invest in private equity
funds. Typically, individual investors and relatively small
institutional investors participate in a fund-of-funds to minimize
their portfolio management efforts
- 6. Criteria Required to Raise a Fund
- General Partners Track Record:
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- Top-down analysis at the Fund level: quality of the fund
manager, size of the commitment, percentage drawn, percentage
undrawn and general profile of the underlying deals
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- A bottom-up analysis employed to ascertain the risk-return
profile of the funds underlying investments. Items include
financials of the underlying portfolio companies, valuation of the
companies at the time of acquisition vis--vis their valuations in
the current market, companies capital structure and assumptions of
follow-on financing, industry exposure, and exit horizons.
- 7. Criteria Required to Raise a Fund
- Investment Strategy: Investment criteria, industry focus,
control/minority position, consistency of investment strategy,
sources of deal flow, deal exits
- Management Team: Management team bios, industry expertise of
the Partners, industry Rolodex, deal sourcing and execution
capabilities, number of board seats, performance of deals, key-man
clause.
- Consistency in Terms and Conditions: Changes in legal terms of
the Fund, including management fees, carried interest, key-man etc.
over time.
- Other investors: Ability of the General Partner to source other
reputable investors
- 8. General Terminology
- Target IRR: This is the return that the General Partner hopes
to achieve over the life of its fund.
- Hurdle Rate: The internal rate of return (IRR) that a fund must
achieve before its general partners or managers may receive an
increased interest in the proceeds of the fund.
- Carried Interest: It is a share in the profits of a private
equity fund. Typically, a fund must return the capital given to it
by limited partners plus any preferred return before the general
partner can share in the profits of the fund.
- Key Man Clause: If a specified number of key named executives
cease to devote a specified amount of time to the Partnership, the
manager of the fund is temporarily suspended from making any
further new investments.
- 9. Committed vs. Invested Capital
- Committed Capital: Committed Capital is the total dollar amount
that an individual LP agrees to commit to a fund over the life of
the fund. The committed capital is not drawn at once.
- Invested Capital: Commitments allocated to a Fund are drawn
down pro rata (based on such Commitments) on an as needed basis (to
make investments, pay management fees etc.) The General Partners
typically give Investors a minimum of 10 business days notice of a
drawdown.
- 10. Committed Capital
- Committed Capital is the total dollar amount that an individual
LP agrees to commit to a fund over the life of the fund
- Depending on the size of the fund, most funds have a targeted
minimum and maximum amount of capital that each LP can commit
- Different LPs can commit different amounts of capital to a
fund
- Committed Capital is a legally binding commitment that is made
during the fundraising process; the amount generally cannot change
once a fund has been launched
- Committed Capital is not paid by the LPs when the fund is
created; it is drawn dawn over time as the fund makes
investments
- 11. Capital Call / Drawdown
- When an investment is made, a GP makes a Capital Call to its
LPs in order to receive the capital required to make the
investment
- Capital Calls are made as a % of total committed Capital (i.e.
a fund may call 10% of total Committed Capital from all LPs) based
on how much money is required for a particular investment
- Capital Calls are typically made during specified periods
throughout the year (i.e. quarterly) during which investments are
made
- Funds can often draw down on a bank facility (or similar
arrangement) to bridge the funding of an investment until a Capital
Call is made and money is received from LPs
- 12. 2/20 Fee Structure
- The GP is paid primarily through two types of fees: a
Management Fee and a Carried Interest Fee
- The Management Fee is paid annually to the GP and is calculated
as a percent of total Committed Capital
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- The most common Management Fee is 2% of Committed Capital, paid
annually
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- Management Fees are typically used to pay GP salaries and
overhead costs
- The Carried Interest Fee is the GPs share of the profits
generated by the funds investments
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- 20% is the most common, however it can vary across funds
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- The GP does not have to commit capital to earn its Carried
Interest
- 13. Distributed Capital
- Each investors proportionate share in the net proceeds received
by the Partnership Fund is distributed in the following order of
priority:
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- First, 100% to each Limited Partner in proportion to its
respective capital contributions to such Fund, including their
capital contributions for investments, management fees, and a
preferred return of typically 8% per annum, compounded
annually.
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- Second, 100% to the General Partner until the General Partner
has received a percentage equal to the Carried Interest Percentage
of the sum of the aggregate amounts distributed
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- Thereafter, the Carried Interest Percentage to the General
Partner and the remainder to each Limited Partner in proportion to
its respective capital contributions to the Fund
- 14. Closing a Deal
- LPs typically do not have any approval rights over investments;
that decision lies with the GP
- In some instances, funds may employ an LP Board which is used
to screen deals prior to the final investment decisions
- After an investment decision is made, GPs often prepare a press
release for their LPs followed by a memorandum which describes the
investment
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- Topics covered include a description of the business,
investment thesis, risks, financing arrangements, ownership
structure, financial metrics, and valuation metrics
- 15. Deal Fees
- Funds often charge a deal fee (aka Closing Fee or Transaction
Fee) at the time of an investment
- Treatment of these fees vary across funds
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- For some funds, the fees accrue to the benefit of the GP (and
in some instances, even specific Principles who work on the
investment)
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- For other funds, the fees (or some portion of the fees) may
offset the Management Fees paid by annually by the LPs, which
effectively raises the IRR for the LPs
- Following an investment, funds may also charge their portfolio
company an ongoing annual management fee
- 16. Ongoing Communication with LPs
- The GP will provide the LP with regular reporting packages
(quarterly, semi-annually) throughout the year to provide updates
on the performance of the funds investment
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- The GP provides valuations, or Carrying Values, for each
investment in the fund. Carrying Values can be based on cost, FMV
of securities (if publicly traded), comparable multiples, or can
reflect impairments in the business relative to the original
investment
- Funds host LP meetings at least once a year in which
representatives from the various LPs can gather in person and
listen to presentations from the GP and portfolio company
executives regarding the performance of the fund and its specific
investments
- 17. LP Co-Invest
- In some instances, the amount of capital required to make an
investment may be larger than a fund is comfortable committing to a
single investment
- LPs are often utilized as potential co-investors in such
instances, where the LP will invest side-by-side with the fund in a
deal
-
- LPs will have access to more detailed information regarding a
potential investment if they are considering a co-investment
- LP Co-Investment does not count toward the LPs Committed
Capital; it is made outside of the commitment
- LP Co-Investment allows the LP to earn returns that are not
subject to the Carried Interest Fee, however the risk is more
concentrated than investing in the fund as a whole
- 18. Exiting Deals
- Funds will distribute proceeds to LPs following a liquidity
event
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- Recapitalization (debt or equity)
- Proceeds are distributed to the LP net of the GP Carried
Interest, if applicable (i.e. if a gain is realized)
- Funds will most often distribute cash to LPs, however
occasionally the fund will distribute securities (i.e. shares in a
publicly traded stock) if a cash distribution is less feasible
- 19. Raising the Next Fund
- Although the exact timing varies by firm and market conditions,
it is important to always have dry powder
- In general terms, a firm will begin discussing the next fund
after the current fund is 50% invested and
- Fund raising typically begins when there is enough remaining
dry powder for 3-4 deals
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- Typically, this is approximately 15% of committed capital, and
allows the fund to invest in add-on acquisitions to existing
platform deals
- When raising the next fund, LPs will most heavily weight the
prior funds exits when determining past performance
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- While the fund will mark-to-market remaining portfolio
companies, LPs prefer to see external market validation of fund
performance
- 20. Raising the Next Fund (contd)
- When going back to LPs for the next fund:
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- Returns must match those promised in fund docs
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- Were top quartile, just like everyone else
- 21. Ongoing Valuation
- Important to keep LPs aware of current performance
- LP updates vary by firm but general methods include:
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- Annual LP meetings and reports
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- Quarterly performance updates
- Investment valuations and LP updates often outsourced to
specific groups within the firm or outside parties
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- In a post-MBA role youll most likely answer questions / provide
brief write-ups on current events etc.
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- No longer allowed to carry investments at cost
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- Limited (or no) liquidity for PE investments
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- Secondary market is growing (recent WSJ article on Goldman
secondary markets)
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- Requires conservative valuations (see Blackstone)
- 22. Ongoing Valuation (contd)
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- No longer allowed to carry investments at cost
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- Limited (or no) liquidity for PE investments
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- Secondary market is growing (recent WSJ article on Goldman
secondary markets)
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- Requires conservative valuations (see Blackstone and recent Sam
Zell discussion)