privcapDigest/ The Monthly Magazine

of Privcap.comOctober 2013

This publication is exclusively for Privcap subscribers © 2013 Privcap LLC

What the World’s Biggest pe investor Wants in a gp

in this issue

Decoding ‘Waterfall’ Math/04A Mobile Success Story/ 08Going Fundless/ 12

privcap Digest / October 2013 / 2

2 / Contents

privcap LLC

David SnowCo-founder and CEOGill TorrenCo-founder and PresidentMatthew MaloneEditorial Director

Content

Tanya KlichAssociate EditorKathleen O’Donnell Cameron FaulknerMedia Coordinators

Design

Miguel BuckemeyerArt DirectorVasheena DoughtyProduction

Contributors

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Contacts

EditorialDavid Snow / dsnow@privcap.com(646) 233.4558Matthew Malone / mmalone@privcap.com (646) 801.2337Sponsorships & SalesGill Torren / gtorren@privcap.com(646) 233.4559For subscriptions, please call 855-PRIVCAP or email subscribe@privcap.com

about privcap Digest

Privcap Digest is a monthly publication exclusively for Privcap subscribers. It offers in-depth features and edited summaries of the most recent and important thought-leadership from Privcap.com. The Privcap editorial team has extensive experi-ence reporting on the global alternative investment industry.

For inquiries about the Digest, please contact Matt Malone at mmalone@privcap.com.

Copyright © 2013 by Privcap LLC

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the Privcap LLC. For permission requests, contact Gill Torren at gtorren@privcap.com.

in this issue

QuotableA roundup of market intelligence shared on Privcap.com

Snow’s Notes‘Waterfall’ math makes a big difference, but is understood by too few investors. By David Snow

Diversifying private EquityFour experts weigh in on the importance of including different voices in fund investing

Deal Story: Bima Told by Dr. Andrew Kuper of LeapFrog Investments

Must See Upcoming programs on Privcap.com

FeaturesWhat the World’s Largest Lp WantsJim Fasano of Canadian Pension Plan Investment Board outlines GP criteria for the $185B fund

Watermill’s Fundless ApproachSteve Karol, founder of The Watermill Group, on how a fundless strategy gives his firm a competitive edge

Expert Q&A Expert Q&A With Greg Little, VP, Pantheon, San FranciscoInterview transcripts in this issue have been edited for clarity and length.

0304060809

1012

13

Up Front

From Our Sponsors

privcap Digest / October 2013 / 3

professionals from the following firms and organizations recently appeared on privcap: Kerogen Capital • Pantheon Ventures • ILPA • CPPIB • Castle Harlan • Watermill Group • Grant Thornton • MVision Gulf Capital • Cambridge Associates • Riverside Partners • Chandan Economics • Baird Capital • Neuberger Berman McGladrey • Vestar Capital • Brynwood Partners

Quotable/

I think LPs have always been smart to communicate with each other…

there has always been a pattern of get-ting together, trying to communicate and share notes.” Kathy Jeramaz-Larson, ILPA, from “Bringing LPs Together” )Link

I think being an opportunistic fund today is critically important

because frankly, deal flow is not as robust as it was back in ’07 and ’08. The ability that we have to consider a wide variety of industries and sectors is really to our benefit right now.” Gretchen perkins, Huron Capital Partners, from “Huron Capital: ‘Opportunistic’ and Proud Of It” )Link

It’s the majors who define the ‘big’ game…but there will always

be a niche for the operator and the company funding the operators who are playing the smaller opportunities or the earlier stage opportunities.” Roy Franklin OBE, Kerogen, from “Asian Demand Drives Global Energy” )Link

Some conventional wisdom says the people that got us in this mess

are not the ones who are going to get us out of it, but in some cases there may be reasons to keep the management team. And then there’s a whole lot of planning around how do we get this trajectory from going down, going back up.”Ed Kleinguetl, Grant Thornton, from “Why 100-Day Plans Are Critical” )Link

That’s our objective, to key in on those companies that can perform

irrespective of the macro-economy.” Howard Morgan, Castle Harlan, from “Seeing As Many Deals As Possible” )Link

We had a very long stretch where it looked like nothing goes wrong

in commercial real estate. We’ve been able to disabuse ourselves of that idea.” Sam Chandan, Chandan Economics, from “Rising Risks in Real Estate” )Link

A roundup of market intelligence shared on Privcap.com

3 / Market Intelligence

On Camera

privcap Digest / October 2013 / 4

rofit distribution from PE funds is the most important element of the GP-LP relationship, so why is the process so often misunderstood?

The answer, of course, is the language surrounding the so-called waterfall—the terms under which funds flow to the mem-bers of the partnership. In the long march toward complete transparency and alignment of interest between GPs and LPs, the language surrounding waterfalls largely remains Byzantine. Not only do many fund documents not completely spell out exactly how the waterfall is calculated, but too many investors, including funds-of-funds, strug-gle to get their hands on the right data and heads around the right math.

A friend who recently departed from a promi-nent gatekeeper/fund of funds told me that the least desirable task among the firm’s investment staff was waterfall work, especially when a change in fortunes such as a deal write-down or clawback required the entire distribution formula be backed

up and recalculated. If some funds-of-funds pro-fessionals are having a hard time with this, imag-ine the issues at under-resourced LPs such as state pension funds.

Waterfall distribution calculations can make a material difference. Katita Palamar, co-founder of investment consultant LP Analyst, says that her review of many limited partnership agreements (LPAs) makes clear that terms around waterfall calculation are often left deliberately opaque, allowing GPs to choose methodologies that tilt in their favor.

The best example is the calculation of the pre-ferred return, the threshold above which GPs start to get paid carried interest. It is in the best inter-est of the GP to use a calculation methodology that gets them to the typical eight percent hurdle the quickest.

Using a favorable waterfall calculation is one tried-and-true method. Here is one key aspect of a waterfall that an LP should know, and which is not always spelled out in the LPA—the start and end points for calculating the preferred return. In other words, does the “clock start ticking” as soon as capital is drawn down from LPs, or as soon as the capital is invested in the underlying companies?

Time is the enemy of the IRR, and so a GP has an incentive to use the typically shorter “cash in ground/out of ground” time markers. But from an LP’s point of view, opportunity costs accrue as soon as capital goes out the door. And as participants in the private capital asset classes can attest, there is often a big time lag between a capital call and the capital actually being injected into the deal. An LP might be justified in requiring that the preferred return be calculated with the capital call as the “born on” date, since this is when LPs actually send money to a private partnership.

Another term not always specified in the LPA is how regularly the preferred return is compound-ed. Here again the GP has an incentive to choose a

Market analysis by Privcap CEO David Snow

In the long march toward complete transparency and alignment of interest between GPs and LPs, the language surrounding waterfalls largely remains Byzantine. Not only do many fund documents not completely spell out exactly how the waterfall is calculated, but too many investors, including funds-of-funds, struggle to get their hands on the right data and heads around the right math.

. CONTINUES ON NEXT PAGE

4 / Commentary

Snow’s Notes

Don’t Drown in the ‘Waterfall’Too few investors understand the math behind profit distributions—here are some ways to ease the pain

privcap Digest / October 2013 / 5

method that gets them over the hurdle rate sooner and more easily, and GPs would tend to favor less-frequent compounding. As noted in a commentary last year by Cesar Estrada of JP Morgan and Jona-than Karen of Simpson Thacher, “In a several- hundred-million-dollar fund with a term of over ten years, the resolution of this particular question can literally become a million-dollar question, and result in a meaningful difference in outcomes in the amount and timing of distributions.”

Estrada and Karen also note that “finance and accounting people are not often found on the front lines of the drafting… of waterfall provisions,” and hence the language used to describe actual meth-odologies is often either missing or vague.

Waterfalls calculations become especially chal-lenging when you need to push the water back up the cliff, as it were. In the case of private funds, unexpected turns of events can mean that distri-butions made and values baked in to the model need to be revisited. Here again the LPA language around waterfall calculations might not be clear

5 / Commentary

enough. For example, it is important for all par-ties to understand what happens in the event of a portfolio company write-down. What happens to a prior distribution to GPs? Do they just keep it and take a wait-and-see attitude toward future perfor-mance, or do LPs need to be immediately “made whole” on the revised performance?

A more perfect alignment on the waterfall is-sue will come with clearer language in LPAs, more (and standardized) cash-flow and valuation infor-mation shared with LPs, as well as do-it-yourself calculation tools so LPs are not entirely dependent on intermediaries and the GPs to understand their positions. A DIY tool was recently unveiled by BNY Mellon, but, of course, the ability to crank out a waterfall calculation is only as good as the speci-ficity of the data used to auto-generate a result. ■

L Follow David Snow on Twitter @SnowsNotes

privcap Digest / October 2013 / 6

Diversifying private equity

6 / perspectives

Privcap asks four experts to weigh in on a single topic. This month: Diversity

Inclusion is Part of the Equation KIM LEWCarnegie Corporation of New York

It’s important for firms to have people who can communicate with different populations. State pension funds are leading the charge because they’re beholden to the general population. You may see diversity goals in the endowments because students are very vocal. It’s absent in foundations but that space is made up of people who are always looking for creative solutions, so you may recognize talent in different ways.

At Carnegie, we’ve developed a highly diverse team strictly as a result of finding the best people. We meet weekly to debate about managers and everybody comes to the party with differ-ent perspectives. While we don’t have a specific program that’s targeted to diverse managers, we absolutely favor managers who have brought together a lot of different opinions. They provide constructive debate, especially when there is a diverse GP base. There is no hard and fast rule but if we were giving out points for GPs, you get an extra point if you are a GP that represents a wider swath of the world. Watch the video here )Link.

Lew is VP and Co-CIO at Carnegie Corporation of New York .

Bridging the Gap JULIAN JOHNSONSponsors for Education Opportunity

SEO’s mission is to train and place undergraduate talent in summer analyst programs at the top Wall Street investment banks. It benefits the firms’ recruiting efforts by expanding their reach well beyond their normal resources.

Since 1980, several thousand SEO alumni have taken positions on Wall Street. In the last decade, a number of those individuals have spread to the alternative investment space, including private equity and hedge funds. Many other SEO professionals were aiming to break into these institutions but it’s not the most transparent process.

Concurrently, there was an interest among alternative in-vestment firms in how SEO’s achievements on Wall Street could transfer to the private equity industry. So four years ago, we cre-ated the SEO Alternative Investments Fellowship Program. We’ve had four years of classes with about 80% of them moving into very significant firms. Watch the video here )Link.

Johnson is Senior Vice President at Sponsors for Education Opportunity.

privcap Digest / October 2013 / 7

LPs are the most important players in promoting diversity within the private capital industry. The public pension plans have been at the forefront of this effort and the endowments and foundations are beginning to consider diversity as part of their responsible investing framework. –Yokasta Segura-Baez, Pantheon Ventures

7 / perspectives

Putting Mandates Into Action ROSA VASQUEZIllinois Municipal Retirement Fund

A 2009 state law mandates the establishment of incremental goals for the inclusion of minority, female, and disabled persons when pension funds recruit staff and seek services. We are al-lowed to set our own goals, which we review annually and make adjustments where we see fit.

Fortunately, IMRF—which at $30 billion is the second largest pension fund in Illinois—has been supporting minority-owned in-vestment managers since 1994.

If one or more minority managers respond to one of our RFPs, the most qualified minority manager will be invited to present to the board.

Not only are we checking owners of firms who are minority, female or disabled, but we’re also looking deep into the teams to see who gets economic benefits. So it’s very important at IMRF that the GP team is also diverse. Watch the video here )Link.

Vasquez is Investment Analyst and Head of the Minority Program & In-ternational Equities at the Illinois Municipal Retirement Fund.

Promoting Talent YOKASTA SEGURA-BAEZPantheon Ventures

LPs are the most important players in promoting diversity within the private capital industry. The public pension plans have been at the forefront of this effort and the endowments and foundations are beginning to consider diversity as part of their responsible in-vesting framework.

Pantheon includes diversity in its best practices. We have per-haps one of the largest groups of women in senior positions. It’s time to boost underrepresented minorities within our firm. With the firm’s blessing in 2011, we have initiated a program to pro-mote minority professionals. This program is really close to my heart, given my own background. We’re executing this effort in two ways. Every time we have an open position, we strive to re-view resumes from minority professionals. We have also part-nered with sponsors to provide internships on an annual basis to young professionals. They spend a summer at Pantheon under my supervision. We’re trying to do as much as we can to increase awareness of diversity initiatives and we can influence our own GPs to do so as well. Watch the video here )Link.

Segura-Baez is a Principal at Pantheon Ventures.

8 / Deal Story

privcap Digest / October 2013 / 8

Bima ⬌LeapFrogAs Told by Dr. Andrew Kuper, Founder & President, LeapFrog Investments

Walk through any low-income neighborhood in Africa or Asia and you will find people with as many as three cell phones or a handful of sim cards. In Ghana, for example, 99.4% are pay-as-you-go mobile users. So how does a telecom turn an overlooked market into loyal subscribers? Bima has developed an incentive model that allows mobile users to accumulate insurance as they use phone minutes. Bima’s life, accident and health insurance products sell for $.20 - $6.00 a month. Insurers benefit from the policy, too. Kuper says, “If you are the insurer that early on provides that kind of support to people, imagine the loyalty you have in the future as that group grows into a multi-trillion dollar opportunity?” Hear the full story here )Link.

The Story

Click to watch this video at privcap.com

“Bima is the Facebook of mobile insurance.” —Dr. Andrew Kuper

The DetailsThe companyDistributor brings affordable healthcare via mobile in emerging markets; The Clinton Global Iniciative is a backer.

Date of investment February 21, 2013

Investment

After 18 months Expanded into several new markets, including Latin America and further within Africa and Asia, with a total of 4 million people covered

$4.23M

The Opportunity

3B mobile phone users in emerging markets

1B have no access

to financial services

Bill Clinton and Bima’s Andrew Kuper

privcap Digest / October 2013 / 9

Must see /Upcoming programs on Privcap.com

9 / Calendar

Upcoming programs on Privcap.com

calendar Week of October 7, 2013

pine Brook’s Capital-Intensive Opportunities Managing Director Michael McMahon on how the firm looks to buy and build companies in both the energy and financial services arena.

Lp Focus: EDC’s Foreign Mission Q&A with Paul Day of Export Development Canada.

Housing Demand Drives Opportunity in China Executives from Century Bridge discuss how foreign investors can profit from the middle-class housing boom in China.

Week of October 14, 2013

Four Ways pE is Transforming the Frozen Food Aisle PE vets discuss high-profile deals that have transformed the grocery aisles.

How W.p. Carey is Going Dutch Jeffrey Lefleur discusses W.P. Carey’s big real estate acquisitions in the Netherlands.

RE Financial Solutions in poland: H&M Case Study W. P. Carey’s acquisition of an H&M distribution center in Poland.

Week of October 21, 2013

Deal Story: Dynamic Dental partners Huron Capital Partners’ recent acquisition illustrates the firm’s target investments in healthcare products & services.

Raising a First-Time Chinese RE Fund What Century Bridge learned from raising its first-time fund targeting Chinese real estate.

Week of October 28, 2013

Expert QA with Albert Tan An expert interview with Albert Tan of Haynes and Boone.

Trends in the Consumer Sector These PE veterans have seen disruptive innovation spell new investment opportunities in the food market.

privcap Digest / October 2013 / 10

What the World’s Largest Lp Wants in a gp

an early fund but keep a larger amount of capital with a more established firm. The overall objec-tive is to grow the dollar amount as the smaller GP raises more third party capital—or shrink it on a relative basis.

CPPIB has partnered with emerging managers in China who have launched spinoffs after a long stretch at an established firm. Sifting through the wreckage of the financial crisis is another strate-gy for seeking emerging managers; his team looks within GPs to identify sub-teams with long-term potential.

Fasano adds, “We try and see which of these managers we think, while being relatively new today, will be very successful and thus grow signif-icantly over the coming years.”

Roadblocks To Going Direct

The gigantic pension recently closed one of the biggest buyouts of 2013. Last month, CPPIB teamed up with L.A.-based fund manager Ares Manage-ment to buy the U.S. department store Neiman Marcus for $6 billion. The company’s sellers, TPG Capital and Warburg Pincus, paid $5.1 billion for the luxury retailer in 2005.

The deal illustrates how some of the largest Canadian LPs are focusing on direct investment deals. For instance, in recent years, the $61-billion Ontario Municipal Employees Retirement System ditched passive investing and co-investing alto-gether, and then launched a venture capital arm in 2011.

But for CPPIB, focusing on venture capital,

The Canada Pension Plan Investment Board (CPPIB)—the largest and most active PE investor the world—is growing so rapidly that maintaining allocation in the asset class will require creativity. In an exclusive interview with Privcap, the head of fund investing at CPPIB reveals the types of GPs the $185-billion fund wants to back.

Click to watch this video at privcap.com

10 / Lp Focus

Many giant pensions to the North are deempha-sizing fund investing and migrating toward direct investing. One would expect the CPPIB, the largest LP in the world, to lead the flock. However, its mas-sive size and rapid growth rate prevents it from go-ing fully direct.

“With our scale, it’s hard to have a large enough direct program to be meaningful to a $185-billion and quickly growing fund,” says Jim Fasano, VP of funds, secondaries and co-investments at CPPIB.

CPPIB can’t partake in a steady flow of direct op-portunities, simply because many of these deals can’t meet the behemoth fund’s minimum check size. So the pension investment manager sought innovative strategies for deploying capital via pas-sive investing.

“We are rolling out an emerging manager pro-gram focusing on those managers who—while not significant in scale today—have all the attributes to grow over time and can scale with us down the road,” says Fasano.

Fasano seeks smaller fund managers with the potential to absorb future capital from CPPIB. “Even if it’s an emerging manager where they haven’t been together as a group, we’ll review the collective track record,” Fasano adds. “We’ll then make sure that the individuals have track records that we would back.” CPPIB also reviews the structure of the organization to confirm strategy and alignment.

“The main thing for us is both the historical performance of the GP and what we believe to be the expected performance going forward,” he said. “Returns are the main driver.”

The pension plans to invest a defined portion in . CONTINUES ON NEXT PAGE

“We are rolling out an emerging

manager program focusing on

those managers who—while not

significant in scale today—have all the attributes to grow over time and can scale with us down

the road.” —Jim Fasano,

VP of Funds, CPPIB

privcap Digest / October 2013 / 11

Gp Restructurings: A Great Way to

Write Large Checks

11 / Lp Focus

we hope to do with our new co-investment program, without broadening the depth to which we go into the GP world, is essentially get more scale per manager.”

Meanwhile, the secondaries program targets in-vestments of $100 to $500 million, with a minimum investment of $25 million. Fasano says the $5 billion secondaries portfolio is growing steadily due to a very active pipeline of deals from GPs.

“Given our size and growth, being able to deploy capital and scale is a significant element,” says Fasano. “But at the end of the day, it really is all driven by returns.” ■

“Scalability of our business has long been a challenge for us, so we look to a number of ways in which

we can increase our private

equity business.” —Jim Fasano,

VP of Funds, CPPIB

Within the last twelve months, CPPIB committed US$654 million to buyout fund Behrman Capital, then committed US$138 million to the newly formed Kainos Capital. The transactions provided immediate liquidity to the funds’ limited partners—and gave the CPPIB a creative way to put vast sums of capital to work. Q: CPPIB backed two GP restructurings—Behrman Capital and Kainos Capital, which spun

out of HM Capital. What attracted you to these deals?

A: We were attracted to two things. One is a portfolio of assets that is attractive but yet is at an inflection point that requires more time to realize full value. Secondly, we had confidence that the GP could manage those assets going forward. We don’t even consider it as a win-win. We look at it as a win-win-win. Behrman or Kainos is a win for the existing LPs, many of whom are looking for liquidity. It gives them the option but not necessarily a mandatory liquidity event. It’s a win for the GPs who can look forward to more stability, knowing that they have some longer-term capital behind them. And it’s a win for us; we have acquired a collection of attractive assets and are able to work with a newly realigned GP to try and maximize the value going forward.

particularly beyond Canadian borders, is often-times out of the question. “Venture capital is just something where we’re never really going to be able to get the scale that we require,” Fasano says. “Scalability of our business has long been a challenge for us,” Fasano says. “So we look to a number of ways in which we can increase our private equity business. One way is to add new activities, new products. Our secondaries business is a good example of that.”

Peripheral Opportunities: Co-Investments & Secondaries

CPPIB’s direct business typically follows what Fasano calls a co-sponsorship model. It enters deals early and takes deeply involved roles with GPs. This stretched the investment team thin.

“They have been focused on larger and larger eq-uity checks,” says Fasano. “So we have lost an ability to invest along some of the mid-market managers, who even in the largest of co-sponsorships, couldn’t hit CPPIB’s minimum equity check size.”

Fasano says the new program will be more pas-sive. “We will be less active. We won’t get involved as early. It’ll be more towards a classical syndicated co-investment program,” he says.

While the direct group focuses on deals priced at $300 million and above, the co-investment program focuses on minority investments between $50 and $125 million, with a minimum investment of $25 million.

“What we do on the large direct side and what

privcap Digest / October 2013 / 12

“ Investors like this setup because they collect a win if we collect a win; but if they don’t get a win, neither do we.”

Click to watch this video at privcap.com

the Fundless approach:Watermill’s competitive advantage

12 / Manager Spotlight

Watermill has seen private equity evolve signifi-cantly since the 1970s, from an industry that was once dubbed ‘bootstrapping,‘ to a developed asset class largely characterized by raising equity from large institutional investors and pooling them in large funds.

Watermill, however, doesn’t invest committed funds—a strategy it has developed during the course of its thirty-plus years in business. Instead, the firm’s strategy is centered on acquiring valu-able companies, and raising necessary funds by tapping investors on a deal-by-deal basis.

“We’re seeing an increase in the amount of people who are trying to do deals without funds,” says Karol. “There’s significant change in the dynamics of the private equity industry.”

He explains that fund investing, like any other industry, experiences a peak that is followed by decline and consolidation. The major funds are in a period of slight struggle in fundraising, while boutique funds are faring better with more refined strategies.

Meanwhile, the medium funds are deep in de-cline, according to Karol. “They’re spinning out partners or managers and those people are try-ing to do what they learned how to do without funds,” he says. “And they’re a lot different than we are because we’ve been doing this for over thirty years our way.”

Karol says that industry-wide, the rise of the fundless sponsor remains relatively new as many sellers still scoff at the term. However, he adds that the firm’s longevity has provided an exten-sive list of intermediaries, sellers and investors

who vouch for the firm’s ability to close a deal.“Because we’ve been around for so long, we can

just say look at our track record…” says Karol.

Advantage 1: Total AlignmentThe strategy benefits LPs from an incentive stand-point because it fully aligns them with Watermill.

“Without a fund, we don’t take any management fees so nobody has to pay us for seeking deal op-portunities, which is all done internally,” says Karol.

Advantage 2: Reaping Rewards Watermill funds its own overhead. At the comple-tion of deals, the firm collects 25% rather than 20%. That extra five is in exchange for not having taken the 2% up front.

According to Karol, “Investors like this setup be-cause they collect a win if we collect a win; but if they don’t get a win, neither do we.”

Advantage 3: Raising Investors Watermill has cultivated a network of about fifty ultra-high net worth investors , many of whom are self-made and accomplished in various fields. They become potential board members and advisors to acquired companies. The firm gains committed capital and committed talent.

Karol says: “When we weigh deals, we call our investors if they have expertise in it. It’s better than due diligence because we don’t have to pay an MBA grad to learn about an industry. We have someone who has made a lot of money in it. It’s a large pool of resources that’s more valuable than money to us.” ■

The Fundless Approach AdvantageKarol discusses Watermill’s perspective on LP/GP communications. Watch the full Privcap video here.

Steve Karol, managing partner and founder of The Watermill Group, discusses why a fundless strategy has worked for his firm for over 30 years.

privcap Digest / October 2013 / 13

13 / From Our Sponsors

Greg Little, Vice President | email: greg.little@pantheon.com Web: www.pantheonventures.com

Expert Q&A With Greg Little, Vice President, San Francisco, Pantheon

expert Q&a/ Click to watch this video at privcap.com

What are some important trends in the venture capital industry? More than ever, there are global forces at play with advancements in technology, broadband and mobile. We’re all using the same devices and operating systems throughout the world. There is a lot more ease in global communication so more winners are emerging from foreign countries. For instance, there’s Skype in Europe. Venture capital funds that have historically focused on companies within a 45-minute drive from their office have begun to make themselves a more global brand. They’re investing or starting offices in foreign countries and spreading their sphere of influence through mediums like Twitter and blogging.

How does Pantheon decide which venture capital funds to back? We seek established firms that have a track record and are very influential in the technology com-munity. The best entrepreneurs want to work with not only the best investors but with technologi-cally savvy people; these professionals usually have experience as an entrepreneur themselves and are able to add real value. So we’re looking for firms that really have that cache of influence in the tech space.

The model has also changed where value-added services—like assistance in marketing and supply-ing a steady flow of engineers—will need to feed the company as it grows. So I think that’s really critical, especially in the venture space because only a few companies are going to deliver returns for LPs. You can have a few moderately successful companies, but that doesn’t work well from a net-return perspective. You need some outsized winners to get the returns that we’re looking for to justify the risk.

Watch Pantheon execs Greg Little and John Greenwood discuss the advantages and challenges that Canada faces in developing its own VC ecosystem. )Link