35,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Global Best Practice in Private Equity Investing Private Equity in Action takes you on a tour of the private equity investment world through a series of case studies written by INSEAD faculty and taught at the world's leading business schools. The book is an ideal complement to Mastering Private Equity and allows readers to apply core concepts to investment targets and portfolio companies in real-life settings. The 19 cases illustrate the managerial challenges and risk-reward dynamics common to private equity investment. The case studies in this book cover the full spectrum of private equity strategies, including: * Carve-outs in the US semiconductor industry (LBO) * Venture investing in the Indian wine industry (VC) * Investing in SMEs in the Middle East * Turnaround situations in both emerging and developed markets Written with leading private equity firms and their advisors and rigorously tested in INSEAD's MBA, EMBA and executive education programmes, each case makes for a compelling read. As one of the world's leading graduate business schools, INSEAD offers a global educational experience. The cases in this volume leverage its international reach, network and connections, particularly in emerging markets. Private Equity in Action is the companion to Mastering Private Equity: Transformation via Venture Capital, Minority Investments & Buyouts, a reference for students, investors, finance professionals and business owners looking to engage with private equity firms. From deal sourcing to exit, LBOs to responsible investing, operational value creation to risk management, Mastering Private Equity systematically covers all facets of the private equity life cycle.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 557
Veröffentlichungsjahr: 2017
Ähnliche
Private Equity in Action
Case Studies from Developed and Emerging Markets
Claudia Zeisberger
Michael Prahl
Bowen White
This edition first published 2017 © 2017 Claudia Zeisberger, Michael Prahl and Bowen White
Registered officeJohn Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought.
Library of Congress Cataloging-in-Publication Data
Names: Zeisberger, Claudia, author. | Prahl, Michael, author. | White, Bowen, author.Title: Private equity in action : case studies from developed and emerging markets / Claudia Zeisberger, Michael Prahl, Bowen White.Description: Hoboken : Wiley, 2017. | Includes bibliographical references and index. |Identifiers: LCCN 2017013990 (print) | LCCN 2017029759 (ebook) | ISBN 9781119328001 (pdf) | ISBN 9781119327998 (epub) | ISBN 9781119328025 (paperback) | ISBN 9781119328001 (ebk) | ISBN 9781119327998 (ebk)Subjects: LCSH: Venture capital–Case studies. | BISAC: BUSINESS & ECONOMICS / Finance.Classification: LCC HG4751 (ebook) | LCC HG4751 .Z425 2017 (print) | DDC 332/.04154–dc23LC record available at https://lccn.loc.gov/2017013990
A catalogue record for this book is available from the British Library.
ISBN 978-1-119-32802-5 (hardback) ISBN 978-1-119-32800-1 (ebk) ISBN 978-1-119-32799-8 (ebk)
Cover design: Wiley Cover image: Skyline image: © Leontura/iStockphoto; World Map image: © pop_jop/iStockphoto
CONTENTS
Preface
Section I: GP–LP: Relationships
Case 1: Beroni Group: Managing GP–LP Relationships
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Beroni Group: Managing GP-LP Relationships
Introduction
Group History
Key Issues
Case 2: Going Direct: The Case of Teachers’ Private Capital
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Going Direct The Case of Teachers’ Private Capital
Introduction
Background
Investment Objectives and Asset Policy Mix
Phase 1: The Origins of Teachers’ Private Capital
Jim Leech: Tasked With Taking Teachers’ Global
Phase 2: Growing Ambition
Phase 3: The Peak – Leading The World’S Largest LBO
Challenges Emerge to the Largest LBO in History
Phase 4: Post-GFC Era
Evaluating the Success of Teachers’ Approach: Issues For Teachers’, Pension Funds and Other LPs
The Way Ahead
Notes
Case 3: Pro-invest Group: How to Launch a Private Equity Real Estate Fund
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Pro-invest: How to Launch a Private Equity Real Estate Fund
April 2015
Background Pro-invest Group
Finding an Opportunity, 2012: Holiday Inn Express – Going ‘down under’?
First Steps – Building a Team
Which Structure?
Anchor Investor – First Commitment
The Search for Funding Options – Looking for the Right ‘Fit’
Adriana Star Capital Appears . . . and Folds
Back to the Drawing Board
Onwards and Upwards
Challenges
Notes
Case 4: Hitting the Target: Optimizing a Private Equity Portfolio with the Partners Group
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Hitting the Target Optimizing a Private Equity Portfolio with Partners Group
Future Plan and the Legacy Portfolio, 2005–11
Magnifying Returns – Allocating to Alternatives
Evolution of Future Plan’s PE Portfolio
Repositioning the PE Portfolio
Enter Stage Left: Partners Group and the Pitch
The Task at Hand
Section II: Venture Capital
Case 5: Sula Vineyards: Indian Wine? – “Ce n’est pas Possible !”
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Sula Vineyards Indian Wine — “Ce n’est pas possible !”
Introduction
Sula Wines
GEM India Advisors
The Indian Wine Industry
The Global Wine Industry
Valuation
Conclusion
Notes
Case 6: Adara Venture Partners: Building a Venture Capital Firm
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Adara Venture Partners Building a Venture Capital Firm
Starting Out: The Origins
First Fundraising: Tough but Straightforward
Investing the First Fund: Off to the Races
Second Fund: First Attempt
The ‘Dark Ages’
Renaissance
Second Fund: All or Nothing
June 2013: A Time to Decide
Notes
Case 7: Siraj Capital: Investing in SMEs in the Middle East
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Siraj Capital Investing in SMEs in the Middle East
Private Equity in the Middle East North Africa (MENA) Region
Siraj Capital
Network & Expertise
The Investment Approach
Tower
Section III: Growth Equity
Case 8: Private Equity in Emerging Markets: Can Operating Advantage Boost Value in Exits?
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
PE in Emerging Markets Can Mekong Capital’s Operating Advantage Boost the Value in its Exit from Golden Gate Restaurants?
Private Equity in Asia
Background: Mekong Capital
Deal Origination
Golden Gate and Growth
Maximizing Value and Creating a Profitable Pathway for Future Owners
The Board Meeting
Notes
Case 9: Slalom to the Finish: Carlyle’s Exit From Moncler
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Slalom to the Finish Carlyle’s Exit from Moncler
Moncler: Background
Carlyle’s Investment in Moncler: The 2008 Transaction
Carlyle’s Investment in Moncler: Value Creation
Carlyle Exit Considerations
The IPO Option
The Trade Sale Option
The Dual Track Process
Decision Time
Notes
Case 10: Investor Growth Capital: The Bredbandsbolaget Investment
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Investor Growth Capital The Bredbandsbolaget Investment
The Swedish Broadband Market
Competitors
The Offering
Building The Company, 1998–2002
Investor Growth Capital
Sentiments Among Investors
Anti-Dilution Provisions in the Shareholders’ Agreement
Options Facing the Majority Investors
Further Articles on Bredbandsbolaget:
Notes
Section IV: Leveraged Buyouts (LBOs)
Case 11: Chips on the Side (A): The Buyout of Avago Technologies
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Chips on the Side (A) The Buyout of Avago Technologies
Chips on the Side (A): The Buyout of Avago Technologies
Agilent Technologies
The Semiconductor Industry
The Semiconductor Group (SPG)
Agilent’s Management Approach
Notes
Case 12: Chips on the Side (B): The Buyout of Avago Technologies
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Chips on the Side (B) The Buyout of Avago Technologies
Chips on the Side (B): The Buyout of Avago Technologies
The Broad Set-Up
The Financing Structure
Notes
Case 13: Going Places: The Buyout of Amadeus Global Travel Distribution
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Going Places The Buyout of Amadeus Global Travel Distribution
The Target: Amadeus
Pre-Acquisition Challenges
The Suitor: BC Partners
The Process
The Strategic Options for Amadeus
Option B: Develop the IT Solutions division and position Amadeus as a fully-fledged IT supplier to travel providers
Section V: Turnarounds and Distressed Investing
Case 14: Crisis at the Mill: Weaving an Indian Turnaround
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Crisis at the Mill: Weaving an Indian Turnaround Alvarez & Marsal
Allegations…
The Groundwork
Action…
The Takeover
New Day, New Team
The Challenges Ahead
The Textile Company
Setting the Stage for Turnaround
Case 15: Vendex KBB: First Hundred Days in Crisis
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Vendex KBB First Hundred Days in Crisis
A Colourful History
The Stamps Don’t Stick!
Time to sell
The First 100 Days
Day 1
Notes
Case 16: Turning an Elephant into a Cheetah: The Turnaround of Indian Railways
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Turning an Elephant into a Cheetah The Turnaround of Indian Railways
Indian Railways
The Looming Crisis in 2001
Recommendations of the Expert Group
Lalu Prasad
Sudhir Kumar
The Complexity of the Turnaround
The Main Issues
Bibliography
Notes
Section VI: Private Equity in Emerging Markets
Case 17: Rice from Africa for Africa: Rice Farming in Tanzania and Investing in Agriculture
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Rice from Africa for Africa Duxton Asset Management and its Investment in Tanzanian Rice Farming
Background and History of Duxton AM
Duxton’s Investment Philosophy
Benefits and Risks of Farmland Investments
Duxton and Socially Responsible Investing (SRI)
Africa as an Investment Destination
The Kapunga Rice Project Limited (KRPL)
Duxton’s Initial (Top Down) Assessment of KRPL
KRPL Business Highlights and Plans
Management’s Five-Year Business Plan
Key Risks for the Deal
Proposed Deal Structure
Final Assessment and Approval
A Change in Circumstances
A Meeting in Istanbul Airport
Notes
Case 18: Private Equity in Frontier Markets: Creating a Fund in Georgia
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Private Equity in Frontier Markets Creating a Fund in Georgia
February 2013
Background
Setting Up A New Investment Vehicle
The Challenge
Notes
Case 19: Asian Private Equity: A Family Office’s Quest for Return
Synopsis
Pedagogical Objective of the Case
Suggested Assignment Questions
Additional Resources
Asian Private Equity (A) The Quest for Return
A Multi-family Office’s Approach to Private Equity
A History of Asian Private Equity
Asian Private Equity Today
Asian Private Equity Growth Drivers
Asian Private Equity Risks
Asian Private Equity Returns
Notes
AAcknowledgements
About the Authors
EULA
List of Illustrations
Case 2
Exhibit 2.1
Snapshot of Ontario Teachers’ Pension Plan: Total Fund Size and Annual Returns
Exhibit 2.2
Glossary of Pension Fund Terms
Exhibit 2.3
Evolution of Asset Policy Mix
Exhibit 2.4
Institutional Approaches to Investing in Private Equity
Exhibit 2.5
OTPP’s Ownership of BCE Inc
.
Exhibit 2.6
Stock Price Chart of BCE
Exhibit 2.7
Teachers’ Private Capital: Portfolio Size and Annual Returns.
Exhibit 2.8
Ontario Teachers’ Pension Plan – Risk-adjusted Returns
Exhibit 2.9
Annualised Net Returns from Fund Investments and Direct & Co-Investments by Teachers’ Private Capital
Exhibit 2.10
Teachers’ Private Capital’s Fund Investments
Case 3
Exhibit 3.1
Pro-invest Team Members and Advisors (May 2014)
Exhibit 3.2
Pro-invest Senior Management Team
Case 4
Exhibit 4.1
Future Plan Total Portfolio Asset Allocation
Exhibit 4.2
Future Plan Historical Assets under Management
Exhibit 4.3
Future Plan Total Portfolio Performance
Exhibit 4.4
Future Plan PE Commitments (in € millions)
Exhibit 4.5
Future Plan Alternative Investment Asset Allocation
Exhibit 4.6
Future Plan PE Target Allocation vs. Actual Exposure
Exhibit 4.7
Future Plan PE Portfolio Performance
Exhibit 4.8a
Evolution of a Primary PE Fund Offering (€10 million commitment, net of fees)
Exhibit 4.8b
Evolution of a Secondary PE Investment (€10 million commitment, net of fees)
Exhibit 4.8C
Evolution of a Direct PE Investment (€10 million investment)
Exhibit 4.9
Partners Groups’ Relative Value Matrix – H1 2012
Exhibit 4.10
Partners Group Proposed Holding Structure & Services
Exhibit 4.11
Private Market Expected Returns and Volatility (by segment)
Case 5
Figure 5.1
Sula Wines – Historical Performance
Exhibit 5.1
Product Positioning, 1 January 2005
Exhibit 5.2
The Indian Wine Market
Exhibit 5.3
The Global Wine Industry
Exhibit 5.4
Industry Comparables
Exhibit 5.5
Transaction Comparables
Exhibit 5.6
Press Clipping
Case 6
Exhibit 6.1
Managing Partners (from investor presentation mid 2013)
Exhibit 6.2
Adara Ventures (I) Portfolio as of mid-2013
Exhibit 6.3
Adara Ventures Mission Statement (2013)
Exhibit 6.4
Adara Ventures II Term Sheet (Q1 2013)
Case 7
Exhibit 7.1
Oil prices July 08 – July 09
Exhibit 7.2
PE Funds in MENA 2001–07
Exhibit 7.3
Siraj’s Investment Practice Breadth
Exhibit 7.4
KSA Macroeconomic Fundamentals, KSA, 2006–13
Exhibit 7.5
Examples of Siraj’s Value Creation
Exhibit 7.6
Tower’s Revenue Contribution by Customer
Exhibit 7.7
Tower’s Pipeline/Announced Projects
Exhibit 7.8
Tower’s Key Financials, 2007–09 (Millions of SAR, Financial Year Ending March 31st)
Exhibit 7.9
Saudi Telecom Operators’ Revenue, 2008–12
Exhibit 7.10
Market Prospects in 3G technology, Internet and Fixed Line
Exhibit 7.11
Telecom Capex Spending in KSA Market, 2009(SAR ’000)
Exhibit 7.12
Tower’s Management vs. Siraj’s Revenue Projections (SAR, Financial Year Ending March 31st)
Case 8
Exhibit 8.1
Middle Class and Affluent Population of Vietnam
Exhibit 8.2
Value Optimization Board at Mekong Capital (May 2015)
Exhibit 8.3
Gross National Income per Capita (Thousands USD, PPP), 2005–2013
Exhibit 8.4
2013 Population (in millions) for Select Countries
Exhibit 8.5
Real GDP Growth of Southeast Asia, China and India (annual percent change)
Exhibit 8.6
Asian Casual Dining / Hot Pot Chains (2008)
Exhibit 8.7
Golden Gate Concepts (2013)
Exhibit 8.8
EBITDA Growth, 2008–2014(e)
Exhibit 8.9
The Eight Keys to Successful Negotiations in Asia (adapted from The Chinese Negotiation, John L. Graham and N. Mark Lam, October 2003, Harvard Business Review)
Exhibit 8.10
Hanoi Securities’ IPO Suggested Valuation
Exhibit 8.11
Restaurant Acquirers’ Perspectives on Value
5
(adapted from interview with Pete Bassi, Retired Chairman and President Yum! International)
Exhibit 8.12
Cast of Characters
Case 9
Exhibit 9.1
Biographical Information
Exhibit 9.2
Carlyle: Background
Exhibit 9.3
The Carlyle Group
8
Exhibit 9.4
Transaction Details
Exhibit 9.5
Transactional Details – Source of Funds
Exhibit 9.6
Moncler Corporate Structure
Exhibit 9.7
Moncler Revenue by Geographies
Exhibit 9.8
Moncler Revenue by Channel
Exhibit 9.9
Moncler Group Consolidated Key Financials
Exhibit 9.10
Global PE backed IPOs by Region
Exhibit 9.11
Top 10 PE-backed European IPOs in 2010
Exhibit 9.12
Global PE Exits by Deal Value
Exhibit 9.13
Comparable Trading Companies
Exhibit 9.14
Recent Branded Apparel Transactions over US$300 Million (including buybacks)
Exhibit 9.15
Recent PE Secondaries in Europe with EV > €400 Million
Case 10
Exhibit 10.1
Forecast Broadband Penetration by Country 2004
Exhibit 10.2
Broadband Penetration in Sweden 1999–2002, Actuals 2003–2009 Forecast
Exhibit 10.3
Telecommunication End User Market Revenue 2001–2004
Exhibit 10.4
Market Share 2002 – Swedish Broadband Market
Exhibit 10.5
Pricing Points by Offering in the Swedish Broadband Market
Exhibit 10.6
Cap Table Pre & Suggested Post NTL Buyout
Exhibit 10.7
Cap Table IGC – B2 Investment History
Exhibit 10.8
B2 Customer Base Forecast 2003 – 2009
Exhibit 10.9
P&L
Exhibit 10.10
Balance Sheet
Exhibit 10.11
Comparables
Exhibit 10.12
Bostream P&L & Balance Sheet
Exhibit 10.13
Media Gallery
Case 11
Exhibit 11.1
KKR Assets under Management 1993–2006 (US$ Billions)
Exhibit 11.2
Silver Lake Partners Invested Capital and Major Transactions 1999–2005
Exhibit 11.3
Agilent Technologies – Business Units (Agilent Technologies 2004 Corporate Report, emphasis of case author)
Exhibit 11.4
Agilent Technologies – Business Units (Agilent Technologies 2004 10K)
4
Exhibit 11.5
Agilent Technologies – Consolidated Statement of Operations, Oct 31
st
2004
5
Exhibit 11.6
Agilent Technologies – Segment Assets, Capex and Investments, Oct 31
st
2004
Exhibit 11.7
Semiconductor Industry Cycle – Historical Perspective
Exhibit 11.8
Semiconductor Industry Cycle – Current Position in 2005
Exhibit 11.9
SPG Business Units
Exhibit 11.10
Operational Improvement ECBU Division 1998–2004
Exhibit 11.11
SPG Business Units – Microeconomics – Last 12 Months (LTM)
Exhibit 11.12
SPG – Operational Statistics vs. Comparables
Exhibit 11.13
SPG Comparable Companies Valuation (at time of transaction)
Case 12
Exhibit 12.1
Purchase Price Summary
Exhibit 12.2
Summary Base Case
Exhibit 12.3
ECBU Comparable Companies Valuations
Exhibit 12.4
SPG Comparable Companies Valuation (at time of transaction)
Exhibit 12.5
An Overview of Financial Covenants
Exhibit 12.6
Overview of Debt in LBOs
Exhibit 12.7
Proposed Debt Structures
Exhibit 12.8
Summary Base Case with Two Capital Structures
Exhibit 12.9
Summary Downside Case with Two Capital Structures
Case 13
Exhibit 13.1
Premiums (bid price vs. share price one month before offer)
Exhibit 13.2
Ownership Structure of Amadeus pre-LBO
Exhibit 13.3
Amadeus Sales Breakdown by Region (2004)
Exhibit 13.4
Amadeus Consolidated Statements of Income (31 July, 2005)
Exhibit 13.5
Amadeus Consolidated Balance Sheet (July 31, 2005)
Exhibit 13.6
Amadeus Consolidated Statements of Cash Flows (July 31, 2005)
Exhibit 13.7
Publicly Traded Comparables
Exhibit 13.8
Selected Recent European LBOs with Leverage >6x
Case 14
Exhibit 14.1
Industry Background
Case 15
Exhibit 15.1
Complete List of Formats at the Time Vendex KBB Was Created – 2000
Exhibit 15.2
Share Price
Exhibit 15.3
Formats
Exhibita 15.4a
Consolidated Financial Statements
Exhibit 15.4b
Vendex KBB: Divisional Breakdown of Sales and EBITA (in millions € unless otherwise stated)
Exhibit 15.5
Profile of Floris Maljers
Exhibit 15.6
External Valuations Vendex KBB
Exhibit 15.7
The Deal Structure
Exhibit 15.8
The Investors
Exhibit 15.9
Formats June 2004
Exhibit 15.10
Consumer Confidence
Exhibit 15.11
Profile of Tony DeNunzio
Case 16
Exhibit 16.1
Network of Indian Railways
Exhibit 16.2
Indian Railways – The Nation’s Lifeline
Exhibit 16.3
Organisation Structure of Indian Railways
Exhibit 16.4
Casualties in Train Accidents
Exhibit 16.5
Indian Economy’s Annual Growth Rates of Real GDP at Factor Cost
Exhibit 16.6
Passenger and Freight Revenue
Exhibit 16.7a
Analysis of Freight Earnings
Exhibit 16.7b
Analysis of Passenger Earnings
Exhibit 16.8
Overall Performance of Indian Railways, 1988–2004
Exhibit 16.9
Financial Performance Indicators of Indian Railways (year ending March)
Exhibit 16.10
Cost Structure
Exhibit 16.11
Main Recommendations of the World Bank and the Expert Group
Case 17
Exhibit 17.1
Bios
Exhibit 17.2
World Food Security
Exhibit 17.3
SRI and Impact Investments
Exhibit 17.4
Kapunga Rice Project Limited: Map and Highlights
Exhibit 17.5
KRPL SRI Credentials
Exhibit 17.6
VALUATION & IRR
Exhibit 17.7
KRPL Investment at a Glance
Case 18
Exhibit 18.1
Bio: George Bachiashvili
Exhibit 18.2
Worldwide Governance Indicators (WGI)
Exhibit 18.3
Georgia’s Investment Climate
Exhibit 18.4
Foreign Direct Investment (FDI) in Eastern Europe and Caucasus
Exhibit 18.5
FDI in Georgia (US$ millions)
Exhibit 18.6
Major Investors in Georgia in 2013 (US$ millions)
Exhibit 18.7
GDP Breakdown in Georgia
Exhibit 18.8
Active Investment in Georgia
Georgian Financial Institutions Institutions (# of companies by function)
Exhibit 18.9
Possible Investment Opportunities
Case 19
Exhibit 19.1
Asian Private Equity Pool – Aggregate (in US$ bn)
Exhibit 19.2
Asian Private Equity Capital raised & invested (in US$ bn)
Exhibit 19.3
Asian Private Equity Share of Global Private Equity Invested (in %)
Exhibit 19.4
Private Equity as % of GDP and M&A activity (in %)
Exhibit 19.5
Asian Private Investment Destinations (in US$ bn)
Exhibit 19.6
Deal Value by Funding Stage (in US$ bn)
Exhibit 19.7
Average Deal Size (in US$ m)
Exhibit 19.8
Asian Private Equity Exits (in US$ bn)
Exhibit 19.9
Current GDP and Expected GDP Growth for Selected Countries
Exhibit 19.10
The Socio-Economic Environment for Private Equity Compared with Western Europe
Exhibit 19.11
Factors Likely to Deter LPs from Re-Investing with Some of their EM PE Managers over the Next 12 Months
Exhibit 19.12
LPs’ Perception of Risk Premiums Required for EM PE Funds Relative to Developed-Market Buyout Funds – by EM Country/Region
Exhibit 19.13
Asian Private Equity Index Returns (June 2009)
Exhibit 19.14
Asian Private Equity Portfolio Exits
Guide
Cover
Table of Contents
Preface
Pages
V2_v
V2_vi
V2_1
V2_3
V2_4
V2_5
V2_6
V2_7
V2_8
V2_9
V2_11
V2_12
V2_13
V2_14
V2_15
V2_16
V2_17
V2_18
V2_19
V2_20
V2_21
V2_22
V2_23
V2_24
V2_25
V2_26
V2_27
V2_28
V2_29
V2_39
V2_40
V2_41
V2_42
V2_43
V2_44
V2_45
V2_46
V2_47
V2_48
V2_49
V2_50
V2_51
V2_55
V2_56
V2_57
V2_58
V2_59
V2_60
V2_61
V2_62
V2_63
V2_71
V2_73
V2_75
V2_76
V2_77
V2_78
V2_79
V2_80
V2_81
V2_82
V2_91
V2_92
V2_93
V2_94
V2_95
V2_96
V2_97
V2_98
V2_99
V2_100
V2_101
V2_107
V2_108
V2_109
V2_110
V2_111
V2_112
V2_113
V2_114
V2_115
V2_116
V2_127
V2_129
V2_130
V2_131
V2_132
V2_133
V2_134
V2_135
V2_136
V2_137
V2_138
V2_139
V2_140
V2_141
V2_142
V2_143
V2_144
V2_155
V2_156
V2_157
V2_158
V2_159
V2_160
V2_161
V2_162
V2_163
V2_164
V2_165
V2_166
V2_177
V2_179
V2_180
V2_181
V2_182
V2_183
V2_184
V2_185
V2_186
V2_187
V2_201
V2_203
V2_204
V2_205
V2_206
V2_207
V2_208
V2_209
V2_210
V2_211
V2_212
V2_213
V2_214
V2_215
V2_229
V2_230
V2_231
V2_232
V2_233
V2_234
V2_245
V2_247
V2_248
V2_249
V2_250
V2_251
V2_252
V2_261
V2_263
V2_264
V2_265
V2_266
V2_267
V2_268
V2_269
V2_270
V2_271
V2_272
V2_273
V2_274
V2_275
V2_276
V2_277
V2_279
V2_280
V2_281
V2_282
V2_283
V2_284
V2_285
V2_286
V2_287
V2_288
V2_289
V2_290
V2_291
V2_305
V2_306
V2_307
V2_308
V2_309
V2_310
V2_311
V2_312
V2_313
V2_314
V2_315
V2_325
V2_327
V2_328
V2_329
V2_330
V2_331
V2_332
V2_333
V2_334
V2_335
V2_336
V2_337
V2_338
V2_339
V2_340
V2_341
V2_342
V2_355
V2_357
V2_358
V2_359
V2_360
V2_361
V2_362
V2_363
V2_364
V2_365
V2_366
V2_370
V2_371
V2_372
V2_373
V2_374
V2_375
V2_376
V2_377
V2_378
V2_379
V2_380
V2_381
V2_382
V2_383
V2_384
V2_385
V2_386
V2_387
V2_388
V2_389
V2_390
V2_399
V2_401
V2_402
PREFACE
Private equity (PE) certainly has no shortage of critics, having been referred to as “capitalism on steroids,” its general partners (GPs) or fund managers called “locusts” and their preferred deal cycle as a “quick-flip.” Attention is generated when the media portray PE as a fast way to multiply invested capital by reducing jobs and overleveraging companies. It is time to clear the air, remove soundbite biases and set perceptions straight by showing how the industry frequently removes inefficiencies and turns underperforming companies into healthier, more dynamic ones or supports fast-growing enterprises with capital and expertise, while taking measured risks other financial players are ill-equipped to pursue.
The sheer complexity of PE deal making often obscures the mechanisms of success from casual observers and the theoretical concepts alone rarely do justice to the reality of investing in private companies. A clear understanding of the PE model is long overdue and this book provides detailed case studies to give senior executives and professionals a ringside seat to the day-to-day challenges tackled by partners in PE and venture funds, in both developed and emerging markets.
Private Equity in Action is the practical companion to Mastering Private Equity—Transformation via Venture Capital, Minority Investments & Buyouts, a rigorous textbook providing the theoretical foundations that the case studies bring to life. While this case book can very well be read on a standalone basis, newcomers to the world of PE will certainly benefit from working with both books in parallel and taking advantage of their synergies.
This case book offers a selection of rich, real-life case studies that demonstrate the application of core PE concepts by providing a unique behind-the-scenes look into the investment practices of PE and VC funds. It helps students and executives comprehend the complex processes associated with investing in private companies, from start-ups to mature businesses, and understand the inner workings of the PE model. While academic concepts build the necessary foundation, practical application and execution of these concepts are the critical link that leads to a successful learning outcome.
This book provides a wealth of opportunities for the reader to put oneself into the shoes of leading PE investors and face a range of actual managerial challenges. With a focus on the all-important executional element that is at the core of successful PE investing, it helps to explain how theoretical concepts translate into investment success. After all, the competitive advantage of PE investors arises from the diligent application of global best practices in their portfolio companies—and a lot of hard work.
All case studies have been written in conjunction with leading PE and VC firms, their senior partners, or with advisors who work closely with the industry; they provide insights into real issues faced and tell real war stories about actual (yet at times anonymized) investments. Each case explains how the actions taken by the PE investors contributed to the transformation of companies in practice with examples covering investment situations not only in the established US and European markets, but also in the emerging (or already emerged) growth markets of Asia, Africa and Central Europe.
Section Overview
The first section of the book focuses on the classic “GP–LP” fund model and shows how the relationship between institutional investors and PE fund managers is changing. The cases then move on to share examples from venture capital, growth equity (or minority) investments and leveraged buyouts in various settings (Sections II–IV).
Turnaround situations and distressed investments certainly test the mettle of PE investors—be they majority or minority owners. Dealing with short-term cash constraints, allegations of fraud and disgruntled creditors or (at times public) stakeholders certainly shows whether the operational partners in a PE fund can live up to expectations (Section V).
Given their positive demographic profiles and access to new customers, emerging markets are becoming attractive target destinations for PE. However, investing in these economies comes with additional risks related to the lack of legal certainty, governance frameworks and consistently applied best practices in deal making and execution (Section VI).
INSEAD Context
All cases in this book have been subject to the rigors of classroom debate and continue to be taught in INSEAD’s MBA, EMBA and executive education programs, as well as in other top business schools; some have won prestigious case awards. They add color to the theoretical foundations laid in the text book, provide context, clarify theoretical concepts and give the reader a chance to step into the shoes of PE and VC professionals, as they deal with issues from fundraising to deal execution and effecting operational change to exiting their investments.
The selection of cases in this first volume leverages INSEAD and its faculty’s international reach, network and connections, especially with professionals in the up-and-coming emerging markets. The settings of the case studies cover PE investing in:
Early-stage companies and VC in India
SMEs in the Middle East
Buyouts in the US and Europe
Turnaround situations in both Europe and emerging markets
Food and beverage in Vietnam
Real estate in Australia
Agriculture in Africa
Optimizing a European pension fund’s PE portfolio
Setting up a new sovereign wealth fund in eastern Europe
SECTION IGP–LP Relationships
One of the competitive advantages we have is we have a large balance sheet, and economies of scale allow us to build big internal teams. We also have very long term time periods, so we never have to sell an asset unless it’s at our choosing. We don’t need the liquidity. Why aren’t we looking for opportunities to invest higher up the capital stack and take advantage of that?
—Gordon J. Fyfe, CEO and Chief Investment Officer, British Columbia Investment Management Corp. (bcIMC) and INSEAD Alumnus
CASE 1BERONI GROUP: MANAGING GP–LP RELATIONSHIPS
SYNOPSIS
This case follows Jack Draper, Managing Director of the Beroni Group, a private equity family of funds, as he manages his growing business and tries to satisfy his investor base. It deals with the issues arising in private equity firms once multiple funds have been raised from various limited partners and are being managed by a related set of general partners. Beroni has just closed its third fund successfully and has started to explore investment opportunities as the financial crisis of 2008–2009 reaches its apex and changes some of the fundamental assumptions for its investor base.
The case is set in a difficult economic environment, which raises some very interesting investment possibilities as well as problems. Jack strives to manage two competing groups of investors seeking exposure to these possibilities, as well as the cash flow problem at one of his leading investors.
The case highlights the different motivations of existing investors: some of them invested in both Funds II and III, others in only one or the other. As Jack starts to address the issue of the composition of the advisory committee (AC), queries regarding overlapping staff resources for both funds and pressure for a reduction in management fees, he is faced with a potentially critical issue: one of his investors is in serious financial distress and has asked to be given preferential treatment to avoid default.
PEDAGOGICAL OBJECTIVE OF THE CASE
The case explains the importance of a professional relationship between investors and managers in a private equity fund and discusses possible solutions that managers can offer to investors facing financial difficulties.
It sets the scene to critically debate investor demands and expectations with regard to the time managers allocate to individual funds and their overall commitment to managing a family of funds.
SUGGESTED ASSIGNMENT QUESTIONS
How should Jack handle the allocation of deal flow between the different funds that have overlapping mandates, and/or between one of his current funds and an eventual successor fund? Should allocations be fixed or discretionary? In addition, regarding the impending deal, which AC should he approach first, and with what sort of proposal, to minimize potential tension among the various investors.
How should he deal with downward pressure on his management fees as more assets come under management, since some costs (e.g., rental costs, back office staff) are fairly steady regardless of how much capital is under management? How could he rebut investor demands to lower management fees?
Since the senior Beroni principals serve on the deal teams and investment committees of more than one fund, how could he help his investors feel comfortable that the principals (and staff) would allocate their time appropriately between the respective funds?
How could he help his investors be comfortable with the prospect of
de facto
cross-liability—that is, if one of his funds were to run into difficulty, how could he “ring fence” other unrelated funds to ensure there were no negative financial or time effects on the managers?
How could Jack balance the needs and requests of EUBank, one of his oldest and largest investors, with the legitimate expectation of other investors in BAF II and BAF III that EUBank not be shown any favoritism, and that a portion of EUBank’s interest be forfeited and distributed to them? Would he be faced with a flood of defaults and withdrawal requests if he were to treat EUBank gently? What fiduciary duty did he have to the nondefaulting investors in BAF II and BAF III that have managed their finances more prudently than EUBank? Would the managers risk breaching the investment fund agreements to implement EUBank’s proposal?
ADDITIONAL RESOURCES
To make the most of this case study, we suggest the following additional sources to provide context and background information:
In particular, we recommend the following chapters from
Mastering Private Equity—Transformation via Venture Capital, Minority Investments & Buyouts
Chapter 1 Private Equity Essentials
Chapter 16 Fund Formation
Chapter 17 Fundraising
Chapter 19 Performance Reporting
You may also refer to the book website for further material:
www.masteringprivateequity.com
.
Beroni Group:Managing GP-LP Relationships
03/2015-5594
This case was written by Greg Blackwood, Senior Research Associate, in close co-operation with Andrew M. Ostrognai, Partner at Debevoise & Plimpton LLP in Hong Kong, and under the supervision of Claudia Zeisberger, Senior Affiliate Professor of Decision Sciences and Entrepreneurship and Family Enterprise at INSEAD, with revisions by Rob Johnson, Visiting Professor at IESE Business School. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.
Copyright © 2009 INSEAD. Revision © 2014 INSEAD
COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.
INTRODUCTION
Jack Draper had just completed the initial close of his third private equity fund for the Beroni Group, a family of funds based in Hong Kong and investing across Asia. As Managing Director, Jack had been with the group for nine years since its founding in 2000, and with his two partners had successfully steered the Beroni Asia Fund (BAF I) to a successful conclusion, creating the opportunity to establish follow-on funds in the same mould. BAF II was approaching the end of its investment period, after which remaining capital could only be invested in follow-on investments. BAF III had received US$500 million in commitments from its limited partners (LPs) by late summer 2008, before the fundraising environment for private equity funds became difficult. Notwithstanding these difficult conditions, Jack was able to get to a first closing, and expected to raise an additional US$300 million by the final close. He took pride in their ability to hit fundraising targets despite the difficult fundraising environment. It was typical of what he and the other principals who managed the fund on a day-to-day basis had achieved over the years.
With success, however, had come some unexpected issues. While managing each fund in isolation required essentially the same skills and processes, he was discovering that managing a group of funds required careful strategic (and sometimes political) manoeuvring. Just the day before, he had received final information about a proposed deal that he planned to present to the investment committee the following week. BAF II still had US$135 million in remaining capital that could be deployed (and another year left on the investment period), and BAF III’s funds were now available. The seller in the proposed deal was in deep distress and the investment committee felt that the pricing on the deal was exceptionally attractive – it was likely to be one of the most successful deals ever sourced by the Beroni Group. But there were a number of other complications:
Some LPs had invested in both BAF II and BAF III, while others had invested in one but not the other. LPs sometimes co-invested directly in companies with the fund in which they had invested.
Each fund had its own advisory committee (AC), and the make-up of each AC was a reflection of LP participation. Hence there was not identical membership across the ACs.
General partner (GP) resources were sometimes thinly spread across multiple funds since the same team managed all three funds.
LPs participating in multiple funds were making noises about a reduction in management fees for the latest fund, since many of the costs associated with managing it were essentially fixed (rent, salaries, etc.). In difficult economic times, LPs were looking for any way to cut their costs.
Finally, in any co-investment situation, the approval of the relevant ACs would be necessary in order to execute.
Jack knew he would end up doing the deal one way or another – he just needed to resolve some of these issues first in order to avoid creating future problems with the LPs.
Another problem facing Jack was that EUBank, one of the Beroni Group’s earliest and largest investors, was (as with many financial institutions) having cash flow problems of its own, and was unable to fund its capital commitments to BAF II and BAF III. As is common in the private equity industry, the limited partnership agreements for BAF II and BAF III had extremely severe penalties for a defaulting limited partner, including forfeiture of half of its interest in the fund. EUBank had proposed to the Beroni Group that it be allowed to suspend making any further capital contributions to BAF II, that its capital commitment to BAF III be reduced from US$120 million to US$60 million, and that none of its interest in either BAF II or BAF III be forfeited. The GP of BAF II had some discretion over enforcement of the forfeiture provision, but there was no mechanism in the limited partnership agreement for BAF III to reduce capital commitments in this way. Nonetheless, in light of the long and otherwise happy history of EUBank and the Beroni Group (and in the hope that EUBank would recover and be a large investor in BAF IV when it was raised), Beroni Group wanted to be as accommodating as possible.
GROUP HISTORY
Jack and his partners had founded Beroni in 2000, closing BAF I with US$250 million contributed by three LPs (see Appendix A). Over the following four years, Beroni successfully deployed all of the capital and went on to exit all portfolio companies in a relatively short six-year timeframe from closing, achieving a remarkable 42% IRR over the period. Shortly after fully investing BAF I’s assets, and with a few credible exits under their belts, the Beroni GPs successfully closed BAF II in 2004 at US$350 million. All of the original LPs participated to some extent, and a further two LPs came on board (see Appendix B).
The firm had been less able to deploy BAF II’s capital due to a dearth of quality deals, with only approximately US$215 million invested as of the initial close of BAF III. The deals in which the company had invested, however, had again generated spectacular returns, estimated to be around 30% IRR (including unrealised gains) – which in turn had further attracted LPs to BAF III. Prior to the meltdown of the financial industry in late 2008, LPs committed US$500 million to BAF III at the first closing. Even though the fundraising environment had become exceptionally difficult, Jack and his partners believed they could secure an additional US$300 million in further commitments by the final close of the fund (see Appendix C), largely because a number of liquid and savvy LPs believed that there were historically good buying opportunities in the market.
KEY ISSUES
Jack now found himself with two active funds and several issues to manage:
Disparate LPs
Because one of the LPs participating in BAF II had elected not to participate in BAF III, and because a number of first-time LPs had subscribed to BAF III, the LP structures of the two funds were significantly different. Jack knew the LP that had opted out of BAF III (Gulf Developments, a sovereign wealth fund with considerable assets and influence which he could not afford to upset) wanted BAF II to fully invest its remaining assets before BAF III began to deploy its capital (particularly because they believed that asset values were now at an all-time low), and would therefore vehemently oppose any investment by BAF III before that time. On the other hand, the BAF III LPs were eagerly looking forward to their first deal in this attractively repriced market, so if a very attractive opportunity went to BAF II in preference to BAF III, Jack risked upsetting his new partners.
Differing AC compositions
Because the investor that had not subscribed to BAF III was on the advisory committee of BAF II but not on the AC of BAF III, and because some of the first-time LPs were on the AC of BAF III but not BAF II, Jack had different ACs to manage. Complicating matters was the fact that for the upcoming deal, Jack would have to engineer approval from both committees in order to receive the go-ahead on a co-investment – and this would generate tension depending on which LPs participated in each AC.
Overlapping human capital
Like many families of funds, Beroni employed the same staff across all three funds. The same senior staff, investment managers and associates that had executed deals for BAF I and who were currently working on BAF II would also manage BAF III; the synergies of information and experience were obvious, and utilising his staff in this way allowed Jack to generate higher management fees per headcount. Of course, each fund’s LPs preferred staff to be 100% focused on their fund to the exclusion of the other, whether it was BAF II or BAF III.
Reduction in management fees
Because some of the LPs had invested in all three funds, they felt that Jack should reduce Beroni’s management fees in some way to reflect the fact that the group as a whole was able to utilise the same staff to manage each successive fund. In addition, because each successive fund required neither additional office space nor additional administrative staff, the LPs felt certain that costs could be cut – providing additional justification for a reduction in management fees. Moreover, because of the difficult economic context, a number of LPs felt that the Beroni Group should “tighten its belt” and pass some of the cost savings along to LPs.
EUBank default
Beroni was faced with an imminent default by one of its largest and oldest investors, which would not only create cash flow problems for BAF II and BAF III (and might even jeopardise the ability of these funds to consummate the investment they were currently considering), but would also create some embarrassment for EUBank and for the Beroni Group. EUBank had put a proposal on the table that would mitigate some of these problems (and yet not leave EUBank in a good position), but accepting the proposal would not only anger other non-defaulting LPs (since they would not receive the forfeited interest to which they had a legitimate claim), but also create a moral hazard should other LPs try to extract a similar deal from the fund GPs. Also, it was not clear whether granting EUBank’s requests would violate the GPs’ fiduciary duty or even breach the limited partner agreements themselves.
Appendix ATable of LPs (BAF I)
LP Entity
Amount Invested(US$ million)
Advisory CommitteeSeat (Yes/No)
Gulf Developments
100
Yes
EUBank
80
Yes
La Famiglia Inc.
70
Yes
Appendix BTable of LPs (BAF II)
LP Entity
Amount Invested(US$ million)
Advisory Committee Seat (Yes/No)
Gulf Developments
120
Yes
EUBank
70
Yes
La Famiglia Inc.
40
Yes
Pensions-R-Us
70
No
StateFund
50
Yes
Appendix CTable of LPs (BAF III)
LP Entity
Amount Invested(US$ million)
Advisory Committee Seat (Yes/No)
EUBank
120
Yes
La Famiglia Inc.
30
Yes
Pensions-R-Us
100
No
StateFund
80
Yes
New LP 1
90
No
New LP 2
80
Yes
*New LP 3
75
No
*New LP 4
75
Yes
*New LP 5
75
No
*New LP 6
75
No
*Denotes anticipated funding as of the final close of the fund.
Source: Fictitious data
CASE 2GOING DIRECT: THE CASE OF TEACHERS’ PRIVATE CAPITAL
SYNOPSIS
This case traces the evolution of the private equity investment platform at the Ontario Teachers’ Pension Plan (“Teachers”), the largest single-profession pension plan in Canada. Unlike the typical pension fund at the time, Teachers forged a pioneering approach to investing by making a concerted push towards direct investing in private equity, well before disintermediation became popular among limited partners (LPs). The case follows Jim Leech, CEO of Teachers and formerly head of Teachers Private Capital (TPC), the private equity arm of the pension plan. It traces the multiyear journey during which Teachers’ worked to develop in house the competence and culture required to move beyond fund investments into direct deals. The case discusses the advantages and limitations of the direct investing model, contrasts it with other approaches to investing in private equity, and raises important issues for institutional investors pursuing strong risk-adjusted returns.
PEDAGOGICAL OBJECTIVE OF THE CASE
The case requires readers to have a basic understanding of the private equity investment model and familiarity with the typical relationship between general partners and LPs. The purpose of the case is to introduce readers to the different avenues available to LPs when deploying capital into private equity, from investing purely in funds and co-investing in deals alongside funds with varying degrees of influence to investing directly in deals, be it for a minority or controlling stake.
In particular, the case delves into the attractiveness of the direct investing model for LPs, offering insights into the internal capability, governance framework and organizational culture that LPs need to build to implement such a model successfully and benefit from its inherent cost savings. The case also discusses the challenges of sustaining and scaling up any direct investment capability, and, more broadly, the challenges that arise when managing a comprehensive private equity program.
SUGGESTED ASSIGNMENT QUESTIONS
Discuss the attractions and challenges of the direct investing model for LPs. What characteristics of the Ontario Teachers’ Pension Plan have enabled it to build its private equity platform?
Why did Teachers’ Private Capital pursue the buyout of Bell Canada Enterprises? What lessons were learned in the process?
How would you assess the success of Teachers’ Private Capital? To support your arguments, calculate Teachers’ Private Capital’s information ratio and comment on its contribution to the pension plan’s overall risk-adjusted returns during different periods. What lessons can other large investors take away from the development of Teachers’ program?
ADDITIONAL RESOURCES
To make the most of this case study, we suggest the following additional sources to provide context and background information:
In particular, we recommend the following chapters from
Mastering Private Equity—Transformation via Venture Capital, Minority Investments & Buyouts
Chapter 1 Private Equity Essentials
Chapter 6 Deal Sourcing & Due Diligence
Chapter 18 LP Portfolio Management
Chapter 21 LP Direct Investment
Case website for faculty and lecturers:
http://cases.insead.edu/going-direct
You may also refer to the book website for further material:
www.masteringprivateequity.com
Going DirectThe Case of Teachers’ Private Capital
03/2015-5993
This case was written by Deepa Ramanathan, INSEAD MBA class of December 2012, under the supervision of Michael Prahl, Executive Director, INSEAD Global Private Equity Initiative, and Claudia Zeisberger, Senior Affiliate Professor of Decision Sciences and Entrepreneurship and Family Enterprise at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Funding for this case study was provided by INSEAD’s Global Private Equity Initiative (GPEI). The research was partially funded by the INSEAD Alumni Fund (IAF).
Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.
Copyright © 2013 INSEAD
COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.
Introduction
As the first snow fell outside his twelfth floor office in the north end of Toronto, Jim Leech, CEO of Ontario Teachers’ Pension Plan, contemplated the recent settlement that Teachers’ (as the pension plan was known) had reached with Bell Canada Enterprises (BCE). The year was 2012 and the settlement pertained to the leveraged buyout (LBO) of BCE, a transaction that would have been the largest LBO in history. Recalling the transaction that had catapulted Teachers’ into the limelight, he marvelled at how Teachers’, which belonged to a class of investors known to be very conservative, ended up leading a consortium of investors in the C$52 billion buyout of the telecom giant. Jim mulled over the long and eventful path that Teachers’ had traced from first venturing into direct investing in private equity, subsequently emerging as a respected partner and a formidable rival to established private equity funds.
Background
With C$129.5 billion in assets at the end of 2012, the Ontario Teachers’ Pension Plan is the largest single-profession pension plan in Canada, investing and administering the pensions of 303,000 active and retired teachers in the province of Ontario. An independent authority on pension fund benchmarking, CEM Benchmarking Inc., ranked Teachers’ number one in terms of 10-year returns and ‘value add’ above benchmark among all peer pension funds in the world for the 10-year period to the end of 2011. The fund had recorded a 10% average annualised rate of return (Exhibit 2.1) and C$60.5 billion in cumulative value added (with compounding) above benchmarks since 1990.
The pension plan for Ontario teachers was originally created in 1917. For the next 73 years it was run by the Ontario government and funds were invested in the debt of government agencies. In 1990, the government privatised the plan by creating an independent, jointly-sponsored pension plan, the Ontario Teachers’ Pension Plan Board, with the authority to invest all assets, administer the pension plan, and pay members (or surviving relatives) the benefits promised. The privatised plan was co-sponsored by the Government of Ontario and the Ontario Teachers’ Federation (OTF), an umbrella organisation for four teachers’ unions. The two co-sponsors appointed four independent members each to the board of directors and an independent chair was chosen jointly. The board members oversaw the pension fund’s management team, which carried out the actual work of investing and administering plan assets and paying out benefits. By law, board members were bound to act in the best interests of plan members and their beneficiaries. Teachers’ also advised the plan sponsors about its funding status, which was determined annually by an independent actuary hired by the plan.
Teachers’ is a defined benefit pension plan, that is, the sponsors are responsible for paying out a pre-defined level of retirement benefits based on factors such as length of employment, salary history, projected lifespan of retirees, etc. What this means in practice is that if the net assets of the pension plan are not sufficient to meet the present value of the liabilities (i.e., the benefits promised to retirees), the sponsors are required to make extra contributions and/or reduce future benefits to bridge the funding deficit. On the flipside, plan sponsors can also make use of funding surpluses, i.e., the excess of net assets over liabilities to reduce the contribution rate of active teachers or increase members’ benefits (See Exhibit 2.2, pension fund terminology).
As sole plan sponsor from 1917 until privatisation in 1990, the Ontario government was responsible for all funding deficits and entitled to all funding surpluses. Under the jointly-sponsored framework, the Ontario Teachers’ Federation became a co-sponsor, making it responsible for half of any surplus or deficit. Strong investment returns in the early 1990s gradually transformed Teachers’ funding status from a deficit of C$3.6 billion in 1990 to consistent funding surpluses in the late 1990s. As a result, teachers in the plan enjoyed low contribution rates and improved benefits during the second half of the 1990s. However, by the 2000s, falling interest rates, a declining ratio of working teachers to retirees (from 10:1 in 1970 to 1.4:1 in 2012) and longer life expectancy leading to an increase in the expected number of years on pension from 20 to 31 years, combined to turn the surplus into a persistent funding deficit. This led to an increase in the contribution rate required from teachers and the government and reductions in the future benefits to be paid to retirees. With these changes the pension fund was able to meet its regulatory obligation of showing a fully-funded plan at least once every three years.
Investment Objectives and Asset Policy Mix
Teachers’ 2011 Annual Report stated:
“Our investment strategies are designed to earn strong returns that support stable contribution rates and pension sustainability and help meet the plan’s long-term funding needs. Our approach is to manage funding and investment risk together. Taking plan demographics and future pension obligations into account, we aim to earn the best return possible at an appropriate level of risk. The need for investment returns must be balanced with strong risk management practices.”
In practice this translated to a target real rate of return of 4.5% per annum for the fund over the long term, an objective which had remained unchanged since the creation of the fund as an independent entity. However, the gradual change in the demographics of the plan had resulted in lower risk tolerance and restrictions on illiquidity, accompanied by an increased emphasis on the cost of implementing investment programmes. At the same time, the changing economic landscape – from the high interest rate environment of the 1980s to the moderation of the 1990s to the asset bubbles of the 2000s and the post-global financial crisis world of today – meant that the means of achieving the targeted rate of return had to be regularly reviewed and revised accordingly. This was reflected in the fund’s strategic asset allocation or ‘asset policy mix’, as Teachers’ refers to it.
The plan’s investment managers performed an ongoing balancing act between the need to fund promised benefits and the need to control the risk of a loss that would have to be covered by increasing contribution rates and/or reducing benefits for future service. This focus on the ultimate risk facing the plan – funding risk – meant that Teachers’ took a holistic view of risk, including market risk, credit risk and liquidity risk facing its assets and liabilities, to determine its asset mix. Teachers’ used a proprietary asset-liability model that incorporated long-term historical data and the current economic outlook along with decisions to be made by the plan sponsors on contribution and benefits levels. Using this model, together with management experience and judgment, Teachers’ established a weighting for each asset class that reflects its long-term risk and return trade-offs in relation to those of other asset classes. The fund used risk budgeting to allocate risk rather than capital, across asset classes, with the risk budget reviewed by board members annually.
Until 1990, the pension plan invested solely in non-marketable Government of Ontario debentures. Following the creation of Teachers’, the asset policy mix of the plan (Exhibit 2.3) changed to allow investment into equities, both public and private, Canadian and foreign as well as income-producing real estate. Teachers’ also began investing in absolute return strategies, hedge funds, money market securities and a wider range of bonds, all of which it classified as fixed income. To achieve its investment objectives, Teachers’ decided on a strategic asset allocation of two-thirds equities and one-third fixed income in 1990. Initially Teachers’ used derivatives to gain exposure to equities, a highly unconventional move for a pension fund. Over five years the fund gradually reduced its holdings of Ontario government securities, increased investment in equities, and reached its target allocation. To allow the investment team to take advantage of tactical opportunities, actual asset allocation was allowed to vary in a 5% band around the strategic asset allocation targets.
Over the years, Teachers’ expanded its universe of investments to include commodities, real estate, infrastructure and timber. Along with real return bonds, these assets were then grouped together in a category that Teachers’ labelled ‘Inflation-sensitive investments’. Starting at 7% in 1996, the target allocation to Inflation-sensitive investments climbed steadily to nearly a third of the portfolio by the early 2000s, and almost half (45%) in 2009. In parallel, in view of the increasing volatility in equity markets and the diminishing risk tolerance of the pension plan given its maturing profile, the target allocation to equities was cut back from two thirds of the portfolio to 40%.
Phase 1: The Origins of Teachers’ Private Capital
As a division within the Equities Investment team, Teachers’ Private Capital invested in private companies; directly, either on its own or co-investing with partners, and indirectly through private equity and venture capital funds managed by third parties. At the end of 2011, TPC’s portfolio of direct investments, co-investments and private equity funds totalled C$12.2 billion. Since inception, this had generated a net-of-fees internal rate of return (IRR) of 19.3%, validating the conviction of Teachers’ initial management team which had envisioned investments in private companies and alternative assets to be part of its portfolio from the start.
