Asia pacific-private-equity-2010-fund-terms-survey

© 2011 Squadron Capital Management Limited. All rights reserved.

Insightful investors in Asia Pacifi c Private Equity

April 2011

The rapid and continuing growth of private equity in the Asia Pacifi c region has heightened interest in private equity fund terms among investors (“limited partners” or “LPs”) comparing potential funds for investment, and fund managers (“general partners” or “GPs”) seeking to benchmark their terms against the market norm. Increasingly, private equity participants are examining how fund terms in Asia compare with best practice principles issued by the Institutional Limited Partners Association (“ILPA”), and seeking to understand why there may be differences in fund terms relative to other markets globally as well as where discrepancies may be acceptable industry differentiation.

In response, Squadron Capital and the Emerging Markets Private Equity Association (“EMPEA”) joined forces to produce this “Asia Pacifi c Private Equity Fund Terms Survey,” providing market data and analysis on the key terms and conditions that prevail in the Asia Pacifi c region, with year-on-year comparisons to track changing dynamics and benchmarks against global norms, where available. The fi rst survey in this annual series, covering data on funds raised in 2009, is available on request from Squadron Capital.

Based on input from 94 Asia Pacifi c GPs that achieved a fi nal closing during 2010 or who were actively fundraising as of 31 December 2010, this unique Survey provides a snapshot of some of the current hot topics in private equity within the Asia Pacifi c region, including the level of management fees and management fee offsets, key person clauses and no-fault divorce provisions. We also examine a topic of specifi c relevance to many markets within the Asia Pacifi c region - the fl exibility or lack thereof for funds to invest in PIPEs - as well as a topic of specifi c relevance to China-focused managers, i.e. the allocation of investment opportunities between parallel US Dollar and RMB funds.

INSIDESurvey Highlights and Information 2

Management Fees 3

Management Fee Offsets 4

Distribution Waterfalls 5

Preferential Fee Terms 6

No-fault Divorce 7

Key Person Provisions 8

Fund Suspensions On Trigger of Key Person Clause 9

Annual Limitations On Capital Calls 10

Ability For / Limitations On Public Market Investing 11

RMB Funds Managers’ Potential Allocation Policy Issues 12

ASIA PACIFIC PRIVATE EQUITY

2010 FUND TERMS SURVEY

KEY TOPICS:

• Management fees• Distribution waterfalls• No-fault divorce provisions• Key person clauses• Limits on concentration and

PIPEs• Renminbi / US Dollar parallel

fund issues

2

April 2011

Survey highlights:

• Annual management fees in the Asia Pacifi c are higher than the global average, likely refl ecting smaller average fund sizes in Asia and certain fi xed costs of fund management irrespective of fund size;

• Almost three-quarters of the respondent Asia Pacifi c funds currently grant a 100% management fee offset, compared with less than half in the 2009 Survey, refl ecting the greatest year-on-year shift in fund terms;

• Demonstrating best practices as per the ILPA guidelines, 84% of Asia Pacifi c private equity funds follow a European-style “fund-by-fund” distribution waterfall and 91% have a key person clause in place;

• Over half the funds surveyed lack a no-fault divorce clause, although voting thresholds for those which do make such provisions compare favorably to the global average; and

• Of the 44% of China-focused GP respondents that manage parallel Renminbi and US Dollar funds, 60% allocate investments between the two purely at the discretion of the GP.

Survey information:

The information in the Survey has been derived from responses to a questionnaire sent by Squadron Capital to over 450 Asia Pacifi c GPs, with the Asia Pacifi c region defi ned as including Australasia, Greater China, the Indian subcontinent, Japan, Korea and Southeast Asia (“ASEAN”). Following the removal of GPs that were not actively fundraising during 2010 and largely incomplete responses, the Survey results cover 94 Asia Pacifi c GPs that either achieved a fi nal closing during 2010 or were actively fundraising as at 31 December 2010.

For funds which were still being raised as at 31 December 2010, the terms stated by the relevant GPs may not refl ect what are or will be the fi nal versions of the limited partnership agreements or constitutional equivalents thereof. Accordingly, the actual fi nal terms and conditions agreed upon for such funds within the Survey - and therefore for the sample size as a whole – will likely be more LP-friendly than the study suggests.

The summary details of the sample funds have been displayed in the charts on this page.

Fund sample by investment strategy

Venture

14%

Growth

63%

Buyout

11%

Distressed / special situations / other

12%

Fund sample by investment strategy

Venture

14%

Growth

63%

Buyout

11%


12% Venture

14%

Growth

63%

Buyout

11%


12%

Fund sample by geographic focus

Greater China

21%

Indian Subcontinent

27%

Japan

2%

Korea

9%

Southeast Asia

13%

Pan-regional

14%

Australia/New Zealand

14%

Fund sample by geographic focus

Greater China

21%

Indian Subcontinent

27%

Japan

2%

Korea

9%

Southeast Asia

13%

Pan-regional

14%


14%

Greater China

21%

Greater China

21%

Indian Subcontinent

27%

Indian Subcontinent

27%

Japan

2%

Japan

2%

Korea

9%

Korea

9%

Southeast Asia

13%

Southeast Asia

13%

Pan-regional

14%

Pan-regional

14%


14%


14%

Fund sample by target fund size

Less than

$100 million

20%

$100-499

million

58%

$100-499

million

63%

$500-999

million

13%

$1 billion and

above

4%

Fund sample by target fund size

Less than

$100 million

20%

$100-499

million

58%

$100-499

million

63%

$500-999

million

13%

$1 billion and

above

4%Less than

$100 million

20%

Less than

$100 million

20%

$100-499

million

58%

$100-499

million

63%

$100-499

million

58%

$100-499

million

63%

$500-999

million

13%

$500-999

million

13%

$1 billion and

above

4%

$1 billion and

above

4%

3

April 2011

Management fees

Management fees continue to be a key area of focus for LPs globally, particularly with respect to the alignment of interests and incentivization of GPs to earn their fees through carry rather than annual management income.

Annual management fees in the region are in general higher than those elsewhere in the world, though this may refl ect the overall smaller fund sizes in the Asia Pacifi c. Despite higher fees, funds in the region might not necessarily be generating annual fee income levels in excess of their GPs’ likely cost bases, or what the ILPA Principles refer to as “reasonable operating expenses and reasonable salaries,” as the majority of funds that are charging annual fees in excess of 2% are sub-$250 million in size.

Note: Private equity fund fees have two components – an annual management fee and a share of the profi t.

Management fees (%)

* Source: 2011 Preqin Global Private Equity Report

0% 20% 40% 60% 80%

>2%

2%

<2%

Comparative management fees

% of funds

Asia Pacific average Global average*

Management fees (%)

* Source: 2011 Preqin Global Private Equity Report* Source: 2011 Preqin Global Private Equity Report

0% 20% 40% 60% 80%

>2%

2%

<2%

Comparative management fees

% of funds

Asia Pacific average Global average*Asia Pacific average Global average*

Management fees by fund size

Fund size ($ million)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0-99 100-499 500-999 > 1,000

Management fees (%)

Management fees by fund size

Fund size ($ million)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0-99 100-499 500-999 > 1,000

Management fees (%)

4

April 2011

Management fee offsets

“Transaction, monitoring, directory, advisory, exit fees and other consideration charged by the general partner should accrue to the benefi t of the fund”

(ILPA Private Equity Principles)

Management fee offsets has been the category that has seen the greatest shift since the 2009 Survey, with almost three-quarters of Asia Pacifi c funds now granting a 100% fee offset, compared with less than half in the previous Survey.

This proportion is also signifi cantly in excess of the global average, where less than 40% of funds are currently in line with what ILPA regards as best practice.

Note: In addition to management fees, GPs in some cases also derive income from underlying portfolio companies (through advisory fees, directors’ fees and so forth) as well as from other sources.

0%

10%

20%

30%

40%

50%

60%

70%

80%

59% or less 60-99% 100%


Fee income offset (%) against management fee

% of funds

Fee income offset (%)


0%

10%

20%

30%

40%

50%

60%

70%

80%

59% or less 60-99% 100%


Fee income offset (%) against management fee

% of funds

Fee income offset (%)

* Source: 2011 Preqin Global Private Equity Report* Source: 2011 Preqin Global Private Equity Report

5

April 2011

Distribution waterfalls

“A standard all-contributions plus preferred-return-back-fi rst model must be recognized as a best practice”


One issue where Asia Pacifi c private equity fund terms are already by and large in line with best practice is the distribution waterfall, where market practice in the region follows a European-style “fund-by-fund” rather than US-style “deal-by-deal” approach. This varies according to fund strategy, however, with a disproportionate number of venture capital funds in the Survey applying deal-by-deal waterfalls.


Fund

level

72%

Deal-by-

deal

28%

Carry structure (Global sample*)


Fund

level

72%

Fund

level

72%

Deal-by-

deal

28%

Deal-by-

deal

28%

Carry structure (Global sample*)

Note: Distribution waterfalls govern the order in which the proceeds from the sale of investments is distributed. Under a fund level distribution waterfall, investors would be repaid all of the amount they invest into a fund plus a minimum profi t hurdle before GPs start becoming eligible for their carry (the term used for incentive payments). Under a deal-by-deal distribution waterfall however, LPs could theoretically have to start paying out carry to GPs even though the LPs themselves have not been repaid all of their original capital investment.

Fund

level

84%

Deal-by-

deal

16%

Carry structure (Asia Pacific sample)

Fund

level

84%

Fund

level

84%

Deal-by-

deal

16%

Deal-by-

deal

16%

Carry structure (Asia Pacific sample)

6

April 2011

Preferential fee terms

There has been an incipient trend in the private equity industry globally for certain GPs to offer differential fee or carry terms to a subset of investors for reasons of relationship (such as fund sponsors or parent organizations), commitment size (in the case of large anchor investors) and/or timing of entry (in particular for fi rst close LPs).

The adoption of such an approach may well enable a GP to kickstart a fundraising process and/or attract large commitments, but at the expense of potential diffi culties further along in the fundraising process as some LPs may view the existence of such deals adversely. For a GP, there are also obviously the fi nancial implications of offering such fee or carry discounts.

While the vast majority of funds in the Survey offer all LPs consistent fee and carry terms, there are a small number which have granted preferential terms to a subset of investors. Interestingly, of the funds which offer differential carry terms for certain LPs, the majority of these are India-focused funds.

Equality of fee/carry terms versus preferential deals

% of funds

0%

20%

40%

60%

80%

100%

Yes, all LPs pay the

same fees and carry

No, certain LPs pay

a lower management

fee

No, certain LPs pay

a lower carry


% of funds

0%

20%

40%

60%

80%

100%


same fees and carry

No, certain LPs pay

a lower management

fee

No, certain LPs pay

a lower carry


% of funds

0%

20%

40%

60%

80%

100%


same fees and carry

No, certain LPs pay

a lower management

fee

No, certain LPs pay

a lower carry

7

April 2011

No-fault divorce

“No fault rights upon a two-thirds in interest vote of limited partners for the removal of the general partner”


The presence and nature of no-fault divorce clauses in the Asia Pacifi c region as a whole is a matter which is still signifi cantly short of what the ILPA regards as best practice.

Over half of the funds in the Survey lack a no-fault divorce clause, though closer analysis of the data set indicates that this is disproportionately the case amongst funds which have not yet achieved a fi nal close as at the end of 2010.

Even for those funds that do have such clauses, the voting thresholds are generally higher than the ILPA’s recommended two-thirds fi gure (though lower than the global average), with 75% being the most common threshold.

Note: A no-fault divorce clause refers to the ability for investors to terminate the management agreement between the fund and the GP, which in the ordinary course can often run for 10 or more years.

% vote required for no-fault divorce

Vote required (%)

% of funds

0% 20% 40% 60% 80%

90% +

80-89%

70-79%

50-69%

Asia Pacific average Global average


Vote required (%)

% of funds


Vote required (%)

% of funds

0% 20% 40% 60% 80%

90% +

80-89%

70-79%

50-69%

Asia Pacific average Global average

No-fault divorce clause in place

Yes

49%

No

51%

No-fault divorce clause in place

Yes

49%

Yes

49%

No

51%

No

51%

8

April 2011

Key person provisions

Key person clauses remain a key area of focus in many of the Asia Pacifi c private equity markets, perhaps more than elsewhere. The high volatility of Asia Pacifi c markets combined with the fact that many Asia Pacifi c GPs have not as yet gone through a full investment cycle means there is a lower opportunity cost for teams or team members leaving or spinning out of their existing fi rms. Indeed, a signifi cant number of spinouts have occurred during the course of 2010 and 2011 to date.

In addition, a greater proportion of GPs in the region continue to be overly dependent on a single founder or individual compared with the more institutional partnership structures of GPs in established markets, which increases the risk of problems should such an individual leave or be unable to continue with the GP.

While the majority of funds within the sample size are in line with the revised ILPA Principles on this matter and have a key person clause in place, a minority of funds are not.

Key person clause in place

Yes

91%

No

9%

Key person clause in place

Yes

91%

No

9%

9

April 2011

Fund suspensions on trigger of key person clause

“Automatic suspension of investment period, which will become permanent unless a defi ned super-majority of LPs in interest vote to re-instate within 180 days, when a key-person event is triggered or for cause”


What happens in cases where the key person clause is triggered?

Approximately half the funds within the data set apply best practice automatic suspension of the investment period, while the other half requires an LP or advisory board vote in order to suspend or terminate the fund.

For suspensions which are not automatic, the median threshold of 75% is a surprisingly high fi gure.

Where the suspension is automatic, lifting of the suspension can generally be achieved by the approval of either a simple majority or two-thirds of LP interests or the advisory board. Practice in the Asia Pacifi c region is thus broadly in line with standard practice elsewhere in the world.

If suspension is automatic:% of LP interests or advisory board required

to lift the suspension

% LP interest or advisory board vote required

% of funds

0%5%

10%15%

20%25%30%35%

51% 67% 75% 80%




% of funds




% of funds

0%5%

10%15%

20%25%30%35%

51% 67% 75% 80%

Automatic suspension of investment period if key person clause is triggered

Yes

49%No

51%

Automatic suspension of investment period if key person clause is triggered

Yes

49%No

51%

If suspension is not automatic:% of LP interests or advisory board required

to suspend/terminate

% of funds


0%

10%

20%

30%

40%

50%

60%

51% 67% 75% 80%

If suspension is not automatic:% of LP interests or advisory board required

to suspend/terminate

% of funds


0%

10%

20%

30%

40%

50%

60%

51% 67% 75% 80%

10

April 2011

Annual limitations on capital calls

Vintage diversifi cation is a key tenet of private equity investing. This is arguably even more true in the case of many of the markets within the Asia Pacifi c region, where historically higher levels of market volatility imply that timing has an even greater than usual impact on returns.

Despite this, barely 10% of Asia Pacifi c private equity funds have per annum limits on capital calls - approximately the same percentage as last year’s Survey (8%) – with most GPs and LPs taking the view that full temporal fl exibility in investing becomes more rather than less important in the volatile markets within the region if they are to invest opportunistically to maximize returns.

Annual restrictions on investment activity

Yes

11%

No

89%

Annual restrictions on investment activity

Yes

11%

No

89%

11

April 2011

Ability for / limitations on public market investing

Private investments in public entities (“PIPEs”) remain a topic of signifi cant debate within the region, being viewed by members of the private equity community – both GPs and LPs – either with disdain, reluctant acceptance or as unique opportunities to generate value.

A majority of funds (59%) in the 2010 data set have formal restrictions on PIPEs, which is a statistically similar proportion when compared with the 2009 data reported in last year’s Survey (57%).

Where restrictions are in place, there appears to be a polarization of the market between funds with ceilings of 10% or less and those with ceilings of 20% or more (at the expense of those with a 15% ceiling).

Investment restrictions in publicly listed companies

Yes

59%

No

41%

Investment restrictions in publicly listed companies

Yes

59%

No

41%

Yes

59%

No

41%

Yes

59%

No

41%

Limitation of investments in listed companies

% of funds

Public investments ceiling as % of fund

0%

5%

10%

15%

20%

25%

30%

35%

0% Up to 10% 15% 20% 25% or

higher


% of funds


0%

5%

10%

15%

20%

25%

30%

35%

0% Up to 10% 15% 20% 25% or

higher


% of funds


0%

5%

10%

15%

20%

25%

30%

35%

0% Up to 10% 15% 20% 25% or

higher

Note: Where applicable, the ceilings above represent the proportion of each fund that can be invested in publicly listed companies, beyond which any such investments can be made only with the approval of the fund’s LP advisory board.

12

April 2011

RMB fund managers’ potential issues relating to allocation policy

As it becomes increasingly common for China-focused GPs to manage parallel Renminbi and US Dollar funds, the topic of managing potential confl icts of interests between parallel funds has become a key matter of concern for LPs globally.

In excess of 40% of China-focused GPs who responded to the Survey now manage parallel Renminbi and US Dollar funds. Of these, 60% allocate investments between the two funds at the discretion of the GP.

The fact that a large proportion of China-focused GPs managing parallel funds have discretion over the allocation procedure could indicate on the positive side that LPs have taken a pragmatic view of the issue, and on the negative side that LPs may in certain cases be too willing to accede to these points in order to ensure access to certain GPs in the market.

Note: The pro rata category also includes GPs which to a large extent avoid the potential confl icts of interests issue by having entirely separate teams managing each of the Renminbi and US Dollar arms.

Do you manage RMB-denominated private equityfund(s) as well as USD-denominated fund(s)?

Yes

44%No

56%



Yes

44%No

56%

Yes

44%No

56%

What is the basis of allocation of opportunitiesbetween the RMB and USD funds?

Strictly pro rata for all

encouraged/permitted

40%

sectors

Purely at the

discretion of the GP

60%



Strictly pro rata for all

encouraged/permitted

40%

sectors

Purely at the

discretion of the GP

60%

13

April 2011

ABOUT SQUADRON CAPITAL

Squadron Capital is a private equity investment fi rm based in Hong Kong and focused on the Asia Pacifi c region. On behalf of its clients, the fi rm constructs and manages portfolios of private equity funds, with aggregate assets under management currently well in excess of $1 billion. Squadron Capital has one of the largest professional investment teams dedicated to private equity in the region, with investment professionals hailing from eight Asia Pacifi c countries. The fi rm is widely recognized as a leader in the industry and has won several industry awards.

ABOUT THE SQUADRON CAPITAL WHITE PAPER SERIES

In order to provide existing and potential limited partners with an overview of key private equity trends and activity in the Asia Pacifi c region, Squadron Capital compiles a series of “white papers” that are updated regularly. This Survey, which is conducted annually by Squadron Capital, is part of the fi rm’s white paper series.

In preparing these white papers, the intention is neither to set out a defi nitive analysis of the state of the private equity markets in the Asia Pacifi c region, nor to execute a ‘data dump’ of raw information, but rather to provide a considered and insightful overview of the key factors and trends likely to infl uence the level of private equity activity over the investment periods of the underlying funds into which vehicles managed by Squadron Capital are likely to invest.

The data contained in the Squadron Capital white papers has been compiled from various publications and databases and in certain cases has been directly quoted from the relevant sources. The identifi cation and selection of key factors and trends is our own, and the qualitative evaluations represent our opinion based on our own analysis.

While Squadron Capital seeks to ensure that the information contained herein is accurate, no representation or warranty of any kind, express or implied, is made with respect to the accuracy or completeness of any such information. Squadron Capital reserves the right to change any such information, at any time, without notice. No reliance may be placed for any purpose whatsoever on the information contained in this document or on its completeness.

No information contained in this document constitutes an offer to sell or an invitation to subscribe for any securities.

The data and charts contained herein may be reproduced, distributed or published on the express condition that you attribute any data and charts you use to Squadron Capital.

Squadron Capital Advisors Limited is licensed by the Securities and Futures Commission in Hong Kong to conduct Type 4 (Advising on Securities) and Type 9 (Asset Management) regulated activities and may only deal with professional investors. The Company is also registered with the United States Securities and Exchange Commission as an Investment Adviser.

© 2011 Squadron Capital Management Limited

Responsible Investor of the Yearin Asia: Squadron Capital

Responsible Investor of the Yearin Asia: Squadron Capital

Squadron Capital Advisors Limited

46th Floor, Cheung Kong Center2 Queen’s Road Central

Hong Kong

Tel: +852 2826 2000Fax: +852 2297 0880

eMail: [email protected]

14

April 2011

The Emerging Markets Private Equity Association (EMPEA) is an independent, non-profi t, global industry association that catalyzes private equity and venture capital investment in the emerging markets of Africa, Asia, Europe, Latin America and the Middle East. EMPEA’s more than 250 members comprise a broad array of fund managers, institutional investors and other industry stakeholders, representing more than 50 countries and over US$1 trillion in assets under management.

The Emerging Markets Private Equity Association (EMPEA) was founded in 2004 by a handful of visionaries at the heart of the industry who shared the belief that private capital has the potential to unleash economic growth in emerging markets while simultaneously generating strong returns for investors.

EMPEA is unusual among membership associations in producing proprietary research that provides an authoritative global view of the market in support of our mission. We leverage the scope and connectivity of our membership to help deliver research and insight built on solid empirical data. We also organize conferences and unique member events around the world, often in partnership with global media brands where the EMPEA network facilitates powerful business networking opportunities.

EMPEA provides the asset class with a voice on key public policy issues to global regulators and policymakers, and works to advance the dialogue on emerging markets opportunities and challenges among institutional investors.

For more information, please visit www.empea.net.

Emerging Markets Private Equity Association

EMPEA Headquarters

1055 Thomas Jefferson St NWSuite 650

Washington, DC 20007, U.S.A.Tel. +1.202.333.8171

EMPEA Asia HeadquartersSuite 3205

No. 9 Queen’s Road Central, Hong Kong

Tel. +852.3713.4879

ABOUT THE EMERGING MARKETS PRIVATE EQUITY ASSOCIATION (EMPEA)

Asia pacific-private-equity-2010-fund-terms-survey

Economy & Finance

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