private equit guide vault

2009 Vault.com Ltd

2009 European Edition

Vault Career Guide to

Private Equity

Copyright 2008 by Vault.com Ltd. All rights reserved.

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ISBN 13: 978-1-58131-598-1ISBN 10: 1-58131-598-8

Printed in the United Kingdom

ACKNOWLEDGEMENTS

Thanks to all Vault staff for their help. Special thanks to our family and friends,especially Angelina, Antoine, Ariana, Olivier, Andrew, Goncalo, Christelle and theCandesic team.

We are also grateful to all the private equity fund managers who agreed to answerour questions and complete our data.

Vault Career Guide to Private Equity

Table of Contents

PREAMBLE 1

THE SCOOP 3

CHAPTER 1: What is Private Equity? 4

Who invests 4

Other specific cases 8

CHAPTER 2: The Market 10

Industry statistics 10

Current trends and issues 12

GETTING HIRED 25

CHAPTER 3: Is It the Right Job for Me? 26

Comparison with other elite jobs 29

Lifestyles 32

Interview with a London director at 3i 33

Interview with former senior partner at London-based mid cap fund 34

Days in the life 35

Career paths 39

CHAPTER 4: The Hiring Process 40

Campus recruiting 40

Networking 41

Search firms 42

Websites 42

Preparing for the interview 42

TABLE OF CONTENTS

PROFILES OF 37 REPRESENTATIVE PRIVATE EQUITY FIRMS IN EUROPE 47

US-ORIGINATED GLOBAL FUNDS with direct presence in Europe 48

Advent International 48

Bain Capital 53

The Blackstone Group 57

The Carlyle Group 65

General Atlantic 71

Goldman Sachs Principal Investment Area 76

Kohlberg Kravis Roberts & Co. (KKR) 81

TPG 87

PAN-EUROPEAN FUNDS 91

3i Group 91

Allianz Capital Partners /Allianz Private Equity Partners / Allianz AGF PRE 98

Apex Partners 103

AXA Private Equity 111

Barclays Private Equity 118

BC Partners 124

Bridgepoint Capital Ltd. 130

Candover 135

Cinven 140

CVC Capital Partners Limited 145

Doughty Hanson 151

Duke Street Capital 154

EQT Partners 157

Eurazeo 161

European Capital 164

Glide Investment Management 167

HgCapital 171

Industri Kapital 176

Montagu Private Equity 181

PAI Partners 184

Permira Advisers 188

TerraFirma 195

OTHER FUNDS with more regional focus 199

Englefield Capital 199

Exponent Private Equity 202

Investitori Associati 205

Mercapital 208

Sagard 211

MEZZANINE FUNDS 214

Intermediate Capital Group PLC 214

FUND-OF-FUNDS 218

Partners Group 218

SHORT PROFILES OF 200 OTHER PRIVATE EQUITY FIRMS IN EUROPE 225

LBO, growth equity and diversified PE Funds 226

Mezzanine Funds 304

Distressed Funds 310

Secondary Funds 312

Fund of Funds 316

APPENDIX 335

RECOMMENDED READING 337

WEB RESOURCES 337

ACADEMIC SOURCES 337

INDUSTRY JARGON (glossary) 338

ABOUT THE AUTHORS 342

Table of Contents



1

Preamble

PREAMBLE

his guide covers late stage private equity funds only, excluding venturecapital. Using the Candesic database of private equity firms, we haveidentified around 250 companies that meet the following criteria: a minimum

of 200-300 million of committed private equity investments in Europe. The listincludes LBO, growth capital, distressed, mezzanine funds and, to an extent, fundsof funds. The guide excludes sovereign funds, which are state owned pools of money,as well as most of the real estate and infrastructure funds. Together and excluding thefunds of funds, the first 200 firms in our sample manage about 400 billion incommitments and invested assets in Europe. (Including the assets outside of Europeand the funds of funds, our sample reaches 900 billion in total commitments andinvestments in private equity.)

We selected 37 firms that we deemed representative of Europe, not necessarily thelargest ones. This includes mostly direct LBO funds and a couple of examples in eachof the other categories. Selecting the top firms was not necessarily clear cutconsidering the variety of situations occurring in an industry undergoing Europeanconvergence. All the other firms included in the analysis are listed at the end of theguide with key statistics and contact details.

T

CHAPTER ONE: What is Private Equity?

CHAPTER TWO: The Market

THE SCOOP

4CHAPTER ONE: WHAT IS PRIVATE EQUITY?

s its name implies, private equity investing refers to investments in non-publicly traded assets. This encompasses a wide range of investments, fromsmall equity stakes in new ventures by so-called angel investors to highly

leveraged controlling equity investments in multi-nationals.

Who invests?

Most private equity funds are structured as limited partnerships with a life ofbetween five and ten years, with a General Partner and a Manager. The directinvestors, or limited partners, are mostly institutional investors who want todiversify into alternative asset classes. This can also include funds of funds that allowsmaller investors access to the asset class. One of the big strengths of private equityis that it closely aligns the interests of investors with those of the fund managers (thegeneral partners) and the management of the companies they invest in, as theygenerally all have a substantial share of the equity.

How they make money

Private equity investors seek to recognise niches that offer attractive growth prospects, tobuy or build a well positioned player in that niche and to give that player the means to

A

PRIVATE EQUITY INVESTORS

Company Management/Entrepreneur

PRIVATE EQUITY FUND

Investment Managers

Investors/GPs(Institutions, HNWI) Funds of Funds

Smaller Investors

Source: Candesic


5

Chapter O

ne: What is Private Equity?

perform better than its peers. In addition, at least in mature markets, they attempt tomultiply their return by leveraging their investment, aided in recent years by low interestrates. As a more difficult credit environment evolves and debtor protection increases, it islikely that some poorly performing funds wont be able to survive much longer.

Types of PEsegmentation by stage and product

The wider private equity sector can be divided into four distinct types of investment:leveraged buyouts, venture capital, mezzanine financing and distressed debt. Somefirms will specialise in a single type of investment, while larger firms will oftenprovide a range of investment alternatives.

A leveraged buyout is the name given to an acquisition that is funded primarilythrough debt. Public companies are often taken private, using large bank loans orcorporate bonds to acquire the firms outstanding equity. The practice was initiallypioneered in the 1970s by banking icons such as Henry Kravis, founder of KKR, andhas developed into an accepted industry standard.

In a leveraged buyout the management team is often given or allowed to purchase astake in the investment. This is done to incentivise the management team and aligntheir interests with the PE firm, who will trust the management team to look aftertheir investment for them. If the current management team is involved in buying thecompany from existing owners, it is known as a management buyout, or MBO. Whenthe management team involved is an external group that replaces the existingmanagement, it is known as a management buy-in, or MBI.

Venture capital is a form of alternative investment that provides high risk equity toearly stage companies. The firms are typically entrepreneurial ventures that do nothave the steady cash flows or track record to raise money through bank loans andpublic markets. To compensate, the venture capital firms expect very high returns ontheir investments. It is sometimes the case that companies seeking venture capitalinvestment may have nothing more than a business plan, and therefore have a highrisk of failure. This inherent risk was particularly damaging during the dotcom crash,as many of the tech companies that lost equity were backed by venture capital firms.The mature part of venture capital is called expansion capital, and is often a sideactivity of LBO funds.

Mezzanine finance is the term given to a layer of debt that is typically used to fill a gapwhen structuring an LBO, which can be either in time, transaction structure or capitalstructure. This level of debt can have many forms and can offer several advantagesover other forms of financing.

6Distressed debt is a high risk form of debt given to a company that is financially distressedor bankrupt. Distressed firms are typically very volatile and difficult to value, andtherefore present arbitrage opportunities for financial investors such as hedge funds.

Segmentation by styledirect investors, co-investors, secondaryfunds and funds of funds

This book focuses on primary funds that invest directly into companies, either takinga majority stake, so they can influence the management and decide on the strategyof their asset, or investing alongside other funds (co-investors like Parallel in the UK).

Another category of private equity investing that is growing fast is the so-calledsecondary, when a fund buys a portfolio of private equity assets or pre-existinginvestor commitments to private equity.

While this activity is not new, the maturing of the industry and the marketdownturn of 2000 led many historical private equity investors, often banks orinsurance companies, to withdraw from the private equity asset class. This inturn led to the rapid growth of another segment of investors specialising in theacquisition of these existing portfolios. Dedicated secondary funds concentrateon acquiring all or part of the portfolios from other private equity funds. Within

TYPICAL BIG LBO FINANCING STRUCTURE (PRE-CRISIS)

Equity

Mezzanine

High yield

Senior debt

30%

10%

10%

50%

Choice of high yield over mezzanine can be led by:

Market conditions Pricing Ease of issue Possible need to refinance

Source: Candesic


7

Chapter O


this segment, secondary direct funds buy portfolios of direct investments. Manylarge diversified funds include it in their activities. Finally, one can distinguishbetween early and mature secondaries.

0

5

10

15

20

25

30

KKRAp

ax

Perm

iraCV

C

Terra

Firm

a

BC Pa

rtners

Black

stone

EQTCi

nven 3i

Carly

le

Chart

erhou

se

Bain

Capit

al

Goldm

an Sa

chs

Bridg

epoin

t

PAI P

artne

rs

Indus

tri Ka

pital

AXA

PE

Barcl

ays P

E

Doug

hty H

anso

n

Alpin

vest

35

40

45

50

60

70

80

90

30

2019

15 11 119 9 9 9 9 8.4 8 8 8 7

5.7 5 5 5 5

86

35

2221

33

44

32

38

11 11

Assets or commitments outside Europe

Assets allocated to European acquisitions

TOP 20 DIRECT PRIVATE EQUITY FIRMS BY AuM IN EUROPE*March 2008, bn(*Doesnt include funds of funds)

Source: Can desic PE database

8We also listed some of the major funds of funds in Europe. They simply invest in anumber of direct PE funds to diversify their risk.

Geographic segmentation: global, pan-European or regional playersin Europe

We also distinguish between major US funds attracted by the investmentopportunities in less mature European markets, pan-European funds that grewbeyond their country of origin and developed teams in major European cities,and local funds that made the strategic decision to concentrate on their homemarket or, like Canadian owned Sagard in France, on a geographic area ofcommon language. Most of the US funds, with the exception of Vestar, launchedtheir European operations out of London, and many still conduct them fromthere.

Segmentation by financing: private vs. listed

We can roughly consider three forms of financing for private equity funds: internalfunding, for example through a parent company or a family office, limitedpartnership with external institutional investors, and access to permanent capitalthrough public funding (3i, Blackstone, Eurazeo).

Other specific cases

A PIPE is a special type of private investment, where accredited investors areprivately invited to invest in a public company. The process has similarcharacteristics to other forms of stock offerings, and is often used when a companyis having difficulty finding additional funding after an unconvincing IPO. Thesecurities sold can be common stock, convertible preferred stock or convertible notes,and are normally sold at a discount due to their relative illiquidity.

Crossover funds are investment funds that attempt to fill the gap between private andpublic equity investing. They combine private equity investing with strategic publicequity investing typically used by hedge funds, with a market risk somewhere inbetween the two. There is a trend for hedge funds to allocate a portion of their fundto private equity investments into side pockets, although typically this will onlymake up around 10% and tends to be the money of the fund managers.


9

Chapter O


Interval funds are somewhere between open and closed-end funds in that they do notprovide daily liquidity, but have specified periods when shareholders are able toredeem and distribute shares with the fund. During this time there will be an offerto buy back a stated portion of shares from investors. Interval funds have provenpopular since being introduced in 1992 as they provide retail investors with accessto private equity investments with a degree of liquidity.

10

CHAPTER TWO: THE MARKET

rivate equity may well be the oldest form of financing. For a long time,merchant banks or early forms of family offices have been responsible fororganised venture capital. The major transformation, beginning in the 70s, has

been the adjunction of high yield (junk) debt to the financing of companies withmature cash flows and the widespread use of leverage. In the last 30 years,professional and mostly independent LBO firms have occupied a leading position inthe market. In the US as well as in the UK, the direct presence of investment andcommercial banks has been eroded as most internal funds have gained theirindependence, often to reduce the risk of a conflict of interest with the increasinglyimportant clients of the banks. Today, banks are mostly present as General Partnersor co-investors and, with the notable exception of Goldman Sachs, the major playersare independent firms. The same process is happening now in the rest of Europe.

Industry statistics

In 2007, global private equity assets under management represented about $1.1trillion, of which 700 billion were LBO funds (these figures, which seem ratherconservative, come from the McKinsey Global Institutes The New Power Brokers,which appeared in October 2007) . A year later, following a record fund raising ofmore than $500 billion, research provider Private Equity Intelligence announced that,with the sum of the undrawn money and portfolio company holdings, the privateequity industry had reached assets under management of $2 trillion and had thefirepower to acquire up to $2.4 trillion in enterprise value; despite the currentdifficulties in the LBO segment, [They] are predicting a $5 trillion industry over thenext five to seven years.

The industry has experienced an average growth rate of 14 per cent since 2000. Froma demand perspective, the growth is fuelled by the strong and sustainableperformance of the best managers, by the ability of many institutional investors toallocate a larger portion of their assets to the asset class and by the surge of newinvestors like sovereign funds. From a supply perspective, there is more awarenessof the possibilities offered by private equity for companies in need of financing, anda growing pool of experienced managers with the skills required to execute thesetransactions.

Of course, as we publish this guide (late 2008), and after a year of depressed markets,culminating in a financial crisis, that have halted the most visible transactions, it isdifficult to merely describe the boom of the past seven years. We may be in the midstof a bust, but we dont think the fundamental attractiveness of the private equitymodel has changed, and would argue for a temporary correction of the recent excess.

P


11

Chapter Tw

o: The Market

Employment statistics

In terms of employment, PE remains a niche; the top 50 PE firms worldwide employedless than 4,000 investment professionals in 2007. If we add the smaller firms, the venturecapital and the family offices, we may reach 20,000 investment professionals, of which

0

5

10

15

20

25

30

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

35

40

45

50

60

70

80

90

30

2019

15 11 119 9 9 9 9 8.4

90

20

25

15

28

72 7170

37

47

Commitments raised

Funds invested

100

78

10

20

35

48

40

24

29

27

28

100

2007

- The recent fast growth of commitments has led to an overhang with too many investors chasing too few deals

- One of the consequences is a rush towards bigger deals

- Another possible consequence is a more relaxed approach to risk and an expected decrease in the overall performance

EUROPE-PRIVATE EQUITY FUNDS RAISED AND INVESTEDbn, equity commitments to and worldwide investments byEuropean PE funds

Source: EVCA; Perep & Preqin (2007); Candesic

12

we estimate 7,000 are based in Europe. According to the Candesic database, the top240 PE firms operating in Europe currently employ about 4,000 investmentprofessionals. These numbers look particularly low when compared to the millions ofpeople employed at the companies owned by the private equity funds.

Current trends and issues

After two decades of relative confidentiality, the private equity industry has comeunder increased scrutiny from the media, politicians and the general public. Amongthe major concerns, the excessive debt levels seem to be losing importance as debtproviders now refuse the extreme conditions demanded by PE investors before thesummer 2007. The public disclosure of the huge compensations that successfulpartners can achieve (e.g., Blackstone) has raised questions and sometimes fiercecritics. Other concerns include the lack of transparency and accountability, as well asa sometimes narrow sense of fiduciary duty. The industry regularly stands accusedof profiteering and asset-stripping. This seems to be an unfair accusation, as moststudies showedat least until recentlythat private equity backed companies createmore jobs than their public equivalents. A meta-review of 12 existing studies by A.T.Kearney claimed that private equity created 600,000 jobs in the United States between2000 and 2003. But critics point out that the report didnt distinguish buyouts fromventure capital.

In France, a study made by accounting firm Constantin for the French Association ofPrivate Equity Investors (AFIC) on more than 100 French companies undergoing

European private equity fund managers by country

Other 2%

Eastern Europe 3%

Switzerland 4%

Benelux 4%

Italy 5%

Spain 6%

Nordic 7%

Germany 10%

France 17%

UK 42%

EUROPEAN PRIVATE EQUITY FUND MANAGERS BYCOUNTRY OR REGION

Source: Candesic PE Database


13

Chapter Tw

o: The Market

LBOs showed that their headcount grew by 4.1 per cent per annum (with 78 per centof it from new jobs and 22 per cent from external growth), whereas the nationalaverage was only 0.6 per cent. This growth was partnered with salaries increasing by3.3 per cent per annum vs. 2.9 per cent on average and other elements ofremuneration being on average better developed and more attractive for all LBOemployees.

Similar studies in Germany (Economic Impact of private Equity in Germany, F.A.ZInstitute, 2004) and in the UK (Employment Contribution of Private Equity andVenture Capital in Europe, Centre for Entrepreneurial Studies in London, 2005) ledto similar findings. (The 2005 study by the Center for Entrepreneurial and FinancialStudies (CEFS) for the EVCA claims that more than 400,000 net jobs were created inEurope by buyout-financed companies between 2000 and 2004. SEIU (ServiceEmployees International Union) warn that the studys claims are based on self-reported information from a small set of portfolio companiesjust 99 out of morethan 1,400 companies that underwent a buyout during the period studied.)

In January 2008, by commission of the World Economic Forum, Josh Lerner fromHarvard and Steven Davis from Chicago published the most extensive study to dateregarding the issue. It is also unique in that it is not suspected of having any bias orexternal influences. Reviewing 5,000 US transactions from 1980 through 2005, theyfind that companies owned by private equity funds have a net reduction of theirworkforce of 1 per cent over two years. This differs from the positive result of anotherstudy commissioned by the Private Equity Council, a lobbyist group, which showedthat employment at privately acquired firms grew by more than 8 per cent, but waslater dismissed by many academics as biased. The World Economic Forum studydoesnt examine what would have happened to the jobs had the transaction notoccurred. They also find that these firms default slightly more often than the averagepublic firm, but only half as much as those with similar leveraging.

In order to address the transparency and profiteering concerns, in 2007 the BVCAannounced the formation of an independent working party under theChairmanship of Sir David Walker to draw up a voluntary code on a comply orexplain basis to address the transparency of the industry and levels of disclosure.Twenty-three private equity firms operating in the UK issued a statement to supportthis initiative, including Apax, BC Partners, Barclays Private Equity Ltd., TheBlackstone Group, Bridgepoint, Candover, The Carlyle Group, Charterhouse,Cinven, CVC, Doughty Hanson, Exponent Private Equity, Hermes Private Equity,HgCapital, ISIS EP LLP, KKR, Legal & General Ventures Ltd., Lyceum Capital,Montagu Private Equity, Permira, Terra Firma Capital Partners Ltd., TPG and 3i.

14

The credit crunch

Leverage in the buyout industry reached an all time high in 2007, which led to anincreasingly lenient approach to risk, with a flourishing of so-called covenant-litedebt financing. Debt providers finally started to object and refuse the conditionsdictated by the buyout funds. The situation may have arisen in the US but spreadimmediately to Europe. In June 2007, banks were left sitting on 5bn of debt from thefinancing of Alliance Boots, the UK pharmaceutical retailer acquired by KKR. Thissignaled a severe correction of both leverage levels and the conditions associatedwith the loans. This was further confirmed during the summer of 2007, when thetightening of the world credit markets led to major collapses in the hedge fundindustry where the effect of this credit adjustment is more immediately visible.

PE FIRM

KKR

Blackstone

Main Private Equity Firms Are Giant Conglomerates

# of Companiesin portfolio

40

45

Carlyle

Bain Capital

200

Apax

TPG

180

Permira

GS Capital Partners

CVC

Cerberus

53

Providence Equity

Thomas H. Lee Partners

Apollo

Warburg Pincus

General Atlantic

Total turnover

$102bn

$72bn

$87bn

$65bn

$55bn

Employees

560,000

350,000

280,000

660,000

300,000

1,000,000

430,000

360,000

86,000

AuM

$86bn

$32+60bn*

$75bn

$50bn

$35bn

$30bn

$30bn

$30bn

$29bn

$22bn

$21bn

100

50

390,000

300,000

375,000

$20bn

$16bn

$15bn

$14bn

* $60bn in other asset classes Source: press search; SEIU; Candesic analysis


15

Chapter Tw

o: The Market

In spite of a record first half year in 2007, the total value of buyouts between Augustand October 2007 was 60 per cent lower than during the same period in 2006. In themonths leading up to the second quarter of 2008, the situation has furtherdeteriorated and many insiders acknowledge that they dont expect to close manytransactions during the year. One immediate consequence is the general impact onthe investment banking business. Before the credit crisis, investment banks couldearn up to 25 per cent of their fee income from advisory related to private equityfirms; this number has fallen to around 10 per cent with a direct impact on the banksprofitability.

For private equity firms involved in major transactions that they cannot easily financeanymore, it is tempting to try and renegotiate terms or simply withdraw their offer.But invoking the material adverse change clause doesnt work well and the breakup fee can be heavy.

One likely consequence will be that private equity funds will have more difficultycompeting against strategic investors as their access to cheap financing will belimited. This in turn will contribute to lower returns. According to the McKinseyGlobal Institute, firms that have relied more on leverage than skill may shut down.This is more the case for mega buyouts which are more likely to rely on financialengineering for value creation.

Regional differencesThe private equity industry has historically grown first in Anglo-Saxon countries. InEurope, the UK still represents about a third of the activity. While countries likeFrance or Spain have had substantial growth in the recent years, the economic,regulatory and cultural environment remains more favourable in Northern Europe.This hasnt prevented funds from expanding throughout Europe, but they recognisethe strong cultural differences.

Even in the UK, supposedly the friendliest place in Europe, public perception aboutprivate equity deteriorated in 2007 following widely publicised critics of the attractivetax status General Partners enjoy. The subsequent reform of the tax system is morelikely to penalise entrepreneurs, for whom the system was originally designed, thanimprove public perception.

This hostility has resonated elsewhere in Europe. The industrys negative reputationis relatively new and differs from country to country. In Germany, the term locustswas famously used in 2005 by the leader of the Social Democrats and again by theformer CEO of Deutsche Boerse in his vitriolic book Invasion of the Locusts, after anactivist fund led to his departure. This has tainted the industrys reputation ever

16

since. It is tempting for politicians to use private equity firms as scapegoats, and it isall the more easily done when some players carry out transactions with an approachthat is considered too aggressive, in a country where social consensus has dominatedfor fifty years. In spite of that, Apax still considers Germany a friendlier environmentfor private equity than France, all of Southern Europe and even Norway.

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0 Belgium

France

AustriaN

orway

Germany

Finland

UK NL

Ireland

CHSweden

Denm

ark

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.8

3.8

3.1

2.6 2.6

1.9 1.8

1.5 1.4

1.1

-0.3

-1

-1.9-2.1 -2.2

-2.5-2.7

-3.0

4.5

5.0

3.8 3.8

Hungary

Greece

Italy

Czech Rep.

Poland

SpainPortugal

Slovakia

PRIVATE EQUITY ENVIRONMENT RANKINGS IN EUROPE2007 grades

Source: Apax


17

Chapter Tw

o: The Market

Costs and performance

"On balance, private equity increases efficiency," says economist Steven Kaplan ofthe University of Chicago.

According to a study he conducted in 2005 with Antoinette Schoare from MIT, largebuyouts consistently outperform public stocks. More precisely, they exceed those ofthe S&P 500 gross of fees and equal them net of fees. However, this depends on thesample and the period considered. There are a couple of limitations in the assessmentof the industry performance, starting with the access to sufficient data, the selectionbias between good and poor performers and the general accuracy of the valuation ofthe assets still in the portfolio. Some other studies have shown more mixed resultsover the last ten years US buyouts could have outperformed the stock market (thoughwhether this can be proven is something of a grey area)but buyouts seem to be anattractive asset class for limited partners and individual investors through their pensionplans. They could also have a beneficial impact on the economy with net job creations.

When looking more closely at their results, Kaplan and Schoar find a large degree ofheterogeneity among fund returns. Returns persist strongly across funds raised by individualprivate equity partnerships. The returns also improve with partnership experience. They alsofind that market entry in the private equity industry is cyclical. Funds [and partnerships]started in boom times are less likely to raise follow-on funds, suggesting that these fundssubsequently perform worse. Aggregate industry returns are lower following a boom, butmost of this effect is driven by the poor performance of new entrants, while the returns ofestablished funds are much less affected by these industry cycles. (This is from Kaplan andSchoars 2004 Private Equity Performance: Returns, Persistence and Capital Flows.)

Nevertheless, a 2008 report by Thomson Financial for the EVCA shows that Europeanprivate equity firms achieved a 15.9 per cent five-year rolling IRR, against 14.5 percent for US buyout groups, and expects the short-term performance of private equityfunds to remain very strong.

Taxation

General partners in private equity funds have been increasingly criticised for payinga very low amount of taxes on their revenue. Until 2008, carried interests were taxedat the level of capital gains at 15 per cent in the US and at a special level of 10 per centin the UK. This is an unintended result of the original attempt to support thefinancing of risky ventures by private equity, by the so-called venture capitalists.Today, when 75% of the capital is invested in buyouts where, by definition, cashflows are relatively stable and predictable, this tax treatment appears generous to

18

many. In October 2007, the UK government announced their decision to raise the rateto 18 per cent, a measure that should be limited enough to prevent a massive exodusof funds. In the US, major players have lobbied hard to kill a Senate bill and a measureby the House of Representatives that would increase the taxation of carried intereststo 35 per cent or more instead of 15 per cent. They are now trying to at least doublethe five year grace period contained in the draft proposal and to ensure that all privateequity firms will be treated equally, including those who went public.

The competition

Cooperation and competition with hedge funds

Hedge funds are similar to private equity funds in many respects.

They have similar organisational and to an extent compensation structures,they are often highly leveraged; they offer high performance and seeminglylower correlation to other asset classes; they need to raise funds frominstitutional investors, they attract top talent; and they are increasingly accused of being too lightly regulated.

They differ mostly from each other in their time horizon and the liquidityof their investments. PE funds invest primarily in very illiquid assets andlock their investors for the entire term of the fund. This leads to differencesin the asset valuation, in the timing of performance compensation, in theexit strategies and ultimately in the motivation of the management of thetarget companies. But, while most hedge funds pursue absolute returns andinvest in very liquid assets, their search for new alpha leads them to buildtheir own PE funds where they can hold side-pocket investments. In 2007,PE represented about 10% of hedge funds investments.

In the competition with PE, hedge funds tend to benefit from having avariety of people with expertise in different places within the capitalmarkets chain.

Activist hedge funds make direct bets when they demand board seats afterbuilding a position in a company. Many hedge funds have entered theLBOmarket, first as mezzanine providers. At the same time, distressedhedge funds compete with their PE counterparties, and the shorterinvestment horizon becomes less obvious a difference.

Finally, in general, hedge funds are pushing into less liquid markets suchas mid-caps to compensate for the lower returns in their traditional fields.Lately, hedge funds are starting to hire PE managers, and PE funds have to


19

Chapter Tw

o: The Market

increase the salaries of their mid-ranking managers. One difficulty PEemployers may face when retaining their managers is that they have to waitmany years for the realisation of their investment before they receive theircarry, while hedge fund managers get their performance every year.

While their core businesses remain quite distinct, hedge funds and private equity arenow experiencing a melt down in most periphery segments.

Other competitors

Government-sponsored principal investors (Dubai, China) and large familyoffices represent a further inflow of liquidity that targets the biggest assets,sometimes competing with the biggest PE funds, sometimes partnering withthem in club deals, and lately buying stakes in the funds directly. Sovereignfunds can disturb the market as they dont have the same performancerequirements or culture. Many of them need to find ways to invest the hugeamounts of money they manage and are less concerned with the risks theyare taking. Insiders mention that, on several occasions, some well-knownsovereign investors have started their due diligence after the acquisition!

The $100bn ticket

Since the buyout of RJR-Nabisco by KKR in 1989, mega LBOs remained rather rare.But, since 2005, the major funds have multiplied their acquisitions of assets with anenterprise value above $10bn. There were 27 of them in the period ending August2007, of which four were in Europe, if we include infrastructure deals. In real dollars,the previous RJR-Nabisco record was finally beaten in 2007 with the $44bnacquisition of TXU by KKR and TPG. Shortly after, the $50bn mark was almostreached with the buyout of BCE, a Canadian company. By June 2007, the major LBOfunds had accumulated so many commitments that a $100bn acquisition by aconsortium was ready to happen at any time. This is less likely in the medium term,following the financial markets turmoil that started in the summer of 2007.

In Europe, after VNU in the Netherlands ($11bn), Wind in Italy ($13bn) and TDC inDenmark ($14bn), the mega deals continued with the first buy-out of a FTSE100company, when KKR bought Alliance Boots for $24bn in 2007. More mega dealscould well happen once the markets have settled, with targets like Sainsburysregularly featuring in the media; in November 2007, Delta Two, which invests onbehalf on the Qatar Investment Authority, terminated discussions to buy the retailerfor 13.4bn.

20

Private goes public

Ironically, private equity funds have come to realise that public money offers severaladvantages: it is a permanent source of capital and most small shareholders areunlikely to be actively tracking the funds activities. In 2007, Blackstone made theheadlines when it went public and raised $4 billion through an IPO. They were notthe first ones but certainly the most publicised. Several other funds were planning asimilar move, starting with KKR, which will most likely IPO on the NYSE. Thedegradation of the environment since the summer 2007 and the disastrous

0

5

10

15

20

25

30

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q

1Q2 Q

3

35

40

45

50

30

15 11 119 9 9 9 9 8.4

Q4

- Largest Deal in Europe

2005 2006 2007Q1 Q2 Q

3 Q4

2008

BCE

TXU (KKR+TPG)

HCA (Bain + KKR + ML)

Hilton(Blackstone)

Alltel (TPG+GS)Alliance Boots (KKR)

LBOs WITH EV>$10bn

Source: Candesic


21

Chapter Tw

o: The Market

performance of the Blackstone shares have halted most ambitious plans. LikeBlackstone, listed PE vehicles in Europe have been slammed by the market: sharesof 3i, Altamir (Apax France), Candover Investments, Eurazeo or KKR Amsterdamhave lost 25 to 50 per cent of their value in less than a year.

Overhang

In private equity jargon, overhang refers to unused (uncalled) capital commitments.It is somewhat similar to dry powder, which refers more generally to the cashreserves kept on hand to cover future obligations. In March 2008, Goldman Sachsestimated at $400 billion the amount of uninvested capital raised by private equityfirms. With the tightening of the credit markets and the temporary death of megaLBOs and club deals, it becomes difficult to invest. Putting the money to work is acondition to charge the management fees on a continuous basis, which may explainsome of the recent appetite for buying stakes in public companies. Another issue isthe impact on the asset allocation plans of the institutional investors, if the capitalremains in cash for too long.

Exits

In their yearly report commissioned by the EVCA, Perep Analytics recognise sevenexit categories for private equity investments: trade sale, repayment of shares orloans, secondary buyouts, initial public offerings, sale of quoted equity, write-offsand sales to financial institutions. In 2007, secondary buyouts reached a record 30 percent of all exits and, for the first time since at least 1992, overtook trade sales by valueof total divestiments.

According to a fund manager in London, Write-offs are kept artificially low forreputation reasons; it it often tempting to merge a hopeless dog with a better runcompany as long as there is limited risk to damage the better one.

Whats next

So, whats next? Prior to the September 2008 crisis, returns were already mixed, highleverage ratios seemed out of the question, mega LBOs were delayed if not cancelled,and still, the market was expected to continue to grow at a significant pace, albeitslightly slower than previous predictions. In a September 2007 conference, CarlylesDavid Rubinstein said that the average holding period is likely to rise from four tosix years. For a while, targets are going to be smaller as big groups are tempted into

22

the middle market. Firms like Blackstone, Cerberus and KKR with its Capstone unitwill leverage their strong restructuring experience and target more distressed assets.However, ultimately, institutional investors are unlikely to lose their appetite for theindustry and the McKinsey Global Institute forecasts a further increase of globalprivate equity assets under management to $1.4bn by 2012, a doubling in five years.Citigroup expects private equity to soon overtake property and hedge funds as themost popular alternative investment for pension funds. In a keynote address at the2008 Wharton conference, David Rubinstein, again, reckoned that Private Equity willnow spend a year or so in purgatory before entering the platinum age, an evengreater period of expansion than the golden age it went through in the last fiveyears. For Rubinstein, returns will remain strong and Private Equity will remainattractive to investors because the techniques used by sponsors to improvecompanies have been proven to work, including giving management a stake in thecompanies they run. In the first half of 2008, the mid market showed its resilience.

GETTING HIRED

CHAPTER THREE: Is it the Right Job For Me?

CHAPTER FOUR: The Hiring Process

26

CHAPTER THREE: IS IT THE RIGHT JOB FOR ME?

rivate equity is a relatively new industry. While the activity has been aroundfor centuries, as long as wealthy investors have been able to acquire stakes inprivate companies, it is only in the last few decades that it has become an

industry, with a typical organization and business model and the recruiting ofprofessionals at undergraduate, graduate and experienced levels. From ourinterviews, private equity in Europe has clearly become more competitive as teamscompete directly within and across countries for the same assets. Because thecompetition is more global, the recruiting tends to be more competitive and

Bachelor only 31%

Unknown or none 11%

PhD/JD/MD 5%

MBA 25%

Master 28%

PROFILES OF 4,000 PE FUND MANAGERS IN EUROPE (Higher Diploma)

Asset management 3%

Strategy & management consulting 10%

PE 11%

Audit & transaction services 10%

Banking 11%

Investment Banking 24%

None 11%

Other 20%

PROFILES OF 4,000 PE FUND MANAGERS IN EUROPE(Most significant previous job)

P

Source: Candesic PE database, January 2008



27

Chapter Three: Is it the Right Job For M

e?

international candidates with language skills are targeted.The industry has grown veryfast, but its attractiveness has grown even faster. Our database shows that more than60 per cent of the investment professionals have an MBA, a PhD or another advanceddegree. Those who only have an undergraduate degree tend to be younger analysts,especially in the UK where it is common to start working after a bachelors degree.The institutions represented areno surprisethe top universities in Europe (typicallytop 5-10 universities in each country) and top 15 global programs for MBA graduates.Globally, INSEAD, Harvard, Cambridge, HEC and Oxford are the most representedacademic institutions across all the professionals, accounting together for about 20 percent of them. Bocconi is the clear challenger to the group of five and sometimes seemsto be the sole local provider of managers in Italy. Other institutions that havesubstantial amounts of graduates in the industry tend to be the best business andeconomic schools in each big European country: Stockholm School of Economics,London School of Economics, St. Gallen, ESCP-EAP, London Business School.

0

50

100

150

200

250

INSE

AD

Harva

rd

Camb

ridge

HEC

Oxfor

d

Bocc

oni

SSE

ESCP

-EAP

Wha

rton

LSE

ESSE

C

Daup

hine

Colum

biaLB

S

Durha

m

Cope

nhag

en

St Ga

llen

IEP Pa

ris

Manc

heste

r

Munic

h

Polyt

echn

ique

Stanfo

rd

210

170

104

69

61 57

4438 37

204

177

168

72 7266

6259

49 4942 42

37

TOP UNIVERSITIES ATTENDED Number of professionals**Double counting allowed for staff with several degrees


28

However, the vast majority of graduates do not start their career in private equity:they will first get their training in related areas of advisory or in top managementpositions.

Most investment managers have started their career in another area: the Candesicdatabase shows that less than 20 per cent of private equity fund managers startedtheir career in private equity (11 per cent at their current employer and the rest at aprevious PE firm). Out of the other 80 per cent, half of them worked in investmentbanking or other areas of banking, especially leveraged finance, and 20 per centworked outside of the finance industry. More than 10 per cent of all fund managershad previous experience in strategy consulting, and the same percentage came fromaudit and transaction services (note that the numbers dont add up to 100 per centbecause many fund managers had several jobs previously). The most frequentprevious employers are PWC, McKinsey and the top tier US investment banks.

0

30

60

90

120

150Private equity

Investment banking

Strategy consulting

Audit & transaction services

PWC

McKin

sey

Morga

n Stan

ley

Goldm

an Sa

chs

Bain

Merri

ll Lyn

ch

KPMG

JP Mo

rgan

Arthu

r And

ersen

BCG

Citig

roup

UBS

Deloi

tte

BNP P

ariba

s

Deuts

che B

ank 3i

Cred

it Suis

se

Lehm

an Br

othe

rs

Ernst

& Yo

ung

ABN

Amro

138

7470

5351

109

95 93

86

77

71

65 64

57

5146 46 45 44

41

MOST FREQUENT FORMER EMPLOYERSNumber of professionals



29


e?

Most fund managers tell us they like their job, the diversity of activities, the team oflike minded brilliant professionals, the opportunity to work closely with executives,and the perks. They also tell us that they work harder than they did ten or twentyyears ago; low hanging fruits have disappeared in developed countries. New risksappear and limited partners become more and more sophisticated. The industry isalso more likely to be hit by global economic downturns. The most recent exampleis how the 2007 US subprime mortgage crisis has led to a sudden and complete haltof all multi-billion dollar LBOs. Many mega funds have quickly dispatched theirfund managers to work on improving the existing portfolio companies. Part of thestress is also linked to the performance dependant reward model; managers get theirshare of the profits only after the PE fund sells the company, typically three to sevenyears after the investment. A prolonged recession with limited exit opportunities candestroy most of the expected remuneration. A recent BVCA report showed that only50 per cent of the private equity firms in the UK paid out a carry to their managers.In addition, the access to the carry is long and becoming longer at those firms that canpay it: it takes an average of seven years to be promoted to partner, and anotherseven years to gain full access to the carry. For all these reasons, one should expectthe staff turnoverso far extremely lowto increase in the private equity industrylike in any other maturing industry.

English is the common language, but in most European countries, fluency in the locallanguage is necessary to interact with the management team of a local private firm.There are exceptions at both ends of the private equity spectrum, whether dealingwith high tech start-ups set up by highly educated PhDs or on the mega LBOs offirms with global operations.

Finally, private equity doesnt appear to be an equal opportunityarea. Unlike inmany other areas of asset management, women represent only 10 per cent ofinvestment professionals and 11 per cent of all professionals (which includes CFOs,COOs and those engaged in business development, fundraising and riskmanagement). In addition they are found proportionally less often in seniorpositions. Pessimists will question their chances to get promoted against men.Optimists will explain it by an improved access at junior level: women represent 15per cent of the analysts and associates.

Comparison with other elite jobs

A significant proportion of private equity fund managers got their initial professionalexperience in investment banking. They appreciate moving into jobs that give thema better lifestyle and often better compensation. As one insider says, now, I am theclient of my former colleagues and I feel like I can set the pace. The IB backgroundis essential as fund managers end up developing their own valuation models thatthey rarely share with their advisors.

30

Like management consulting, private equity offers the opportunity to work acrossindustries and geographies on various management issues, in direct contact with thetop management and other professionals. Numerous insiders coming frommanagement consulting see their move as a natural career progression, with theadvantage of being closer to the real operations of the companies in their portfolio,and the opportunity to participate directly to the implementation or monitoring ofimplementation of the strategy. Some consultants, especially those who didnt haveprior significant line experience, become frustrated after years of advising topexecutives and feel the need to do things by themselves.

The MD of a French mid cap fund states that one of my great joys is to coordinate thevarious advisors. It can be a lot of work, but they are generally the ones who keepworking late a long time after I left the office. While this may be an extreme situation, itis certain that the private equity fund manager doesnt have to report to the limitedpartners the way top executives in public companies report to their shareholders.

The skills required in most hedge funds are somewhat different. This is mainly dueto the timeframe of the investment: hedge funds get in and out of an investmentwithin months, weeks, sometimes days. Quantitative skills are often more developedand required. One can say that, on average, private equity roles are more wellrounded and come with more variety in the day to day job. There are however manycommon features: the small team of bright professionals, often with internationalbackgrounds, the exceptional remuneration opportunities and the high flexibilitybeing close to the top of the value chain.

Understanding the jobs: The investment process and the roles inthe private equity firm

Most private equity firms are small (roughly 10-20 people for each billion dollarsunder management) and organised along the same lines, with a relatively heavysenior investment team supported by a few juniors, an individual or a small team incharge of fund raising, operating partners who can advise, second or take over themanagement of the portfolio companies, and a very light support staff (as most non-core activities are outsourced). Senior fund managers are likely to be involved in moststeps of the private equity investment process. In new or in smaller funds, they arealso likely to participate in fundraising.

The only job that varies significantly from one firm to the next is deal origination.Some firms have a dedicated person or team and most will leverage the entire seniorteam. In certain firms they have to develop their own network to identify earlyinvestment opportunities. In any case, this is always encouraged as earlyidentification and exclusive access to deals is one of the main drivers of performance.


31


e?

Deal sourcing. Fund managers will assess the various opportunities brought byinvestment bankers, brokers and other contacts in their networks. Typically, nomore than 25 per cent of the deals are proprietarythe rest comes from the bankers(50 per cent) and from affiliated funds or advisors (25 per cent). Some firms havea thorough process of monitoring thousands of public and private companies toidentify underperformers or companies with non-core assets and excess costs. Mostbig firms will have to analyse hundreds of targets.

Due diligence. During the due diligence, they will select and monitor their variousadvisors (investment bankers, lawyers, accountants, management consultants andother specialised advisors), often leaving the investment bankers with theresponsibility of coordinating the team.

In a fund of funds, the due diligence will be more targeted at the financialperformance and investment process of the fund. Managers will conduct most of thediligence themselves.

Financial structure. The fund manager will discuss the financial structure and theuse of leverage with the debt and mezzanine finance providers. They may have toget approval from the General Partners.

INVESTMANT PROCESS OF PRIVATE EQUITY FIRMS

Fund raising Deal sourcing Acquisition Post-acquisition

ExitManagement

Investment strategy

Investorshunting

Set up funds

Networking Identification

of investment opportunities

Preliminary investigation

Prioritsation ofopportunities

Due diligence Set up of

financialstructure

Valuation GP agreement Investment

Committeedecision

Contractpreparation

PortfolioMonitoring

Portfolio and company management- Optimisationof operations

- Reorganisation- M&A- Strategic review

Vendor due dilligence

Valuation Partial or total

divestmentthrough- IPO- Trade sale- Secondary sale- Write-off

Source: Candesic

32

Investment Committee. Often working within a team, the fund manager will puttogether the various elements of the investment case and will submit it to theinvestment committee, composed of the senior partners and some of their advisors.

Acquisition. Once the case is agreed upon internally, the team can make a bindingoffer to the vendor. If it is accepted, the acquisition proceeds, and may last three tosix months, with the due diligence likely to continue in the background.

Post-acquisition. The performance of the companies in the portfolio is constantlymonitored and actions are taken if the results deviate from the tight plan that wasagreed upon with the management. Some firms will just have a fund managersitting on the board of the company; some will delegate one of their employees towork with the executive team; others will put entire teams of operationalconsultants to work.

Exit. After a period of three to seven years, the portfolio company should haverepaid a substantial part of its debt. Hopefully, the new company has a reasonableleverage ratio and can be sold with a handsome profit to the public through anIPO, to another PE firm, or to a strategic investor through a trade sale. In recentyears, numerous secondary and tertiary transactions have occurred, when furthergrowth in the ownership of a bigger private equity firm is considered the bestoption, i.e., the option that maximises the current value of the portfolio company.

The firm will hire an investment bank to manage the sale process and prepare anInformation Memorandum (IM). It will generally hire accountants to prepare theVendor Financial Due Diligence document, and sometimes consultants for the VendorCommercial Due Diligence document.

Lifestyle

Private equity can be demanding. Like other high-paying jobs, it comes with a lot ofstress. One French Managing Director observes that the globalisation of the businessmakes life more difficult than it was 20 years ago, when nobody knew what privateequity was. We were a small club of professionals and had plenty of opportunities.Now we compete against the world for every asset. However, since most of the fundmanagers have had a previous experience in consulting, leveraged finance orinvestment banking, the transition to private equity is generally very satisfying: Youhave fewer hours, less hierarchy, you work more for yourself, and you direct thework of others, remarks a former M&A banker.


33


e?

Interview of a London director at 3i

What do you like most about PE?

PE work is a daily challenge. I love being an entrepreneur.

What do you dislike about PE?

The time pressure can be pretty intense!

What recommendations would you give to a graduate interested in PE?

It is important to have previously worked in a different environment. There are basically threeoptions. I believe experience in transactions services (Big 4 accounting) is great you gain excellentanalytical financial skills. People who worked in investment banking have great technical skills(What is a good/bad investment?) but regarding their entrepreneurial mind-set, they can sometimeshave difficulties. I believe that the most important skills are the soft skillshard skills can be learnt,but PE is a people business. My main role is communicating with the management. We need to buildpersonal relationships in order to influence the decision-making process from an informalperspective. These types of skills are best learnt at a strategy consultancy.

What does the team structure look like?

3i, for example, has small teams of 3-4 PE fund managers and boosts the teams during projectphases with external legal, tax, strategy and finance consultants. But companies like Permiraor Cinven staff their teams with up to 10 people.

How do you work together with the management of acquired companies?

First of all I sit on the board of the company. There is always a formal and an informal role.The formal role includes that we are a part of the organisation. We are not consultants, we areshareholders. The informal role includes personal relationships with the management. Theserelationships are often the key to making a good decision together.

What role does pressure play in the daily work of PE fund managers? Please explainfrom an internal (teamwork) and external (work with management of acquiredcompanies) point of view.

The pressure is positive as long as the projects are going well. If the fund is losing moneyfrom that investment then the pressure increases significantly. It is even worse than for anentrepreneur. It is the money of the partnership and they are all alpha-people who do not liketo lose money. Fortunately, in my ten years in PE I have never had that situation.

34

What are the exit strategies?

Normally you do not want to exit unless you want to retire. Some people leave PE after amajor mistake. The few that do leave have a lot of opportunities though, for example as a CEOor CFO. Our PE firm offers fund managers the possibility to move into one of our portfoliocompanies which can be interesting. However it is always a psychological problem for seniorPE fund managers to work again as employees. The mindset is different and the change isoften very difficult.

Interview with a former senior partner at London-based mid-cap fund

What do you like most about PE?

PE is a hectic industry with lots of eagerness. Throughout the three steps of the private equityinvestment process (fundraising, transforming company, selling) there are a lot more areasinvolved: legal side, financial side, strategic side

What recommendations would you give to a graduate interested in PE?

The corporate finance area of a bank is a good way of starting with PE because mainly the sametasks are involved. When you work as a management consultant, it is always the same as oneaspect of PE you will experience: the commercial due diligence.

It would be good if consultancies could put their PE guys to work for a while within privateequity companies so that they would get the whole picture.

The best way to go into PE is to begin with a start-up PE firm. That way you grow into theprocess. Working in PE should be at least for 15 years. Normally it takes up to 10 years tofundraise and to build the portfolio and, basically, in the last 5 years you will make themoney.

Fundraising for our company meant 25 people working 5 years until we had 200 millionpounds together.

What are the exit strategies?

It is difficult to leave a private equity firm because your incentives are always paid off a couple ofyears later. By leaving you accept that you dont receive your full shares of all the deals you did.

I quit private equity at 45 but everybody in my company was very surprised because it wasan unusual move.


35


e?

People who work in PE have to be very clear about the fact that the work is very intense andthe cultural pressure is often very strong. We had to get rid of people during the last few yearsbecause they became too ambitious about their shares. It did not serve the company anymore.

Days in the life: Senior investment manager in London for majorpan-European LBO fund

7.30 am: Im on my way to work checking my emails via BlackBerry.

8.00 am: Breakfast meeting regarding a potential target company with experts.

9.00 am: Today, I attend a management presentation. When we have a projectrunning I normally participate in contract negotiations with the company owners orthe financing banks which last late into the evening.

13:00 pm: I use lunch time to review my synthesis of market studies. I make sure thatthe consulting teams we hired for commercial due diligence are working in the rightdirection. We feel we have to challenge them by asking for updates or for moreinformation regularly.

On another day I would have lunch with colleagues or advisors and discuss potentialprojects.

Afternoon: Today, we dont have contracts to negotiate and have organised afinancial due diligence presentation by a Big Four accounting firm at our office.

Dinner: If we had negotiations in the signing phase of the project I would stay at theoffice for a long night. Shortly before the final offer I will occasionally need to pullan all-nighter, but that is something I can expect and am prepared for. Today, as weare still discussing potential targets I can leave the office at 8pm for a dinner meeting.

I like to use meal times for meetings, although usually only have one of thesemeetings a day.

Day in the life: Business school student, junior analyst role as internin France for pan-European multibillion mid-cap LBO fund

9.00 am: I get into the office and glance over the finance section of the daily paper anda dedicated private equity newspaper we get delivered.

9.30 am: Team meeting. We normally talk about any issues and news relating to adeal in process, a company in our portfolio, or a new investment opportunity.

10.30 am: I start work on an IM (investment memorandum) which must be finishedwithin three weeks as we made an indicative offer last week. I start reading thecommercial and financial due diligences; I have a quick discussion with the directorin charge of the investment to talk about what points from the diligences he wantsme to focus on.

13.00 pm: Lunch.

14.00 pm: I keep working on the IM.

15.00 pm: Presentation with the management team to a large bank to get an idea ofhow much debt they would be willing to provide, and at what rates.

17.00 pm: In the wake of the previous meeting, we have a rough idea of the leveragelevel and interest rate for the deal and I update the financial model to check how theinternal rate of return (IRR) evolves with the new conditions.

17.30 pm: Call with an alternative potential debt provider for the same deal.Apparently they are not as interested as the first bank in this particular deal, but gaveus an idea of what benchmark levels we could expect.

18.00 pm: I have to find some peer comparables and make some research slides oninvestment opportunities. During my research, I come across some other companieswhich may interest the team, so I gather some key figures on each one.

19.30 pm: I start preparing a presentation for investors for the new fund which isbeing raised.

20.30 pm: Leave the office.

Day in the life: Investment manager in Spanish local fund

8.00 am: Breakfast with a potential business partner and a representative of aninvestment bank. We discuss the possibility of partnering to acquire an asset that isfor sale. The potential business partner operates in the same sector and thecombination of our skills and experience could be beneficial in this particular deal.

9.30 am: Return to the office and catch-up on e-mail and news.

9.45 am: Review and sign a non-binding letter of interest for the potential acquisitionof a target company. We have been working hard on the analysis of thisopportunitytoday we submit our indicative offer.

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Vault Career Guide to Private Equity C

hapter Three: Is it the Right Job For Me?

10.15 am: Review a pack of due diligence reports on a potential investment we areconsidering. The pack includes the main findings on the financial, fiscal, commercialand legal areas, produced by a team of advisors assisting us in this transaction. Wehave an investment committee meeting later on and need to be well prepared for thediscussion.

11.45 am: Review Investment Memorandum (IM) prepared by internal deal team onthe same transaction.

13.00 pm: Interview a candidate for an analyst position in our fund.

14.00 pm: Lunch with the former manager of a large company. At this stage of hiscareer he would like to lead a management buyout. We discuss a couple of potentialinvestment opportunities and agree next steps.

16.00 pm: Investment committee meeting. We have a lively discussion around apotential investment that we are considering, its merits and risks. We are inexclusivity and getting close to a final commitment.

18.30 pm: Internal meeting to discuss overall status of projects we are working on.

19.30 pm: Meeting with a consulting firm. They have come here to present theirthoughts and views on the healthcare sector at our request. We discuss trends andopportunities.

20.45 pm: Go home.

Day in the life: Junior associate at a small fund in Milan, Italy

9.00 am: I start the day with research on the logistic market for an IM in process.When working on a new sector, it is necessary to understand exactly how it worksand be able to explain it to others. I discuss with other analysts who have moreexposure to the sector and conduct my own research on the internet, as well as ininternal documents and databases.

11.00 am: Briefing conducted by the boss to prepare the next meeting.

11.30 am: Meeting with two directors of a German real-estate group willing toparticipate in an investment in Russia. Two senior associates and I are present tolisten to their objectives, explain our offer and answer questions.

13.00 pm: Lunch with our guests.

37

14.00 pm: Conclusion of the meeting, signature of documents. I go back to my IM onlogistics.

15.30 pm: I call the initiator of the logistic project to ask for technical details that willbe included in the IM.

16.30 pm: I set up the prospective profit & loss and compute returns for the logisticventure.

18.00 pm: Meeting with an Italian entrepreneur looking for financing of a newventure. Entrepreneurs typically want to share a lot of the details of their ideas,because they want to be really really sure we understand. We often run into politicalaspects (it can be difficult to stop them!) so the meeting is quite long.

20.30 pm: Debriefing with the boss, we share our first impressions and decide if weshould carry on discussions further.

21.00 pm: Evaluation of the progress on the logistic IM.

21.20 pm: End of the working day.

Day in the life: Partner at German mezzanine fund (500m AuM)

9.00 am: Arrive at the office. 15-minute daily briefing with the office manager(agenda of the day, overview of the mail) followed by a 15-minute daily briefingwith investment team (main tasks for the day).

9.30 am: Marketing calls with business partners: M&A advisors, lawyers, accountantsand PE firms regarding marketing plan (6-10 calls). Some fundraising calls too.

10.30 am: Meeting in our office with CEO and CFO of a German mid-size companylooking for expansion capital to acquire a competitor.

12.00 pm: Lunch with the two visitors.

14.00 pm: Reading a new information memorandum (IM) describing a fashionretailer for sale.

16.00 pm: Reading the financial due diligence by PWC on our most promising deals(construction industry); summary of the main points.

18.00 pm: Progress review on construction deal with investment manager (Research,financial model, etc) and distribution of tasks for the new deal.

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Vault Career Guide to Private Equity C

hapter Three: Is it the Right Job For Me?

19.00 pm: Conference call with English lawyers to discuss progress on fundraising fornew fund.

20.00 pm: Debriefing with the team.

20.30 pm: Dinner with lawyer.

Career paths

Maybe because it is such a young industry, there doesnt seem to be a lot of life afterprivate equity. Not that there wouldnt be opportunities, but as most of ourinterviewees observed, Why move if I get everything I want here? While we donthave the most precise statistics, most people leave private equity to go into privateequity! This can be moving into a larger fund, creating ones own fund or sometimesmoving into an operational or interim management position in the portfolio.

There are a few cases of fund managers who transferred to a top executive positionin the industry, but a more natural development is to spend increasing time in non-executive director positions until full retirement. If not in the portfolio, even a CEOrole proves to be difficult as managers typically have five to 10 years of carry that theyrisk losing if they leave the fund. Only hedge funds have deep enough pockets tobuy out private equity fund managers.

39

40

CHAPTER FOUR: THE HIRING PROCESS

ost private equity funds dont have a very formal recruitment process. Thefirms are small, the turnover is low, and so are the recruitment needs, unlessone has an aggressive international expansion. There are however a couple

of exceptions, like 3i, Bain Capital, Blackstone, Carlyle or Goldman Sachs PIA. Thekey success factors for entering the industry are the academic pedigree and thenetworking skills. For experienced candidates, an excellent track record is of courseanother requirement.

Many firms dont have a recruiting or HR person but a recruiting committee chairedby one of the funds managers. Other HR responsibilities can be outsourced. After aninternal or external screening, a couple of candidates will be invited to a set of three orfour rounds of interviews. Even for internships, the average seems to be two rounds.While this is based on anecdotal evidence, many interviews are one on one. The fitwith the individual fund managers is a key component in a small transaction team.

Campus recruiting

Because most firms don't have a very formal recruitment process, they often don'trecruit on campus. In recent years, the big ones like Alpinvest, Blackstone, Alliaz,Axa or Goldman Sachs PIA may have appeared on selected MBA campuses likeINSEAD or LBS for graduate recruiting, but this used to be the exception. It ischanging fast: according to Sandra Schwarzer, who heads career services at INSEAD,at least nine PE firms participated in 2007 in company presentations or Career Fairs.While in 2006 a record 26 students declared joining a PE/VC firm straight afterINSEAD, this has gone up to 39 in 2007. We expect the number of schools visited togrow once the current credit crisis softens. It is also encouraging that an increasingnumber of the top MBA students have a summer internship in PE firms (20 atINSEAD in 2007). And there are a couple of opportunities for internships at otherschools: in France, for example, Axa PE and Barclays PE advertise on the Intranet oftop Parisian business schools to recruit interns.

Indeed, a growing number of funds now value the opportunity to recruit a couple ofyoung analysts for a gap year. They warn however that only a tiny percentage ofinterns may receive an offer afterwards as the firms often don't have the need formore permanent staff.

M


41

Chapter Four: The H

iring Process

Networking

All top business schools now offer a private equity elective. This often givesstudents an opportunity to start networking very early, sometimes with a summerinternship or even a gap year working as an analyst. Some of them, like ChicagoGSB in London, also provide a private equity club where students can meet withalumni in the industry.

Several European business schools are developing dedicated research focusing onprivate equity issues. The Nottingham University Business School created theCentre for Management Buy-out Research (CMBOR) in 1986 in partnership withBarclays Private Equity and Deloitte to monitor and analyse management buy-outs. ESSEC in France launched a private equity chair in 2006, sponsored byBarclays Private Equity. At London Business School, the Private Equity Institutehas been established to advance the understanding and practice of private equity.The Munich-based Centre for Private Equity Research (CEPRES) is managed

HEADHUNTERS TARGETING PRIVATE EQUITY

In the UK Blackwood Group Kinsey Allen Consulting Marks Sattin Private Equity Parker Linton Associates Ltd Private Equity Recruitment (more for juniors with a couple of years experience Stevenson James Search & Selection Walker Hamill Wood Hamill

In France CT Partners Alvedis Conseil Boyden Egon Zender

In Germany PER (out of London) Grip (Frankfurt)

In Spain Korn Ferry Heydrick & Struggles

Source: Candesic interviews

42

academically by Goethe Business School in Frankfurt and Technical UniversityMunich. Cass Business School is currently launching the Cass Private Equity Centre(CPEC) which will promote understanding and provide evidence of the key issuesand challenges in the industry. EDHEC in France is the exclusive provider ofpreparatory courses in Europe for the CAIA exams that cover all alternative assetclasses. Their research currently focuses more on hedge funds but could soonextend to private equity.

Search firms

Headhunters are mostly involved in looking for specialist skills. The typical mandateis to replace a senior manager or fill new senior positions following an expansionplan. While the major executive search firms all claim to be involved, ourinterviewees directed us to local specialist firms.

Website

Firm websites are often disappointing for candidates applying to small or mid-sizefunds. Most company websites wont even mention the name of a recruiting personor give specific contact details. It is understood that the right candidate is alreadypart of the club or will be personally introduced. But strongly motivated candidatesshould not hesitate to try their chance through the switchboard.

Preparing for the interview

The type of questions depends a lot on the background of the managers. Oneexperienced candidate for a position in a London-based mid cap fund told us thateach former consultant asked me to draw a value driver tree and conducted a typicalconsulting case interview while each former investment banker tested my negotiationskills and my knowledge of valuation models.


43

Chapter Four: The H

iring Process

General questions

Why PE?

Why this firm?

What makes a good deal?

How would you find deals, how do you know what to buy?

How would you do it?

Which deal can you describe and what do you think of it?

If you had that amount of money, what would you buy in this country?

Behavioural questions

What do you do in your spare time?

Tell me about yourself.

Finance questions

IRR vs. multiple

How to motivate management

How do you value a company? What is a P/E ratio?

LBO model: candidates are expected to be familiar with LBO models. They arelikely to be asked to comment on a simple valuation model that may contain arelatively obvious miscalculation. In some cases, the candidate has to build a simplemodel on paper. Knowing the definitions and differences between free cash flowsto equity and free cash flows to the firm, how to choose the appropriate discountrate and calculate it, and how average EBIT or EBITDA multiples have been doinglately may be a deciding factor. At a major London-based firm, candidates are givena laptop and asked to build an LBO model.

What are the pros and cons of using mezzanine to finance a transaction? In whichcases will you consider it? What should you be aware of?

44

Industry questions

How many transactions can an analyst work on simultaneously? In a year?

Give an example of an industry with high Capex, with no Capex.

Case studies

For a given EBITDA in a given industry, how much leverage can you afford? Howdo you find out?

Full case study including analysis of the growth drivers in an industry, major risksand competitive positioning of an asset. One Associate candidate in London reportsbeing sent all the case study material 24 hours prior to the interview with therequest to prepare a presentation to the Investment Committee.

37REPRESENTATIVEProfiles of

PE firms in Europe

US-ORIGINATED GLOBAL FUNDS with direct presence in Europe

PAN-EUROPEAN FUNDS

OTHER FUNDS with more regional focus

MEZZANINE FUNDS

FUND-OF-FUNDS

48

ADVENT INTERNATIONAL

UK Regional HeadquartersAdvent International plc111 Buckingham Palace RoadLondon SW1W 0SRUKTel: +44 20 7333 0800

www.adventinternational.com

THE STATS

Chairman: Peter A. BrookeEmployer Type: Independent PrivateCompany Total private equity funds under manage-ment: about 11bn (2008)Employees: 130 investment professionals,of which 65 are in Europe (2008)No. of Offices: 15

COMPANY FOCUS

Sectors: Business Services & Financial Services Retail & Consumer Technology, Media & Telecoms Healthcare & Life Sciences Industrial

Financial stages: International buyouts, recapitalization andgrowth equity investments (up to 500mequity), some venture capital

Types of financing: Majority equity

EUROPEAN LOCATIONS

London (HQ) Amsterdam BucharestFrankfurt Kiev Madrid Milan Paris Prague Warsaw Bratislava(affiliate) Oslo (affiliate)

REST OF THE WORLD

Boston (HQ) Tokyo Singapore(affiliate) Buenos Aires Sao Paulo Mexico Further affiliates in five othercountries

KEY COMPETITORS

3i Apax Barclays Private Equity Cinven Montagu

EMPLOYMENT CONTACT

In the US: [email protected] other offices, see "contact us" atwww.adventinternational.com



49

Advent international

THE SCOOP

International investmentLondon and Boston-based Advent International is truly an international privateequity firm. While most of the big names in private equity have outposts in Europeand Asia, Advent takes "international" to another level, with 15 offices around theworld, from Argentina to Southeast Asia. In the last two years alone, it has openednew offices in Amsterdam, Prague and Kiev. Advent is also responsible for a numberof firsts in the global private equity landscape; they put together the first leveragedbuyout in Hungary and Poland; the first private equity-backed public-to-private dealin Central Europe and Spain; the first global private equity fund, in 1987; and thelargest-ever private equity fund dedicated to Latin America. Founded in 1985 as aspin-off of TA Associates international operations, the firm has backed more than 500companies in some 35 countries.

Middle of the road Advent invests in middle-market companies in five core sectors: business andfinancial services, retail and consumer, health care, industrial and technology, mediaand telecom. In North America and Europe, the typical Advent investment is $20million to $200 million; in Central Europe and Latin America, the average outlay ison the smaller end of the range, between $20 million and $60 million. Advent alsomanages venture capital funds focused on start-up to revenue-stage companies inHealth Care & Life Sciences, primarily in North America, not to be confused withUK-based Advent Venture Partners. The firm's venture investments usually run from$5 million to $20 million.

FUNDS FUND CAPITAL

Advent International GPE VI

LAPEF IV (Latin America)

6.6bn

$1.3bn

Most important funds

VINTAGE YEAR

2008

2007

Advent International GPE V

ACEE III (Central Europe)

2.5bn

330m

2005

2005

Advent International GPE IV 2.0bn2002

50

In December 2006, the firm won an impressive and unprecedented four industryawards at the fourth annual European Private Equity Awards organised by EVCA.The list included the European Private Equity House of the Year as well as theEuropean Mid-Market Deal of the Year, for Moeller in Germany, and the EmergingEuropean Deal of the Year, for Terapia in Romania.

Deal-makingAdvent has been on a shopping spree as of late with a clear acceleration in the lastthree years. In early 2005, the firm brought in the new year with the acquisition ofProservvi, the leading provider of back-office processing services to financialinstitutions in Brazil. Then in April, Advent bought a stake in Fat Face, the activecasual wear market leader in the U.K. One month later, across the Atlantic, theprivate equity group picked up Making Memories, the Utah-based provider ofscrapbook and card-making products. In June, Advent invested in the drillingservices and equipment company Boart Longyear and Italian vending machineoperator Gruppo Argenta. In August, the global private equity group acquired fivedifferent companies, ranging from a Romanian paints business to a technologycompany in the U.K. In September 2005, Advent bought a majority stake in CasaReha, a German private nursing home group. It pursued a buildup strategy and, in2007, doubled the size of the company with the acquisition of competitorSozialKonzept, catapulting Casa Reha into the top five of German private nursinghome groups. In December of the same year, Advent announced the sale of the groupto HgCapital.

Advent had already shown its skills in Germany with the 2006 turnaround and salefor 1.1bn, in an auction to Doughty Hanson, of global electronics manufacturerMoeller Group, which was on the verge of bankruptcy when acquired in December2003. This highly successful restructuring attracted the praise of the judges who sawthe deal as an outstanding example of a traditional private equity house taking ona difficult asset and turning it around.

In 2007, Advent headed again to Germany, this time to buy a 770m majority stakein German fashion discount chain Takko from Permira. The same year in the UK,Advent International acquired Worthing, a share registration business they renamedEquiniti, for 550m from Lloyds TSB Registrars. In December, Advent announcedthe first fully-financed public-to-private transaction since the summers turbulence inthe credit markets with the 524m acquisition of Domestic & General Group plc(D&G), the UKs leading specialist provider of extended warranty plans for domesticelectrical goods. In France, it took a majority stake in Stokomani, the French discountretailer, from Alpha Group.


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Advent international

The firm is also active all over Eastern Europe. In April 2007, it opened an office inPrague and, in September, it announced the first members of its Kiev team inUkraine. In December 2007, within two days, it acquired a 70 per cent stake in KAIGroup, Bulgarias largest manufacturer of interior and exterior floor, wall anddecorative ceramic tiles, and a 70 per cent stake in Bucharest-listed Ceramica Iasi,one of Romanias leading ceramic bricks and clay roof tiles producers.

GETTING HIRED

Advent International has around 130 investment professionals working out of 15offices around the world. About half of them are based in Europe.

As a firm half headquartered in the US, the firm has its share of American MBAs.But the European team is not different, with almost half of the professionals holdingan MBA, and Harvard by far the most represented school in the team.

Strategy consulting (13%)

Audit & transaction services (7%)

Banks (35%)

Other (45%)

Masters (23%)

Bachelors only (30%)

Unknown (1%)

PhD/JD/MD (5%)

MBA (41%)

Higher DiplomaHigher Diploma

Most significant previous jobMost significant previous job

Source: Candesic

Source: Candesic

52

While the most represented former employer, McKinsey, accounts for 12 per cent of theEuropean professional staff, employees have relatively diverse backgrounds. Formerbankers represent 35 per cent of the team, slightly below the industry average.

Although the firm does not offer employment information on its web site, it doesprovide contact details for each of its outposts. Candidates interested in working forAdvent International should get in touch with the appropriate office (see "contactus" at www.adventinternational.com).

0

5

10

15

20

Wharton (4)

Oxford (5)

Cambridge (6)

INSEAD (10)

Harvard (18)

0

1

2

3

4

5

6

7

8

Merrill Lynch (3)

ING (3)

UBS (5)

Dresdner (6)

McKinsey (8)

Top 5 former employers (# of professionals)Top 5 former employers (# of professionals)

Top 5 universities attended (# of professionals)Top 5 universities attended (# of professionals)**double counting allowed for staff with several degrees

Source: Candesic

Source: Candesic

53


111 Huntington AvenueBoston, MA 02199USATel: (617) 516-2000

London Office:Bain Capital LTDDevonshire House 6th flr, Mayfair Place London, W1J 8AJ UKTel: +44 20 7514 5252

www.baincapital.com;www.baincapital.co.uk

THE STATS

Managing Director, Bain Capital: JoshuaBekenstein and 25 other partnersManaging Director, Bain Capital Europe:Stuart GentEmployer Typ

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