Presenting a live 90-minute webinar with interactive Q&A Private Equity Fund Formation in 2013 Navigating JOBS Act, State Adviser Registration, SEC "Bad Actor" and "Red Flag" Rules, and the EU's AIFM Directive TUESDAY, NOVEMBER 5, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Scott W. Naidech, Partner, Chadbourne & Parke , New York Adam D. Gale, Partner, Mintz Levin Cohn Ferris Glovsky and Popeo , New York Jonathan R. Talansky, Partner, Mintz Levin Cohn Ferris Glovsky and Popeo , New York Edouard S. Markson, Partner, Chadbourne & Parke , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Strafford Webinar: Private Equity Fund Formation in 2013 Presentation (November 5, 2013) by Scott Naidech, Chadbourne & Parke LLP Adam Gale, Mintz Levin Jonathan Talansky, Mintz Levin Edouard Markson, Chadbourne & Parke LLP M INTZ L EVIN Mintz Levin Cohn Ferris Glovsky and Popeo PC
Goals of Presentation • Describe significant changes impacting private equity fundraising in 2013 • Describe recent market trends, including structural changes taking place in the market • Highlight changes in “market” terms, including ILPA changes and other market impacts • Summarize certain new regulations impacting PE funds (including Dodd- Frank, state adviser registration, broker-dealer issues, JOBS Act, Bad Actor Rules, AIFMD, Red Flags, Volcker Rule) • Sun Capital decision – Ramifications for PE Funds • FATCA update M INTZ L EVIN Mintz Levin Cohn Ferris Glovsky and Popeo PC
1. What do we mean by “Private Funds”? • Any (i) “blind pool” vehicle (ii) invested by a sponsor (iii) who often receives a management fee and profit participation (known as a carried interest or performance fee) (iv) offered to qualified high net worth investors only • For purposes of this presentation, “Private Funds” means “ Private Equity Funds ”. For example, Venture Capital Funds, Growth Equity Funds, Buyout Funds, Real Estate Funds, Distressed Debt Funds, Mezzanine Funds, etc., investing in illiquid securities 7
2. Key incentives for raising a Private Fund? • Key Economic Incentives for Sponsor Raising a Fund: Access to private capital from alternative sources; Carried Interest and Management Fee • Key Economic Incentives for a Limited Partner Investing in a Fund: Access to a diversified pool of investments in a targeted geographic region and/or industry being managed by a specified team of experts 8
3. Recent changes in key incentives… • Ten years ago, most fund negotiations focused on economics; five years ago…governance; in 2013…back to economics • Impacts on incentives altering the standard “2 and 20” model – economy and fund size. • Volume: currently over 1,900 Private Equity and Real Estate Funds looking to raise capital, seeking almost $800 billion • Total amount of probable commitments from this pool: only $250 to $300 billion/year. • Conclusion: less than one-half of fundraises will successfully raise their target amounts. 9
Following unprecedented highs, fundraising fell materially through the global economic downturn Capital committed to private investment funds by year of final close ($ in billions) $684 - 54% 700 $665 600 171 $547 500 128 400 $361 $364 $325 $318 $290 110 300 $269 212 92 86 $219 67 50 84 200 59 61 80 137 $105 94 94 92 66 100 173 79 78 78 79 82 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 Q2 Q3 Q4 Full year Number of 557 846 1,071 1,297 1,466 1,412 930 918 989 945 461 final closings Gradual stabilization since 2010 … the “new normal” Data and graphics compiled by Credit Suisse Private Fund Group. Source: Preqin, as of Jul-2013. Includes all Buyout, Distressed, Fund of Funds, Infrastructure, Mezzanine, Real Estate, Secondaries, Venture and Other (excludes Hedge Funds). Total fund size is accounted for in the year of a fund’s final closing. Interim closings for funds that have not held their final closing are accounted for in the year of each closing, and amounts are rolled forward to the quarter in which the final closing occurs. Capital committed in 2003-2007 is provided annually in the year of final closing. Data are continuously updated and therefore subject to change. 10
Congested fundraising market has caused fundraising duration to increase significantly Number of funds on the road and aggregate target (1) Time spent on the road for funds closed in Q2 2013 (2) ($ in billions) 25 22% % of Funds Closed 19% 1,958 18% 20 2,000 16% 16% 1,845 15 9% 1,800 10 1,624 1,619 5 1,561 1,600 0 1-6 7-12 13-18 19-24 25-30 31-36 Months Months Months Months Months Months 1,400 Average time taken to close: approximately 19 months (3) 1,200 1,000 $888 $770 $758 Status of funds on the road (4) 800 $699 $607 2nd close + 600 13% 400 200 No close 1st close 0 56% 31% Q4 2009 Q4 2010 Q4 2011 Q4 2012 YTD 2013 Number of funds raising Aggregate capital sought Funds yet to hold a first close seeking more than $380 bn 56% of the over 1,900 funds on the road have yet to hold a closing, and the average fundraise is taking 19 months to complete Data and graphics compiled by Credit Suisse Private Fund Group. (1) Preqin, The Private Equity Fundraising, Q2 2013. (2) Preqin, The Preqin Private Equity Quarterly, Q2 2013. Represents months from fundraising launch to final close. (3) Preqin, average of Q1 – Q2 2013. (4) Preqin, Jul-2013. 11
Liquidity challenges for LPs are ever-present, but improving Duration of buyout dry powder (2) Unfunded commitments remain high (1) ($ in billions) ($ in billions) $442 $485 $484 $426 $391 1,200 $1,068 $1,062 $380 6.1 13.0 $988 $1,007 $1,025 2.0 $1,002 60 0 $355 years $944 5.1 years 1,000 1.7 5.1 years $258 50 0 years years $799 years 4.9 2.7 800 years 40 0 years $177 $559 2.1 600 30 0 $230 $220 years $406 20 0 400 $95 $86 $80 $83 $76 $73 10 0 $37 200 0 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 E quity value of buyout inves tm ents D ry p ow der for buyouts /years of sup ply at c urrent deal p ac e Buyout Venture Mezzanine Distressed Real Estate Growth Other Drawdowns from and distributions to LPs (U.S.) (3) Net cash flow to LPs (U.S.) (3) ($ in billions) ($ in billions) 140 $131 $17 20 $113 $101 120 $12 15 $89 $10 $9 100 $78 $85 $8 $8 $83 10 $79 $73 $4 $67 80 $66 $66 $64 5 $59 $54 60 $49 0 $35 40 $23 -5 20 -$5 -10 -$7 0 -15 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 ' 11 ' 11 ' 11 ' 11 ' 12 ' 12 ' 12 ' 12 ' 13 Drawdowns Distributions Data and graphics compiled by Credit Suisse Private Fund Group. (1) Preqin, Jul-2013. 2013 numbers are as of Jul-2013. (2) Preqin, Jul-2013. S&P Leveraged Buyout Review, Q1 2013. Bain, 2013. CS PFG Analysis. (3) VentureXpert, Jul-2013. Cash flow to LPs defined as cash distributions less drawdowns. Quarterly totals may not sum to annual totals due to rounding. 12
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