Re-post by Suzanne Dingwall William of Venture Law

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After a long consultative process with ILPA members and other industry constituents, the ILPA has released a best practices document that outlines a set of guidelines regarding partnership governance, alignment of interest between GPs and LPs and reporting & transparency.

To endorse the Principles, please click here Please include your name, as well as the organization you are endorsing on behalf of in your e-mail.  To view the Principles, click here

Below you will find the official press release issued today by the ILPA and supported by the CVCA.

The Institutional Limited Partners Association (ILPA) releases the ILPA Private Equity Principles

Guidelines intend to create framework for sustainability and growth of asset class through improved governance, alignment of interests and transparency

TORONTO, ONTARIO – The Institutional Limited Partners Association (ILPA) today introduced the ILPA Private Equity Principles, which establishes a set of principles and best practices for the private equity industry with the goal of strengthening the long-term viability of the asset class as an institutional investment strategy. Through enhanced partnership governance, strong alignment of interests and improved investor reporting and transparency, the ILPA believes the limited partner and general partner communities as well as other industry practitioners will mutually benefit from an improved set of guidelines that reaffirm a focus on investment value creation. This approach has historically served as the key tenet to the success of the asset class.

“Private equity has become an important strategy for most institutional investors from around the world as overall returns from private equity have outpaced those of other asset classes over the long run,” said Joncarlo Mark, Chairman of the ILPA. “This is primarily the result of a traditionally strong alignment between general partners and their portfolio companies and a focus on growing these businesses. A similar alignment between the general partners and the supporting institutions that provide them investment capital will help ensure successful returns in the future.”

The ILPA Private Equity Principles were developed through broad communication and coordination between a wide cross section of private equity investment institutions. This process included input from many of ILPA’s 215 member organizations from around the world, which provided feedback through roundtable discussions and a comprehensive survey that ultimately generated the concepts proposed in this document.

“The ILPA’s mission is to provide networking, communication and ongoing research and education – including the development of best practices – that will help our members and other industry participants improve their investment capabilities and performance,” said Kathy Jeramaz-Larson, Executive Director of the ILPA. “The ILPA Private Equity Principles will establish an operating framework for investors to engage in ongoing dialogue and to develop improvements that will benefit the industry for years to come.” In conjunction with the release of this document, ILPA has formed a new Best Practices Committee that will focus on continuing to strengthen private equity as an asset class by soliciting input from other private equity practitioners and by utilizing the Private Equity Principles as a living document to incorporate changes as warranted in the future.

In addition, ILPA encourages and welcomes the formal endorsement of the ILPA Private Equity Principles from both members and non-members, including general partners, fund-of-funds and industry consultants. The ILPA Private Equity Principles are posted on the ILPA website at www.ilpa.org. A list of institutions that wish to be formally recognized as signatories to the Private Equity Principles will also be posted and updated on a regular basis.

The Institutional Limited Partners Association is a not-for-profit association committed to serving limited partner investors in the global private equity industry by providing a forum for facilitating value-added communication, enhancing education in the asset class and promoting research and standards in the private equity industry. ILPA has over 215 institutional member organizations that collectively manage approximately $1 trillion of private equity assets. For a copy of the ILPA Private Equity Principles or for more information about ILPA, please visit www.ilpa.org.

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The 1st quarter CPP Investment Board results have been out for awhile, but your loyal scribe has been otherwise occupied…sorry. According to the stats, it wasn’t a bad quarter for Canadian GPs at all in fact, despite the ravages of the economy at the end of 2008 and early 2009.

This post is the latest in the ongoing series covering the Canadian general partners that have been lucky enough to receive a limited partner commitment from the CPP Investment Board (see prior post “CPPIB Canadian general partner Q4 2008 performance numbers” May 25-09). For the ninth consecutive quarter, Canada’s very own national pension fund didn’t make a single new direct formal commitment to a Canadian general partner (other than Onex Corp).

The CPPIB team did commit, however, to 18 U.S. and international GPs during 2008; but just two foreign funds in Q1 2009. In total, 42 of the last 43 direct GP commitments have been outside of Canada.

If you are a regular visitor to the site, you’ll know that we pull out the figures showing the performance results that the Canada Pension Plan Investment Board is receiving from its GP relationships (they’ll want me to remind you that’s calendar Q1, not CPPIB’s fiscal Q1).

The figures that follow cover four categories: CPPIB’s commitment, paid-in-capital (which tells you how much of the fund is invested in deals and/or drawn to pay management fees) reported value, and reported value + distributions (which tells you what the notional simple return of the fund is against the paid-in-capital figure). That figure is based in large part on what the manager believes the portfolio is worth as at March 31, 2009, subject to GAAP fair value accounting. MM means millions.

As we’ve done in the past, I’ve added our own Fund II returns (as at Q1/09) as they get muddled when included as part of the CPPIB Legacy fund of fund program that committed $10 million in December 2004 (back when Edgestone ran the program for CPPIB) to our $83MM Wellington Financial Fund II. For the first time ever, I’ve also stripped out the returns that we provided to that fund to see how it did without our profits baked in (the loss increases from -31% to -36%). Fund II ceased pursuing new transactions in August 2006 with the first closing of our $150MM Fund III that month (CPPIB doesn’t have $ in our Fund III, either directly or via TD’s VC fund-of-fund program):

Canadian Venture and Life Science Funds

Celtic House VP Fund II (2002 US$):
$13.5MM, $15MM (111%), $9.8MM, $20.9MM (+39%)

Celtic House VP Fund III (2005 US$):
$50MM, $32.5MM (57%), $17.6MM, $17.8MM (-38%)

Edgestone Venture Fund (2000):
$50MM, $44.7MM (89.4%), $12.2MM, $59.0MM (+32%)

Edgestone Venture Fund II (2004):
$50MM, $43.5MM (87%), $35.1MM, $35.1MM (-19%)

Lumira/MDS Life Sciences Technology Fund II (2002):
$200MM, $110.6MM (55%), $50.7MM, $111MM (+0.4%)

Skypoint Telecom Fund II (2001 US$):
$25MM, $23.2MM (93%), $8.3MM, $11.9MM (-49%)

TD Capital Legacy VC Fund (2002):
$82MM (originally $100MM), $63.7MM (77.7%), $34.0MM, $43.7MM (-31%)

TD Capital Legacy VC Fund (2002)
ex-Wellington’s Fund II investment:
$72MM, $58.1MM (81%), $33.7MM, $37.1MM (-36%)

Ventures West 8 (2003):
$50MM, $39.5MM (79%), $29.9MM, $32.0MM (-19%)

Wellington Financial Fund II (12/04):
(CPPIB participated in our $83MM Fund II via a $10MM commitment by the Legacy VC Fund)
$83MM fund size, $56.3MM (68%), $3.0MM, $66.0MM (+17%)

Canadian Buyout & Debt Funds

Birch Hill Equity Partners III (2005):
$85MM, $70.9MM (83%), $67.5MM, $70.9MM (+0%)

Clairvest Equity Partners I (2001):
$50MM, $46.4MM (93%), $15.3MM, $72.1MM (+55%)

Clairvest Equity Partners III (2006):
$40MM, $18.6MM (47%), $15.8MM, $15.8MM (-15%)

Edgestone Equity Fund II (2002):
$100MM, $91.3MM (91%), $68MM, $126.5MM (+39%)

Edgestone Equity Fund III (2006):
$100MM, $63.1MM (63%), $38.6MM, $53.1MM (-16%)

Edgestone Mezzanine Fund II (2000):
$30MM, $29.3MM (98%), $2.4MM, $28.1MM (-4%)

Kensington Co-investment Fund (2002):
$40MM, $42.4MM (106%), $9MM, $53.0MM (+25%)

Onex Partners (2003 US$):
$150MM, $139.6MM (93%), $136.8MM, $301.2MM (+116%)

Onex Partners III (2008 US$):
$400MM, $3.5MM (1%), $0.8MM, $0.8MM (nmf%)

TD / CPPIB CDN Private Equity Holdings I (2006):
$400MM, $151.2MM, (38%), $111.1MM, $118.4MM (-22%)

TD Capital CFOF Legacy Buyout (2002):
$121MM, $109.3MM (90%), $68.6MM, $119.1MM (+9%)

Tricap Restructuring Fund (2001):
$150MM, $187MM (125%), $47.2MM, $270.7MM (+45%)

Tricap II (2006):
$300MM, $299.9MM (100%), $185.4MM, $274.3MM (-9%)

—–

I’ll try to tackle the non-Canadian GPs tomorrow.

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By Chris Arsenault Managing Partner at iNovia Capital

Please note that a full copy in .pdf of the magazine can be downloaded on the CVCA web site.

First, you survive the crisis, then you take advantage of the opportunities afforded by the confusion, advises CVCA keynote speaker Thomas J. Barrack Jr.

At this year’s CVCA Annual Conference, held in Calgary in late May, we had the pleasure to have with us, as a keynote speaker, Thomas J. Barrack Jr., Founder, Chairman and CEO of Colony Capital, LLC. Barrack’s keynote speech was of utmost interest and very enjoyable, in part because he presented the audience with his views on both sides of the harsh reality of today’s private equity buyout market, outlining the key challenges as well as some great opportunities.

Like many other private equity buyout firms across North America, Barrack’s firm, Colony Capital, is having a tough time adjusting to all the changes caused by what is considered to be the worst market ever for the U.S. investment community.

Even though Colony Capital has only one transaction of importance in Canada, the 2006 acquisition of Fairmont Hotels & Resorts Inc., Barrack believes Canada will be one of the big winners coming out of this global crisis. This is being driven by the country’s stronger banking system, smaller and better performing buyout funds, and fundamentally sound assets across numerous line of business. They weren’t as badly impacted by the sub-prime crisis due to the fact that they weren’t overly leveraged with debt.

Barrack recently took the time to expand on some of his views with Private Capital.

Chris Arsenault: What are your current views on the state of the private equity industry in general?

Thomas J. Barrack: Let me summarize a few of my instinctive views into two categories, short term and long term.

Short term: debt is the new equity (rescue, restructuring and acquisition of all forms of distressed debt); alternative energy subsidized platforms will be the flavour of the year; real estate will continue to get clobbered; private equity will perform poorly for another two years.

Long term: oil is the new gold; alternative energy projects will reduce oil supply and increase cost; real estate will be the asset of choice; technology will play a bigger role in communications and will impact the real estate model and travel; private equity will outperform other asset classes and VC and technology funds will be at the top of the list.

Arsenault: Do you see more challenges or more opportunities for private equity players?

Barrack: Colony Capital has a few billion in dry powder, and we are being asked: “Don’t go to fast, don’t be too opportunistic.” The reasoning behind such comments is understandable and is being felt across the whole private equity community. The major investors in private equity funds are banks, pension funds and endowment funds, and their contributions are directly impacted by the lack of distribution by private equity funds. They need distributions in order to make their contributions but they got a double hit, first by a slowdown in distributions AND simultaneously by a 50 per cent asset value loss.

The super funds are the ones that are suffering the most though, they lost more money in the last two years then they had made over the last 10 years. The fee dilemma created by these funds also didn’t help as some firms were leveraging their fees to a point where it killed the model of sticking to finite capital for fees and infinite capital for investments.

We are seeing great opportunities, sound businesses being deleveraged, and true value that can be built through time. We are going back to more realistic growth objectives and we expect to do very well in the mid to long term. In the short term we have to focus on the challenges from an inches and feet perspective, not miles. We need to fix the trust issues between fund managers, investors, lenders and the markets. High leveraging multiples must be part of our past.

Arsenault: How are private equity buyout funds, such as Colony Capital, reacting to the new paradigms?

Barrack: This crisis will pass like all other crises. The key is two-fold: First you need to survive; second, you need to take advantage of the opportunities created by confusion. Experience will show a lot of its value in the coming 18 to 24 months. Inflation will return exponentially within two to three years. Private equity & real estate will directly benefit from the short-term deleveraging and the long-term inflation.

Arsenault: What does your experience tell you?

Barrack: That we need to return to principled leadership by making decent and informed decisions based on true value for the long term. No short-term value creation thinking. Even though the short term will continue to be unpredictable, the medium to long term are totally predictable. We entered into an era of broken confidence, adrift in a sea of unfulfilled expectations. New equity owners will take the reins of very valuable operating companies, acquire assets on a lower cost base and start deleveraging. And with these new teams being incented with long-term value creation goals, investor returns will be restored, and with lower leverage ratios, confidence and trust will be restored. But first, you need to survive!

Arsenault: How much deleveraging needs to occur?

Barrack: $6.9 trillion. So we will still have pretty shaky grounds in the short term. In the long run, the winners will also include those able to convert debt into equity.

Arsenault: How about your views on Canada?

Barrack: Canada can be a strong beneficiary of what is happening. The U.S. is in its worst shape ever. While here in Canada, the banks are solid, we haven’t seen any hyper leveraging; no super funds were put in place. And in these times unique skills are required, different tools are needed, and Canada is better equipped to delicately take advantage of the opportunities created by the numerous short-term stimulus packages.

Arsenault: Any other points you would like to share?

Barrack: The private equity model is changing and the focus will be going back to slower, more realistic growth and building stronger companies. A clearer understanding of the fundamentals – honesty, integrity and force of character – will show. I think many older fund managers will take this opportunity to retire, giving more room to younger more energetic managers to step in. And hopefully they will do things right and slow and understand they need to bring the confidence back, the circle of trust.

This global crisis is a savior for some, as it basically gave all fund managers a free “Get out of Jail” pass for returns!

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By Chris Arsenault Managing Partner at iNovia Capital

Please note that a full copy in .pdf of the magazine can be downloaded on the CVCA web site.

The outspoken and energetic Silicon Valley investor icon Tim Draper storms the stage at the 2009 CVCA Annual Conference

The theme of this year’s CVCA Annual Conference was “Embrace our Energy.” Well, keynote speaker Tim Draper did just that. He had more energy than any other venture capitalist in the room that evening – his eyes were sparkling and he saw opportunity everywhere.

When asked about the current state of the venture capital industry, Draper, who is Founder and Managing Director at Draper Fisher Jurvetson, focused on two core issues. First: we need to break down the borders and enable free trade, he said, and second, we need a new private stock market. While Draper offered no solutions on achieving free trade, he continues to actively advocate for borderless markets. He regularly takes time out of his busy schedule to speak with government officials, the private equity industry, politicians and industry leaders to convince them the world will be a better place if we dropped our commercial borders.

On the second issue, Draper expects to be able to launch a new private equity exchange market. Oh yeah, and Draper also sings! He not only sings, he wrote the lyrics to the “The Riskmaster” and gave CVCA attendees a taste of his singing skills right there and then. Good thing we had the lyrics on the screen to sing along!

Chris Arsenault: What makes these times so exiting for you?

Tim Draper: Timing is now! The current crisis is creating huge liquidity problems. The venture backed IPO market is inexistent and it’s tough for entrepreneurs, venture capitalists, limited partners and future entrepreneurs. While some people are panicking, or even worse clinging to the past, I think that crisis creates opportunity. And that’s a VC’s job to identify the opportunities.

Arsenault: You said earlier that our time was now, why is that?

Draper: I’m talking about the cycle of high returns for venture capital funds versus private equity funds. It’s a cycle. One goes up while the other goes down. The last cycle was owned by the private equity guys, from 2000 to 2008, and they had an amazing run. Until last year that is. We just now embarked on the venture capital cycle and will be coming out of the recession. That means good business for us. It’s the best time ever to invest venture capital money: we are going through a recession/depression, there are low company valuations, liquidity solutions are near, there’s less competition for VCs and entrepreneurs, and new technologies will be game changers.

Arsenault: How does your experience guide you through these times?

Draper: My father and my grandfather pioneered venture capital in Silicon Valley and I’ve been in the business for over 25 years. Some of the greatest companies in the world have started in recessions or depressions, such as GE, IBM, HP, Adobe, Skype and Johnson & Johnson. And now is the best time to invest in start-ups because existing companies are reeling, smart people are out of a job, new technologies are going to change the way we work and play, and there are fewer start-up competitors.

Entrepreneurs are now more enabled by technology than ever before. Entrepreneurs don’t require as much cash either. So we need to support these entrepreneurs, but we now get a larger stake in the company because of the more reasonable valuations. I do fear that there will be less VCs out there though. I also think that the markets will come back. They are slowly creeping back, but we need a new platform for liquidity.

Arsenault: So tell us more about XChange.

Draper: Awesome. This is the greatest thing to happen in the liquidity markets in a long time. XChange is a new springboard to an IPO. Companies can post their profile, raise money, control access and communicate with shareholders. Investors can peruse, connect with companies, buy and sell shares. The technology behind the platform answers today’s communications needs.

My company Draper Fisher Jurvetson is a substantial investor behind XChange. We need more liquidity. Liquidity is what drives deals. The current markets don’t offer solutions for companies under $250 million. This platform will enable companies to remain private while providing liquidity to investors. It will allow entrepreneurs to raise cash for their ventures while enabling investors to get their money out short of an IPO. Investors will need to be qualified trading institutions. Big names will be backing this new platform. We expect to launch in September.

Arsenault: What do you see in Canada?

Draper: Well first, the XChange platform won’t be available in Canada, at least not at initially, but it would be great to find a partner to do so. The Canadian government should drop the borders and have real free trade with the U.S. Lower friction to do business is needed. Aren’t we are both socialist countries now?

We want to bring our DFJ network to Canada and do more deals here. Canada has a history of great technologies – RIM, Sierra Wireless, OpenText, Sharepoint – great universities, a strong entrepreneurial community and a better perspective from outside Silicon Valley, more creative.

This is our time now!

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In the May 27th FP Executive Podcast, Jacoline Loewen, Loewen & Partners (www.loewenpartners.com), talks to Sacha Ghai of McKinsey & Co about his recent research of the major trends in private equity. Sacha discusses how PE investors create value for their portfolio companies.

What is Private Equity?

First of all, Sacha talks about how the definition of Private Equity is a misnomer as it includes debt and additional fund types such as venture, real estate, infrastructure, mezzanine, and distressed debt, among others.

Private Equity is relatively new industry that has experienced strong long term growth and increased deal volume. However, it is cyclical in nature with the record amount of US$625 billion raised in 2007 and US$554 billion in 2008. The fundraising activity has continued to decline into 2009. Currently, private equity has over $1 trillion of dry powder globally ready to be invested.

Does Private Equity create “real” value?

Sacha discusses how the current economic downturn has prompted business owners to look for capital in places other than their local banks. However, many are wondering whether private equity is the right choice for them. Sacha discusses how private equity creates value and for whom – business owners, fund managers and society.

Interestingly enough, Sacha’s findings show that although buyout firms outperformed the public market, the average results were similar or worse. Only the top quartile of funds delivered consistently superior performance. Generally, those PE firms that achieve premium results maintain their superior fund management in its successor funds.

How value created and what is it like to work with a private equity firm?

Sachs goes into detail about how private equity creates value for both investors and business owners. PE investors who are top performers drive value throughout the term of the cycle of the investment:

 •          Deal sourcing – provide access to proprietary deal flow, leverage brand and industry network to aid the process

•          Due diligence – present insights on potential improvement and links to external advisors

•          Deal structuring – help align incentives for business owners

•          First 100 days – establish clear actionable strategies and provide access to management expertise

•          Medium/long-term – institute aggressive monitoring and refining of strategies

•          Exit – provide insights on timing and tailored strategies for different buyer alternatives

Listen to the complete interview: The Financial Post Executive: What Private Equity Does for Your Business – Sacha Ghai, McKinsey & Company

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