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CO-INVESTMENT: INTELLIGENT PORTFOLIO CONSTRUCTIONAnnual Private
Capital Conference, MontreuxJune 27, 2019
This presentation is for information purposes only, is
confidential and may not be reproduced in whole or in part (whether
in electronic or hard-copy form).
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INTRODUCTION TO CAPITAL DYNAMICS
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3 |CONFIDENTIAL
• Private asset manager with over USD 16bn AUM
• Investing globally and operating locally with 150
professionals across 11 offices
• Delivering solutions since 1988
• Focused on mid-market private equity and credit, and clean
energy infrastructure
WHO IS CAPITAL DYNAMICS?
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A PIONEER IN MID-MARKET CO-INVESTMENT
(1) Andrew Beaton, David Smith, Oliver Schumann and Luca
Giacometti working together at GE Capital prior to joining Capital
Dynamics in 2007. Their mid-market co-investment experience at GE
Equity goes back to 1994.(2) Senior team members include Andrew
Beaton, David Smith, Andrew Bernstein, Oliver Schumann and Luca
Giacometti. (3) Experience includes transactions completed by the
co-investment team’s senior members priorto their joining Capital
Dynamics in 2007.
There is no guarantee that the portfolio of any investment
program discussed in this presentation will achieve similar results
or be so constructed. Performance figures contain simulated data
from unrealized investmentsbased on comparable
companies/transactions. For important information on past
investments, please refer to the Dataroom and the Track Record
Notes attached. Performance figures contain simulated data
fromunrealized investments. Past and simulated performance is not a
reliable indicator of future results.
Year when the senior members’ track record began11994
Years’ private equity experience228+
Lead sponsors/GPs with whom co-investments made350
Total enterprise value of portfolio companies3
$27 BN€24 BN
Portfolio company HQ countries322
Average portfolio company enterprise value3
$345 MM€305 MM
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WHY WE BELIEVE IN THE MID-MARKET
Source: (1) The National Center for the Middle Market; Q3 2018
Indicator. (2) The Mighty Middle: Why Europe’s Future rests on its
Middle Market companies as of September 30, 2018. (3) Preqin 2018
Private EquityReport. (4) Capital Dynamics’ intelligence. (5)
Capital Dynamics based on Thomson One Cambridge Associates. (6)
Capital Dynamics study “ Value creation in Private Equity”. (7)
S&P Capital IQ.Investors should review the comprehensive
overview of risk contained in the private placement memorandum
relating to this opportunity and the risk factors attached.
• 200,000 US mid-market (MM) companies; 3rd largest economy in
the world1
• Revenues of US MM companies growing consistently at higher
rates versus S&P 5001
• 140,000 MM companies in the largest four European economies;
9th largest economy2
• 80% of buy-out deals invested in mid-market companies3
• Universe of 600+ experienced MM managers with whom
co-investments may be made4
• Demonstrated resilience to macroeconomic risks (e.g., policy
changes, market downturn) and out-performance over other segments
through the recovery period1,2,5
Large and growing set of opportunities
• Value creation through revenue/EBITDA growth and operational
improvement rather than leverage6
• Acquisitions of MM companies typicallyat lower entry
valuations7 than large-cap. ones due to reduced competition, market
inefficiencies and size discount
• Multitude of exit opportunities with limited reliance on
cyclical exit channels such as public equity and leveraged
markets
Attractive risk-weighted returns
• Steady deployment of capital and mitigation of concentration
risk = stable deal flow in the MM
• Reduced impact of macroeconomic policy risks on the portfolio
companies5
• Reduced impact of rising interest rates on the portfolio due
to lower leverage and conservative capital structures in the
MM6
Portfolio diversification benefit
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CO-INVESTMENT: INTELLIGENT PORTFOLIO CONSTRUCTION
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MAIN TYPES OF CO-INVESTMENT PORTFOLIOS
Globally diversified portfolio investing in large deals
Global diversified portfolio investing in mid-market deals
Concentrated regional portfolio
No. of investments in portfolio
More than 50 20 - 30 Less than 20
Investment size(typical)
Large (enterprise values >
EUR 1 billion)
Mid-market (enterprise values of
EUR 50 million toEUR 1 billion)
Small- to-medium-sized(enterprise values of
EUR 50 million toEUR 250 million)
Investment approach Passive Active ActiveDiversification High
Optimal Low
Risk-returnprofile
Expected returnsimilar to index
Balancedrisk-return
High concentration of risk
Illustrative co-investment fund diversification models
Source: Capital Dynamics.
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CO-INVESTMENT SELECTION
Managers should have the following attributes:
• Skillset to identify attractive target companies for
investments
• Ability to assess the characteristics of the lead
investor/manager
• Global network of several hundred lead investors spread across
the key geographies, sectors and investment strategies. Independent
academic research has endorsed the importance of diversification
across many co-investments (in the absence of great skill or divine
intervention)1
1Summary of paper: Adverse Selection and the Performance of
Private Equity Co-Investments, Braun/Jenkinson/Schemmerl, October
2018.
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CONTRASTING APPROACHES TO SELECTION…
Typical LP Capital Dynamics
As direct investors, we look at target companies first, review
them on a stand-alone basis and ascertain fit with the lead
investor’s competence. Typical LPs have the opposite approach and
rely heavily on due diligence of lead investors.
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…WITH ACTIVE ENGAGEMENT, POST-ACQUISITION
• Board members/observers: board representation amongst senior
team members• Active role in changing or supplementing management
team, and providing strategic advice based on industry expertise•
Leveraged global platform to introduce international financing
sources• Made follow-on investments, often with new equity (e.g.,
provided Italian ceramics leader with acquisition capital)• Made
introductions to acquisition targets• Financed buy-out of minority
shareholder via de-listing (e.g., take-private of leading Polish
logistics company)• Assisted in preparation for exit• Negotiated
exit terms (e.g., led negotiation of sale of IFA portfolio company
to a European insurance company)• Introduced potential new clients
(e.g., took U.S. portfolio company on roadshow in Europe)• Risk
management through independent valuation of investments• Monitoring
of sustainable development and ESG improvement
Capital Dynamics’ approach
• Establish a portfolio review plan• Review monthly or quarterly
company reports• Attend investor meetings
Typical co-investors
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AN AGILE APPROACH TO INVESTMENT
The image part with relationship ID rId3 was not found in the
file.
Mid-sized industrial businesses with international expansion
potential
Emergence from the Global Financial Crisis
(2009-2010)The image part with relationship ID rId3 was not
found in the file.
Software and services businesses
Growth opportunities at reasonable entry multiples
(2014-2016)The image part with relationship ID rId3 was not
found in the file.
Transactions with stronger downside mitigation
Downside mitigation and smaller, active transactions
(from 2016)
Smaller, active co-investments with specialized lead
investors
Source: Capital Dynamics; Logos are those of selected portfolio
companies. The investments shown above are for illustrative
purposes only and have not been selected on the basis of
performance. There is no guaranteethat similar investment
opportunities will arise in the future. Past performance is not a
reliable indicator of future results. For complete information on
past investments, please refer to the Dataroom.
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WHAT THIS MEANS FOR PERFORMANCE
1Adverse Selection and the Performance of Private Equity
Co-Investments, Braun/Jenkinson/Schemmerl, October 2018.2The annual
management fees and carried interests of a private equity
co-investment fund are generally set at a level which is
approximately half that applicable to a typical private equity fund
active in the mid-market.
• Braun, Schemmerl and Jenkinson analysis
• 1,000+ co-investments from 13,000+ private equity
transactions
• Between 1981 and 2011
Recent academic research1
• Co-investments do not suffer from adverse selection (i.e.,
selection bias)
• Co-investments achieve better returns due to their lower
costs2
Results
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WHAT THIS MEANS FOR PERFORMANCE
Performance of co-investments versus investments not offered for
co-investment1
Und
erpe
rfor
man
ceO
utpe
rfor
man
ce
1Net performance shown in terms of Public Market Equivalent
(PME).
Source: Adverse Selection and the Performance of Private Equity
Co-Investments. Braun/Jenkinson/Schemmerl, October 2018.Note:
Bubble size indicates the amount of capital invested in specific
years.
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IMPACT OF INTELLIGENT PORTFOLIO CONSTRUCTION…
1Adverse Selection and the Performance of Private Equity
Co-Investments, Braun/Jenkinson/Schemmerl, October 2018.2The annual
management fees and carried interests of a private equity
co-investment fund are generally set at a level which is
approximately half that applicable to a typical private equity fund
active in the mid-market.
• Capital Dynamics has carried out simulations of proprietary
data
• 268 private equity funds
• 4,739 underlying portfolio companies
• Vintage years between 1995 and 2010
Recent research• Random co-investment funds with
different investment strategies
• Gradual changes in strategy tested by replicating funds with
intelligent portfolio construction
• These changes allow quantification of risk measured by TVPI
spread
Simulation methodology
• Far greater downside protection versusrandomly-selected
buy-out fund
Results
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Source: Capital Dynamics.There is no guarantee that Capital
Dynamics successor program will be so constructed.
Fund manager
2%
7%
10%
15%
15%
16%
35%
Consumer
Health care
IT
Financial services
Business services
Energy
Industrials
Sector
22%
42%
36%
2016
2017
2018
Vintage Geography
12%
43%
45%
RoW
NorthAmerica
Europe
…USING THE FOUR KEY DIVERSIFICATION PILLARS…
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0.6
0.8
1
1.2
1.4
1.6
1.8
2
Buy-out fund selected atrandom from our
database
Manager diversification Random geographicalallocation
Equal weighting of deals Replication usingintelligent
portfolio constructionfor co-investment fund
Median TVPI Lower decile TVPI
Rang
es o
f TVP
Is
Risk mitigation of 67% using intelligent portfolio
construction
…REDUCES RISK SIGNIFICANTLY
Risk mitigation through intelligent portfolio construction1
1Capital Dynamics' calculation and analysis based on Preqin data
using a sample of 64 multi-manager co-investment funds as of June
30, 2018.
Source: Capital Dynamics, January 2017 and 2019.
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Source: Capital Dynamics, January 2017 and 2019.
SIMULATION PROCESS VISUALIZATION (FUND-LEVEL)
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PORTFOLIO-LEVEL SIMULATION METHODOLOGY
(1Between 1999 and 2018. (2) No co-investment funds available in
2000 and in 2003. Source: Capital Dynamics calculations based on
Preqin data as of June 30, 2018.
Capital Dynamics has performed a portfolio simulation analysis
to estimate the impact of adding a co-investment fund to a
traditional portfolio
• Select two random investments every year during a 15-year1
period– an investment in a private equity fund of funds– an
investment in a comingled private equity co-investment fund2
• The fund of funds and co-investment funds are all equally
weighted
• The total commitment to each category of funds can be
defined
• The current performance of a random portfolio can be expressed
in terms of TVPI (exact reconstruction from the data in the Preqin
database)
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Source: Capital Dynamics calculations based on Preqin data as of
June 05, 2019. Analysis based on the IRR (approximated with the
“Proxy IRR” method) yields the same results. Private equity
Internal Rate of Return (IRR) and Total Value to Paid In (TVPI) are
net of fund expenses, management fees and carried interest.
1.24 1.28 1.32 1.36 1.4 1.44 1.48 1.52 1.56 1.6 1.64 1.68 1.84
1.88 1.92 1.96 2
TVPI
Median return increased
Reduction of the risk
Example: 30% allocation to co-investment
No co-investment 30% co-investment
SIMULATION PROCESS VISUALIZATION (PORTFOLIO-LEVEL)
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CONCLUSIONS
Benefits of intelligent portfolio construction for
co-investments versus conventional PE fund
1) Outperformance
2) Significant risk mitigation
3) Greater performance at portfolio level, too
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David SmithSenior Managing DirectorAuthorised adviser of:Capital
Dynamics LtdWhitfield Court30-32 Whitfield StreetLondon W1T 2RQ,
[email protected]
Constantinos EconomouSenior VP, BDCapital Dynamics LtdWhitfield
Court30-32 Whitfield StreetLondon W1T 2RQ, UK
[email protected]
For furtherInformation:
mailto:[email protected]:[email protected]
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For investors based in the United Kingdom, the European Union
and Dubai International Financial Centre, this presentation is
being communicated to you by Capital Dynamics Ltd (CDL). CDL is a
firm authorized and regulated by the UK Financial Conduct Authority
as an Alternative Investment Fund Manager.
For investors based in the United States, this presentation is
being communicated to you by Capital Dynamics Broker Dealer LLC on
behalf of Capital Dynamics, Inc., a registered investment adviser
with the US Securities and Exchange Commission.
For all other investors, the presentation is being communicated
by the firm entity acting as the manager or general partner,
adviser to the client or such other firm entity authorized to make
this communication as appropriate.
Capital Dynamics Group is an independent asset management firm
focusing on private assets and comprises Capital Dynamics Holding
AG and its affiliates.
DISCLOSURE STATEMENT
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“Capital Dynamics” comprises Capital Dynamics Holding AG and its
affiliates.
The information contained herein is provided for informational
purposes only and is not and may not be relied on as investment
advice, an investment recommendation, an offer to sell, or a
solicitation of an offer to buy any interest in any fund or any
security, commodity, financial instrument or derivatives linked to,
or otherwise included in, a portfolio managed or advised by Capital
Dynamics, or an offer to enter into any other transaction
whatsoever. Any such offer or solicitation, if made, shall be made
pursuant to a private placement memorandum furnished by Capital
Dynamics. No person has been authorized to make any statement
concerning the information contained herein other than as set forth
herein, and any such statement, if made, may not be relied upon.
Recipients should make their own investigations and evaluations of
the information contained herein prior to making an investment
decision. Nothing contained herein may be relied upon as a
guarantee, promise, assurance, representation or warranty. This
presentation is strictly confidential, is intended only for the
person to whom it has been provided and may not be shown,
reproduced or redistributed in whole or in part (whether in
electronic or hard copy form) to any person other than the
authorized Recipient without the prior written consent of Capital
Dynamics.
Further, this document may contain information that has been
provided by a number of sources not affiliated with Capital
Dynamics. Capital Dynamics has not verified any such information.
Nothing contained herein shall constitute any representation or
warranty and no responsibility or liability is accepted by Capital
Dynamics as to the accuracy or completeness of any information
supplied herein.
This document may contain past performance and projected
performance information. It must be noted that past performance and
projected performance is not a reliable indicator or guarantee of
future results and there can be no assurance that any fund managed
by Capital Dynamics will achieve comparable results. Certain
statements contained in this document may include statements of
future expectations and other forward-looking statements. Due to
various risks and uncertainties, actual events or results or actual
performance may differ materially from those reflected or
contemplated in such forward-looking statements.
Except where otherwise indicated herein, the information
provided herein, including any forecasts contained herein and their
underlying assumptions, are based on matters as they exist as of
the date of preparation and not as of any future date, and will not
be updated or otherwise revised to reflect information that
subsequently becomes available, or circumstances existing or
occurring after the date hereof. Capital Dynamics does not purport
that any such assumptions will reflect actual future events, and
reserves the right to change its assumptions without notice to the
Recipient. Any forecasts contained herein are intended to be
provided in on-on-one presentations to the Recipient. Capital
Dynamics has not independently verified the information provided
and does not assume responsibility for the accuracy or completeness
of such information.
The Recipient should not construe this document as a binding
legal agreement or the contents of this document as legal, tax,
accounting, investment or other advice. Each investor should make
its own inquiries and consult its advisors as to any legal, tax,
financial and other relevant matters concerning an investment in
any fund or other investment vehicle. Capital Dynamics does not
render advice on tax accounting matters to clients. This document
was not intended or written to be used, and it cannot be used by
any taxpayer for the purpose of avoiding penalties which may be
imposed on the taxpayer under U.S. federal tax laws. Federal and
state tax laws are complex and constantly changing. The Recipient
should always consult with a legal or tax adviser for information
concerning its individual situation.
When considering alternative investments, such as private equity
funds, the Recipient should consider various risks including the
fact that some funds may use leverage and engage in a substantial
degree of speculation that may increase the risk of investment
loss, can be illiquid, are not required by law to provide periodic
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information, often charge high fees, and in many cases the
underlying investments are not transparent and are known only to
the investment manager. Any such investment involves significant
risks, including the risk that an investor will lose its entire
investment.
By accepting delivery of this document, each Recipient agrees to
the foregoing and agrees to return the document to Capital Dynamics
promptly upon request.
DISCLAIMER
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United Kingdom: This document has been issued by Capital
Dynamics Limited who is authorised and regulated by the Financial
Conduct Authority (“FCA”). This document is addressed only to
persons falling within one or more of the following exemptions from
the restrictions in section 21 of the Financial Services and
Markets Act 2000 (“FSMA”):
• Authorised firms under FSMA and certain other investment
professionals falling within article 19 of the FSMA (Financial
Promotion) Order 2005 (“FPO”) and their directors, officers and
employees acting for such entities in relation to investment;
and
• High value entities falling within article 49 FPO and their
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Dynamics Ltd. Capital Dynamics Ltd is authorized and regulated by
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in the analysis described herein should return this document to
Capital Dynamics Limited, Whitfield Court, 2nd Floor, 30-32
Whitfield Street, London W1T 2RQ, United Kingdom and contact
Capital Dynamics as soon as possible (t. +44 20 7297 0200).
Furthermore, please kindly note that any fund to which this
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Capital Dynamics Limited reserves the right to amend or change the
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Capital Dynamics GmbH is registered as an investment intermediary
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no. 2 and 3 German Commerce and Industry Regulation Act with the
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is published on the following website:
www.vermittlerregister.info.
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Swiss representative and paying agent. Any distribution of shares
in the Luxembourg feeder fund in Switzerland would be exclusively
made to, and directed at, qualified investors, as defined in the
Swiss Collective Investment Schemes Act of 23 June 2006, as amended
and its implementing ordinance. Accordingly, the Fund has not been
and will not be registered with the Swiss Financial Market
Supervisory Authority FINMA.
MATERIAL NOTES TO INVESTORS
http://www.vermittlerregister.info/
Co-investment: intelligent portfolio constructionIntroduction to
�CAPITAL DYNAMICSWho is capital dynamics?A pioneer in mid-market
co-investmentWhy we believe in the mid-marketCO-INVESTment:
INTELLIGENT PORTFOLIO CONSTRUCTION�MAIN TYPES OF CO-INVESTMENT
portfolioSco-investment selectionCONTRASTING APPROACHES TO
selection……with Active engagement, post-acquisitionAn agile
approach to investmentWhat this means for performanceWhat this
means for performanceImpact of intelligent portfolio
construction……using the four key diversification pillars……reduces
risk significantlysimulation PROCESS Visualization
(fund-level)Portfolio-level simulation methodologysimulation
PROCESS Visualization (portfolio-level)CONCLUSIONsSlide Number
21DISCLOSURE STATEMENTDISCLaimerMaterial notes to investors