Download Understanding private equity and private equity funds

Understanding private equity
and private equity funds
Table of contents
1. 
History and fundamentals of private equity
2. 
Market overview
3. 
Private equity funds – lifecycle, structure and mechanics
4. 
Diversification within private equity
5. 
Accessing the asset class
6. 
Appendix
2
History and fundamentals of private equity
Private equity investments are speculative and involve substantial risks. It is possible that investors may lose some or all of their investments. Please see Disclosures and general risks beginning on
page 45 of this presentation for a more detailed description of the risks associated with investing in private equity.
3
Private equity in perspective – a brief history
In the 19th century agrarian life shifted to complex enterprises—such as railroads—
requiring more capital than one individual or family could supply
The complexity and learning curve meant than many who tried to run such companies
did not succeed
Merchant banks would step into distressed situations, take control of a troubled
enterprise, reorganize its finances and put in place new management
4
First true leveraged buyout
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J.P. Morgan & Co. bought the
Carnegie Steel Corporation for $480 million
in 1901; the corporation’s assets were
merged with others to form United States
Steel, the world’s largest-ever company at
the time
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After the Glass-Steagall Act (1933),
investment banks took over these types
of deals from merchant banks
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In the late 1970’s firms arose specializing
in using debt leverage to purchase
companies in “leveraged buyouts” or LBOs,
founding what became the private-equity
industry
Source: The Wall Street Journal, A Short (Sometimes Profitable) History of Private Equity, John Steele Gordon, January 17, 2012.
Image source: The Morgan Library & Museum. Reprinted with permission.
5
What is private equity?
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Investments in public and non-public companies or assets through privately negotiated transactions.
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Investments are directly into private companies or buyouts of public companies that result in a delisting of
public equity.
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Private equity managers seek to acquire quality assets at attractive valuations and use operational expertise
to enhance value and improve portfolio company performance.
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Capital is raised from investors for private equity, which can be used to:
– 
Fund new technologies
– 
Invest in organic growth opportunities
– 
Make acquisitions
– 
Strengthen a balance sheet
There is no guarantee that the goals of enhancing value and improving performance will be achieved.
6
A company’s growth–from a business idea to an IPO
The following illustrates a simple example of a company’s growth as facilitated by private
capital:
Start-up
Build-up
Private
Equity
40%
Owner
100%
IPO
Public
25%
Owner
60%
Owner
45%
Private
Equity
30%
Source: Adapted from Private Equity: Beyond the Storytelling. Aswath Damodaran, Ph.D., New York University Stern School of Business,. Reprinted with permission.
The above charts are for illustrative purposes only and do not represent actual companies or transactions.
7
A company’s growth–a public company matures
The following illustrates differing ownership ratios in public companies
of varying sizes:
Young growth public
Growth public
Founder
15%
Founder
25%
Public
75%
Mature public
Public
85%
Insider(s)
4%
Public
96%
Source: Adapted from Private Equity: Beyond the Storytelling. Aswath Damodaran, Ph.D., New York University Stern School of Business,. Reprinted with permission.
The above charts are for illustrative purposes only and do not represent actual companies or transactions.
8
Examples of public company challenges
1
Market may be
mispricing
the firm
2
The company’s
business model
may be broken
3
The company
may be
mismanaged
9
Value gaps create an opportunity for private equity
A mature public company is taken private: The general partners (GP) of the private equity
firm raise equity capital from limited partner (LP) equity investors and borrow the rest
Mature public
Private equity
Insider(s)
4%
PE equity:
40%
Debt:
60%
Public
96%
Source: Adapted from Private Equity: Beyond the Storytelling. Aswath Damodaran, Ph.D., New York University Stern School of Business,. Reprinted with permission.
The above charts are for illustrative purposes only and do not represent actual companies or transactions.
10
How does private equity drive value creation?
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Operational improvements
Financial engineering
Organic and external growth
Entry/exit timing – multiple exit routes
Strong
Corporate
Governance
Model
Typical
Applications
− 
More frequent availability and detail of information available to private equity managers
than in public markets
− 
− 
− 
− 
Provides ability to influence and change company managements
− 
− 
− 
− 
− 
Providing growth capital to developing business
Can generate implied control premium
Creates alignment of interest
Operates over long-term investment horizon
Addressing succession issues and growth capital needs in family-owned firms
Seeks to unlock value in under-funded subsidiaries of large corporations (carve-out)
Reorganizing large multi-divisional corporations to become more efficient / productive
Seeks to restart growth via take-privates of undervalued and undercapitalized publiclylisted companies
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Value creation in an illustrative buyout
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Operational improvement may drive value creation by fostering revenue growth and improved EBITDA1
margins
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These, together with debt pay-downs and a higher valuation (“multiple expansion”) represent the potential
difference between capital originally invested and the investment value when exited
16,000
Operational improvement
3,065
14,370
Multiple
expansion
Investment value
at exit/current
3,654
12,000
(655)
1,533
8,000
6,774
4,000
Capital
invested
Revenue
growth
EBITDA margin
improvement
Debt
paydown
1 EBITDA—A
company’s Earnings Before Interest, Taxes, Depreciation and Amortization.
Valuation creation analysis is performed by Pantheon on a recent large buyout fund manager. Past performance is not indicative of future results. Future returns are not guaranteed, and loss of
principal may occur. The information above is provided for illustration purposes only and to provide an example of valuation creation within a buyout fund.
12
Market overview
13
Why the rising interest in private equity?
Top performing asset class
Private equity’s history of outperformance
Listed equity 7.42%
Fixed income 5.13%
Private equity 10.71%
Real estate 6.86%
0.00%
2.00%
4.00%
6.00%
Returns
8.00%
10.00%
12.00%
Source: Bloomberg. Investment returns 10 years ended December 31, 2016. Listed equity, fixed income, private equity and real estate are respectively represented by the following indexes: S&P 500,
Bloomberg Barclays Aggregate U.S. Bond Index, Cambridge Associates U.S. Private Equity, Dow Jones U.S. Select REIT. Indices are unmanaged, do not incur expenses, and are not
available for investment. Returns are calculated as a 10-year average ended December 31, 2016. The above chart is for illustrative purposes only. The appropriateness of private equity for
any individual portfolio will vary. Please see index descriptions at the end of this presentation. Index performance is not representative of the Fund’s performance. Please call 800.835.3879 or
visit our website at www.amgfunds.com/pantheon to obtain Fund performance information.
14
Private equity outperformance vs. public markets
Ten-year rolling returns, starting in 1988 (%)
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
Bloomberg Barclays U.S. Aggregate Index
S&P 500 Index
Cambridge Associates U.S. Private Equity Index
Source: S&P 500 Index, Bloomberg Barclays Aggregate U.S. Bond Index, Cambridge Associates U.S. Private Equity Index. Each rolling 10 year period is from July 1 to June 30 of the years
indicated. Past performance is not necessarily indicative of future results. Future returns are not guaranteed and a loss of principal may occur. Index performance is not representative of
the Fund’s performance. Please call 800.835.3879 or visit our website at www.amgfunds.com/pantheon to obtain Fund performance information.
15
Embraced by institutional investors
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Institutional allocations to private equity
U.S. public pensions have long been
investing in private equity and most have
increased their target allocations over time
—the average public fund now targets an
8.3% allocation1
Large endowments such as Harvard,
Stanford and Yale have invested in private
equity for decades, with current target
allocations of 20%, 23% and
31%, respectively2
9.0%
Target allocation
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8.5%
8.5%
8.5%
8.3%
8.0%
7.8%
7.5%
7.5%
7.0%
2009
7.8%
7.5%
2010
2011
2012
2013
2014
2015
U.S. public pension funds' average target private equity allocation
Source: Preqin, May 23, 2016.
Source: Harvard 2016, Stanford 2016, Yale 2016.
Chart is for illustrative purposes only. Individual asset allocation will vary. Individuals must determine the percentage of allocation to private equity based on their individual portfolio.
1
2
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Private equity owned companies include many household names
Equinox
Facebook
Skype
Dell
Versace
Kraft
Heinz
Shake
Beats
Electronics Shack
Burger King
Hilton
Dunkin’
Donuts
The names above are presented for illustrative purposes only. They do not constitute an endorsement of Pantheon or any particular offering. This
does not imply that Pantheon will invest with these managers.
17
Who invests in private equity?
Institutional investors
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Public and private pension funds
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Insurance companies
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Foreign governments sovereign wealth funds
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Fund-of-funds managers
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Large family or multi-family offices
High net worth and “mass affluent” investors
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Through tailored fund vehicles
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Private equity funds–
lifecycle, structure and mechanics
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Typical lifecycle of a private equity fund
Fundraising
(1 year)
Investment
period
(4-5 years)
Harvest
period
(6-10 years)
Companies
bought
Companies
sold
Goal to
return capital
and profits
to investors
Source: Pantheon. There is no guarantee that the goal of capital return will be achieved.
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Typical life cycle of a private equity fund
A private equity fund consists of private equity “portfolio company” investments
Fund period
Fundraising
Investment
Activities
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A fund’s manager – or general partner (GP) – establishes a limited
partnership agreement setting forth the funds’ terms and
conditions.
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Investors in the fund – or limited partners (LPs) – commit a certain
amount to the fund upfront during the fundraising period.
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When capital is needed for portfolio acquisitions, the GP issues
requests for capital from the LPs (“capital calls”), up to the LP’s
Duration
1 year
4-5 years
commitment amount.
Harvest
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In the harvest period, companies are sold or go public via an IPO,
and the fund distributes proceeds back to the LPs.
6-10 years
Source: Pantheon.
21
How are returns realized in a private equity investment?
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Without an exit strategy, a private investment can tie up money indefinitely in an illiquid asset
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Private equity addresses this key challenge through a 3-phased investment approach:
investment, improvement, exit
Typical life cycle of a private equity company investment
Phases
Activities
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Make a controlling investment in a company, the majority of which may be funded
with debt
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The rest of the purchase price comes from the funds’ own equity capital
Improvement
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Aim to increase the company’s financial results and value by implementing
operational, financial, and/or management changes
Exit
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Cash out of the investment to realize potential returns and return capital to investors
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Typical exits include an IPO, trade sale to another private equity firm, or a
recapitalization
Investment
Source: Pantheon.
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Mechanics of private equity: the J-curve effect
The “J-Curve” refers to the “J” shaped line that represents the cumulative net cash flows of
a private equity fund during its life
w 
Negative flows—and therefore negative returns—characterize the early years of a private equity fund
resulting from capital calls, management fees and the cost of investments as money is put to work
w 
In the hypothetical example below, flows reach breakeven and then turn positive as investments are exited
after a 3-5 year holding period; distributions to fund investors are made after investments are exited
Harvest period
Total commitment
Cumulative cash flow
Value creation (hold period)
Investment period
Net invested capital potentially becomes positive
(Breakeven point)
1
2
3
4
Distributions
5
Capital calls
6
7
8
9
10
CCF
Source: Pantheon. This is a simplified example and does not represent the performance of an actual company or fund. Private equity investments involve substantial risk. There can be no assurance
that actual fund cash flows will be similar to the model set forth on this slide. Cash flow patterns will vary depending upon the activities of the underlying private equity partnerships.
23
Typical private equity fund structure
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Private equity fund managers – known as general partners (“GPs” or “managers”) form limited partnership
vehicles to invest in private companies
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Investors commit a specific amount of capital (typically $10 million-minimum) to a private equity fund
to become limited partners (“LPs”)
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GPs also typically invest their own capital alongside limited partners
Private equity fund
manager (“GP”)
Investors (LPs)
Pension funds
Sovereign wealth
$10mm+
$10mm
Insurance companies
Corporations
Private equity fund
(limited partnership)
Companies
Endowments
Foundations
UHNW investors
Source: Pantheon.
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Typical private equity fund characteristics
Access structure
Offering process
Investment minimum
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Offerings are typically exempt from registration under the Securities Act of 1933, Regulation D
and are sold via private placements to qualified buyers
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Confidential Private Placement Memorandum (“PPM”) is the primary offering document
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Typical minimum starts at $10 million
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Typically 1.25-2.0% per annum
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Typically charged on committed capital during the investment period, and on invested capital
thereafter
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Typically 20% of profits after fees and expenses charged at the time an investment is sold—
known as “carried interest”
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Carried interest is typically only paid after the return of capital + fees and expenses to
investors, and only after a “hurdle” return rate is achieved (generally 8%)
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Typical fund expenses include audit, administration, etc.
Fees & Expenses
Management fee
Performance fee
Fund expenses
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Diversification within private equity
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Key diversification considerations in a portfolio of private equity investments
Diversification within a private equity portfolio takes into account:
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Vintage – The first year a private equity fund
makes a portfolio company investment
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Industry – Industry sectors
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Geography – Global regions
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Manager – Investment managers
(General Partners)
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Stage – Private equity investments’
stages of maturity
Stage
Vintage
Portfolio
Manager
Industry
Geography
Diversification does not guarantee a profit or protect against a loss in declining markets.
27
Manager selection is important – wide gap exists between strongest and weakest
private equity performers
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The difference in performance results between top and bottom quartile investment managers (performance
“spreads”) can vary significantly by asset class
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1st quartile private equity managers outperformed those in the 4th quartile by over 13% over the past ten
years–this is a dramatically wider performance spread than for public market funds where spreads have
averaged about 2% or less
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For this reason, expertise in identifying strong managers and avoiding weak ones is particularly important
when investing in private equity
Performance spreads between 1st and 4th quartile managers—Ten years ended 06/30/16
14%
Performance
Spread (%)
12%
13.06%
10%
8%
6%
4%
2%
0%
Private Equity
2.04%
1.91%
2.27%
U.S. Small-Cap Public Equity
U.S. Large-Cap Public Equity
U.S. Bond
Source: Thomson Reuters, Morningstar Direct. Private Equity returns are based on the Cambridge Associates U.S. Private Equity Index for all vintage years from 2006-2016. Please see index
description at the end of this presentation. U.S. Small-Cap Public Equity, U.S. Large-Cap Public Equity and U.S. Bond are based on the following Morningstar categories: U.S. Small-Cap Public
Equity—Small Blend, Small Growth, and Small Value. U.S. Large-Cap Public Equity—Large Blend, Large Growth, and Large Value. U.S. Bond—U.S. Taxable Bond category. Index performance
is not representative of the Fund’s performance. Please call 800.835.3879 or visit our website at www.amgfunds.com/pantheon to obtain Fund performance information. Past performance is
no guarantee of future results.
28
Private equity investments can occur at different stages of a company's development
Investment stage / maturity (early to late)
Venture
Capital
Early-stage
(start-ups) and late
stage companies
(development)
Growth
Capital
Minority
investments
in established
companies
Special
situations
Mezzanine
Includes debt and
equity instruments–
usually unsecured
and subordinate to
other obligations
Investments include
distressed debt,
infrastructure,
energy/utilities,
and turnarounds
Buyout
Control investments
in established,
cash-flow positive
companies
Relative risk (high to low)
Source: Pantheon. No investment or strategy implies a complete lack of risk. A private fund investment involves a high degree of risk as such investments are speculative, subject to high return
volatility and will be illiquid on a long-term basis. Investors may lose their entire investment.
29
Characteristics of each stage
Stage/Maturity
Characteristics
Average
Investment Life
Venture capital
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Early-stage (start-up) and late stage (development)
Typically 100% equity
7+ years
Growth capital
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Minority investments in established companies to fund growth
Strong growth characteristics
Typically does not use leverage
100% equity
5+ years
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Elements of both debt and equity instruments
Fixed returns from interest payments
Opportunity to participate in capital appreciation
Usually unsecured and subordinate to other obligations
2-3 years
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Investments include distressed debt, infrastructure, energy/utilities, and
turnarounds
Short investment cycle can produce high IRRs but lower multiple on capital
Mezzanine
Special situations
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Buyout
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Control investments in established, cash-flow positive companies
Typically uses leverage
Lower volatility of returns
Debt and equity instruments
Varies
4-5 years
30
Types of private equity investments
Primary
investments
Co-investments
Secondary
investments
31
Types of private equity investments
Type
Characteristics
Primary
investments
(“Primaries”)
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Investments in newly created private equity funds
Secondary
investments
(“Secondaries”)
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Existing private equity fund interests sold on the secondary market
Co-investments
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Blind pool commitment
The secondary market allows LPs in primary funds to liquidate their interests
before the full 10-12 year fund term has finished
A direct company investment by an LP
The investment is in a company that is backed by a private equity fund in which
the LP is also investing
w 
The LP ends up with two separate stakes in the company. One stake is indirect –
through the private equity fund, and the other is through the direct co-investment
w 
Co-investment opportunities are offered by GPs to LPs for diversification reasons
when the GP wants to acquire a larger stake in a company than is prudent for
the fund
32
Characteristics of primaries, secondaries, and co-investments
Investment type Benefits
Primaries
Secondaries
Co-investments
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Offer due diligence
opportunity on GP, strategy
and track record prior
to investing
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Facilitate consistent
exposure across vintages
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Allow strategic diversification
by investment stage and sector
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Greater insight into
portfolio composition
at time of commitment
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Initial fund fees and
expenses already paid
Detractors
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Initial management
fees negatively impact
interim NAVs
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Longer time horizon
to distributions
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Less strategic
allocation flexibility
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Potential for overdiversification
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Less availability in
the market
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Shorter time horizon
to distributions
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Allow the limited partner
to increase exposure to
a particular opportunity
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Provide limited timeframe for due-diligence
and decision making
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Often offered on a no-fee,
no-carried interest basis
w 
Require significant
resources and expertise
for evaluating deals
Summary
w 
Blind pool commitments
that seek to produce a
higher multiple on invested
capital than secondaries
w 
Investments in partly
known portfolios that can
be valued; Seek to produce
a higher internal rate of
return (IRR) than primaries
w 
Offers LPs increased deal
exposure for lower
aggregate fees but requires
especially high level of
expertise & speedy
decision-making
33
After initial investment period, primaries and secondaries are complementary strategies
w 
Primaries are blind-pool, uninvested portfolios with longer time horizons to returning distributions than
secondaries. Over the life of an investment, primaries offer a higher potential multiple on invested capital than
secondaries
w 
Secondaries are more mature, invested portfolios. They may help mitigate private equity’s J-curve effect
because portfolio companies are closer to being exited, so the fund is closer to returning distributions. Over
the life of an investment, secondaries’ shorter time horizon to distributions offers a higher potential internal
rate of return (IRR) than primaries
Primaries
Secondaries
Performance
(NAV + distribution)
Time
Source: Pantheon. The above chart is for illustrative purposes only.
34
Accessing the asset class
35
Accessing private equity
Institutional investors
Vehicle type
Characteristics
Co-investment
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Concentration risk, due to single company investment
Direct fund
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w 
Single strategy, single manager
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w 
Fund of secondary investments
Secondary fund
Co-investment
fund
Fund of funds
Invests in approximately 15-30 companies
Typically a known and mature portfolio, potentially mitigating risk
and the J-curve
w 
Invests alongside non-affiliated primary funds with excess capacity
of portfolio company investments
w 
w 
w 
Primary funds retain decision-making authority
w 
Professionally managed partnership investing in single manager private
equity funds
w 
w 
w 
Can be generalist or sector/strategy specific
Investment minimum
(typical)
$10 million
$10 million
$10 million
$10 million
Offers diversified approach (40-50 companies)
Often managed by a fund-of-fund manager; difficult to replicate
$10 million
Offers a diversified approach (20-30 managers)
Often difficult to replicate
Source: Pantheon. The characteristics above reflect the typical characteristics of such funds but we note that the characteristics of any particular fund in the private equity industry may and will vary.
36
Accessing private equity
Individual investors
Vehicle type
Characteristics
Stock of publicly
traded private
equity firm
w 
w 
w 
A single company stock purchase
Listed private
equity mutual
fund
w 
Mutual funds that invest in either:
Access fund
Investment minimum
(typical)
N/A
Does not offer direct private equity access or diversification
Tax reporting is typically via K-1
$2,500
–  Listed private equity companies (Blackstone, KKR, Carlyle)
–  Public companies that invest in a portfolio of private companies
w 
Allows individuals who are not accredited investors to access the
characteristics of private equity through the stock market
w 
Tend to be closely correlated to public equity markets
w 
A fund which is set up by a GP to invest in one pre-identified primary
fund
w 
w 
w 
Lower minimum investment compared with typical private equity fund
$250,000
Typically have a term one-year longer than the underlying primary fund
Available at large broker/dealer wirehouses with large in-house expertise
and support staff
Source: Pantheon. The characteristics above reflect the typical characteristics of such funds but we note that the characteristics of any particular fund in the private equity industry may and will vary.
37
Accessing private equity
Vehicle type
Individual investors
Registered
private equity
fund
Characteristics
w 
Perpetually offered closed-end funds typically registered under
the Investment Company Act of 1940
w 
Typically structured as a fund-of-funds vehicle – may employ multiple
private-equity strategies
w 
Generally invest a majority of the portfolio in private equity
(primary funds, secondary funds, and co-investments)
w 
w 
Can offer diversification across the asset class
w 
w 
Investment minimum
(typical)
$25,000-$50,000
In order to manage liquidity, a portion of the portfolio may be invested
in liquid securities
Low minimum investment compared with typical private equity fund
Available to Accredited Investors
Source: Pantheon. The characteristics above reflect the typical characteristics of such funds but we note that the characteristics of any particular fund in the private equity industry may and will vary.
38
Appendix
39
About Pantheon
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Founded in 1982, Pantheon manages AUM of over $35 billion1, and is a leading global private equity fund
investor, managing private equity funds and separate account programs for investors around the world
w 
The firm’s long-term presence in Europe, the U.S. and Asia has allowed the team to develop an extensive
network of relationships for rigorous on-site due diligence and ongoing investment monitoring
w 
Pantheon is a trusted partner to over 380 institutional investors across the globe, including public and private
pension plans, insurance companies, banks, endowments and foundations
1
AUM of $35.2B as of September 30, 2016. This figure includes assets subject to discretionary or non-discretionary management, advice or those limited to a reporting function.
40
About AMG Funds
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AMG Funds provides access to premier boutique asset managers through a unique partnership where
the investment managers maintain operational autonomy and are truly independent.
w 
AMG Funds is not beholden to a single investment approach or a single manager to help find the best
investment solutions. This innovative approach leverages the independent manager’s specific expertise to
deliver products that cover the complete asset class spectrum.
w 
Delivering the talents of independent boutiques under a consolidated platform allows AMG Funds to offer
unmatched access to specialized investment expertise.
41
Definitions
Advisory Committee: Fund agreements often establish an investor advisory committee appointed by the sponsor. but comprised of members representing a
number of the fund's investors. One of their key roles is on the resolution of conflicts of interest
Buyout: Funds that acquire controlling interests in companies with a view towards later selling those companies or taking them public Carried Interest: This is
the general partner's share of the profits of the investments made within a private equity fund. It is normally expressed as a percentage of the total profits of the
fund. It typically ranges from 5-10% of profits for fund-of-funds and secondary funds and 15-20% of profits for direct funds
Catch-up: Once the general partner provides its limited partners with their preferred return, if any has been set, it then typically enters a catch-up period in
which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached
Clawback: Gives the limited partners the right to reclaim a portion of the GP's carried interest in the event that losses from later investments cause the GP to
withhold too much carried interest
Investment Constraints: A percentage limit to ensure diversification by company or fund. For example, no more than 10% of capital commitments in any one
portfolio company
Co-investment Rights: By having co-investment rights, an LP in a fund can invest directly in a company also backed by the fund manager itself. In this way,
the LP ends up with two separate stakes in the company; one, indirectly, through the private equity fund to which the LP has contributed; another, through its
direct investment
Committed Capital: The amount of capital that each limited partner agrees to contribute to the fund when and as requested by the GP Distressed: Funds that
invest in debt securities of financially distressed companies at a discount
Distribution: Cash or stock returned to the LPs after the GP has exited from an investment. Stock distributions are sometimes referred to as 'in-kind"
distributions. The partnership agreement governs the timing of distributions to the limited partner, as well as how any profits are divided among the limited
partners and the general partner
Drawdown: Also known as capital calls. Issued to limited partners when the general partner has identified a new investment and a portion of the limited
partner's committed capital is required to pay for that investment
DPI (Distributions to paid-in): See "Realization Multiple" below
Due Diligence: Investing successfully in private equity at a fund or company level involves thorough investigation. As a long-term investment, it is essential to
review and analyze all aspects of the deal before signing. Capabilities of the management team, performance record, deal flow, investment strategy and legal
are examples of areas that are fully examined during the due diligence process Fund-of-fund: A private equity fund that, instead of making direct investments in
companies, invests in a number of private equity funds, which in turn, invest the capital directly
General Partner ("GP"): The firm managing the private equity fund
GP Commitment: The amount of capital that the GP contributes to its own fund in the same way that an LP does. Generally 1% in commingled strategies
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Definitions
Growth Equity: Funds that invest in later-stage, pre-IPO companies
Investor Giveback: Investors are typically required to return distributions to meet their share of any fund obligations or liabilities Investment Period: The period
during which the general partner is permitted to make new investments on behalf of the private equity fund in portfolio companies. Typically 3-5 years
In-kind Distribution: Distributions of stock (as opposed to cash)
Internal Rate of Return (IRR): In a private equity fund, the net return earned by investors from the fund's activity from inception to a stated date. The IRR is
calculated as an annualized effective compounded rate of return, using monthly cash flows and annual valuations Investment Company Act of 1940: Often
known as the Company Act or the 1940 Act, it is the primary source of regulation for mutual funds and closed-end funds and was established to protect public
interest in these types of securities
Key Person: There are certain individuals ("key persons") deemed to be important in managing the investments of the fund. Key person events vary from fund
to fund. When triggered these events generally cause a suspension of the fund's investment period. If triggered, the fund is typically prevented from making
new investments until a sufficient number of new key persons are appointed to the satisfaction of the investors
J-curve: Used to illustrate the historical tendency of private equity funds to experience capital outflows and negative returns in early years and cash flow
distributions and investment gains in future years as its portfolio companies mature
Lead Investor: The firm of individual that organizes a round of financing and usually contributes the largest amount of capital to the deal Legal Structure:
Generally formed as limited partnerships but could also be limited liability companies
Limited Partner: Institutions or individuals who contribute capital to a private equity fund
Limited Partnership: The standard vehicle for investment in private equity funds. The partnership's general partner makes investments, monitors them and
finally exits them for a return on behalf of investors — limited partners
Minimum Commitment: Most private equity funds impose a minimum subscription amount or capital commitment threshold in order to become a limited
partner. This is typically $5-10 million for funds aimed at institutional investors
Mezzanine: Used to provide a middle layer of financing in some leveraged buyouts, subordinated to the senior debt layer, but above the equity layer.
Mezzanine financing shares characteristics of both debt and equity financing
Management Fee: The annual fee, typically a percentage of LP commitments to the fund, is intended to cover the basic costs of running and administering a
fund. Generally based on committed capital and could be 2% per annum for a top-tier primary GP. Fees are typically lower for funds-of-funds
Multiple (gross & net): Also known as the multiple of invested capital ("MOIC") or total value to paid in capital ("TVPI"). It is calculated by dividing the fund's
cumulative distributions and residual value by the paid-in capital. It gives a potential investor insight into the fund's performance by showing the fund's total
value as a multiple of its cost basis. It does not take into account the time value of money
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Definitions
Net Asset Value ("NAV"): The value of an investor's holdings
Organizational Expenses: The costs of establishing and running the fund. These generally include the out-of-pocket expenses the manager incurred in
forming the fund and any related vehicles, such as printing, travel, legal, accounting, filing and other organizational expenses
Paid-in Capital: The cumulative amount of capital that has been drawn down or called from investors
Portfolio Company: A company in which a private equity fund invests
Primary Fund: Also known as a direct fund. Pools of actively-managed capital that invest in private equity companies with the intent of creating value in the
companies in which they invest
Preferred Return/Hurdle: The minimum annual return that the limited partners are entitled to receive before the general partners may begin receiving carried
interest. If there is a hurdle, the rate is typically around 8%. A minimum annual internal rate of return promised to the LPs before the GP shares in profits
Realization Multiple: Also known as the "distributions to paid-in" or ("DPI"). It is calculated by dividing the cumulative distributions by paid-in capital. The
realization multiple, in conjunction with the investment multiple, gives a potential private equity investor insight into how much of the fund's return has actually
been "realized", or paid out, to investors
Residual Value: Also known as the RVPI. It is calculated by dividing the fund's residual value by paid-in capital. It provides a measurement, in conjunction with
the investment multiple, of how much of the fund's return is unrealized and dependent on the market value of its investments
Secondaries: Also known as secondary investment. Purchasing existing private equity fund commitments from an investor seeking liquidity in such fund prior
to its termination
Term: The life or duration of a private equity fund. Typically 10 -13 years depending on whether direct or fund-of-funds. Extensions of one year at a time and
usually no more than four years are common
Top Quartile Returns: The top 25% of all private equity returns, typically for a given vintage year
Transaction Fees: GPs may charge portfolio companies certain transaction fees. Typically, any transaction fees received by a GP offsets some portion of the
management fee charged to LPs of the fund to avoid "double-charging"
Venture Capital: Investment in early and development-stage companies
Vintage Year: The first year that the private equity fund draws down or "calls" committed capital for a portfolio company investment is known as the fund's
vintage year
Withdrawal: Transfers of interests in private equity funds are severely limited, although may be permitted with the consent of the GP
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Disclosures and general risks
Private equity investments are speculative and involve substantial risks. It is possible that investors may lose some or all of their investment. In general,
alternative investments such as private equity or infrastructure involve a high degree of risk, including potential loss of principal invested. These investments
can be highly illiquid, charge higher fees than other investments, and typically do not grow at an even rate of return and may decline in value. In addition, past
performance is not necessarily indicative of future results.
Private equity investments represent illiquid securities, are generally not listed on any securities exchange or traded in any other market, and are subject to
substantial limitations on transferability.
In addition to all of the risks inherent in alternative investments, private equity investments involve specific risks associated with private equity investing.
Interests in private equity funds and many of the securities held by such funds may be difficult to value and will be priced in the absence of readily available
market quotations, based on determinations of fair value, which may differ from the values that would have been used had a ready market for the investments
existed. Such differences may be material.
Private equity funds are not registered as investment companies under the Investment Company Act of 1940, as amended (the “1940 Act”), and investors in
such funds will not benefit from the protections of the 1940 Act.
Operating results for the portfolio companies in which private equity funds invest during a specified period will be difficult to predict. Such investments involve a
high degree of business and financial risk that can result in substantial losses.
The securities in which a private equity fund may invest may be among the most junior in a portfolio company’s capital structure and, thus, subject to the
greatest risk of loss. Generally, there will be no collateral to protect an investment once made.
Private equity funds may invest in companies whose capital structures are highly leveraged. Such investments involve a high degree of risk in that adverse
fluctuations in the cash flow of such companies, or increased interest rates, may impair their ability to meet their obligations, which may accelerate and magnify
declines in the value of any such portfolio company investments in a down market.
Investors in private equity funds will have only limited rights to receive information about such funds or their managers, and will have no recourse against such
funds or their managers. Private fund investments are less transparent than public investments and private fund investors are afforded fewer regulatory
protections than investors in registered public securities.
Private equity funds are subject to risks associated with legal and regulatory changes applicable to private equity funds.
Private equity funds often make illiquid investments for which there are no readily available market prices. This risk is exacerbated to the extent that private
equity funds generally provide valuations only on a quarterly basis.
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Disclosures and general risks (cont.)
A private fund investment involves a high degree of risk. As such investments are speculative, subject to high return volatility and will be illiquid on a long-term
basis. Investors may lose their entire investment. Private equity fund managers typically take several years to invest a fund’s capital. Investors will not realize
the full potential benefits of the investment in the near term, and there will likely be little or no near-term cash flow distributed by such funds during commitment
periods.
Private equity funds are subject to significant fees and expenses, typically, management fees and a 20% carried interest in the net profits generated by the fund
and paid to the manager. Private fund investments are affected by complex tax considerations.
Private equity funds may make a limited number of investments. These investments involve a high degree of risk. In addition, funds may make minority
investments where the fund may not be able to protect its investment or control, or influence effectively the business or affairs of the underlying investment. The
performance of a fund may be substantially adversely affected by a single investment.
Private equity fund investors are subject to periodic capital calls. Failure to make required capital contributions when due will cause severe consequences to the
investor, including possible forfeiture of all investments in the fund made to date.
This document is confidential and is intended solely for information of the person to whom it has been delivered. It is not to be reproduced or transmitted, in
whole or in part, to third parties. It is presented for information purposes only and is not intended to be either a specific offer by any AMG Funds or Pantheon
entity to sell or provide, or a specific invitation for a consumer to apply for, any particular financial product or service that may be available.
Nothing contained in this document is intended to constitute legal, tax, securities or investment advice. The general opinions and information contained herein
should not be acted or relied upon by any person without obtaining specific and relevant legal, tax, securities or investment advice.
The information in this document is supplied by Pantheon Ventures (US) LP, an affiliate of AMG Funds LLC. AMG Funds LLC does not guarantee the accuracy
of such information, but believes it to be reliable. Additional information is available upon request.
Investment products are not FDIC insured, are not bank guaranteed and may lose value.
Any statements regarding market events, future events or other similar statements constitute only subjective views, are based upon expectations or beliefs,
should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties,
both general and specific, many of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in,
contemplated by, or underlying these statements. In light of these risks and uncertainties, there can be no assurance that these statements are now or will
prove to be accurate or complete in any way.
This material is distributed by AMG Distributors, Inc., a member of FINRA/SIPC.
AMG Distributors, Inc. is a wholly owned subsidiary of AMG Funds LLC and Pantheon Ventures (US) LP is majority owned by Affiliated Managers Group, Inc. (AMG).
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Disclosures and general risks (cont.)
Index descriptions
Indices are unmanaged, are not available for investment, and do not incur expenses.
The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all major indices. The S&P 500 Index is proprietary data of Standard & Poor’s, a
division of McGraw-Hill Companies, Inc. All rights reserved.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate
bonds.
The Dow Jones U.S. Select REIT Index measures U.S. publicly traded Real Estate Investment Trusts.
The Cambridge Associates U.S. Private Equity Index is based on data compiled from 970 U.S. private equity funds (buyout, growth equity, private equity,
energy and mezzanine funds), including fully liquidated partnerships, formed between 1986 and 2010. The Cambridge Associates U.S. Private Equity Index has
limitations (some of which are typical to other widely used indices) and cannot be used to predict performance of the Fund. These limitations include
survivorship bias (the returns of the index may not be representative of all private equity funds in the universe because of the tendency of lower performing
funds to leave the index); heterogeneity (not all private equity are alike or comparable to one another, and the index may not accurately reflect the performance
of a described style); and limited data (many funds do not report to indices, and the index may omit funds, the inclusion of which might significantly affect the
performance shown).
© 2017 AMG Funds LLC. All rights reserved.
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