March 03, 2017

Founder of Opalesque

Could private equity be coming to a 401(k) account near you?

Read in Opalesque's new Private Equity Strategies how PE looks for a path Into the defined contribution market, and more:

- Regs Watch: Brief Updates on Changes in Regulation for Private Equity

- New guidelines on valuation, international taxes, and fund liabilities

- Movers & Shakers: Movers & Shakers

- Northern Trust Launches Blockchain Offering For Private Equity With IBM

- Data Snapshot: Private Equity Dry Powder Hits New Record

- Data Snapshot: Private Equity CTOs Add Outsourcing, Increased Security To Priority Lists

- Indigo Partners Low-Cost Airline Investments Take Off

- Quick Hits: Recent transactions, fund news, people moves, and events

Subscribe to this free Opalesque publication here: http://www.opalesque.com/subscribe-private-equity-strategies.html

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Welcome to the latest issue of Private Equity Strategies. We are kicking off a new

year and a variety of concerns are battling for the tops of private equity’s priority

list. Our introductory piece looks at how Pantheon is trying to include private equity

investment opportunities in custom target date funds.

In our latest Opalesque Marketplace listing we highlight a new real estate opportu-

nity in Europe.

In our Movers and Shakers column, we caught up with Northern Trust about their

efforts to streamline private equity fund administration with blockchain technology.

Our data snapshots look at increasing levels of private equity dry powder and how

the role of the private equity CTO has evolved.

We also catch up with Indigo Partners a private equity firm that specializes in estab

lishing low cost airlines. Finally, our regular features - Regs Watch and Quick Hits keep

you up to date on new regulations and fund news.

I hope you enjoy the issue. If you have any story ideas reach out to mccann {at}

opalesque.com

Issue 114 | February 28, 2017

In This Issue

Private Equity Looks For A Path Into The

Defined Contribution Market ...... 3

Could private equity be coming to a 401(k)

account near you?

Regs Watch: Brief Updates on Changes in

Regulation for Private Equity.....................5

Links and brief updates on changes to the

regulatory landscape for private equity,

including: new guidelines on valuation,

international taxes, and fund liabilities.

Movers & Shakers: Movers & Shakers:

Northern Trust Launches

Blockchain Offering For Private Equity With

IBM.........................6

Private Equity gets into blockchain

Data Snapshot: Private Equity Dry Powder

Hits New Record..........7

Data Snapshot: Private Equity CTOs Add

Outsourcing, Increased Security To Priority

Lists........................8

Indigo Partners Low-Cost Airline

Investments Take Off..........................10

Quick Hits ............................................12

Recent transactions, fund news, people

moves, and events.

Private Equity

strategies

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Bailey McCann

Private Equity Strategies

rivate equity as an industry has

come to rely on pension alloca-

tions as a significant, if not major

ity source of new allocations over the

years. That model has worked quite well

for a few decades, but now as retire

ment accounts shift from pension plans

to 401(k) and other defined contribution

vehicles, private equity isn’t part of the

mix. Private equity investments don’t

offer the daily liquidity that is often

required by these types of retirement

offerings. That’s sent the industry scram-

bling to find new ways of including

long-term investments in products that

are biased toward short-term liquidity.

Enter Pantheon. London-based Panthe

on, a veteran investor in private equity,

infrastructure, and real assets, has intro

duced a new product that would allow

custom target date funds to include

private equity in the asset allocation

mix. Notably, the product includes

performance-based pricing.

“We want to be able to offer the same

investment access and benefits to

the defined contribution market that

individuals in a defined benefit plan

receive,” explains Kevin Albert, Manag-

ing Director at Pantheon in an interview

with Private Equity Strategies. “Defined

benefit plans have been able to plan for

long-term funding by investing in asset

classes like private equity, but that secu-

rity is not available to the DC market.”

The U.S. retirement market consists

of both defined benefit (DB) and DC

plans, and more than 90 million U.S.

citizens are covered by DC plans, with

Private Equity Looks For A Path Into The

Defined

Contribution Market

DC assets in excess of $6.7

trillion. Historically, DB plans

have outperformed DC plans

for reasons that include a

shift toward alternative assets

and differing investment fee

structures. Based on the strong

returns the private equity asset

class has delivered in recent

years, Pantheon believes that

private equity strategies have

the potential to address the

performance delta between DB

and DC plans and merit consid-

eration as a viable investment

option by plan sponsors.

“We believe it is essential to

take action to close the perfor

mance gap between DB and

DC plans,” Albert says. “Research

shows that 52% of American

households are currently at

risk of not having enough to

maintain their living standards

during retirement.Retirees can

ill afford to suffer continued

underperformance in their DC

plans.”

The performance pricing

option applies only to that

portion of a portfolio actu-

ally invested in private equity

investments (e.g., not including

cash and liquid securities). A

performance-based fee is only

accrued when the performance

of the private assets in the

portfolio beats its benchmark,

which is the S&P 500.

Pantheon does not receive all

the performance fee it ac

crued immediately. When a

performance fee is accrued, it

is gradually paid to Pantheon

over at least eight calendar

quarters. This is so there can be

a reservoir available to reverse

performance fee accruals in

scenarios of underperfor

mance.

(Continued on the next page)

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Because Pantheon’s strategy intends to accommodate periodic trading, and the fee accrued would be reflected in the

strategy NAV as of the relevant period, investors will not pay for performance they did not experience.

Pantheon is working with a number of General Partners, including KKR, to seek to manage the less predictable and

irregular investor capital inflows that can be expected in a DC plan, and to facilitate efficient deployment.

The types of private equity investments in the strategy will look roughly similar to others Pantheon already has. The

target-date fund team will be included as another client within the investment committee, which considers co-

investments, secondaries fund investments, infrastructure funds, buyouts funds, etc. “The product has the benefit of

offering diversification by manager not just by deal,” Albert contends.

Pantheon isn’t the only firm looking for new ways to include private equity in DC vehicles. Last week Blackstone

acquired Aon Hewitt’s record keeping business, which could signal the firm’s desire to infuse private equity in more

corners of the retirement market. Aon Hewitt is the fifth-largest record keeper of DC plans by assets, with $377 billion

under administration as of Sep. 30, 2015, according to Pensions & Investments data.

Prudential also offers a similar setup to DC plans for real asset investments that includes a mix of REITs and listed

infrastructure and real estate companies.

It’s still early days for the Pantheon product. The company has had several review sessions with private equity and

retirement plan consultants to ensure that it will fit the needs of custom target date funds and so far the reception has

been positive. “I think the key issue is, this is a new asset class for DC plan sponsors and everyone wants to make sure

they don’t get on the wrong side of risk and litigation concerns. We feel confident we’ve addressed those possibilities,”

Albert adds.

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

s journalists like me and lawyers

have written ad nauseum, new

and ever more regulations are

in the pipeline for private equity and

alternatives as a whole. Here we will

hit on some of the cases of note and

provide links to new guidance over the

past month.

India: Regulation Of Compensation

Agreements By SEBI

India is making changes to the way it treats

compensation agreements and that could

have a significant impact on private

equity firms in the region.

Trump Moves to Roll Back Obama-

Era Financial Regulations

President Trump has moved to chisel away

at the Obama administration’s legacy on

financial regulation, announcing steps to

revisit the rules enacted after the 2008 finan-

cial crisis and to back away from a measure

intended to protect consumers from bad

investment advice.

Deregulation could add banks to

private equity sector

Fund managers at small, new or otherwise

aspiring private equity groups seem hopeful

a rising tide of deregulation in financial ser

vices could lift their ships as well.

Credit easing, regulation put plans

on critical list

U.S. corporate defined benefit plans have

been closing and freezing benefit accruals

for decades, with a number of industry ex

perts pointing to the very regulations meant

to protect them as a top contributing factor.

CSRC: China is to accelerate financial

reform

CHINA is trying to lure more foreign capital

into the mainland’s financial market and will

stick to the stance of reform and opening-

up, the country’s top securities regulator

said today during a press conference amid

recent regulatory signals for further financial

reforms.

The Top Ten Regulatory and Litiga-

tion Risks for Private Funds in 2017

The top of every private fund adviser’s list for

2017 – and how to assess and manage the

associated risks.

Regs Watch: Brief Updates on Changes in

Regulation for Private Equity

Sunken ship

President Trump’s latest private

equity hire Philip Bilden has

officially withdrawn his name from

consideration as Secretary of the Navy.

Bilden is a former managing director

with HarbourVest Partners and said

that he wouldn’t be able to disentangle

himself from his financial investments

in order to take the job.

Deal or No Deal

The proposed $31 billion merger between the London

Stock Exchange and Deutsche Boerse is likely dead. British

regulators said the deal wouldn’t pass anti-trust checks.

The merger would have combined stock exchanges in

the UK, Germany and Italy, plus many of Europe’s largest

clearinghouses.

The deal will also stop a €510 million sale of LCH Clearnet’s

French arm to Euronext. That deal was backed by LSE and

was contingent on the merger with Deutsche Beorse.

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Movers & Shakers: Northern Trust Launches

Blockchain Offering For Private Equity With IBM

Bailey McCann

Private Equity Strategies

orthern Trust has launched the first commercial deployment of blockchain technology for private equity fund

administration. The firm is partnering with IBM for technology development, which works off of the Hyperledger

Fabric. Hyperledger is an open-source blockchain development platform that is focused on finding ways to use

distributed technology in financial services.

Northern Trust started working with $20 billion Swiss asset manager Unigestion, in 2016, to create the blockchain offer

ing for its private equity business. The blockchain platform has been designed to support compliance with current, local

regulations. Northern Trust will also make use of IBM’s high-security network for blockchain to ensure that private keys

and platform security are constantly maintained.

“One of the main challenges for private equity is certifying documents. Paper is being passed around for capital calls,

investments, and other transfers. Blockchain provides an immutable, certified record of which documents are current and

approved,” explains Peter Cherecwich, President of Corporate & Institutional Services, Northern Trust in an interview with

Private Equity Strategies.

According to Cherecwich, using blockchain will allow funds to have “one version of the truth” which will ultimately be able

to cut down the time from fund launch to capital deployment. Unlike traditional document management systems which

are often files of PDFs, distributed ledger technology ensures certification, permissioning, and version control so that

investors, external auditors, and others are always working from the most up-to-date materials without the possibility of

losing one or more PDFs. Funds that use the technology will also avoid being locked into a single vendor’s product line.

The Unigestion private equity fund that served as a trial balloon for this technology is domiciled in Guernsey. Cherecwich

says that Northern Trust went through an in-depth process including an external security audit by local regulators to get

the official sign off - a process it is prepared to replicate with other, popular fund domiciles.

“Guernsey has been at the forefront of innovation in the financial industry for many years. As a jurisdiction, we continu-

ally monitor new technologies, support businesses in developing groundbreaking new ideas and provide a supportive

environment where products can not only flourish but be first-to-market,” said Chief Minister of Guernsey, Gavin St Pier in

a statement on the launch.

Northern Trust will be making the platform available to other private equity firms and investors that have a relationship

with the firm. “We’d like to start building an ecosystem of GPs and LPs that are using the technology,” Cherecwich said. “We

have already had other firms reach out to us about getting involved.”

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Data Snapshot: Private Equity Dry Powder

Hits New Record

With investors on the hunt for yield, PE remains a favored asset for institutional investors. Fundraising surged as limited partners

(LPs) continued to recycle distributions into new capital commitments. Returns also had another strong showing, continuing to

outperform public markets by a sizable gap over both short-term and long-term time horizons. Global buyout activity, on the other

hand, declined amid a challenging deal-making environment.

A new report from Bain & Company shows that it is becoming harder for private equity to deploy its billions and still find the kind

of returns it is used to. In 2016, buyout-backed exits around the world dropped 23 percent in value and 19 percent in count from

2015 and fell even further from the record levels of 2014. But, asset sales of $328 billion in disclosed value from 984 deals actually

constitutes an extremely strong run, helping the industry deliver its fourth-best year ever by value.

With nearly all of the pre-crisis deals exited, buyout firms are adjusting to a new normal with longer holding periods of about 5

years – up from the historical average of about 3.5-4 years. Bain expects this trend to continue in the medium term, as a result of

high purchase prices and limited sources of market beta, requiring general partners (GPs) to roll up their sleeves and do the time-

consuming work of creating value with their assets.

“Deals are undoubtedly hard to come by. On average, studies show that PE firms see less than 20 percent of deals relevant to them

in their pipeline,” said Hugh MacArthur, who leads Bain’s Global Private Equity Practice.

According to MacArthur, when deals do materialize, they command high prices. And with an expected hold time of about 5 years,

the margin of error for generating alpha and delivering acceptable returns to LPs has greatly narrowed. In response, GPs are

codifying their battle-tested approaches – what they are good at, what has and has not created value, and where and how their

funds have made money for investors – to build playbooks that consist of detailed, sequenced actions taken over time to maximize

value from each investment.

But could this be as good as it gets? Many GPs are apprehensive that the industry cannot sustain the torrid pace of fund-raising for

much longer. Bain expects that distributions will continue to outpace contributions and LP commitment to the PE asset class will

stay strong. However, the fund-raising environment may not be as favorable in coming years, making it important for GPs tfocus

on what makes them stand out from the pack.

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Data Snapshot: Private Equity CTOs Add

Outsourcing, Increased Security To Priority Lists

Bailey McCann

Private Equity Strategies

The role of the private equity CTO has changed significantly. New technology along with a growing list of cybersecurity threats

have placed more demands on the IT department than ever before. According to a new survey of private equity CTOs from Eze

Castle Integration, these demands have led to an evolution in the role of the CTO away from simply maintaining hardware and

workflows and into making the CTO an integral part of information security and compliance support.

For 2017, respondents to the survey said that their key priorities were cybersecurity, improving customer experience and updat

ing older technologies. Outsourcing some business functions and technology infrastructure to cloud services providers and oth-

ers also made the list in a big way, with firms looking to outsource a variety of operations.

None of this comes as a surprise to Eze Castle’s Chief Strategy Officer, Mark Coriaty. He says that private equity CTOs have been

looking to companies like Eze Castle for those new technologies as well as guidance on how best to implement them.

“Outsourcing has grown significantly over the past three years. Firms are looking for guidance, advice and managed services

capabilities,”Coriaty tells Private Equity Strategies. “Private equity firms, specifically, are looking closely at how they manage and

maintain data securely. Many firms lack a centralized data source. We can provide a private cloud that allows for centralization and

data management.” He adds that Eze Castle also works with CTOs on a consulting basis to help them learn about best practices for

information security and maintaining compliance.

The figure below outlines what CTOs are likely to outsource over the next year:

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

In addition to outsourcing, private equity firms are also looking for ways to implement cloud services. Cloud technology

can allow firms to scale up in size rapidly, while maintaining security. Working with a cloud services provider also

eliminates the need for sprawling and complex networks of hardware.

According to Coriaty, most private equity firms are working in a private cloud environment, but some have started to

consider a partially public cloud -- also known as a hybrid cloud - when they work with counterparties to ensure consistent

security throughout processes. Over the long-term Coriaty expects that firms will continue to explore ways that they can

outsource basic business operations in order to cut costs and free up investment staff to focus on deal making.

Even as CTOs split some of their duties with third party technology providers, the role of the CTO is likely to become more

important and demanding over time. Data in the report shows that the CTO is taking on a more strategic position within

private equity firms and will be asked to contribute more heavily across in the organization. See the figure below for how

the role of the CTO is expected to evolve over the next year. More information on these trends is available in the full report

here.

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Indigo Partners Low-Cost Airline Investments

Take Off

by Bailey McCann

Private Equity Strategies

Earlier this month, Indigo Partners, the private investment firm of Bill Franke announced that it was launching a new low cost airline in

Chile. The airline will be the first low cost provider in the region, but the model is nothing new for Franke who has made a name for himself

with critical growth investments in other low cost providers including Spirit and Frontier Airlines.

He is currently the Chairman of Frontier Airlines and Wizz Airlines another low cost provider in Eastern Europe. Prior to starting Indigo

Partners he was the CEO of America West Airlines.

JetSMART, the new Chilean airline will launch with three aircraft to take passengers throughout Chile. The airline will operate brand-new

Airbus A320 aircraft and expects to grow the fleet to nine by the end of 2018.

“We are excited to do business in Chile and believe there is an overlooked customer segment wanting to fly, but for the right price,” Franke

tells Private Equity Strategies. “There are many other reasons why Chile is an attractive entry point for the launch of a low fare carrier,

including its economic stability and aviation traffic growth; Chile’s growing economy; supportive and fair regulatory environment; and

open skies and strong bilateral treaties with neighboring countries, among others.”

Franke says that after the announcement went public he was approached by other regional entities looking to either expand JetSMART or

set up a similar low cost model in their countries.

Unlike traditional airlines, the ultra low cost model offered by JetSMART and others, gives fliers a seat on the plane and little else unless

they pay incrementally for specific services like checked baggage, legroom, beverages and other amenities. The model is popular with a

growing number of travelers who don’t mind a bare bones trip from point A to point B.

According to Franke, outreach to millennials has been positive in terms of grabbing market share for low cost carriers, because they don’t

come with the fond memories of airline glamour that defined flying in the industry’s early days. “In Europe, low-cost airlines account for

40% of all air travel. In the United States, they represent about 7% and the market share has grown for these companies by 10.3% in the

last three years. By 2034, low-fare operators are expected to account for 21% of the world market,” he says. When it comes to getting an

airline like JetSMART off the ground, Franke says finding millennials online is easiest. Outreach to older generations happens with a mix of

print ads and television. Once fliers get comfortable with the itemized approach low cost carriers use in pricing, they are usually hooked

he contends.

“This business model ensures that consumers will not pay for products and services they do not want or need. And even if you select

additional services and products, we want customers to pay less than the average fare currently available on the market”, explains Mr.

Franke. In this way, people have the option to build their experience according to their needs and the services they want.

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

opalesque.com

Opalesque Private Equity Strategies

Issue 114 | February 28, 2017

Events

Quick Hits

Bought: Generation Growth Capital

acquired BestMark, a Minneapolis

provider of customer experience

measurement services and analytics.

Financial terms weren’t disclosed.

Fund News: LLR Equity Partners is

raising its fifth private equity fund,

according to regulatory filings. The

Philadelphia-based firm closed its last

fund on $950M in 2012.

Fund News: Kohlberg & Company has

acquired Pexco, an Alpharetta, Ga.-

based specialty plastics manufacturer,

from Odyssey Investment Partners.

Terms of the deal were not disclosed.

Bought: Dospuntos, backed by Varde

Partners, acquired Via Celere, a Spanish

development and construction com-

pany, for €90 million.

Fund News: Arle Capital Partners, a

London-based private equity firm, is

shutting down, according to Financial

News.

Fund News: Silver Lake is reportedly

moving its New York offices to the new

Hudson Yards development where it

will join other PE firms including KKR.

Fund News: WSJ reported that Terra

Firma Capital Partners has hired

Barclays and KeyBanc to find a buyer

for EverPower Wind Holdings, a wind

energy company it wishes to exit.

Fund News: Vanedge Capital Partners,

a Vancouver-based venture capital

firm, has closed its second fund with

C$161 million in capital commitments.

Best Practices for Launching &

Managing an SBIC

March 23, 2017 | New York

Hosted By: Capital Roundtable

Best Practices for Overseeing PE

Portfolio Companies

May 11, 2017 | New York

Best Practices for Investing

in Troubled Middle-Market

Companies

May 18, 2017 | New York, NY

Hosted By: Capital Roundtable

People: Edward Beckley has joined TPG

Capital to focus on global infrastruc

ture opportunities. He previously

led the European infrastructure fund

management unit of Macquarie.

Fund News: Aliter Capital, a new

British buyout firm focused on the

business services sector, has closed

its debut fund with £90 million in

capital commitments.

PUBLISHER

Matthias Knab

knab@opalesque.com

EDITOR

Bailey McCann

mccann@opalesque.com

ADVERTISING DIRECTOR

Greg Despoelberch

gdespo@opalesque.com

www.opalesque.com

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