Portfolio ManageMent atlas 2012 - PEI Media

may 2012 | privateequityinternational.com
FOR THE WORLD’S PRIVATE EQUITY MARKETS
Portfolio
Management
atlas 2012
A PEI supplement
Zapping zombie funds
Secondaries in Asia
Exchanges, post-Facebook
Optics and real estate
...and more
Sponsors:
Capital Dynamics
Landmark Partners

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may 2012 portfolio management atlas 2012 page 1
e d i to r ’s l e tt e r
Editor, Private Equity International
James Taylor
Tel: +44 207 566 5438
james.t@peimedia.com
Contributors
Sam Sutton
Thomas Duffell
Robin Marriott
Tom Porter
Editor, PrivateEquityInternational.com
Christopher Witkowsky
Tel: +1 212 633 1072
christopher.w@peimedia.com
Editor, PrivateEquityInternational.com
Oliver Smiddy
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Senior Editor, Private Equity
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LONDON
Second floor, Sycamore House,
Sycamore Street
London ECIY 0SG
New York
3 East 28th Street, 7th Floor
New York, NY 10016
SINGAPORE
105 Cecil Street
Unit 10-01 The Octagon
Singapore 069534
Hong kONG
Level 19, Silver Fortune Plaza
1 Wellington Street, Central
Hong Kong
Quite a turnaround
Let me start with a caveat. Journalists like us are often
too inclined to attach undue significance to particular
events; to read trends into a number of isolated and possibly
unrelated incidents.
Nonetheless, when we heard about The Carlyle Group’s
offer to provide potential investors in its latest fund with
a mechanism for selling their fund interests to secondary
buyers, it did really feel like a watershed moment.
As recently as a few years ago, portfolio management
was still a fairly undeveloped concept, and there was still a
degree of stigma attached to secondary sales. So a mechanism
like this would represent quite a turnaround. Whereas
once GPs would actively discourage LPs from selling their
fund interests to a third party, or at best approve it only grudgingly, now they’re actively coming
up with ways to facilitate the process. A sign of the times, if ever there was one.
The articles in this supplement clearly illustrate that as LPs have become more and more
sophisticated, portfolio management has become increasingly sophisticated too. This is partly
driven by necessity – compliance with regulatory pressures, for example, or the need to reduce
GP relationships to a more manageable number.
But as we discuss on p. 3, it’s also because investors are no longer willing to just sit around
and hope for returns after making a commitment. Since the financial crisis highlighted the
downsides of locking capital into illiquid funds, it’s no wonder that the secondaries market has
really taken off in the last few years. Pricing is always tricky, as Cogent’s Todd Miller explains
on p. 24 – but there are plenty of buyers, and a growing number of willing sellers.
Secondaries aren’t just a useful portfolio management tool for mature investors, either.
They can also provide new LPs with a way to develop their exposure to new strategies and
geographies in a less risky way. There’s some suggestion that this is proving particularly helpful
in Asia, where it can help to mitigate long-held concerns about transparency and track
record (p. 14).
Of course, the industry’s increasing maturity creates challenges for investors too, notably
the rise of zombie funds (p. 6). What’s the best way to deal with managers who are clearly not
going to be able to raise another fund, but are prolonging the life of their existing vehicle so
they can keep racking up management fees? Specialist consultants are springing up to help
with this issue, which is only going to get worse as more of the boom-year vintage chickens
come home to roost.
But if anything, that just strengthens the case for a more active approach to portfolio
management. Expect more GPs to follow Carlyle’s lead and accept this as the new reality.
James Taylor
Editor, Private Equity International

page 2 private equity international may 2012
c o n t e n t s
portfolio
management
atlas 2012
m ay 2 0 1 2
1 Editor’s Letter
3 Overview: Out of the shadows
Limited partners are getting increasingly active –
and GPs are starting to accommodate them
6 How to deal with ‘zombies’
Help is at hand for the many LPs now grappling with
managers who are unlikely to raise more capital
8 Keynote interview: Capital Dynamics
Martha Cassidy and Joseph Marks of Switzerlandbased
Capital Dynamics explain how operating at
the smaller end of the secondaries market allows
the firm to work with individual sellers and GPs it
knows well
16 Keynote interview: Landmark Partners
Landmark Partners’ Robert Shanfield talks about why
his firm likes complicated, off-market deals
20 The optics of real estate secondaries
Discounts are still a sensitive issue when
secondaries players are trading interests in private
equity real estate funds
22 Data Room
The secondaries market at a glance: fundraising,
pricing, deal volumes and more
24 On the Record: Todd Miller of Cogent Partners
Cogent MD Todd Miller explains the impact of
public market volatility on secondary pricing
12 Exchanges: Life after Facebook
Why the Facebook IPO will force secondary
exchanges to adapt and evolve
14 Secondaries in Asia
Using the secondary market to build exposure in
Asia has its advantages – but it’s easier said than
done
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Fran Hobson
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Annual subscription
UK £875 US/RoW $1,675
EU €1,145
Subscribe online
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PEI is published 10 times a year.
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ISSN 1474-8800
© PEI 2012
No statement in this supplement is to be construed as a recommendation
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be reprwoduce d or transmitted in any form or by any means, electronic
or mechanical, including photocopying, recording, or by any information
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Whilst every effort has been made to ensure its accuracy, the publisher and
contributors accept no responsibility for the accuracy of the content in this
supplement. Readers should also be aware that external contributors may
represent firms that may have an interest in companies and/or their securities
mentioned in herein.

may 2012 portfolio management atlas 2012 page 3
o v e r v i e w
Out of the shadows
The days of the passive limited partner – who made a commitment, sat back and
waited with fingers crossed for a return – are long gone. And GPs are starting to
accommodate this, writes Christopher Witkowsky
In this challenging fundraising market,
private equity firms are having to figure
out ways to differentiate themselves from
their competitors as they seek to tap
into the ever-dwindling pool of capital
available for the asset class.
Sometimes, if firms are competing for
capital with other funds of around the
same size and with a similar track record,
performance alone is not enough. And so
firms need to offer sweeteners to attract
potential investors into their funds.
Recently, the Carlyle Group came up
with a novel way to address this challenge
– and it’s one that taps into the desire of
limited partners to be much more active
in managing their portfolios.
Gone are the days when LPs would
stockpile hosts of managers in search
of diversity; these days, LPs are much
more selective and deliberate about who
should be in their alternatives portfolio
and why. Equally, many are growing
more comfortable with trading in and
out of positions in private equity funds
– something that seems to go against
the long-term locked-in nature of the
asset class.
Acknowledging this new mindset,
Carlyle has established a way for investors
in its sixth global fund – which is
targeting $10 billion – to access liquidity
relatively quickly by allowing them to sell
all or parts of their stakes in the vehicle
twice a year.
The soon-to-be-listed firm lined up
five secondaries firms to be preferred
buyers of LP stakes should they be put up
for sale: Goldman Sachs, Partners Group,
Landmark Partners, Coller Capital and
Credit Suisse (who all had to make primary
commitments to the sixth fund as
part of the deal).
Carlyle, which will also buy up a portion,
plans to price interests twice a year
using the average weighted price of all
bids required to meet the supply of available
interests, thus creating a market for
the stakes. The highest priced bids would
be matched first with the available interests
to determine the final price.
The move met with a variety of reactions.
For a long time now, firms have
tried to figure out ways to ease the illiquidity
burden of the asset class on LPs
– and many thought Carlyle appeared
to have found a way to do that. The programme
was an answer to LPs’ growing
concerns about long lock-ups and their
inability to get liquid if needed (something
that proved a real problem for
many in the wake of the financial crisis).
However, the programme also seemed
to strike at an idea at the very heart of
private equity: that LPs are supposed to
find managers they trust so much that
they are willing to commit capital for
a decade or more. One of the advantages
of the asset class – the argument
goes – is that smart GPs, who have no
As LPs
become more
sophisticated,
they’re less
comfortable
being purely
passive; they
want to be
more
involved
pressure to hand back capital in tough
times (like, say, hedge funds) can ride
out cycles and focus only on the health
of their businesses.
Either way, many industry sources are
agreed on one thing: the model Carlyle
has created will be copied by other
firms, because LPs are going to want
the same kind of liquidity provisions.
As LPs become more active with their
portfolios, they will be less interested
in just making a commitment and forgetting
about it until years later, in the
hope that carried interest will eventually
kick in.

page 4 private equity international may 2012
o v e r v i e w
Brem: LPs want flexibility
“One of the challenges of private
equity is trying to build a portfolio in
a systematic, targeted way. It is a blind
pool, and you don’t know exactly what
GPs will invest in,” says Monte Brem,
founder and chief executive officer of LP
consultant and secondary advisor Step-
Stone Group. “You don’t know geography
exposure, what industry exposure
you’ll get.”
“Let’s say you’re five years into building
a programme and you have more
technology exposure than you expected
or wanted. Secondaries should be used as
a way to buy and sell to evolve and craft
your portfolio over time,” Brem says. “As
LPs become more sophisticated, they’re
less comfortable being purely passive;
they want to be more involved.”
Getting ACTIVe
In the early to mid-2000s, major private
equity LPs worked hard to build
up their portfolios. Take the California
Public Employees’ Retirement System,
which committed billions of dollars to
the asset class in the middle part of the
2000s, mainly to the biggest managers
in the business. In 2006, the pension
system’s Alternative Investment Management
programme committed $9.6
billion; in 2007, $14.2 billion; in 2008,
$11.1 billion. (The system hit the brakes
hard in 2009 after the onset of the financial
crisis, committing just $1 billion,
and continued to slow the programme
in 2010 committing $700 million; since
then it has been slowly ramping it up
again, committing about $1.8 billion
last year.)
Amid this frantic commitment pace,
CalPERS also did something that would
prove to be a pioneering move in the
industry, at least among large public
FORCED SELLERS
Big limited partners aren’t just selling
stakes because they want to. In some
cases, it’s also because they have to.
Regulation has become an increasing
driver of secondary activity, particularly
for the banks.
Banks have contributed huge sums of
capital to the asset class since its inception
– but as a result of the legislation
introduced in the wake of the financial
crisis, many are now scaling back their
private equity exposure.
In Europe, the prevailing view is that
our biggest banks need bigger capital
buffers, so they can absorb bigger losses
if (/when) things go wrong again. The
riskier the assets on their balance sheet
– and private equity investments are
classed firmly in that category – the more
capital they’ll need to hold.
In the US, institutions are still
grappling with the implications of the
Dodd-Frank Act – and, specifically, the
Volcker Rule. As originally envisaged,
the idea behind Volcker was relatively
institutions: in 2007, it began a massive
sell-off of about $2.1 billion-worth of
private equity fund interests on the secondary
market. The sale started in the
third quarter of 2007 and completed
by August 2008, finishing just before
Lehman Brothers fell into bankruptcy
and the economy collapsed. As such,
the timing of the sale became an almost
unbelievable win for the system , in that
it mitigated the impact of the crash. “In
today’s market, we would have had hundreds
of millions in losses,” Leon Shahinian,
former CalPERS’ senior investment
officer, admitted in 2008.
At the time, the pension system
decided to sell a large chunk of its
Höppner: leading the fight
simple: to stop banks using their own
balance sheets for risky investments.
But this has morphed into a 300-page
tome that seems to raise as many questions
as it answers.
The result of all this is that many
banks are choosing to sell their private
equity assets – which has led to some
huge portfolios hitting the secondary
market.
Another big issue in Europe is the Solvency
II rules, which will limit the ability
of insurers and possibly pension funds to
invest in ‘riskier’ assets like private equity.
EVCA, led by Secretary-General Dörte
Höppner, is leading the technical fight
against these proposals. But it may be
an uphill battle...

may 2012 portfolio management atlas 2012 page 5
o v e r v i e w
private equity holdings as a way to clean
up its portfolio, which by mid-2007 had
become massive. The system sold 80
partnerships comprised of 60 different
GP relationships across private equity
strategies including buyouts, venture and
distressed debt.
While the pension was selling off
a huge chunk of its portfolio – which
occurred between the third quarter of
2007 and August 2008 – it was ramping
up its exposure to mega-funds. Between
late 2007 and 2008, the system committed
almost $1 billion each to TPG and
The Carlyle Group, and $500 million to
The Blackstone Group; it also bought
big stakes in Apollo Global Management
and Silver Lake. But in early 2011, the
system put around $800 million-worth
of mostly mega-fund stakes up for sale,
which appeared to signal a move away
from the strategy it had pursued only a
few years earlier.
All of these moves illustrate the work
of a very active LP unafraid to use the
secondaries market strategically. In
Dear: CalPERS takes an active approach
2007, at a time when the system wanted
to max out its exposure to the biggest
funds in the market, CalPERS made
room in the portfolio by hitting the
secondaries market. In 2011, when the
system – now under the leadership of
CIO Joe Dear – wanted to dial down
its exposure to mega-funds, as well as
trim down the number of managers in
its portfolio, it turned to the secondaries
market once more.
Other large LPs have since followed
CalPERS’ lead. In 2010 and 2011, many
Canadian pension systems sold legacy
fund assets on the secondaries market,
in order to cut back on the size of their
fund commitments as they increased
their focus on direct investment. And in
the last couple of years, public pensions
in the US have been selling down their
private equity portfolios in a bid to cut
down the number of manager relationships
and make their programmes more
manageable.
The private equity secondary market
had its busiest-ever year in 2011, with an
Secondaries
should be
used as a way
to buy and
sell to evolve
and craft your
portfolio over
time
estimated $25 billion of deal volume –
and sources believe 2012 could be even
more exciting, potentially even topping
the $30 billion mark.
Much of that deal volume is being
drive by financial institutions around
the world forced to offload their private
equity holdings because of regulations
restricting their exposure to “risky” asset
classes. But volume is also coming from
public pensions and other institutions
like sovereign wealth funds and university
endowments actively managing their
programmes – completely selling out of
some funds and unloading small stakes
in others, as well as making room for
re-ups or even new relationships.
LPs – and by extension the private
equity market – have changed a lot
in the last 20 years. Today’s investors
have no problem stepping in and out
of fund positions, and more and more
LPs expect to be able to be aggressive in
shaping their private equity portfolios.
It’s this growing sophistication that will
ultimately make private equity more of a
partnership between LPs and GPs than
ever before.

page 6 private equity international may 2012
z o m b i e f u n d s
Attack on the ‘zombies’
Help is emerging for LPs grappling with the growing problem of how to deal with
funds that have no prospect of raising future capital, writes Christopher Witkowsky
Watch out zombies!
A slew of private equity professionals,
including consultants and former limited
partners, have taken it upon themselves
to deal with so-called zombie funds in
institutional investors’ portfolios. These
are funds run by managers unlikely to
raise future capital – but who are hanging
onto their investments in order to
keep collecting management fees and
maintain an income stream (without
which they might be forced to find a
new line of work).
These zombie funds have become
major headaches for LPs, especially
those who have legacy portfolios that
contain funds well past their contractual
lives – usually around 12 years if routine
fund life extensions are counted.
For many LPs like public pension
plans with scant resources, having to
deal with zombie funds can be demoralising,
especially when the managers
consistently ask for fund contract
amendments that keep their fees alive
without any kind of reciprocal benefit
to the investor.
“This whole phenomenon is a symptom
of a maturing industry,” says David
Fann, president and chief executive
officer of TorreyCove Capital Partners,
an investment consultant to institutional
investors like Oregon’s state pension
system and the Teachers’ Retirement
Fann: no immunity from zombies
System of Illinois. “Investors will typically
have zombies in their portfolio
if they have been at it for more than
15 years. There will be managers you
give up on; they become non-core in
this environment. You can’t immunise
yourself from a zombie fund.”
Amend and pretend
Being branded a zombie fund isn’t always
a performance issue; for example, a manager
may have a decent track record, but
has been compelled by the death of a
key executive to call it quits – either by
choice or necessity. (WL Ross & Company,
which has been struggling to raise
its fifth fund, is a timely example of a
firm whose capital-raising plans have
been hampered by succession concerns,
despite Wilbur Ross’s long track record
of first quartile returns: the original
target was $4 billion, but it slashed this
by half last year following a tepid reception
from LPs).
However, in most cases, the zombie
manager’s current fund has underperformed
(and maybe past vehicles too).
As years go by and nothing improves,
key members of the investment team
depart as it becomes apparent that the
fund will not be paying out carried interest
because it won’t hit its hurdle rate.
At some point, a small team is left to
manage out remaining assets, and that’s
when the real zombie action begins.
Consultants and LPs have horror stories
about an endless series of amendment
requests. Fund life extensions are
the most obvious – but some managers
will lobby for extra money to pump
into remaining portfolio companies,
and possibly even extensions of the
management fee that will keep the firm
alive long enough to exit its remaining
investments.
In most cases, LPs end up having to
accommodate zombie funds because the
alternative is even less palatable: if they
choose to end the fund for good (by not
extending the fund life), they will be

may 2012 portfolio management atlas 2012 page 7
z o m b i e f u n d s
If you were
cynical, you
might think
the GP is not
selling the
investments
because
they can’t
find a job
elsewhere
given shares in the remaining investments
in the fund. These shares are illiquid, and
the LP may not have the expertise to
manage out the investments.
As a result, LPs are usually forced to
continue paying a management fee to
make sure the firm can keep the lights
on. “Usually the situation is that the GP
is working hard to maximise value in the
remaining portfolio companies,” Fann says.
“If you were cynical, you might think the
GP is not selling the investments because
they can’t find a job elsewhere.”
The challenge for LPs in this situation
is to make sure the manager is getting
paid an appropriate amount to keep
managing out funds long past the end
of their contractual lives. “How do you
align incentives to ensure the assets are
managed and value is maximised for LPs?
It gets to be a tricky balance,” says Jamie
Ebersole, senior investment director at
fund of funds SL Capital Partners.
The situation can become even tenser
when a zombie manager tries to renegotiate
the way incentive payments are
triggered. Generally, funds come with
some kind of hurdle rate that needs to
be met before carried interest begins to
accrue. In some cases, managers will try
to renegotiate the hurdle rate down to
give the GP the opportunity to collect
carried interest, ostensibly as a way to
incentivise the investment team to stick
around and manage out the portfolio.
“In limited cases, you’re looking at
resetting incentives for a team that up
to that point may not have created any
value for you, and you’re being asked
to give away even more value to them,
which can be seen as rewarding poor
performance,” Ebersole says. “That’s a
difficult situation to deal with.”
LPs get SOPHISTICATed
So is there an alternative?
These days, LPs are increasingly using
the secondary market to manage their
portfolios. That could mean trimming
down the number of managers with
whom they invest, or simply trying to
unload “non-core” managers.
But secondaries provide another way
for LPs to escape zombies. A few firms in
the market target legacy funds that they
buy to replace the GP and sell down the
old assets. Saints Capital, W Capital and
Industry Ventures specialise in deals like
this. StepStone Group, which formed in
2007, completed a similar deal last year
when it bought legacy assets from The
Canopy Group, a venture outfit that had
been slowly winding down.
There are also now several firms –
some of which have cropped up in the
last year – that work with LPs to manage
out these types of portfolios.
LP Capital Advisors, based in Sacramento,
has managed a California Public
Employees’ Retirement System’s legacy
assets portfolio, which contains some
‘zombie’ funds. “End of fund life issues”
can be time-intensive for a small amount
of dollar return, says chief executive
officer Donn Cox. “There’s a different
type of focus for LPs when you get down
to these last funds, especially if they’re
not ongoing relationships,” Cox explains.
“For a lot of these, it’s their last fund and
they’re winding down.”
Heavyweight Joncarlo Mark, a former
private equity portfolio manager at the
California Public Employees’ Retirement
System, formed Upwelling Capital to
help institutional investors deal with
investments run by managers unlikely
to raise a new fund.
“People are trying to figure out what
to do with all the relationships, funds, coinvestments
they have,” Mark told Private
Equity International. “If you don’t do anything,
you risk continued erosion of value,
illiquidity and misalignment of interests,
particularly if the manager is not in the
money. If you sell, you risk discounts on
the secondary market.”
Zombie funds are not going away. In
fact, more and more investment vehicles
will fall into zombie territory as
the industry matures, and LPs withhold
money from GPs whose most recent
funds have disappointed. It’s the natural
progression of the industry – and investors
need to be ready for it.

page 8 private equity international may 2012
ke y n ot e i n t e r v i e w c a p i ta l d y n a m i c s
Big value in small deals
Switzerland-based Capital Dynamics typically operates at the smaller end of the
secondaries market. The firm’s Martha Cassidy and Joseph Marks tell PEI this allows it
to work with individual sellers and GPs it knows well through its primary fund business
In a secondaries market that continues
to break records, as the biggest players
raise huge funds and complete headlinemaking
mega-deals, firms that operate
out of the spotlight at the smaller end
of the market may have the best opportunity
to find great deals.
Take Capital Dynamics: the Switzerland-based
private equity asset management
firm likes to mine its opportunities
in the quiet world of small sellers, where
intermediaries and big players tend not
to tread. In this segment of the market,
deals are often one-off transactions for
specific, individual stakes.
Something for everyone
The secondaries market is booming; deal
flow was estimated to be about $25 billion
last year, and many observers expect
this number to break the $30 billion
barrier in 2012 (although that clearly
depends on the health of the overall
financial markets – heavy volatility can
scare potential sellers, who then back off
from bringing offerings to the market as
they lose confidence in the ability to get
attractive pricing).
One key driver is regulatory reform,
which is forcing banks around the world
to reduce their exposure to so-called
“risky” assets like private equity. The
result has been some massive, multibillion
dollar secondary offerings from
Marks: smaller deals mean fewer
intermediaries
Cassidy: mid-sized bank portfolios
interesting
banks – like Bank of America’s $1.9
billion sale to AXA Private Equity in
2010. These tend to be intermediated
and highly competitive.
It’s a similar story with the big US
public pension systems, which have
increasingly been using the secondary
market to sell down their private
equity portfolios. The California Public
Employees’ Retirement System got the
ball rolling when it sold more than $2
billion of its portfolio in 2007; more
recently New Jersey’s state system has
sold more than $600 million of its portfolio,
while New York City’s pension
system wants to ultimately sell about
$2 billion of interests. Again, these offerings
are usually large, competitive and
fought over by big buyers.
But while these huge portfolios have
represented a large part of transaction
volume over the past year, there
is no shortage of opportunities for
those focused on the smaller end of
the market, according to Martha Cassidy
and Joseph Marks, co-heads of the
secondaries team at Capital Dynamics.
Beyond these big offerings are billions
of dollars-worth of smaller portfolios
and one-off sales brought to market
by smaller LPs, who typically want to
remain anonymous to avoid damaging
relationships with general partners.
“Some 70 percent of the market is
estimated to be intermediated today…

may 2012 portfolio management atlas 2012 page 9
ke y n ot e i n t e r v i e w c a p i ta l d y n a m i c s
However, that still leaves roughly $9 billion this year of dealflow
for us that is not intermediated,” says Marks. “That’s still a big
market for a $276 million fund, and we can be very selective
on that $9 billion.”
What’s more, these opportunities can often be very attractive
from a financial point of view, he says. “The smaller deals
tend to be less intermediated, often less efficient in price discovery
and they’re often negotiated directly between buyer
and seller. That’s the kind of competitive dynamic we don’t
mind engaging in.”
An evolving market
The private equity secondary market has evolved slowly over the
past 25 years or so. Once it was purely an outlet for distressed
LPs to unload their obligations; now, it’s also an essential tool
used by investors to manage their portfolios.
“There was this little tag of shame associated with having
to do a secondary sale,” Cassidy says. Sellers “wanted to make
sure the process was highly confidential, so ‘If I can’t fund my
capital calls, I don’t want anyone to know’.”
Equally, GPs’ views on secondaries have also evolved over
the years. Once there would be consternation at the thought of
one of their LPs contemplating selling out of their fund. These
days, GPs are generally happy to know they have an outlet to
allow an unhappy LP to get out of their obligations, potentially
in favour of another more suitable partner.
“Secondaries allow [GPs] to enhance their LP base… GPs
realise secondaries sales are an opportunity for them,” Marks
says.
And while big portfolio sales tend to grab the headlines,
another important change is that sellers now realise they don’t
necessarily have to sell whole portfolios in one go; instead,
they can chip away at offerings by passing on smaller stakes to
numerous buyers, according to Cassidy and Marks.
Capital Dynamics has taken advantage of this development
to “cherry pick” their favoured GPs from larger offerings, they
add. “That’s what we do and we see others doing it,” says Cassidy.
“If I’m keen on a geography or a sector, I’ll look for those
particular funds.”
Adds Marks: “Sellers are becoming more mosaic in situations;
they’re not always willing to take a portfolio discount if
they can do better.”
Capital DYNAMIC’s world
With a $276 million secondaries vehicle that is less than half
invested, Capital Dynamics has plenty of firepower – and a big
universe of supply from which to choose. So the fund of funds
narrows down its opportunity set by working with certain
sellers – like small family offices, pensions and endowments
and even mid-sized banks.
The latter is a particularly interesting area, says Cassidy.
Many mid-sized banks built private equity exposure either
because they were interested in building relationships with
firms so they could get involved in deal financing, or because
they had a senior executive not with the bank anymore who
once liked the asset class.
“You’d be amazed at what’s in some of these small banks’
portfolios,” she says. “They’re not what anyone would classify
as strategically composed portfolios; they’re not necessarily
designed as a balanced private equity portfolio. It’s like a
dog’s breakfast.”
Now, the banks want to sell. “We’re at the beginning of
seeing it from all other mid-sized banks out there in America,
of which there are loads that have private equity for sale,”
Cassidy says.
This “phenomenon” of small banks trying to offload their
private equity portfolios is mirrored by small endowments,
small family offices and even small pension funds, according to
Marks. As a result, “there’s a very meaningful role to play in the
much less efficient sections of all those markets,” he says.
The vast majority of Capital Dynamics’ deals involve GPs
that it already knows. Here, the firm has an in-built advantage
thanks to the information it gets from its primary fund of funds
business. “We have a treasure trove of information,” Marks says.
As such, both sides of the business work together to make sure
the firm is chasing the best deals.
What’s more, he adds, the firm can bring “world class”
research capabilities to its investment process. And then there’s
its global presence; although headquartered in Switzerland, it
has offices in London, New York, Zurich, Tokyo, Hong Kong,
Silicon Valley, Sao Paulo and Munich, among others.
“When you look at those three factors, that gives us a good
advantage at what we think is the more attractive part of
the secondaries market because of its inefficiencies,” Marks
says.

page 10 private equity international may 2012
c o m pa n y p ro f i l e c a p i ta l d y n a m i c s
Capital Dynamics* is an independent asset management firm focusing on private assets including private equity,
clean energy and infrastructure, and real estate. Capital Dynamics offers investors a range of products and services
including funds of funds, direct investments, separate account solutions, and structured private equity products.
Our senior investment professionals hold an average of over 20 years
of investing experience and due diligence expertise, gained through
diverse backgrounds as fund investors, direct investors, and coinvestors.
With 160 professionals and 10 offices worldwide, Capital
Dynamics is able to deliver top-quality service to its client base of
sophisticated institutional investors such as pension funds, endowments,
family offices, high net worth individuals, and advisors.
Headquartered in Switzerland, Capital Dynamics has offices in
London, New York, Zurich/Zug, Tokyo, Hong Kong, Silicon Valley,
Sao Paulo, Munich, Birmingham (UK) and Brisbane.
Secondaries
Our Secondaries team is led by Managing Directors, Martha Cassidy
and Joseph Marks; with five dedicated professionals in New York and
Zurich, and additional support as needed. The team is fully integrated
in the broader investment management team, and leverages our entire
global platform, network of contacts and relationships to source,
diligence, and transact on a global basis. Our secondary capabilities
are further augmented by our portfolio and risk management team’s
sophisticated tools and extensive quantitative experience.
Focus on innovation and quality
Capital Dynamics is an industry leader in quantitative risk management;
an essential component of successful private equity investing. The
importance of risk management has intensified due to tighter financial
regulations and heightened investor awareness. Our Portfolio and
Risk Management team conducts customized, in-depth client portfolio
analyses and our Portfolio Servicing team provides comprehensive and
dedicated back office services for a diverse set of global investors.
We are proud of our distinguished reputation within the private
equity community. In 2011 and 2010, we were voted “Fund of Funds
of the Year in Europe” by Private Equity International.
Capital Dynamics is a signatory of the United Nations Principles for
Responsible Investment (PRI). Our emphasis on quality has been
recognized with the International Standard ISO 9001:2000 certification
of compliance.
Investment types 2
Primary fund investments – We have invested in private equity funds
since the late 1980s, spanning all geographies and strategies. We have
established solid relationships with over 400 General Partners, and
monitor 788 active funds.
Secondary fund investments – Active in the secondary market since
the early 1990s, we raised one of the first dedicated secondary funds.
The combination of our large number of existing fund investments
and proprietary databases often provides an information advantage
when evaluating secondary transactions.
Direct investments – Our extensive relationships with the globe’s
top-tier fund managers provide a consistent volume of high-quality
investment opportunities. Our co-investment strategy is focused on
mid-market buyouts, but also includes select development capital
and special situations.
Clean Energy and Infrastructure – Our specialized team of senior
industry investors employs a direct investment strategy focused
on a diverse mix of clean and low-carbon energy assets that can
offer attractive risk-adjusted returns and compelling diversification
benefits from this emerging class of real assets.
Real Estate – Members of our Real Estate team have been investing
in real estate funds since 1990 and maintain relationships with fund
managers around the globe.
Structures
Funds of funds – We offer private equity, primary and secondary
funds of funds, allowing investors to implement a global allocation
strategy through access to premier private equity managers, in addition
to portfolio diversification.
Separate accounts – We assist clients to create individual programs
to meet unique risk profiles and liquidity constraint parameters.
We offer legal structuring services to meet the regulatory, tax and
compliance requirements for each separate account client.
Structured products – We customize solutions one client at a time.
Every structured solution is designed to deliver compelling benefits such
as early liquidity, enhanced return on investment, reduced risk, lower
open commitments and/or decreased risk-weighted capital reserves.
Please contact us at info@capdyn.com, or visit our website www.
capdyn.com for further information.
*
“Capital Dynamics” comprises Capital Dynamics Holding AG and its affiliates
2
History includes 2005 acquisition of Westport Private Equity Ltd., and the Real Estate team’s prior experience

Performance:
the result of long-term dedication
We understand the dynamics of performance and know
that long-term dedication to uncompromising quality
is the best route to success. Capital Dynamics is an
award-winning private asset manager highly skilled
in funds of funds, separate accounts and structured
products.
To discover how our extensive experience in private
equity, clean energy and infrastructure, and real
estate – together with our long-standing industry
relationships – can link you to the full potential of
private assets, please contact us at info@capdyn.com.
www.capdyn.com
London | New York | Zurich/Zug | Tokyo | Hong Kong | Silicon Valley | Sao Paulo | Munich | Birmingham | Brisbane
Awards issued to various Capital Dynamics affiliated companies. Not an offer to sell or a solicitation to purchase any security. Capital
Dynamics Ltd. is authorized and regulated by the Financial Services Authority (FSA). Past performance is not indicative of future results.

page 12 private equity international may 2012
e x c h a n g e s
Life after Facebook
The Facebook IPO might be a big score for investors, but secondary exchanges
will have to adapt when one of the largest private companies goes public. Sam
Sutton reports
Are you on Facebook?
It’s a safe bet that you are; 845 million
people log-in to the social media behemoth
at least once a month. The site’s
rapid growth over the last few years has
not only changed the world; it has also
played a key role in the development
of secondary exchanges, which facilitate
the buying and selling of shares in
private companies and as such provide
investors with a route to liquidity prior
to an initial public offering.
So while Facebook’s upcoming IPO
will spell huge returns for its founders,
employees, and any investors lucky
or skilful enough to own shares in the
social media giant, it also represents a
huge challenge for secondary exchanges
– which in recent times have relied on
Facebook for a large part of their transaction
volume.
Exchanges: facing a drop in volume
And if that makes it harder for these
exchanges to survive and thrive, it could
be bad news for investors – not only
equity owners looking for an exit, but
also potential buyers who were unable to
participate in the company’s most recent
capital raise and use exchanges to gain
access in lieu of waiting for the next
funding round.
Although exchanges have had plenty
of opportunity to prepare for this eventuality
– Facebook’s decision to file for
an IPO was hardly a surprise – there’s
no doubting how significant the drop
in volume is likely to be once Facebook
and other tech darlings have migrated
to the public markets.
In April, prominent exchange
SecondMarket laid off ten percent of its
staff, in a move that anticipates life after
Facebook. In a statement, a SecondMarket
representative said:
“In a post-Facebook
market world, we have
decided to eliminate
some positions that are
no longer core to our
company’s long-term
mission.” That meant
a sizeable reduction in
headcount – although
the company said it
would continue to hire
“in select areas”.
This has happened
before, too: Offroad
Capital, an online platform for private
shares, was sold to NYPPEX in 2001
as demand collapsed after the bursting
of the tech bubble. With secondary
volumes apparently on the decline, one
might assume that the current generation’s
crop of exchanges is in for some
similar misfortune.
Or are they?
A changing world
Sam Schwerin of Millennium Technology
Value Partners takes a contrarian view:
that Facebook has brought secondary
deals into the mainstream.
“Some people expect the volume for
secondary direct will go down after
Facebook’s IPO,” he tells Private Equity
International. “But secondary is now
becoming a fundamental part of how
the venture ecosystem works… and
Facebook is the best case study for that.”
Millennium predicts that secondary
volume, defined in part by the shares
trafficked on exchanges, will hit record
levels in 2012. According to Schwerin,
those predictions are based on the belief
that many private companies will need
alternative liquidity strategies at various
stages of their development. And as
secondary offerings have become a more
accepted strategy, so too has the use of
exchanges.
Nonetheless, they will clearly need
to adapt.

may 2012 portfolio management atlas 2012 page 13
e x c h a n g e s
Secondary
is now
becoming a
fundamental
part of how
the venture
ecosystem
works
Early iterations of the modern secondary
exchange allowed buyers to
purchase private shares through what
SecondMarket’s senior vice president
Jeff Thomas refers to as an “over-thecounter”
model. Although companies
ultimately had a right of refusal over
who could get access, buyers and sellers
were more or less able to participate
in transactions using the exchanges as
an intermediary.
Even though secondary markets for
private shares had existed for decades,
transaction volume was limited. The
explosion of technology companies and
availability of private shares pushed the
market above ground.
“What was novel about it [was that] it
had evolved,” says Greg Brogger, founder
and president of SharesPost. “It had
migrated online. It had become much more
visible. And the number and scale of the
transactions and scale of transactions had
grown. It was a new market, and everyone
was trying to figure it out, and to a certain
extent there was a lack of order.”
The growth of online platforms like
SharesPost and SecondMarket led companies
to push for greater control over
who had access to information about
their shares, which in turn forced the
platforms to change their approach.
SecondMarket was one of those to
change its model, Thomas says. Now, when
investors contact the exchange seeking
private shares of a company, SecondMarket
catalogues that information; this is
then provided to the company concerned,
which can use it to time the availability of
secondary offerings. This also gives them
greater control over the size of the secondary
stake, as well as the number and
source of its investors.
One issue for these exchanges is that
their infrastructure has been largely built
around the needs and specifications of
Facebook and other tech giants. So even
if more and more companies do follow
Facebook’s lead in delaying their IPOs and
engaging with investors via the secondaries
market, exchanges will have to evolve
to meet the needs of smaller businesses.
Xpert Financial is one exchange
that is hoping to build an ecosystem for
those smaller companies to operate, in
by expanding the flow of information
between investors and companies.
“When we first started, we always said
that the companies were the unicorns.
They’re the ones you have to build the
process [around]; you have to make it
work for them. If you align the companies,
everything else will come together,”
founder and chief executive Thomas
Foley tells Private Equity International.
The exchanges are at least benefiting
from some helpful regulatory changes.
One of the primary concerns private
companies had about engaging with
the secondary market related to the
500-shareholder limit, which required
firms to disclose financial information
or go public once they had at least 500
shareholders. The JOBS Act, which was
signed into law by President Barack
Obama in April, raises that limit to 2000
shareholders – giving the companies
much greater flexibility around offering
investors access.
Because of that, and because of what
many say is a strong pipeline of companies
looking to tap into the secondary
network, secondary exchanges are
optimistic for the future – even after
Facebook.
“The number of companies that are
going to be involved, that’s going to
grow immediately,” Brogger says. “All
the attention and media Facebook has
taken up, it’s not going to necessarily
take all the oxygen out of the room for
other companies.”

page 14 private equity international may 2012
a s i a
Improving visibility
Asia’s lack of well-regarded GPs with track records is pushing LPs into the
secondary market in search of greater visibility – but it’s easier said than done,
writes Tom Porter
Investors are
very keen to
increase their
exposure to
Asia through
secondaries
Most LPs want more exposure to Asia.
In a world where most developed
economies are sluggish at best, investors
are inevitably keen to tap into the
high-growth Asian markets. But there’s a
catch: finding suitable managers to back
is by no means easy.
Asia’s lack of established GPs with any
substantial track record makes it difficult
for investors to have confidence in the quality
of either the GP or the underlying assets.
“You need to focus on GPs who have
had several successful funds to be sure
that they will still be making new investments
and be able to take care of the
older assets,” says LGT Capital principal
Andre Aubert.
Unfortunately for LPs, Asia’s relatively
nascent private equity industry does
not have a great number of these. This
lack of options for investors is the key
reason firms like Hony Capital and New
Horizon Capital have been able to raise
sizeable sums so quickly, according to
one market source.
With so much capital available, some
funds clearly slipped through the net, says
Lucian Wu, managing director secondary
investments at Paul Capital. “There was
so much capital chasing exposure in Asia
in 2006 and 2007 that many first-time
funds were raised that shouldn’t have
been.” Many of these funds are now fully
invested and underperforming, he says,
with GPs struggling to exit their portfolios
or raise a second fund.
A less risky WAY to inveST
The result is that LPs looking to build
their exposure to Asia are increasingly
looking to do this via the secondary
market – partly because investing at
a later stage in the fund lifecycle gives
them get a better look at the performance
of managers and assets.
“It is a less risky way to invest,” explains
Wu. “We typically look for funds that are
75 percent or more invested where there
is a lot of visibility to the quality of the
assets and minimal blind-pool risk.”

may 2012 portfolio management atlas 2012 page 15
a s i a
“Visibility is the most notable advantage,”
agrees Conrad Yan, a partner at
Campbell Lutyens. “When you invest in
a manager, particularly the newer ones,
sometimes there will be a difference
between the strategy they promise you
and the strategy they actually implement.
In a secondary portfolio you know what is
in there; you know what you are buying.”
A key concern for investors trying to
increase Asian exposure is the lack of
exits. “In this respect, a major attraction
of the secondary route is the payback
period is much shorter – which means
you don’t have to put aside your entire
commitment as distributions come back
much quicker,” says Wu.
Secondary buyers can also retrospectively
get exposure to better-performing
older funds. “It allows you to cherry pick
the vintages that are showing the best
returns,” he adds.
Happily, there is a growing number of
sellers in the market, the vast majority
of which are from Europe, the US and
the Middle East.
Banks continue to empty their private
equity portfolios due to regulatory
pressures – and many are overweight in
Asian assets because they have tended
to hold on to them disproportionately
when selling in the past, sources say. That
should mean more secondary deals for
Asian assets as banks divest their global
private equity portfolios.
Last year a syndicate of secondaries
funds comprising Paul Capital, Harbour-
Vest Partners, LGT Capital Partners
and Axiom Asia acquired all of Bank of
America Merrill Lynch’s non-real estate
private equity assets in Asia, spinning out
the captive team to create NewQuest
Partners. The $400 million portfolio
comprised more than 20 growth and
buyout assets in China and India.
LPs’ greater activism and desire
for liquidity is also driving the market.
“Right now in Asia there are certain
In a secondary
portfolio you
know what
is in there;
you know
what you are
buying
funds that people come to us to ask for
pricing on from time to time – certain
GPs that are not performing too well
where LPs are losing patience and feel
they can make better use of the capital
by selling their interests,” says Yan.
Demand for secondaries in Asia is
also drawing out more willing sellers.
“In 2009 we did several transactions
buying Asian assets from distressed
investors who were mostly from Europe
and Middle East. More recently we see
non-distressed sellers who are actively
managing their portfolio – they can get
very attractive prices for the best funds,”
says Aubert.
Buying constraints
However, while LPs are keen to increase
their exposure through this less-risky
strategy, it presents its own challenges.
“I understand there are some investors
out there saying secondaries are a
good way to build exposure to Asia, but
it is easier said than done,” says Yan.
Hiro Mizuno, a partner at Coller
Capital, agrees. “Buying Asian funds in
the secondary market is not easy, firstly
because of robust prices. Secondly,
because the sellers are mainly from
outside Asia the assets always come as
part of a global portfolio. There aren’t
many opportunities to just buy vanilla
LP interests in Asian funds as a way of
increasing exposure.”
“We are aware that quite a few transactions
are happening between existing
LPs, but aside from major LPs who can
give GPs a promise to invest in their next
fund, they will find it difficult to buy into
Asian funds using secondaries,” he adds.
“We are not seeing a wave of LPs
trying to buy into Asian funds using
secondaries. The most active investors
are the secondary funds themselves,”
says Yan.
Lexington Partners, which closed
its seventh secondaries fund on $7 billion
last year, is increasingly active in
Asia, as is Coller Capital, which is very
close to a final close on its $5.75 billion
sixth fund (and “not exactly struggling”
according to a source with knowledge
of the process).
“Over the last couple of years this has
been one of the topics we have been
discussing most with investors; they are
very keen to increase their exposure to
Asia through secondaries,” says Mizuno.
It’s true that the lack of well-regarded
GPs in Asia (and hence some of the problems
with visibility) is largely a function
of private equity’s relative youth in the
region; Yan, for one, believes the issues
around track record will naturally fade
as the industry in Asia develops.
“The issues will fade away; it’s just a
matter of time. Last time we did a portfolio,
people were keener on the older
regional funds rather than the country
funds. I think if we did another now or
in six months, the situation would be
completely different,” he says.
But while LPs will undoubtedly be
more confident about their primary
investments as more GPs develop good
track records, they’re also likely to make
greater use of the secondaries market
to manage their portfolios. So this is a
trend that’s only going to go one way.

page 16 private equity international may 2012
ke y n ot e i n t e r v i e w l a n d m a r k pa r t n e r s
Quiet and complex
Landmark Partners’ Robert Shanfield talks about why his firm likes complicated deals
– and explains how Landmark is staying ahead in this constantly evolving market
We don’t hear from Landmark Partners
often and they like it that way. In a rare
opportunity, Robert Shanfield, a partner
at Landmark, shares his thoughts on
the secondary market and how his firm
approaches the business. While some secondary
investors favour public auctions for
buying limited partner interests in private
equity funds, Connecticut-based Landmark
prefers private negotiations with LPs who
have specific, idiosyncratic and sometimes
complex reasons for selling assets.
The firm’s preference for this
approach began with its very first secondary
fund, raised in 1990, and has
continued all the way through to its $2
billion 14th private equity secondary
fund, which Landmark began investing
during the early days of the economic
crisis.
Roughly half of the investments in
Landmark’s current fund are “structured
transactions”, which have specific terms for
how buyers and sellers address issues such
as unfunded commitments and the sharing
of distributions. “While the other half
are not structured, our focus is to work
with opportunities away from an auction
process and, in one way or another, address
unique seller needs and sensitivities.”
“In the midst of the economic crisis,
we were able to negotiate deals that mitigated
certain concerns or roadblocks
sellers might have had in a traditional
transaction,” says Shanfield.
Despite the post-crisis return to
normalcy, Landmark continues to see
Shanfield: staying on top of LP concerns
“In the midst
of the economic
crisis, we were able
to negotiate deals
that mitigated
certain concerns or
roadblocks sellers
might have had”
situations where a more customized secondary
solution is required. “The bid-ask
spread has diminished in the last eighteen
months. Nevertheless, there are still
other challenges presented by plain vanilla
transactions that cause many institutional
owners in the asset class to conclude that
the auction channel or a competitive process
doesn’t work for them.”
In addition to private equity, Landmark
buys LP stakes in venture capital
funds – which account for between 20
percent and 30 percent of the firm’s
investments – as well as mezzanine debt.
Separately, Landmark manages capital
for secondary real estate transactions
and is deploying its fifth such fund.
Two other aspects of Landmark’s
strategy have remained consistent
since the 1990s: the mature nature of
the assets it buys (unfunded obligations
typically fall between 20 and 30 percent)
and the fact that it does not use debt to
finance its deals.
“While we’ve seen activity in the
market that has been more expansive,
in terms of accepting larger unfunded
commitments as a proportion of total
exposure acquired and in the use of debt
to finance purchases of fund interests,
we have had trouble convincing ourselves
on either front,” Shanfield says.
“We view our deliverable to investors
as exposure to the private equity asset
class that is shorter duration and lower
risk than classic primary exposure. If
you use debt to finance your purchases,

may 2012 portfolio management atlas 2012 page 17
ke y n ot e i n t e r v i e w l a n d m a r k pa r t n e r s
then there is some prior claim on the early cash flows of the
portfolio that go to pay the lender. In theory it may very well
increase the return, but there is clearly additional financial risk
and extended duration.”
Most of Landmark’s investments fall between $50 million
and $400 million. The firm will, at times offer, co-invest to its
limited partners in certain transactions.
“When there are deals that warrant more capital than we
are prepared to allocate from a single fund, we can seamlessly
engage our limited partners for co-investment,” Shanfield says.
“We have an investor base that’s been with us for a long, long
time and are experienced co-investors with us.”
An evolving market
While Landmark’s strategy has remained broadly similar since
its founding, the secondary market has evolved substantially,
according to Shanfield, both in terms of volume and in the range
of motivations and objectives of institutional sellers.
“It has become more important to understand at an ever
more granular level the assets underlying the partnerships that
we buy,” he says. “Understanding the individual assets from the
bottom-up and having a direct investment perspective is key
to making sure that we make the right value decisions.”
Landmark has also observed an increasing level of intermediation
and auction activity in recent years. “While that doesn’t
mean that every auction opportunity is a bad or flawed one,
and we have and will continue to selectively participate in such
processes, we do think that negotiated opportunities often
have advantages for us and sellers,” Shanfield says.
Another change that has taken place is the duration of hold
periods. “Assets seem to be sitting in funds longer. I think that’s
partly a commentary on the exit environment, but it’s also a
commentary on some general partner incentives you have to
consider in certain circumstances,” Shanfield says. “There are
questions in many instances about whether a manager is going
to be able to raise their next fund… That could have some
influence on their appetite for selling today versus holding
for a continuing fee stream and/or a bigger home run in the
future.”
According to Landmark, average holding periods have
extended from 3.6 years in 2007 to 4.8 years today.
“These longer hold periods mean ultimately investors have
more money tied up in private equity for longer, which means
they don’t have as much to then recycle back into more commitments,”
he says.
Less liquidity for new investments, however, can also translate into
more active portfolio management via the secondary market.
Still growing
Landmark’s private equity team had an active year on the investment
front in 2011, closing and committing to 12 transactions
worth a combined $800 million.
“We had a strong complement of both structured and nonstructured
transactions,” Shanfield says, adding that even the
firm’s traditional transactions were negotiated deals. The deals
Landmark has completed since the beginning of 2011 involve
a wide range of sellers, including family offices, endowments
and multi-employer pension plans.
“Our transaction activity in the first quarter of 2012 has
kept pace with 2011,” Shanfield says. “We’re extremely pleased
with the volume and the nature of what we did in 2011 and
this year.”
The firm’s 14th private equity secondary fund is currently
about 70 percent deployed.
In recent years, Landmark has been developing a reputation
for being more quantitatively-minded and research-oriented
in the private equity space, according to Shanfield.
“We think that it’s important for us to stay on top of limited
partner concerns, because it puts us in a better position to
appreciate the constantly changing nature and often complex
considerations that investors have as they think about their
portfolio,” he says.
“By staying at the forefront of developments in the thinking
around issues such as performance measurement, liquidity
management and portfolio construction, we’re on top of the
issues and complexities that institutional investors face. This
puts us in a better position to brainstorm creative ways to
solve their problems.”
Looking forward, the firm expects secondary transaction
volume to grow by about 10 percent. “We think that the stage
is set for, in the worst case, modest growth in the amount of
secondary transaction volume in the next few years, and in all
likelihood growth well better than that,” Shanfield says.
And it’s not just about regulatory pressures, he adds. “There’s
a lot of attention to the Volker Rule, Dodd-Frank and the European
crisis as drivers. I’m not sure we’ve seen these as watershed
events in terms of transacted activity at this point, but
they are catalysing a lot of thinking and a lot of consideration
amongst owners that may be setting the table, depending on
how compliance is enforced in the US and how European
issues continue to unfold.”
The private equity secondaries space continues to be a
robust and durable market in which to invest, according to
Shanfield. “In this market, I think Landmark’s strategy and
approach are exceptionally well-positioned,” he says.

page 18 private equity international may 2012
c o m pa n y p ro f i l e l a n d m a r k pa r t n e r s
Landmark was established in 1989 when the Firm
launched Landmark Venture Partners, its first secondary
private equity fund. With over 22 years of
experience in the secondary business, Landmark is
recognized as the first institutional secondary private
equity firm. Since inception, the Firm has managed 15
secondary private equity partnerships, with a consistent
investment strategy. The Firm believes investors
in the Funds will benefit from the strong reputation,
knowledge and experience, as well as network of relationships
that Landmark has built during its tenure in
the secondary private equity industry.
Landmark has formed 27 funds focused primarily on
venture capital, buyout, mezzanine and real estate partnership
investing over the last 22 years. These funds
have been capitalized at $9.1 billion* of which $7.1
billion* has been invested or committed through in
excess of 400 transactions.
The Landmark team includes 53 professionals and support
staff experienced in all phases of investment origination,
analysis, portfolio management, accounting, and
reporting. The firm’s competitive advantage in deal origination,
structuring, and negotiation comes from having
acquired over 1,400 partnership interests with over
15,000 underlying company or property investments.
Landmark’s team brings the philosophy, the process,
and the knowledge to successfully execute sophisticated
investment strategies. Our name, ‘Landmark,’ signifies
the many historical firsts our firm has achieved in the
private equity and real estate investment arena.
Landmark’s Private Equity Secondary
Investment Program
Landmark strives to execute transactions primarily on
a negotiated basis and acquire portfolios of interests in
private equity funds and direct investments through
secondary market transactions that are unique, may
require structuring, and where the opportunity for
value creation exists. Each of the secondary funds is
a diversified portfolio of private equity interests with
the objective of achieving strong returns at lower risk
for this asset class and generating cash distributions to
our partners beginning in the fund’s first year.
Landmark’s Real Estate Secondary
Investment Program
Landmark established the first institutional real estate
secondary program in 1996 and is currently investing
on behalf of its fifth real estate secondary fund. Our
funds acquire interests in existing funds, partnerships
or other structured entities invested in underlying real
estate. We focus on substantially committed portfolios
where most of the underlying investments are
identified. Each of the secondary funds is a diversified
portfolio of real estate interests with the objectives
of achieving strong returns at lower risk for this asset
class and generating cash distributions to our partners
beginning in the fund’s first year.
* as of December 31, 2011
Contacts:
Robert Shanfield
Partner, Private Equity
E: robert.shanfield@landmarkpartners.com
Tel: +1 860 651 9760
Chad Alfeld
Partner, Investor Relations
E: chad.alfeld@landmarkpartners.com
Tel: +1 860 651 9760

Secondaries Firm
of the Year in
North America
Landmark Partners
Pioneered The Market
Now
Leading Its Evolution
Landmark pioneered the secondary market in 1990 with the first
institutional secondary market transaction. Since then Landmark
has acquired interests in over 1,400 private equity
and real estate funds and partnerships
Private Equity and Real Estate Secondary Investing
Boston, MA
One Federal Street
Boston, MA 02110
(617) 556-3910
Headquarters
Simsbury, CT
10 Mill Pond Lane
Simsbury, CT 06070
(860) 651-9760
www.landmarkpartners.com
London, UK
29-30 St James’s Street
London, SW1A 1HB England
+44 20 7343 4450
This award does not necessarily represent investor experience with Landmark Partners, or the Landmark Funds, nor does it constitute a
recommendation of Landmark Partners or its services. This award is not indicative of Landmark Partners future performance.

page 20 private equity international may 2012
real esta t e
Optically minded
Discounts are still a sensitive issue when secondaries players are trading interests
in private equity real estate funds, writes Robin Marriott
In an age where there are a multitude
of reasons for investors to reduce their
fund holdings – liquidity issues, regulatory
pressure, risk management and
so on – it’s no surprise that last year
was a strong one for the burgeoning
private equity real estate secondaries
market, with the spread between the
price aspirations of buyers and sellers
narrowing.
“It has got to a level where, in my view,
any fair, reasonable and willing party can
agree to a transaction,” says Paul Parker,
managing director of real estate for
Europe and Asia at Landmark Partners,
one of the biggest global buyers of secondaries.
“That really explains why last
year was a record year and this year
probably will be as well.”
In light of the difficult economic climate
and the pressure on sellers, it seems
logical that there will be discounts on
offer. But an important psychological
barrier remains: neither side wants it to
look as though they’ve either paid or given
away too much. The parties involved often
refer to this as the ‘optics’ of the deal.
“This is a market that is driven by
optics, more so than most,” says Parker.
“[And yet] people always ask: ‘What are
the discounts?’”
Understanding exit routes
For its part, Landmark doesn’t refer to
discounts at all; instead, it talks about
‘pricing’, in an effort to show that the
firm views discounts as a by-product of
its approach to valuation, rather than its
objective. For secondary buyers, this is
an important distinction that they argue
is often misconstrued.
When considering the subject of pricing
(and the resulting discount), Parker
says his firm’s approach focuses on the
prevailing market conditions and the
market outlook, and whether Landmark
has ‘faith’ in the underlying valuations,
reporting and projections of the sponsor.
But above all, he says: “It is a question
of whether the underlying sponsors can
deliver on their asset management goals
and achieve their exit objectives.”
Parker points to the number of fund
partnerships that are approaching their
termination dates and/or refinancing obligations
while faced with the challenges of
tough markets across Europe, parts of Asia
and in certain areas of the US.
In 2008 and 2009, pricing and discounts
were driven by the fact that valuations
completely lagged activity in the
underlying market; according to Parker,
a buyer actually had to discount just to
get ahead of the time when the revaluation
of the fund came through. But today,
valuations generally reflect what is happening
in the underlying markets – with
a few notable exceptions.
Parker offers the example of a
2004-vintage fund that projected an
exit via the public markets around
2011 or 2012. Given the dearth of
initial public offerings, the manager is
now facing a ‘plan B’ scenario of selling
individual assets in a tough market. If
potential buyers know the fund needs to
sell, that will naturally drive down the
price offered. “It is essential to consider
projected exit strategies, with an understanding
that they will be reflected in
the pricing and hence the discount,” he
adds.
Focusing on value
Marc Weiss, head of the private real
estate secondaries team at Switzerlandbased
Partners Group, agrees that it is
“absolutely unhelpful” to talk about the
level of discount in a trade – although
he accepts there is a “natural bias” in the
industry to associate high discounts with
a great transaction, and low discounts
with a lousy one.
A better approach, he says, is to focus
on underlying valuations. “When it
comes to sellers, we say: ‘Do not focus on
the discount itself, rather focus on the
dollar amount or absolute euro amount
of what you may need to realise as a
loss. That is more important than the
percentage’,” Weiss explains. “We find
there is a lot of value for us in explaining
how we look at values and how we
look at the market. By doing that, the
seller realises that we are not viewing
the market any differently than they are.
If the seller agrees with our opinion on
value, it therefore should accept our
discount.” Ultimately, this boils down
to how motivated the seller is to deal
with the problem, he says.
As financial markets improve, multiples
will alter for the better, Weiss

may 2012 portfolio management atlas 2012 page 21
real esta t e
suggests. But if one takes a longer-term
view, discounts might actually need to
creep up a little. “For real estate, if one
examines cap rates [the percentage
number used to determine the value of
a property based on estimated future
operating income], they are back to
historic highs,” Weiss points out. “[But]
in a world where it is more likely that
borrowing costs will rise rather than
fall, I think one needs to be very careful.
If one wants to be forward looking at a
time when values are improving faster
than they should, then that is going to
drive up your discount.”
From the BOTTOM up
For David Boyle, who heads up the
real estate programme within Morgan
Stanley’s AIP division (which focuses on
small and medium-sized funds), the best
approach is to start with the underlying
assets. “For secondary trades, we focus
on what the right risk-adjusted return
is and underwrite from the bottom up,
visiting all the properties for an assetby-asset
analysis,” he explains.
With this approach, the investment
bank’s secondaries business can find itself
buying interests close to net asset value
(NAV) one day and at a wide discount
the next. “We want to make a commitment
on a secondary basis that we
would have committed to on a primary
basis – so the quality of the GP and the
underlying assets is very important to
us,” Boyle adds.
Boyle provides a recent example of
where the manager had, if anything, been
too conservative in writing up values. In
certain cases, the firm had even bought
at discounts of 35 percent to NAV.
“There is no right or wrong answer,”
says Boyle. “We do our work and figure
There
is no right or
wrong answer.
We do our work
and figure out
what we think
the right riskadjusted
return is
Under the microscope: many sellers still focus on discounts
out what we think the right risk-adjusted
return is. That translates back into what
the discount to NAV is.”
At times, AIP has submitted bids that
it thought were pretty strong – but the
seller didn’t transact because the price
didn’t reach NAV. “A lot of sellers have
the ‘psychology of NAV’ and not wanting
to take a big hit,” Boyle says. “That certainly
affects whether the seller is going
to sell in the first place.”
Again, these deals often come back to
perception: if the optics are wrong, the
seller still may not trade.

page 22 private equity international may 2012
d a ta ro o m
Secondary DEAL vOLUME since 2001 Secondary funDRAISIng since 2001
Deal volume has recovered in the last two years after a post-crisis dip
$bn
30
LP appetite for secondaries has generally been trending upwards for
a decade
$bn
30
20
20
10
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Triago
Source: Triago
Secondary Market SELLER UnivERSE in 2H 2011
Financial institutions were by far the biggest sellers in the second half of last year, both by volume and value
12%
8%
3%
5%
13%
20%
39%
Number of Sellers
n Financial Institution
n Public Pension
n Endowment & Foundation
n Sovereign Wealth Fund
n Fund-of-Funds
n Family Office
n Other
10%
7%
5%
2% 9% 28%
39%
Transaction Value
n Financial Institution
n Public Pension
n Endowment & Foundation
n Sovereign Wealth Fund
n Fund-of-Funds
n Family Office
n Other
Source: Based on Cogent Partners data and publicly-disclosed information
Secondary PRICIng Over TIME
Secondary Bid SPREADS Over TIME
Discounts to NAV have been narrowing steadily in the last two years The gap between buyers and sellers was at its height in late 2010
%
100
89% 89%
86%
83%
84%
80
80%
84%
85%
81%
60
61%
72%
n Bid Spreads By Year
n Avg. High % Exposure n Avg. High % NAV
40%
40
H1 2009 2H 2009 H1 2010 2H 2010 H1 2011 2H 2011
Source: Cogent Partners
2003 2004 2005 2006 2007 2008 2009 H1
2010
Source: Cogent Partners
2H
2010
H1
2011
2H
2011

may 2012 portfolio management atlas 2012 page 23
d a ta ro o m
Using seconDARIES to BUILD exPOSURE
More than two-thirds of Asian LPs are planning to use the
secondaries market to increase their allocation to private equity
100
90
GROWTH STORy
The evolution of private equity secondaries
Oct-01 Goldman closes $1bn fund to buy disillusioned LPs out of VC funds
Dec-01 Coller spends $100m on stake in Lucent’s corporate venturing arm
Apr-02 Coller sells first Lucent asset in €470m trade sale
80
70
68%
Sep-02 PEI publishes first indepth secondaries report
Feb-03 Deutsche Banks exits private equity in $1.6bn MidOcean spin-out
Respondents %
60
50
40
30
20
30%
35%
Jan-03 Coller IV baffles with $2.5bn close (initial target: $1bn)
May-03 Vision Capital buys four direct investments from Morgan Grenfell
Private Equity
Oct-03 Lexington Capital Partners V raises $2bn
Feb-04 CSFB Strategic Partners II collets $2bn for PE and RE secondaries
Mar-04 Coller lands £300m Abbey National portfolio
10
0
Source: Coller Capital
North America
LPs
European LPs
Asia Pacific LPs
Oct-04 SVG Capital launches Diamond, a €400m CDO of private equity
funds
Nov-04 Pantheon buys SFr400m Swiss Life portfolio
Dec-04 PEI reports ‘active portfolio management’ is becoming ‘reality’
Mar-05 nova, HarbourVest buy assets from troubled WestLB
Secondary Market vOLUME by PERCEnt FunDED
Over TIME
In recent years, LPs have been buying increasingly mature fund
stakes
%
100
May-06 JPMorgan sells $925m piece of global PE fund
May-07 At $4.5bn, Coller V is largest fund ever
Jul-07 $1.9bn Conversus private equity CLO lists on Euronext
Nov-08 Harvard readies $1.5bn funds disposal
Nov-08 Wellcome to offload £4bn in funds citing currency gains
Dec-08 Auction for Lehman’s private equity assets gets underway
Jan-09 Cogent: secondaries pricing drops 28% in five months
80
Feb-09 Coller pays £50m for 24% SVG stake
Mar-09 Sun Capital launches ‘online dating services’ for selling LPs
60
40
20
0
60.6% 61% 71% 79.7% 86.5% 92.3%
15.2% 13%
11%
24.2% 26%
13.7% 11.9%
18%
6%
6.6% 1.6% 1.7%
H1 2009 2H 2009 H1 2010 2H 2010 H1 2011 2H 2011
Apr-09 GS Vintage V raises $5.5 billion
May-09 Secondaries investing in a lull after ‘08 peak
Oct-09 Troubled AIG announces $600m portfolio sale
Dec-09 CIC offers to buy €800m of stakes in €11bn Apax Europe VII
Feb-10 Pending Volcker ban brings prospect of bank sell-off
Oct-10 Pantheon closes Fund IV on $3bn
Nov-10 Coller launches Fund VI with $5bn target
Feb-11 CalPERS puts $800m of stakes up for sale to end GP relationships
Jun-11 AXA spends $5bn on buys from Barclays, Citi, BoA, Natixis
n =25% and =50%
Source: Cogent Partners
Jul-11
Jul-11
IFC backs Greenpark to back a $500m emerging markets
secondaries fund
Lexington collects record $7bn for secondaries

page 24 private equity international may 2012
o n t h e re c o rd
p r i c i n g
The waiting game
Cogent Partners managing director Todd Miller explains to PEI how secondary
pricing has been affected by the public market, and how that may impact buyers
PEI: According to Cogent’s latest research, secondary
pricing fell dramatically in the second
half of 2011 – from 84.5 percent of net
asset value (NAV) to 80.6 percent. Has that
changed recently or has pricing plateaued?
Pricing [assets] off of an old NAV date
has certainly helped the optical price.
But you have to take into consideration
the fact that the NAVs are probably artificially
low.
Someone could just say, ‘I just sold
an asset at 90 percent of NAV’ – that’s
the optical price. But if you’re the seller
today, you would say: ‘Was [that] 90 percent
of NAV off the 30 September [valuation]
or off the 31 December [valuation]?’
The date is actually very important,
because we’ve had some big swings in
the public markets; you just don’t know
[how GPs have valued their assets].
As Q1 [valuations] come out – and
NAVs should have been written up, in
general – it will be interesting to see
where that optical pricing is.
What sort of impact has this had on buyers?
Buyers are saying, ‘I don’t need to be
overly aggressive today, because deals
will have to get done’ [to accommodate
the Volcker Rule]. And that’s before you
start talking about pension fund deals,
where people are over-allocated.
You know, it used to be [secondary
fund managers would] invest a fund over
three or four years. Now, you could put
a fund to work in, probably, 18 months.
I think buyers are looking around today
Miller: market could have been bigger
saying, ‘there are tons of institutions
that need to do deals, or will have to do
deals’. Even though you’ve seen several of
them already done, there is a significant
amount of private equity on the balance
sheets of financial institutions, both in
the US and abroad.
The bulk of that activity has revolved around
buyout funds, the pricing of which remained
relatively robust in the second half. Why is
that?
That’s kind of where we’ve seen pricing
be the strongest. The [recovery in] public
markets certainly haven’t hurt of late...
There are exits there.
The private equity space isn’t nearly
as volatile as the public markets. If the
public markets are down 20 percent,
private equity is going to be down
You have
to take into
consideration
the fact that
the NAVs
are probably
artificially
low
[maybe] mid-to-high single digits percent.
As fewer financial institutions face the need
to unload assets, and pensions fall back to
their target allocations, is there any concern
that the market might run dry?
We talked to a couple of buyers, and I
just asked them: how much deal flow
did you look at last year? How much
was shown to you; did you price; did
you have an opportunity maybe to buy?
Several of them said in the $40 billion
to $50 billion range, and one said that
they looked at almost $70 billion worth
of deal volume last year.
If pricing had been there, if pricing
had been good enough, this market
could’ve been a lot bigger. Because I
think the supply was there. n

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