evca interactive handbook

8/11/2019 Evca Interactive Handbook

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EVCA HandbookProfessional Standards for the PrivateEquity and Venture Capital IndustryEdition January 2014

Discloseconflicts ofinterest

Do no harm tothe Industry

Maintainconfidentiality

Act infairness

Keep yourpromises

Act withintegrity


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The objectives of the Code are: tostatetheprinciplesofethicalbehaviour

thatmembersof theEVCAabide by; toassertonbehalfofthemembershipthe

collectiveobservanceofhigh standardsofcommercialhonourand justandequitableprinciplesoftradeand investment;and

toprovidethebasisforconsiderationof,anddealingwithlapsesin, professionalconductwithinEVCAmembership.

Compliancewith theCodeis mandatoryfor allEVCAmembersandtheiraffiliatesand isdealt withthroughtheProfessionalStandardsCommitteeonbehalf oftheBoardofDirectorsoftheEVCA.Intheeventofaprovenseriouscaseofmisconductby amember,thesanctionisexpulsionof thatmemberfromthe EVCA.

Code of Conduct1 Act with integrity2 Keep your promises3 Disclose conflicts of interest4 Act in fairness5 Maintain confidentiality6 Do no harm to the Industry

The Code of Conduct is mandatory for all members of the EVCA.

Section 1Code of Conduct

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Section 2Commentary on the

Code of Conduct

The following section includes commentarywhich is helpful in the application andinterpretation of the Code. Further explanationon how the Code itself can be used in practice isset out in Section 3.

The six principles that comprise the Codestand together as a whole rather than beingindependent from one another.

A litmus test for application of these sixprinciples is a personal conviction that youractions would stand up to public scrutiny.

An alternative test is to judge your actionsby reference to whether you would find itacceptable for other parties to pursue a similarcourse of action under similar circumstances.

2.1 Act with integrityIntegrityis thefundamentalbuildingblockoftrust inbusinessrelationships.

Trustisbuilt uponrepeatedinteractionsbetweenindividualsthatinvolveclarity,reliabilityandhonesty.Integrityimpliesthatcompetitiveadvantageand commercialsuccessare derivedthroughtheapplicationof superiorindividualand collectiveskill andnotthroughtheuse ofmanipulativeordeceptivedevicesorpractices.TheGPwillact withintegritytowardsits LPs,PortfolioCompaniesand otherstakeholdersand willseek toensurethat thePortfolioCompanyconductsitsbusinesswith integrity.TheGP expectsthesamefromitsLPs inall areaswheretheyinteract.Actingwith integrityimpliesnotseekingto evadeoravoidthe consequencesoferror.

2.2 Keep your promisesEthicalbusinessbehaviourimplieskeepingpromisesregardlessofwhetherornotthereis alegalobligationtodoso.

WithintheIndustry,commitmentsare oftenmadesubjectto theprovisionof furtherinformation,carryingoutdue diligence,theresultsofuncertainexternaleventsandother matters.Thismeansthatclarityaboutwhat isactuallycommittedandwhat isstill subjecttofurtherinvestigationisveryimportant.

Promisesaremadein thelightof circumstanceswhichare knownatthetimethat thepromiseis made.Theethicalindividualor businessonlymakespromiseswhichthey reasonablybelieveare capableofbeingfulfilled.

Promisesareof equalimportanceregardlessofto whomtheyaremade.

2.3 Discl ose conflicts of interest

Conflictsof interestcanoccurwhena personwhohas aduty toanotheralsohas apersonalor professionalinterestthatmightinterferewith theexerciseof independentjudgment.Theyinevitablyarisewithinbusiness.A GPshouldseek tomanageconflictsofinterestfairly.Wherethese conflictsof interestaffectLPs,theGP shouldalwaysconsultwiththe LPAdvisoryCommitteeaspart ofthisprocess.Conflictscan arisebetweentheGP andthe Fundandits LPs;betweendifferentFunds;betweendifferentLPsin theFund;betweenLPsof differentFundsmanagedby theGP; andbetweentheFund andotherinvestorsin therespectivePortfolioCompanies.Tofacilitatethemanagementof conflicts,LPs shouldensuretheydeclaretheir ownconflictsof interestinany situation,forexampleifthe LPis aninvestorintwoFundsmanagedbytheGPandoneFundissellinganinvestmentto theotherFund.Conflictsof interestshouldbediligentlyidentifiedand disclosedtoall partiesconcerned.

2.4 Act in fairnessFairnessmeans playingbytherules, whetherlegislativeornot,basedonfactsand circumstances.

Rulesforconductingbusinessinour Industrymayvarybetweencountries,regions,societies,legalsystemsand transactions.It isimportantthat membersunderstandthe differentrules thatapplytotheirparticularbusinessorsituation.A GPshouldpay dueregardtotheinterestsofLPs inthe Fundtakenas agroupand should,where

relevant,consultwith theLP AdvisoryCommitteeor allLPs. AnLPshouldpaydueregardtotheinterestsoftheFundasawholeandhowtheirindividualbehaviourmayimplicatethe Fund,theotherLPsortheGP.LPsshouldengagewiththeGPandotherLPsina timelymannerwhensituationsarisewhich requireanLP voteundertheFunddocuments.

AGPshouldpaydueregardtotheinformationneedsofLPsintheFund,andcommunicateadequateinformationtothem ina waywhichisclear,fairand notmisleading.Goodinvestorrelationsfora GPdependuponcleardisclosureandtimely communicationofrelevantandmaterialinformation.TheGP willseek toestablishtransparentcommunicationwithPortfolioCompanymanagement.LPs shouldalsocommunicateclearlyandpromptlywiththe GP.

2.5 Maintain confidentialityInthe ordinarycourseof business,individualsand firmswillobtaincommerciallysensitiveinformationfromothermarketparticipants.

TheGP willtreatPortfolioCompanyorLP informationas confidentialandwill notmakeuse ofthatinformationina waythatis detrimentaltothe PortfolioCompanyor LP.LPsshouldalso complywiththecontractualrequirementstomaintainconfidentiality,forexampleonreceivingconfidentialinformationwhen carryingoutduediligenceonaFund(towhichitmayor maynotdecidetocommit),orwhenreceivinginformationasan LPin theFund.

Inan efforttosafeguardthecommercialinterestsofdisclosingparties,reasonablesteps shouldbetaken toprotectinformationfrominappropriatedisclosureandduecare shouldbetaken tofollowanyagreedprocedures.

2.6 Do no harm to the IndustrySuccessincommercialenterpriserequiresthepursuitof competitiveadvantage.

Thepursuitof competitiveadvantageisnot initselfharmfulto theIndustry.Industrymembersshould,however,conducttheir businessinaresponsiblemannerandnot engageinpracticesthatare foreseeablydamagingtothepublic imageandgeneralinterestsof theIndustryandits stakeholders.All participantsin theIndustryshouldpromotebestpracticesforthe widerbenefitoflong-term,sustainableinvestment,economicgrowthandvaluecreation.

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OutlineThis section of the Handbook is intended toprovide illustrations by way of questions andanswers both for the establishment andmanagement of a Fund as well as to provideguidance on how the Code may apply duringthe life cycle of a Fund. In doing so, it takesaccount of common market practice andcorporate governance in the Industrywherever possible.

Theillustrationsarenot intendedtobeexhaustiveor prescriptive.Whilethequestionsare intendedtoprovideauseful resource,it shouldnotbeassumedthatonesizefitsall.Someofthescenariosmaybeinappropriateasa resultofthe size,nature,localenvironmentandcomplexityof someGPsoperations.Thedifferinginvestmentobjectivesof Fundsmayalso meanthatthe examplesarenotappropriatetoall Funds.

Locallegaland regulatoryrequirements,andtheextentto whichtherearefiduciaryrelationshipsand obligations,differin thevariousEuropeanjurisdictions.Theprincipleis thattheselegal requirementsareobservedinall relevantjurisdictions.Thisdocumentdoes notdescribethoserequirementsor providea completeor mandatorystatementof thedutiesof thoseinvolvedinthe establishmentandmanagementof Funds.Itis nota substitutefor professionaladvice,whichshouldstillbe obtainedwhereappropriate.TheIndustryparticipantsshouldalso befamiliarwithand mindfulofapplicablenationalandsupranationalcorporategovernanceguidance.

Whileendeavouringto reflectanticipatedpan-Europeanlegislationandregulation,thisdocumentdoesnot reflecttheimpactof differinglegalstructuresusedforPrivateEquityand VentureCapitalvehicles.Inparticular,it isassumedthat FundsarebeingmarketedtosophisticatedLPs andhencethis documentdoes notreflectthelargerangeoflegal protectionssurroundinginvestmentsthataremarketedtoretailinvestors.

Section 3Guidance on the Application of the Codeof Conduct: Questions and Answers

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3.1 Fund formation3.1.1. Earlystageplanning3.1.2. LPsandmarketing3.1.3. Structuring

3.2 Fundraising3.2.1. TheFundraisingprocess3.2.2. TheFundraisingTeam3.2.3. TargetLPs3.2.4. Originofcapital3.2.5. LPs3.2.6. Structureof theoffer:termsof investment

3.2.7. Structureofthedocuments3.2.8. TermsintheFunddocuments3.2.9. PresentationstoLPs3.2.10. Responsibleinvesting3.2.11. Trackrecords3.2.12. Forecasts3.2.13. TimeperiodforFundraising

3.3 Investing3.3.1. Duediligence3.3.2. Costs3.3.3. Approachto responsibleinvestment3.3.4. Investmentdecision3.3.5. Structuringinvestments3.3.6. Responsibilitiestoother shareholdersin thesameor other

classesofshares andtobondholders3.3.7. InvestmentAgreement3.3.8. GPsconsenttoPortfolioCompanyactionsandboard

appointments3.3.9. ThePortfolioCompanyscorporatestrategy3.3.10. Co-operationwithco-investorsandsyndicatepartners3.3.11. Co-investmentandparallelinvestmentbythe GPand

itsexecutives3.3.12. Co-investmentandparallelinvestmentsbyLPs and

otherthirdparties3.3.13. Divestmentplanning

3.4 Management of an investment3.4.1. Investmentmonitoring3.4.2. Environmentalfactors3.4.3. Socialfactors3.4.4. Governancefactors3.4.5. Boardparticipation3.4.6. ExerciseofGPconsents3.4.7. Exerciseofinfluenceonresponsibleinvestmentfactors3.4.8. Responsibilitiesinrelationto otherstakeholders3.4.9. Follow-oninvestments3.4.10. Underperforminginvestments

3.5 Disposal of an investment3.5.1. Implementationofdivestmentplanning3.5.2. Responsibilityfordivestmentdecision-making3.5.3. Warrantiesand indemnities3.5.4. Cashvs.shares/earn-outson realisation3.5.5. Saleof aPortfolioCompanybetweenFunds

managedbythe sameGP3.5.6. Managingquotedinvestments

3.6 Distribution s3.6.1. Distributionprovisions3.6.2. TimingofDistributions

3.7 LP relations3.7.1. ReportingobligationstoLPs3.7.2. TransparencytoLPs3.7.3. LPrelationsgenerally3.7.4. LPconflictsofinterest3.7.5. LPAdvisoryCommittee3.7.6. KeymanProvisions

3.8 Secondaries3.8.1. Overview3.8.2. SecondaryTransactions

3.9 Winding up of a Fund3.9.1. Liquidation3.9.2. Funddocuments

3.10 Management of multiple Funds3.10.1. Conflictsof interest3.10.2. Establishmentof newFunds

3.11 GPs internal organisation3.11.1. Managementare responsiblefor establishingthe control

environment3.11.2. Managementare responsiblefor establishingprocedures

forriskassessment3.11.3. Managementare responsiblefor controlactivities3.11.4. Humanresources3.11.5. Incentivisation3.11.6. Financialresources3.11.7. SegregationofFundassets3.11.8. Proceduresandorganisation3.11.9. Internalreviewsand control3.11.10. Managementare responsiblefor theorganisations

informationandinformationsystemsandfor

communicationswithinandoutsidethe organisation3.11.11. Externalcommunication3.11.12. MarketTransparency EVCAResearchandData3.11.13. Externalassistance3.11.14. Considerationsrelatingtomonitoringofgovernance

GPgovernanceAPPENDIXCODE OFCONDUCTFOR PLACEMENTAGENTS

3.1 Fund formation

There are a number of factors that the GPs FundraisingTeam should consider and address during its initialplanning. Doing so will help the Fundraising Team toensure the GP will be able to operate the Fund with dueskill, care and diligence and ensure an adequate level offinancial and operational resources for the managementof the Fund. A well-structured Fund will be better placedto accommodate different types of LP and also able tomaximise any regulatory and tax efficiencies. In thissection it is acknowledged that the GP may not be aformed legal entity at the time the Fund launches.The term Fundraising Team is used to denote the keypersons involved in the Fundraising process and who,once the Fund is formed, will also be closely involved in

the Fund throughout its life.

3.1.1. Early stage planning

Question

Whatissuesshould theFundraisingTeamconsiderand addressduringitsearly stageplanning?

Explanation

Appropriateearlystage planningofa Fundisvital toits success.Ithelpstofocus theFundraisingTeamsothateffortand costarenotexpendedinappropriately.Planningduringthis stagewillnormallyoutlineallof theFundraisingTeamsactivitiesup tothe firstclosingofthe Fund.

Recommendation

TheFundraisingTeamsearlystage planningshouldaddressthefollowingissues:

whatthe Fundsinvestmentpolicy,investmentobjectivesandinvestmentstrategywill beand,if applicable,deal flowallocationtopriorFundsand cross-overFundinvestments;

whatminimumandmaximumFundsize theFundraisingTeamwillneedto establishtoimplementtheinvestmentstrategy;

whatwillbethelengthoftheInvestmentPeriodandthetermoftheFund;

fromwhattypeofLPstheFundraisingTeamintendstotryandraiseCommitmentsfortheFundand inwhich jurisdictionsthosepotentialLPsarebased (asthis canimpacton thestructure(s)tobeused);

considerationofthe costsofthe Fundraising; whathumanresourcestheFundraisingTeamwillneedtoputin

placein ordertoimplementtheFundsobjectives,inparticularwho

therelevantinvestmentandindustryprofessionalswill beandensuringsuchindividualsarelikelyto remaincommittedto theFundforits duration;

whatcashresourcesshouldbe budgetedandwhatthe appropriateManagementFeeisfor theFund;

whatthe appropriateprofitshareand CarriedIntereststructurewillbe,in particularfocusingon theapportionmentofCarriedInterestbetweentheFundraisingTeam,timingof paymentandGPClawbackmechanisms(e.g.Clawbackandescrowarrangements);

howresponsibleinvestmentconsiderationswillbeincorporatedintotheorganisationandinvestmentandportfoliomonitoringprocesses;

considerationofthe existingFundsconstitutionaldocuments,ifapplicable,toensurethat theFundraisingTeamisawareof anyrestrictionscontainedin thosedocumentsasto timingsinrelationtoraisingnew Funds,scope,etc.

3.1.2. LPs and marketing

Question

WhatmattersregardingpotentialLPs andmarketingofthe Fundshouldbeconsideredat theearlystages?

Explanation

Anefficientandwell-plannedmarketingcampaignisvitalin ensuringthatFundraisingissuccessful.ManyEuropeanaswell asnon-Europeanjurisdictionsregulatethemarketingof Fundsandrestrictsolicitationto certaintypesofLPs (suchassophisticatedandprofessionalinvestors)and insomejurisdictions,theserestrictionsmayapplyto earlyinformaldiscussionswithpotentialLPs.PlanningidentifiesrelevantjurisdictionsgivingtheFundraisingTeamtheopportunityto obtainappropriateadvice.

Alongwiththe adventofpan-Europeanregulation,themarketingofFundswithintheEU maydependon thejurisdictionofthe Fund

vehicle,aswell asthe locationofthe GP/manager.An EU-widemarketingpassportwill beavailableto thoseEU-basedGPs/managerswhocomplywiththe relevantrequirementssetout intheAlternativeInvestmentFundManagers(AIFM)Directive.Specialcareshouldbetaken whilstthisnew legislationtakesshape,as allthedetailsofthe implementationhaveyet tobe finalised.

Recommendation

TheFundraisingTeamshouldclearlyidentifytheregulatorylandscape,particularLPsandtypes ofLPs thattheywish toattractto theFundinany relevantjurisdiction.BeforecommencingFundraising,theFundraisingTeamshouldestablishwhatrestrictionsapplyto themarketingofFundsin eachjurisdictionwheretheywish tomarkettheFund.

Considerationshouldalso begivento thecontentofthe duediligenceinformationto beprovidedtoprospectiveLPsand themediumthroughwhichitwill bedelivered.Forexample,willthe informationbeavailableelectronicallythroughavirtual dataroomhostedon asecureareaofthe GPswebsite,oron asecuredata hubsite.Thoughtshouldalsobe givenas tohowmeetingswith prospectiveLPs willbe held.Forexample,willtheyall beone-on-onemeetingsorshould aninitiallaunchmeetingbearrangedto whichallprospectiveLPsare invitedtoenablethem tomeeta cross-sectionofmembersof theGPsteam.

The Q&A covered in section 3, is set out undera number of headings, which are highlightedin the grid. The Q&A itself follows this grid.

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Theextentto whichspecificLPs aregrantedinfluenceoverthemanagementof theFundshouldbe consideredcarefully.Ifsuchinfluencealtersthe managementstructureofthe FunditcancompromiseLPslimitedliability.Substantialinfluenceonthemanagementof aFund(in particularthedecisionstoinvestordivest)cansubjectthe Fundtomergerregulationsandnotificationrequirementswithundesirableconsequencesfor itand theLPs.

Recommendation

Wheneverpossible,the GPshouldtry toensurethat allLPs intheFundbenefitfromequaltreatment.Differentterms canbe offeredtodifferentLPs,but,whereverpossible,preferentialtreatmentorspecificeconomicbenefitsto individualLPs orLP groupsshouldbejustifiable(e.g.withreferencetothe amountinvestedby apreferredLP orby specificexperienceofan LPwhichaddsadditionalvalue tothe Fund).

Also,anypreferentialtreatmentshouldbe clearlydisclosedtoall other

LPsfromtheoutsetinawaythatsuchLPsatleastknowthatcertainotherLPsmay benefitfrompreferentialtreatment.IfcertainLPs areondifferentterms,thiscan impactonLP alignmentofinterests.

LPsshouldnot generallyparticipatein theday-to-daymanagement(includingtheinvestmentdecisionprocess)of theFund.Wheretheydoso,theyandtheirfellowLPsshouldbeawareofthelegalrisksthatarisefromdoingso incertainjurisdictionsandwhich maymeanthatanLP losesits limitedliability.They mayalsoexpose themselvestoclaimsfromotherLPs.

IndetermininginitialtermsandsubsequentnegotiationswithpotentialLPs, aGP shouldconsiderthealignmentofinterestofthegroupwithallLPs.

WhereaFundis structuredas multipleparallelpartnershipsorentities,theFundraisingTeamshouldpreventone suchentityorasingle minorityLP(in thecontextofthe wholeFund)beingabletoundulyinfluencetheFundor blockspecialresolutionswithoutadequatejustification.

3.2.7. Structure of the documents

Question

WhatdocumentsshouldtheFundraisingTeamproducewithrespecttothe Fundandwhat mattersshoulditaddress?

Explanation

Dueto theongoingnegotiationsuntilfinalclosingof aFund,documentstend tobe continuallyrevisedto reflectalldiscussionswithLPs.However,certaincoreelementsdescribetheofferand itsessentialcharacteristics.

Thesecoreelementswill usuallybeaddressedin acombinationofdocumentswhichwill normallyincludeaprivateplacementmemorandum(oftenthemain marketingdocument)andtheconstitutionaldocumentsofthe Fund.TheFundraisingTeamwillnormallyalsoassemblea comprehensivedatapack orvirtualdataroomanddocumentsaboutthe Fundandits investmentstrategy,

collectivelycomprisingthedue diligencematerials.

Locallawsin thejurisdictionswheretheFund ismarketedmayset outrequirementsonthe structureand contentoftheprivateplacementmemorandumandFunddocuments.

Continuousamendmentofdocumentscreatesa riskthat notall LPsreceivethesame informationaboutthe Fundbeforetheymakeaninvestment.

Recommendation

AdraftprivateplacementmemorandumorsimilarFunddocumentsshouldtypicallybemadeavailableto LPspriorto firstclosing.ConstitutionaldocumentsestablishingtheFundshouldalsobeproduced.

Appropriaterecordsshouldbekept toensurethat allLPs areabletoreviewthesameinformation.Theuse ofduediligencerooms(physicalorvirtual)can bean effectiveway toprovideinformationtoprospectiveLPs.Betweenthe firstandfinal closingsthisinformationshouldbeupdatedif changesarerequiredandsuch updatesshouldbedisclosedto bothexistingandpotentialLPs,so thatall havehadaccesstothe sameinformation.

Appropriateadviceshouldbe soughtonthe requirementsofthelawsinall jurisdictionswherethe Fundispromoted.

TheFunddocumentsshouldcontainfulland trueinformationpresentedin amannerthat isclear,fairand notmisleading.Appropriatestepsshouldbe takentoensure andrecordtheaccuracyandcompletenessof thedocuments,employingthird-partyadvisorswhereappropriatee.g.auditingof aGPs trackrecord.

TheFundraisingTeamshouldensure thatit canjustifyexpressionsofbeliefandstatementsmadein theFundsmarketingmaterialsusingreliabledocumentsand research,updatingwherenecessaryuntil theFundhasclosed.

Asa generalrule,anychangesto theFunddocumentswouldrequiretheapprovalofLPs.However,therewilltypicallybe acarveout forchangesagreedafterthefirst closewithprospectiveinvestorsin theFundwhicharenot adversetothe interestsof existingLPs.These

changescanbemadebytheGPwithoutLPconsentinordertofacilitateits Fundraisingefforts,providedhoweverthatwhere anyLPisadverselyaffectedbythe changeinquestionthen theaffectedLPwouldhavetoconsentto thechange.

3.2.8. Terms in the Fund documents

Question

Whatarethe typicaltermstobe setout inthe Funddocuments?

Explanation

TheFunddocumentsshouldset outthe keytermsand providetheframeworkwithinwhichthe GPwill operatetheFund.It isrecommendedthatthe Funddocumentsshould address,ataminimum,the followingmatters:

Team adescriptionofthe managementstructureandthe management

team,identificationof thekey executivesof thisteamand theregulationof aKeymanevent(such asdepartureofa keyexecutive);

adescriptionoftheteamsskillsandexperience; detailsofteam continuity,dynamics,decision-makingprocesses

andteamsuccession;

Track record thetrackrecordofpriorinvestmentsmadebytheGP;

Investment strategy theinvestmentscopeoftheFund; theinvestmentpolicy,investmentcriteriaandInvestmentPeriod

ofthe Fund,includingtheapplicableinvestment,lendingandborrowingguidelinesandinvestmentrestrictions.(NB: Thesemustbeset outparticularlyclearlyas,often,these importantmatterswillnotbesetoutinanydetailinotherkeydocuments,andtheyareusuallyincorporatedbycross-referenceto theprivateplacementmemorandum);

theresponsibleinvestmentpolicyof theFundand theproceduresforensuringcompliancewithsuchpolicy;

Structure and powers adescriptionofthelegalstructureoftheFund; asummaryofthepowersoftheGP;

conflictofinterestresolutionprocedures; remitandcompositionoftheLPAdvisoryCommittee; thereportingobligationsthattheGPwillhavetoLPs; carriedinterestescrow,clawbackand true-upprovisions,andother

LPprotections(includingkeymanandGP removalprovisions); transferofLPinterestprovisions;

Financial thecostand feestructure(includingdifferentiatingbetweencosts

bornebythe Fundandthoseborne bythe GP.Usually,placementagentfeesshouldbebornebytheGPandLPsshouldnotbereimbursedfordue diligencecosts duringtheirreviewofthe Fund.Acap isnormallyset onFundinceptioncostsincludinglegalandaccountingfees etc.);

howanyTransactionfeesanddirectorsfeesreceivedbytheGPwillbe treated;

theGP Commitmentand CarriedInterestarrangements; themechanicsforDrawdownofCommitmentsanddefault

mechanicsinthe eventofLPs defaultsonDrawdowns(whichshouldnormallyimposesignificantsanctionsondefaulttoreducetherisk ofsuch default);

thevaluationpolicythatwillapply; ifapplicable,thepricingof interests,units,shares,etc. inthe Fund; howDistributionstoLPswillbemade; indemnificationprovisions;

Co-investments and follow-on investments Co-investmentrightsandpowers; thepolicyonCo-investmentwithotherFundsmanagedbythe

GPoranyofitsassociates; theprovisionsthatthe GPwill makeforfollow-oninvestments;

Term, Exits and new Funds thetermoftheFund,theprocessforextendingtheFundand

terminationand liquidationproceduresfortheFund; Exitstrategies; thecircumstancesinwhichinvestmentsmaybe purchasedfrom

orsold tootherFundsmanagedby theGP orits associates; anyrestrictionsonthe circumstancesin whichtheFundraising

Teamorthe GPwill bepermittedtoestablishany otherFundwitha similarinvestmentstrategyor objective;

Risk factors asummaryoftheriskfactorsthatarerelevanttoinvestmentin

theFund,includinga generalwarningtoLPs ofthe risksthatareinherentininvestinginFunds,and alsoanyparticularrisk factorsthatmayadverselyaffectthe Fundsabilitytocarryout theinvestmentpolicyor tomeetany projectionor forecastmade.

TheFunddocuments(privateplacementmemorandumorsimilarandconstitutionaldocuments)shouldbe preparedand madeavailabletoLPs insufficienttimefor themtoconsiderthem priortoclosingandtoallowtime fornegotiationwithLPs.Appropriatesubscriptiondocumentsand confirmationofparticipationshouldalsobe circulated.

TheFundraisingTeamshouldtakeadviceon whetherthelaw inanyjurisdictionwherethedocumentswillbesentrequiresanyothermatterstobe addressed.

3.2.9. Presentati ons to LPs

Question

Whatresponsibilitiesarise withrespecttomarketingpresentations?

Explanation

Presentationsand informationprovidedbythe FundraisingTeamthatinfluenceLPsdecisionsare oftensubjecttothe lawofalljurisdictionswhereaFundispromoted.Theselawswilloftenapplytoinformationprovidedto LPs,irrespectiveofthemedia bywhichitis communicated.

Insome circumstances,presentationsmaybe madetopotentialLPsatan earlystageand theinformationprovidedto themmayinfluencetheirdecisionto invest,eventhoughtheyhavenot yetreceivedanyformalFunddocuments.It isimportantthatpotentialLPs aremadeawareofany changestoinformationprovidedto themat anypointduringtheFundraisingprocess,so thattheyare ableto makea

balancedinvestmentdecisionbasedon correctinformation.

Recommendation

Asmentionedin thesectionon LPsand marketingabove,theFundraisingTeammustcomplywith locallawsrelatingto themarketingofFundsin alljurisdictionswheretheFundis promotedandappropriateprofessionaladviceshouldbe obtained.

Theteamshould ensurethatinformationprovidedto potentialLPsand promotionalstatementsmadeto themin whateverform(e.g.intelephonecalls,meetings,slide presentations,letters,emails,websites,etc.)evenat anearly stage,iscorrectand fairlypresented.Anysubsequentmaterialchangestosuch informationshouldbecommunicatedtopotentialLPs.

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3.2.10. Responsible investing

Question

WhatinformationshouldGPs providetoLPson theissuesofresponsibleinvesting?

Explanation

Thetopicof responsibleinvestingis becomingincreasinglyimportanttoLPs whorequireconsiderationto begivento environmental,socialandgovernancefactorsinthe GPsinvestmentprocesses.

Recommendation

GPsshouldclearlydefine anddocumenttheirresponsibleinvestmentpolicyandproceduresforcompliancewithsuchpolicyand willtypicallybe askedbyLPs toprovideinformationboth duringduediligenceand throughoutthe lifeofthe Fund.TheGP shoulddiscloseanyindustryassociationmembershipsor affiliations.

3.2.11. Track records

Question

Whatinformationshouldbe providedaboutthe trackrecordoftheGP?

Explanation

PotentialLPs willexpectdetailedtrackrecordinformationoftheGPtobeavailableaspartoftheduediligenceprocess.Itisveryeasyforsuchmaterialto bemisreador tomisleadpotentialLPs,particularlyin viewofchangingcircumstancesorif thereis selectivepresentationofmaterial.

Recommendation

Marketinglawsgenerallyprohibitthe presentationoftrack recordinformationona cherrypickingbasis.Informationwith respecttothetrackrecordshouldnot thereforebe madeonthe basisofselectivedatathatis unrepresentative,misleadingorincomplete.Thebasisof allsuch statementsshouldbe fullydisclosedintheFunddocuments.In particular,the periodtowhichany trackrecordinformationrelatesshouldbe disclosed.Gross andnettrack recordinformationshouldbe calculatedandcompiledinaccordancewiththevaluationandaccountingstandardsappropriateforthe Fundsjurisdiction.Anyuseofbenchmarksmustbeappropriate,consistentandclearlydefined.

TheFundraisingTeamshouldensurethatwhenthere isany materialchangethataffectssuch informationpriorto finalclosing,it isdisclosedtoall LPs.

Trackrecordinformationmaybe confidential(forexample,to previousemployersor PortfolioCompanies)andthe FundraisingTeamshouldensurethatappropriateconsentisobtainedbeforeit isused.

3.2.12. Forecasts

Question

ShouldtheFundraisingTeammakeforecasts?

Explanation

TheFundraisingTeammaywishto makeforecastsregardinglikelyperformancein theFundschosensectors,targetIRRand moneymultiple.However,itis veryeasyfor suchmaterialtobe misreadorto

misleadpotentialLPs,particularlyinview ofchangingcircumstancesorif thereis selectivepresentationofmaterial.

Recommendation

Forecastsare legallynotrequiredin institutionalproducts/privateplacementsand arethereforenota typicalfeatureofthe Funddocuments.The makingofforecastswithinthe Funddocumentsisultimatelyabusinessand economicdecisionofthe GP/FundraisingTeamwhenmarketingtherespectiveproduct.

Ifthe GP/FundraisingTeamdecidetoincludeforecastsin anofferingdocument,such forecastsmust notbe madeonthe basisof datathatisunrepresentative,misleadingorincomplete.Further,the relevantdata,theassumptionsandthe approachtaken toproducetheforecastsshouldbe fullydisclosedinthe Funddocuments.

3.2.13. Time period for Fundraising

Question

Isthereany specificperiodduringwhichFundraisingmustbecompleted?

Explanation

Itis importantFundraisingdoesnotcontinueindefinitely,asthis canpreventthe GPfromimplementingtheFundsinvestmentstrategy,whileresourcescontinueto becommittedtomarketing.

Recommendation

TheFundraisingTeamand theGP shouldensurethatFundraisingiscompletedwithina reasonabletime afterfirstclosingof theFund.Markettermstypicallydictatethata finalcloseshouldtake placewithinaprescribedperiodof thefirstclose,unless byLPsconsent.

Considerationshouldbe giventolevyingan equalisinginterest

paymentfromLPswhocommit tothe Fundafterthefirst closingtoreflectthecostof moneyforLPs committingat anearlierstage oftheFundraisingprocess.The purposeofthisis sothat allLPs canbetreatedasif theyhadcommittedat thefirstclosing.The equalisingpaymentsare generallycreditedpro rataamongtheexistingLPs andnottreatedas anasset ofthe Fund.

3.3 Investing

When making investments on behalf of the Fund, theGP should implement the Funds investment policy withdue skill, care and diligence and in accordance with theagreements the GP has made with the LPs in the Fund.

A GP should be mindful of the responsible investmentimpact of the conduct of its business and should givedue consideration to material risks and opportunitiesassociated with responsible investment factors such asenvironmental, social and governance (ESG) factorsthroughout the period of its investment.

3.3.1. Due diligence

Question

Whatduediligenceshouldbe donewhenevaluatinganinvestmentandto whatlevelof detail?

Explanation

Thedue diligenceprocessundertakenby theGP isvital. Theinformationacquiredduringtheprocess,togetherwiththe GPsownknowledgeandexpertise,willform thebasisof anyinvestmentdecision.

Thedue diligenceprocesswill investigatea widerangeof aspectsofthetargetcompanysbusinessincludingcommercial,financial,tax,legal,regulatory,technology,environmental,socialandgovernanceaspectsandmanagementcapability.The objectivewill beto gainadetailedunderstandingofthe prospectsfor thetargetcompany,evaluatingtherisksandissuesitisfacingormayhavetofaceinthe

futurethatmayplay apart inthe GPsinvestmentdecisionandtheultimatesuccessofthe PortfolioCompanyoverthe projectedInvestmentPeriod.

Fromthis,an assessmentwillbe madeofpotentialforvalue creationandultimatelyExitopportunitiesfromthe investmentforthe Fund.

Recommendation

AGP shouldseeksufficientinformationtoallowit toproperlyevaluatetheinvestmentopportunitybeingproposedandto establishthevalueofthe targetcompany.The informationsoughtshouldaddressallappropriateissues(which mayincludethe financialpositionofthetargetcompany,the experienceand abilityofits managementteam,themarketin whichthetargetcompanyoperates,thepotentialtoexploitanytechnologyorresearchbeingdevelopedbythe targetcompany,possiblescientificproofof anyimportantconcept,protectionof importantintellectualpropertyrights,pensionliabilities,possibleenvironmentalliabilitiesandother responsibleinvestmentfactorsinthe broadercontext,litigationrisks andinsurancecoverage).

Thedue diligenceprocessshould alsoincludetestingthe assumptionsuponwhichbusinessplans arebased,verifyingtheidentity,experienceandcapabilityofGPs andco-investors,and objectivelyevaluatingtherisksthat mayarisefrom investingand thepotentialreturnoninvestment.

Otherappropriatechecks,as requiredbyLPs,regulatorsandotherstakeholdersshouldbe carriedout.Thisspecificallyincludeschecksbeingmadeon thesellersto ensurethatthe investmentdoesnotfacilitatemoneylaundering,andto ensurethatthe investmentcomplieswithanti-corruptionor anti-briberyregulations.

3.3.2. Costs

Question

IsitrighttoexpecteithertheFundorGPtoreimburseLPduediligencecosts?

Explanation

Onoccasion,LPs mayrequestforthe GPto partiallyorfullyreimbursethecostof theFundreviewprocesse.g.travelexpenses,consultants,advisers,legalfees,etc.

RecommendationItis nota generallyacceptablepracticeforLPs toexpectthat theirduediligencecostsshouldbereimbursedeitherby theFundor theGPwhenconsideringaninvestmentina Fund.Thispracticeis likelytobeunacceptabletothe othercommittedLPs,whowouldultimatelybeartheburdenofthesecosts.ItcouldalsoleavetheLPin questionandGPopentoaccusationsof bribery.

Question

Shouldcostsincurredbythe GPduringthe FundraisingprocessbebornebytheFundortheGP?

Explanation

TheFundraisingprocesscan bea costlyexercise,withseveralpartiesinvolvedincludinga PlacementAgent,lawyers,accountantsandFundadministrators.TheGP shouldensurethatthoughtgoes intobudgetingfor theprocessandhow theadvisorswill bepaid.

Recommendation

Itis generallyacceptedthat PlacementAgentfeesshouldbe paidbytheGP andnotout ofthe Funditself.Lawyers,accountantsandFundadministratorscanbe paidoutof theFundformationcostsup toanagreedcap.

3.3.3. Approach to responsible investment

Question

Howshoulda GPapproachresponsibleinvestmentfactors?

Explanation

AGP shouldbemindfulof therisks posedandopportunitiespresentedtoits PortfolioCompaniesbyresponsibleinvestmentfactors.Thesuccessofan investmentmay beimpactednotonly byits financialperformancebutalso byotherperformancecriteria.AGP needsalsotobe mindfulofits ownLPsapproachestoresponsibleinvestmentandto seekto complywiththeirrequirements,whichmayincludeexpectationsas regardsreportingon responsibleinvestmentfactorsintheinvestmentandownershipprocessesandin somecasesexclusionsfrominvestingincertainsectors.

Recommendation

GPsshouldintegrateconsiderationof responsibleinvestmentrisks

andopportunitiesintotheirdue diligenceandinvestmentapprovalprocessesand keeptheirinvestmentdocumentsandprocessesunderperiodicreview.

Anystafftrainingneedson responsibleinvestmentmattersshouldbeaddressed.Evaluationofresponsibleinvestmentmattersshould notbelimitedto legalcompliance,butcouldalsoinclude potentialfutureregulationand marketplacefactorssuchas existingoremergingvoluntarystandards;consumerexpectationsand clientrequirements;andbroaderissuesthat couldhavereputationalimpact.

WheretheGP hasidentifiedrisksand opportunities(includingESGrisks)thatare deemedmaterialtothe successofthe investment,theGPshouldensure thatpracticesaredevelopedtomitigateassociatedrisksand pursueopportunities.Theimplementationandeffectivenessofthesepracticesshouldbe monitoredas appropriate.Notingthatthemarketplacecontextcouldchange,theGP shouldoccasionallyundertaketoupdatethe responsibleinvestmentrisk/opportunityanalysisandrevise,removeor addpoliciesas appropriate.WheretheFundsLPs haveexpressedaninterestin responsibleinvestmentfactors,the GPshouldseek toreportto theseLPson asuitablyregularbasis.TheGP mayalsochooseto sendunsolicitedreportsonresponsibleinvestmentfactorstoall LPs.

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3.3.4. Investment decision

Question

Howshoulda decisiontoinvestin aPortfolioCompanybereachedbyaGP?

Explanation

Anydecisionbya GPto makeaninvestmentinvolvesanappraisalofthe opportunityandan evaluationof therisks versustherewardsofthe opportunity.Theinformationonwhichthis decisionwillbebasedwillusuallyhave beengatheredandcriticallyappraisedwithintheteamof executivesworkingon thetransactionduringtheduediligencephase.The quantitiesofinformation,however,willnormallybeso greatthatit willneedto besummarisedbeforeit ispresentedtothe InvestmentCommitteeorother decision-makingbodyof theGPthat ultimatelydecideswhetherornot tomakean investment.

Undertakinga successfuldue diligenceexercisethatconfirmsthe

validityoftheunderlyingassumptionsofa businessplanwillnotgenerallybe sufficientin itself.Whatis alsorequiredisthe experienceoftheseniorexecutivesofa GPtoaddvaluetotheduediligenceexercisebycriticallyevaluatingtheinformationcollectedby applyingtheirdepthof businessandinvestmentexperience.

Recommendation

Theresultsof thedue diligenceexerciseand theGPsseniorexecutivesrecommendationsshouldbe distilledintoa comprehensivewritteninvestmentproposalwhichaccuratelyreflectsthepotentialofthe targetcompany,addressingarangeof bothfinancialandnon-financialfactors.Aspart ofthis process,considerationwillalsohavebeen givenasto whethertheproposedinvestmentfitstheinvestmentcriteriaandcomplieswiththe investmentrestrictionsinthe Funddocuments.The investmentproposalis animportantdocument;not onlydoesit providea writtenrecordoftheinformationconsideredin makinganinvestmentdecision,butit willtypicallycontainthecoreinvestmentthesisthat willcontinuetoprovidetheyardstickby whichthesuccessof aninvestmentwillbe judgedduringitsregularreviewbythe GP.

Investmentdecisionsshouldbe madebysuitablysenior andexperiencedpersonnelofthe GP;normallytheseindividualswillformanInvestmentCommittee.Typically,theexperiencedindividualsresponsibleforevaluatingand proposingan investmentwill notbeinvolvedin makingthefinal investmentdecision.If thereareany

significantchangesto aninvestmentproposal,furtherreview,evaluationand additionalapprovalsmaybe required.Itis goodpracticetouse theunderlyingreportsfromwhichtheinvestmentproposalis drawntoforman importantsourcedocumentforstrategicreviewandperformanceforthePortfolioCompanies.

3.3.5. Structuring investments

Question

WhatfactorsshouldtheGP considerwhenstructuringandnegotiatingan investment?

Explanation

InvestmentsbyFunds canbe structuredin manyways.Insome casestheFundmay bea passiveminorityinvestorin aPortfolioCompany,whilein others,theFundmay obtainsubstantialor indeedfullcontroloverthePortfolioCompany.In determininghowthe investments

shouldbestructured,considerationshouldbe giventothe jurisdictioninwhichthe investmentis tobe made,theinvestmentstrategyoftheFundandwhetherthe investmentis tobe theacquisitionofa minorityormajorityinterestin aPortfolioCompany.

TheFundmay alsoneedto carefullyconsiderits positionandstrategywheninvestingalongsideotherparties(e.g.as partofa syndicate)andwhetheritowes anydutiesor obligationsto othersasa result.

Itis possibleforthestructureof aninvestmenttoimposeliabilitiesandresponsibilitieson theFundbeyondthoseenvisagedandanysuchrestrictionswilltypicallybe thoroughlyinvestigatedwiththehelpofthe Fundslawyers.

Recommendation

TheGP shouldstructureandnegotiateeachinvestmentmadeby theFundinsucha waysoastoensurethatitmeetsboththeobligationstoand theinterestsofthe Fund.

WhenstructuringanyinvestmenttheGP shouldtakestepstominimiseanyadversetaxor otherconsequences.Forexample,theGPshouldtake intoconsiderationERISArequirementswherethereareUS basedERISALPs,of anyinvestmentfortheFundand itsLPs,whichmayrequirecertaininformationandobserver/boardrightstobeobtainedin respectofthe PortfolioCompany.

3.3.6. Responsi bilities to other shareholders in the same

or other classes of shares and to bondholders

Whetherasa shareholderin thePortfolioCompany,or throughprovisionsagreedin theInvestmentAgreement,the Fundhasownershipresponsibilitiesandshouldexercisethoseresponsibilitiesproactivelyand ina waythatcontinuallysupportsthevalue oftheFundsinvest ment.

Question

HowshouldtheFund conductitselfinrelationto otherinvestorsin thePortfolio Company?

Explanation

Insomejurisdictions,itis commonpracticein theIndustryfordifferentclassesofinvestorstoacquiredifferenttypesof securitiesaccordingtotheirrelativepositionin thetransaction,thenatureand leveloftherisk theyaretaking onand therelativevaluethey arebringing

tothe investment.

Thereturnsforeach typeofsecurity,whetherequityor debt,willtypicallyvarydependingoncertainoutcomes.It isthereforepossiblethatconflictsmayarise betweenholdersofdifferentclassesofsecuritiesif expectationsare unclearorbasedon erroneousassumptions,or ifactualPortfolioCompanyperformanceis notasprojectedat theoutset.

Recommendation

Thenegotiationofshareholderrightsshouldbe conductedopenlyandwithclarityamong allinvestorsinthe PortfolioCompany.

Dueconsiderationshouldbe giveninadvanceto potentialareas ofconflictand whereconflictdoesarise,the resolutionof thatconflictshould,tothe extentpossible,beconductedfairlyandin sucha waythattheoutcomedoes notimpactthe valueofthe PortfolioCompany.

3.3.7. Investment Agreement

Question

WhatdocumentsshouldconstitutetheInvestmentAgreementandwhatcommercialtermswillthey address?

Explanation

Therewillbe alarge numberofdocumentsproducedduringtheprocessofmakingan investment,forexampleshareholdersandinvestorrightsagreements,articlesof associationandloanagreements,these arecollectivelyreferredto inthis Handbookas theInvestmentAgreement.Thecontentofthese willbe influencedbymanyfactors,forexamplelocallegal andregulatoryrequirementsandstructuraland taxconsiderations,such aswhethera minorityormajorityinterestisto beacquired.

Thedocumentswillneed tofullyreflectall aspectsofthe agreedtransactionand takeaccountofthe commercialtermsthat theGP has

agreedwithothershareholders(ifany) andthePortfolioCompany.Itiscommonpracticeforthe rolesofthe GP,otherpartiesandthemanagementteam ofthe PortfolioCompanyin relationtothe runningofthe PortfolioCompany,tobe setout inthe InvestmentAgreementatthe timeof theinvestment.

Thesecommercialtermsmayaddressthe followingmatters,althoughthisvariesdependingon whetheraminorityor majorityinterestin thePortfolioCompanyis acquired:

ownershipand controlofthePortfolioCompanypost-investment; sharetransfers(mandatory,permittedandprohibited)and

pre-emptionrights; incentivesfor themanagementteamof thePortfolioCompany

andobligationsimposedonthem; divisionofmanagerialresponsibilitiesfollowingtheinvestment; warranties,representationsand indemnities; investmentperformancemilestonesand anyfutureobligations

toprovidefurtherfunding; boardandshareholderconsentsneededbeforespecifiedactions

aretaken; agreementswith lenderstothe PortfolioCompanyand

inter-creditorarrangements; quality,quantityand frequencyof informationthat isto

beprovided;

Exitprovisionssuchas tag-alongordrag-alongrightsand/orcompulsorysale provisionsto resolveanydeadlockregardingasale,andalso orderofprioritieson aliquidation1;and

theconsiderationofresponsibleinvestmentfactors.

Thereisa stronglikelihoodthatlocallegaladvice willbe requiredinthedraftingofthe variousdocumentsconstitutingtheInvestmentAgreement.

Recommendation

Thesemattersshouldbe consideredwhen negotiatingan investmenttoensurethat thelegaldocumentsreflectthe commercialtermsnegotiatedby theGP.The teamshouldconsiderusinglocal legaladviceonthe appropriatemannerforrecordingwhathas beenagreed.

3.3.8. GPs consent to Portfolio Company actions

and board appointmentsQuestion

ThroughwhatmechanismsshouldtheGP seekto ensurethatit isable,onbehalfof theFund,to influencea PortfolioCompany?

Explanation

Therearea numberofdifferentwaysinwhich theGP canensurethattheFundcan influencea PortfolioCompany.Whichofthese willbeappropriatewilldependon anumberof factors(includingthe sizeoftheFundsinvestmentandthelevel ofinfluencethatthe GPconsiderstobe appropriate).Ifthe Fundholdsa majorityshareholdingin thePortfolioCompany,itwill havetheability,as amatterof companylaw,toeffecta numberofdecisions,andin sodoinginfluencesthePortfolioCompanybyvirtue ofthis majorityshareholding.TheGPmayalsoseek tospecifycertainrights inthe PortfolioCompanysconstitutionaldocumentsandagreecontractualrightsin theInvestmentAgreementitentersinto withtheshareholdersofthePortfolioCompany,suchas obtaining(i) investorconsents;and (ii)boardappointments.

1Note,(i)atag-alongisarightforashareholdertoinsistthathis/hersharesareboughtonthesametermsbythe samepurchaserasanother shareholderwhois sellinghis/hershares;and (ii)a drag-alongrightentitlesa sellingshareholder,suchas aPrivateEquity investor,torequirethe remainingshareholderstosell toa third-partypurchaseron thesameterms.

(i) Investor consentsInsome jurisdictions,it iscommonin theInvestmentAgreementbetweentheFundand thePortfolioCompanyforcertainactionsofthe PortfolioCompanyto besubjectto thepriorconsentof theGPon behalfofthe Fundinits capacityasshareholder.These arecommonlycalledinvestorconsents.

WheretheGP hasappointedindividualstothe PortfolioCompanysdecision-makingbody,theirconsentmay alsobe requiredbeforecertainactioncanbe undertakenby thePortfolioCompany,althoughtheywilloftenbeundera dutytoactin thebestinterestsofthePortfolioCompany,ratherthanthe Fund.

Theavailabilityandlevelof investorconsentsthat aredeemedappropriatewill varydependingonthe sizeandnature oftheFundsinvestment.

(ii) B oard appointments

TheGP willtypicallyalsoconsidermaking:

appointmentsto theboardor otherdecision-makingbodiesof thePortfolioCompany(seefurtherthe sectiononBoardparticipationbelow);and

appointmentsofpersonsto internalcommitteesof thePortfolioCompany(e.g.advisorycommitteesorthe remunerationandauditcommittee,whererelevant).

Itis importantto notethatindividualsappointedtosit onthe boardofthe PortfolioCompanybythe GPmay haveresponsibilitiesbothtowardsthe GP,whohas arrangedtheirappointment,as wellas tothePortfolioCompanyandall itsshareholdersasa companydirector(aswellas tothe companyscreditorsincertaincircumstances).Typically,suchindividuals,asdirectorsofthe PortfolioCompany,willbe requiredtoact inthe bestinterestsofthe PortfolioCompany.ThePortfolioCompanysinterestsmayconflictwith thoseofthe Fundandin suchcircumstancesthedirectormust actin accordancewith thedutiesowedtothe PortfolioCompany.

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Recommendation

Inrelationto investorconsents,the GPshouldconsiderrequiringthePortfolioCompanytoobtain investorconsentsfor corporate,financialandaccounting,businessandotherkey matters.Thelistof matterswillvarydependingonthe relevantjurisdiction,thesize ofinvestmentandtheshareholdingheld,but thefollowingshouldbeconsidered:

significantdevelopmentsinthe business(e.g.capitalexpenditure,newissuesof capital,disposalsofa significantamountof assetsincludingrealestate,changestothe PortfolioCompanysconstitution);

changesinthe capitalstructureandborrowingarrangements; changesinleasesorothermaterialcontracts; materiallitigationclaims; changesofcontrol,acquisitionordisposalofsharesbyother

shareholders; adoptionofthePortfolioCompanysauditedaccounts; makinganydividendsor distributions;

adoptionofanewbusinessplan; changestothe PortfolioCompanyskeymanagementortheir

remuneration; adoptionoforchanges tothe communicationpolicy; developmentsin thefinancialor otherperformancecriteriaof the

PortfolioCompanywhichwill materiallychangethenatureof thebusinessinwhich theFundhas invested;

windingupor dissolvingthePortfolioCompany;and anytransactionsbetweenPortfolioCompanyandShareholder,

PortfolioCompanymanagementorother relatedparties.

Investorconsents,whileneedingto becomprehensivein scope,mustnotbe sowide-rangingasto restrictthemanagementteamsabilitytorunthePortfolioCompanyortake upexcessiveamountsofthe GPstime.Theabovelist isnot exhaustive,ratherit givesanindicationofsometypicalmatterswhichare subjecttoinvestorconsent.

Whenconsideringtheadvantagestothe Fundoftakingany controlrights,theGP shouldalsoconsiderpossibleliabilitiesor restrictionsimposedbylawon thoseexercisingcertaintypesofcontrol.

3.3.9. The Portfolio Companys corporate strategy

Question

Towhatextentis theGP onbehalfof theFundresponsibleforthedefinitionand executionofthePortfolioCompanyscorporatestrategy?

Explanation

Atthe timeofinvestmentbya Fund,theinvestmentdecisionisnormallytakeninsupportof aspecificstrategy,businessplanandmanagementteam.Frequently,throughthe negotiationprocessleadingupto investmentby theFund,the GPwill havehadsignificantinputindeterminingthetargetsfuturecorporatestrategy.Overaperiodof time,thisbusinessstrategymay needtobe refinedandamended.

Recommendation

TheGP shouldbean activeparticipantthroughits board

representationor,wherepermittedbythe relevantcompanylawina particularjurisdiction,throughtheexerciseof shareholdervotingorcontractualrightsinthe settingofthe PortfolioCompanysstrategy.Theresponsibilityforexecutionofstrategysitswith theboardandmanagementteam ofthe PortfolioCompany.TheGP shouldensurethatit remainsinformedon theprogressbeingmadetowardsachievementof thestrategy.Whereappropriate,theGP,onceagainthroughitsboardrepresentationorthroughtheexerciseofshareholdervotingor contractualrights,whereso permitted,shouldbeavailableto adviseandassist wherethestrategyneedsto berefinedandamended.

Further,the GPshouldensure thatthePortfolioCompanyunderstandsthe importanceof havingtherightmechanismsandprocessesinplace forresponsible,efficientand appropriatedecision-makingandeffectivecorporategovernance.

Thedegreeof activismofthe GPwill varyaccordingtothenatureandstructureofinvestmentsmadeand thejurisdictioninwhich thePortfolioCompanyis located.TheGP shouldthereforeensureits levelofinvolvementissuitablerelativeto thecircumstancesofa particularPortfolioCompanyandthe Fundsownershipstrategy/policy.

3.3.10. Co-operation with co-investors and syndicate partners

Question

WhatrelationshipshouldtheGP havewithco-investorsand othermembersofa syndicatein whichtheFund participates?

Explanation

Whereaninvestmenthasbeen syndicatedor thereareco-investors,aGPmaynotbeabletocontrolaninvestmentandmayhavetoco-operatewith othershareholdersin ordertoachievedefinedgoalsandbuilda consensusasto appropriateactionsto betaken.

Recommendation

TheGP shouldactin theinterestsofthe Fundandany otherclientsinvestingin therelevantPortfolioCompanyand identifyandmanageanyconflictsofinterestthatmay arisebetweenthem.Whereverpossible,the GPshouldnot acceptanyobligationsinfavourof otherinvestors,unlessit wouldbein theFundsintereststohave some

agreementor understandingwiththose investors.

3.3.11. Co-investment and parallel investment by the

GP and its executives

Question

Whatissuesshouldthe GPconsiderregardingCo-investmentandparallelinvestmentbyitself,its associatesor itsexecutives?

Explanation

WheretheFunddocumentspermitthe GP,itsassociatesor itsexecutivesto co-investor makeparallelinvestmentsalongsidetheFund,thereispotentialto createaconflictof interestfortheGP.

Recommendation

Subjecttowhat isprovidedinthe Funddocuments,detailsofCo-investmentarrangementsshouldbe disclosedtothe FundsLPs.Toavoidthe potentialof prejudiceto theFundsinterest,itisrecommendedthatsuch documentsonly permitCo-investmentorparallelinvestmentbythe GP,itsassociatesor itsexecutiveswhereinvestmentand divestmentis exercisedon apro-ratabasiswith theFund,inthesamesecurities,atthesametimeandonthesameterms.Ifthis recommendationisnot followed,it isparticularlyimportantthat theoperationofthe Co-investmentarrangementsshouldbedisclosedto LPsand documented.

3.3.12. Co-investment and parallel investments by LPs

and other third parties

Question

Whatissuesshould theGP considerregardingCo-investmentandparallelinvestmentsby LPco-investorsand otherthirdparties?

Explanation

Insome circumstances,LPco-investorsinthe Fundorother thirdpartieswithwhomthe GPhas somerelationshipmaywishto investdirectlyintoa companythattheGP isconsideringinvestinginonbehalfofthe Fund.Allowingsuchdirectinvestmentcanbe detrimentaltothe Fundsinterests;if theinvestmentprovestobe successfulandthe Fundsinvestmentallocationwasreducedto allowdirectinvestmentby theFundsLPs andthirdparties,the returntotheFundsLPs willbe reduced.Such syndicationmay,however,allowsmallerFundstoinvestin largertargetcompaniesthan mightotherwisebethe case,whilestill complyingwithanydiversification

restrictionsin theFunddocuments.

Recommendation

TheGP shoulddeterminetheFundsappetiteforeachinvestmentandonlyafter thatshouldCo-investmentand/orparallelinvestmentsbeconsidered(apartfromin thecase ofpre-arrangedand disclosedCo-investmentarrangementsor wheretheLP co-investorlendsspecialexpertiseorother valuetothe transaction).DetailsofCo-investmentarrangementsshouldbe disclosedtothe FundsLPs.

Whena conflictof interestarises,itshouldbe resolvedinaccordancewiththe GPsconflictofinterestresolutionprocedures.LPs mayplacethemselvesin conflictofinterestsituationswheretheyengageinco-investment.Theconflictmaybe moreproblematicwheretheLPalso sitson theLPAC.The criteriaforinvitationsforLPs toco-investpresentanotherpotentialsourceof conflictsof interest.Theparametersofany co-investmentprocessshouldbeclearly setouttoallLPsinadvance.

3.3.13. Divestment planning

Question

Howshouldthe GPplan forthedisposalof aninvestment?

Explanation

Itis importantto ensurethatbeforean investmentis madethe keyinvestorsagreea commonstrategyfor realisingtheinvestment.

Itwill notalwaysbe possibletoachievethis strategy,for exampleiftheinvestmentfailstoperformand/orpurchasersdeclinetocomeforwardor conditionsare notfavourablefor anIPO,but itis desirabletoagreean Exitstrategyin advance.

Recommendation

ThedivestmentorExit processshouldbediscussedwith co-investors,othersyndicatemembersandthemanagementteamof thePortfolioCompanybeforethe initialinvestment.The GPshouldseek toensure

that,oninvestment,itnegotiatessuitablemechanismsto ensurethatanydeadlockregardingdivestmentof aninvestmentcanbe resolvedina mannerappropriateforthe Fund.

3.4 Management of an investment

Good management of an investment is essential if aFund is to maximise its returns. Value in an investmentcan be wasted and opportunities missed if this part ofthe investment process is not undertaken properly.The Private Equity model of active investmentmanagement and long-term value creation requiresthat the conventional rights and entitlements associatedwith share ownership are accompanied by responsibilitiestowards Portfolio Companies and towards LPs in theFunds invested in those Portfolio Companies.

The following sections on investment monitoring andexercise of GP consents reflect the duties of the GPtowards the LPs invested in its Funds to both effectivelymonitor and manage the investments. The sectionon board participation reflects the duties of directorsappointed by the GP to serve the interests of thePortfolio Companies.

3.4.1. Investment monitoring

Question

Howshouldthe GPmonitoran investmentmadeby theFund?

Explanation

TheInvestmentAgreementshouldensure thattheGP regularlyreceivessufficientinformationfroma PortfolioCompanyallowingtheGP tomonitorandappraiseboth thefinancialand non-financialperformanceofthe investmentand sufficientresourceshouldbeallocatedbytheGP toreview,monitorandanalysesuch information.

Thisinvestmentmonitoringfunctionand informationflowshouldenabletheGP toconfirmthatthe investmentis progressinginaccordancewiththe relevantbusinessplan andtheGPs investmentthesis.Itshould alsoprovidesufficientinformationtoidentifyanyfailurestomeettargetsor milestonesand formthebasis ofremedialplanswherenecessary.

Recommendation

TheGP shouldensurethatit dedicatessufficienttimeand resourcestomonitoringtheinvestmentsofthe Fundandapportionstheseresourcesand responsibilitiesappropriately.

TheGP mustnotdiscloseany informationthat itmay receiveonbehalfofthe Fundfroma PortfolioCompanyin amannerthat maybreachanydutyof confidencethat itmay owetothe PortfolioCompany.However,theGP shouldseekto negotiateappropriaterightstodiscloseinformationtothe FundsLPs sothat theymay,inturn,monitortheir investmentsin theFund.

TheGP shouldprepareregularwrittenanalysesofinvestmentswhichshouldbe reviewedby theseniorexecutivesofthe GP.Thewrittenanalysesshouldaddressperformanceof thePortfolioCompanyagainsttheagreedinvestmentthesisandits targetsandmilestonesdetailedin thebusinessplan forthePortfolioCompany.Itshouldalso notesignificantdevelopmentssincethe lastreviewandthoselikely tooccurin thenear term,provideinformationonanychangesto personneland thefinancialandnon-financialstatusofthe PortfolioCompany,andrecommendanyremedialactionthattheGP shouldconsidertakingin ordertoensurethe PortfolioCompanycontinuesto hitthe targetsset.

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Question

Whatarethe responsibilitiesofthe GPin relationtoperformanceinformationofPortfolioCompanies?

Explanation

Mostjurisdictionshavelegislativeobligationsregardinginformationtobe providedto shareholdersof PortfolioCompanies.However,it iscommonpracticefor Fundsthatinvestin PortfolioCompaniestorequiremorefrequentanddetailedinformationthan requiredbylegislation.In particular,the GPmay requiremorefrequentanddetailedinformationregardingthePortfolioCompanyinordertofulfilits contractualobligationstothe LPsin theFund.

Recommendation

TheGP shouldagreenon-legislativeinformationrequirementswiththePortfolioCompanysmanagementthattake intoaccountitsownreportingobligations,itsabilityto performitsresponsibilitieson behalf

ofthe Fund,asshareholderandthe efficientandeffectiveuseofresourceswithinthe PortfolioCompany.Typically,keyperformanceindicators(KPIs)are developedthat allowPortfolioCompanymanagementand theGP tocarefullymonitorcompanyperformance.

TheGP shouldtreatcorporateinformationwhichit obtainsconfidentiallyandwith dueconsiderationtocommercialsensitivityandtheneeds ofthe PortfolioCompanysotherstakeholdersandshouldensurethatits ownLPsare boundbysimilarconfidentialityobligationswith respecttosuch informationin theFunddocuments.

3.4.2. Environmental factors

Question

Whatenvironmentalfactorsshouldthe GPconsiderin relationtothemanagementof theFundsPortfolioCompanies?

Explanation

Generally,GPs shouldsupportaprudentapproachto environmentalchallengeswithin theirPortfolioCompanies.These challengescouldconcernarangeof factorsincludingresourceuse,wasteproductionanddisposal;emissionstoair,land andwater;energyuse,cost ofcarbonandclimatechange;biodiversityandhabitatconservation.

Recommendation

Duediligenceintoprospectiveinvestmentsshouldincludeanevaluationof thelikelyenvironmentalimpactofthe conductofsuchbusiness.GPsshouldrecommendtothe boardsofPortfolioCompanies,pursuantto shareholderdocuments,toidentifyand takematerialenvironmentalfactorsintoaccountinthe formulationof thePortfolioCompanysbusinessplan.GPs aregenerallyexpectedtoactivelymanageenvironmentalriskfactorsin PortfolioCompanies.

3.4.3. Social factors

Question

Whatsocialfactorswouldbe applicableto theconductofthe FundsPortfolio Companies?

Explanation

Generally,factorswhichaffectthe workforce,customers,suppliersand

communitiesof aPortfolioCompanyshouldbeevaluatedat boardlevel.Socialfactorscanincludestakeholderdialogueandobservanceofcorelabourstandardsin areassuchas childlabour,forcedlabour,tradeunionrightsand discriminationin thelabourmarket.

Recommendation

Humanrightsarelikely tobe anintegralpartof thesocialfactorsandboardleveldiscussionsmayincludedevelopmentofstrategiestopreventdirectand indirectinvolvementinhuman rightsviolations.Dependingonthesize andnatureof thebusiness,a PortfolioCompanymayalsoconsiderintroducingacorporatesocialresponsibilityprogrammeand publishingcorporatesocialresponsibilityreports.AGP shouldensurethatsuch itemsareput ontheagendafor boarddiscussionwhereappropriate.

3.4.4. Governance factors

Oneof thekey areasofdue diligencethatshouldbe completedby aGPpriorto investmentis corporategovernanceatthe prospectivePortfolioCompany.Thecorporategovernancesystems,processesandcontrolsappliedbythesenior managementteamat thecompanywillrevealmuchaboutthe effectiverunningof thebusinessto beinvestedin.A businesswitheffectivecorporategovernanceinplace willprovideastrongplatformforthe rapidimplementationofvalue buildinginitiatives.A businesswithweak,ineffectivecorporategovernancewillmakea higherriskinvestmentbutis likelytoreap considerablebenefitfromtheimplementationofrobustgovernancesystemsandprocessesthat aresuitableforthe business.

Effectivecorporategovernance,onceinstalled,shouldsupportthedecision-makingprocessandfollow-throughwithinthe organisationandthealignmentof interestsacross thestakeholdersinthe businessincludingmanagement,employeesandtheGP itself.

Question

Whatgovernanceprocessesare applicableat thePortfolioCompanyfortheconductof aFundsbusiness?

Explanation

APortfolioCompanyislikely tobe providedwith guidanceongovernancerequirementsby theGP atinitial investment.Insomecases,theimplementationofspecificrequirementswill bea conditionofclosingthe transaction.The managementof aPortfolioCompanycanbe stronglyinfluencedbythe attitudeofthe GPto boardeffectiveness,controls,checksandbalances.If notalreadyin place,theGPshouldtypicallyensurethat eachPortfolioCompanyhasappropriategovernancestructuresto safeguardagainstfraud,bribery

andcorruptionandtoensure internalfinancialcontrol,qualityassurance,risk andconflictmanagementandtransparentreportingandcommunication.Ensuringtheseobjectivesare achievedwhilstpreservingthe autonomyof thePortfolioCompanyboardtodrivebusinessgrowthandnothamperit withbureaucraticprocessesandcontrols,is animportantbalancetoachieveand tobe abletodemonstrateat thepointat whichthebusinessis sold.

Recommendation

ToensurethatPortfolioCompaniesareapplyingappropriategoodgovernancepracticesandstandards,theGP shouldensureit remainsupto dateandfamiliarwith goodpracticeandguidancein therespectivecountriesand industriesinwhichits PortfolioCompaniesarebased.This canbe doneina numberofways,forexamplethroughasuitablelaw firmoradvisorwhich canensurethat relevantCodesandstandardsareunderstood,particularlyby thoseindividualswhowillbe representingtheGP onthe boardofthe PortfolioCompany.Also,byrecruitingandinstallingexperiencedexecutivesto theboardorrespectivesupervisorycommitteesof thePortfolioCompany,whocandemonstratea goodunderstandingofand trackrecordinapplyingtherequiredgovernancestandardsandpractices.Finally,it isimportantthat theGP alsodemonstratesto itswiderstakeholdercommunitysoundenvironmental,social andgovernance(ESG)practicesand standardsthat arebothappropriateandproportionatetoits ownbusiness.

WheretheGP hasidentifiedrisksand opportunities(includingESGrisks)thatare deemedmaterialtothe successofthe investment,theGPshouldensure thatpracticesaredevelopedtomitigateassociatedrisksand pursueopportunities.Theimplementationandeffectivenessofthesepracticesshouldbe monitoredas appropriate.Notingthatthemarketplacecontextcouldchange,the GPshouldoccasionallyundertaketoupdatethe responsibleinvestmentrisk/opportunityanalysisandrevise,removeor addpoliciesas appropriate.WheretheFundsLPs haveexpressedaninterestin responsibleinvestmentfactors,the GPshouldseek toreportto theseLPson asuitablyregularbasis.TheGP mayalsochoose tosendunsolicitedreportsonresponsibleinvestmentfactorstoall LPs.

3.4.5. Board participation

Question

Howshouldthe GPact inrelationto theboardof thePortfolioCompany?

Explanation

TheGP willfrequentlyappointoneor moreexperiencedmembersofitsown stafforrepresentativesto theboardof thePortfolioCompany.Typically,designeesofthe GPwill havein-depthexperienceofthesectorandwill havebeeninvolvedinthe originalduediligenceandreviewofthe investment.Therearemany variationson theoverallcompositionofboards,butin relationtonon-executivemembersof theboard,thesemayincludesome/allof thefollowing:oneor moresingledirectorswhoaremembers/employees/representativesof theGP ofthe Fund;anindependentnon-executivechairman;and/or,an independentnon-executiveboardmember.Thesenon-executivemembersoftheboardmaybe selectedasthey havespecificandappropriateindustryknowledgeand insight.

Recommendation

TheGP shouldensurethatthe boardisstructuredandappointmentsaremadein thebestinterestsof thePortfolioCompany.

Therelationshipbetweentheboardand themanagementofthePortfolioCompanyshouldbe clearandsupportedby appropriatedocumentationofroles andresponsibilities.

Question

Whoseinterestsdothe GP-appointeddirectorlookafteron aboard?

Explanation

Whateverthe meansofappointment,directorsdonotserve theinterestsof oneparticularshareholderbutactin theinterestsofthePortfolioCompany.The positionofdirectorisa fiduciaryone.Adirectordoesnot actas therepresentativeor advocateof thebodywhichappointedhim.Fiduciarydutiesgenerallyaresummarisedas adutyofloyaltyto thecompany,adutyto avoidanddiscloseconflicts,dutiesofconfidentiality,toact ingoodfaith, toexercisecare,skill anddiligenceandtoact withintegrity.RecommendationAGP-appointeddirectorshouldalwaysbe awarethathe/shemustactin theinterestsofthe PortfolioCompanyandall itsshareholders.Whereconflictsarise,theGP mayneedto excusethedirectorfrommeetingsandmayneed toreachinvestmentrelateddecisionsinfulldisclosureof thedirectorsconflictofinterests.TheGP shouldensure

thatits boardappointee(s)clearlydiscloseany conflictsof interestwithrespectto theirroleas membersoftheboard promptlywhentheyarise.

Question

Whatdoesbeinga boardmemberentail?

Explanation

Theoverridingprincipleoffiduciarydutyto thecompanyandall itsshareholdersapplyto thewholeboard.A directorisexpectedtodevotesuchtimeand diligenceasis reasonablynecessaryto furtherthebusinessof thecompany.Attendanceat andbeingwell preparedforboardmeetingsshouldbe assumed.Directorswith particularskillsmaybe askedtoserve onadditionalboardcommitteessuchasdirectorswith accountancytrainingservingon auditcommittees.

Recommendation

Adirectorshouldbe preparedto investtimein hisrole asa directortounderstandtheneedsof thecompanyandto participatein reviewanddecision-makingaffectingthe business.

TheGP shouldensurethatits appointee(s)tothe boardfullyunderstandtheirresponsibilitiestothe GPand theirlegaldutiestothe PortfolioCompanyas amemberof theboard.

Question

Whatskillsdoes theGP-appointeddirectorneed tobe aboardmember?

Explanation

Manyskillsare applicableto membershipof aboardof directors.Thecompanymayparticularlyneeddirectorswithindustryexperience,with legal,corporatefinanceor accountingexperienceorwithgeneralmanagementexperience.All theseskills,plus theabilitytoevaluaterisk andotherskills, arelikelyto beneededby everycompanyovertimeandare unlikelytobe offeredbyonesole director.Therefore,the abilitytoworkcollaborativelyandopenlywithseniormanagementand otherdirectorsisalso ofgreatimportance.

Recommendation

TheGP shouldencourageits boardappointee(s)to seekappropriatesupportandtrainingtoenable themtocarry outtheirduties asboard

memberstothe bestoftheir abilitiesandin accordancewiththeirlegaldutiesand contractualcommitments.TheGP shouldseektoensurethatall appointeesto theboardare individualsof appropriateauthority,skill andexperiencewhocan providevalue andinsighttothePortfolioCompany.

Question

Whatisthebestsizefora board?

Explanation

Thinkinghasevolvedon optimumboardsize.Factorsto bearin mindinconsideringboardcompositionincludetheskillsrequiredto runthebusiness,theinterestsofthe shareholdersandtheir desireforactiveparticipationin decision-making,thegovernanceandlogisticsandcostsimplicationsofconveningalargegroupof peoplefrequentlyandtheneed forbalanceddecision-makingthroughdiversityofopinion.

Recommendation

Nonumbercan bestipulatedforoptimumboardsize buttheboardshouldperiodicallyreviewits compositionand itssuccessand adjustitssize accordingly.

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Question

Whatliabilitiescomewithboard membership?

Explanation

Somedirectorsmaybe unwillingtoacceptofficebecauseofthepotentialliabilitiesattachingto theposition.Theofficeof directorisapositionof responsibilityandtrust andno oneshouldbe forcedintoacceptingtheposition.Directorsmayincurpersonalliabilitiesinparticularforfailureto maintaincompanybooksand recordsor fortransactionsat anundervalueandin certaininsolvencysituations.Directorsare generallyentitledtoexpectindemnificationfromthecompanyand fromtheirappointingGPin thecase ofGP-appointeddirectorsas wellas Directorsand Officersliabilityinsurance(oftencalledD&Oinsurance).Recommendation

Directorsshouldbe abletoobtain legalorother specialistadviceforcomplexboarddecisionsand shouldhavetheassuranceof legalandinsuranceprotectionswhenproperlyconductingtheirduties.

Question

Howmanyboardseats shouldanindividualaccept?

Explanation

Someonewitha trackrecordofgoodperformanceasa boarddirectormayfindthemselvesinvitedtojoin multipleboards.Thismaylead tothepersonhavinglimitedavailabilitytoperformtheirduties fully.

Recommendation

Adirectorshouldonlyaccept thenumberof boardseatsthattheycanreasonablyexpecttodischargeproperly,takingintoaccountunforeseendevelopmentsin companiesand theneedto participatenotonlyin fullboardmeetingsbutalso incommitteesandto devotesufficienttime toreviewboardinformation.

Question

Whataboutbest practicegovernanceguidance?

Explanation

Therearea numberofthinktanks andorganisationsofferingbestpracticeguidanceon theofficeofdirectorand onthe governanceofboards.Thereare alsovariationsbetweenjurisdictions.

Recommendation

AGP ina positiontonominatedirectorstoboardsof PortfolioCompaniesshould beawareof bestpracticeguidanceandfactorthisintoits ownboardnominationsandexpectationsofits directors.

Question

Isa diversitypolicy necessary?

Explanation

Boardsfunctionasdecision-makingandreviewforumsinvolvingpeoplewithdifferingskillsand approaches.Diversityofskills andstylesleadsto balancedandinformeddecision-making.

Recommendation

Inreviewingboardcomposition,the boardshouldbeawareof thebenefitofdiversityinits selection.Apolicyneed notbe codifiedtobeeffective,but itmay behelpfulto havea writtendiversitypolicytofurthertheselectionprocess.

Question

Whatarethe keycomponentsofthe PortfolioCompanysstrategythatarethe responsibilityofthe board?

Explanation

APortfolioCompanysstrategyconsistsof anumberof corecomponents.Firstand foremostis thedevelopmentoflong-termvaluecreationthroughsourcesofcurrentandfuturerevenue.Ofimportancehereare theefficientandeffectivedeliveryofappealingproductsand services,thedevelopmentofcompetitivefutureproductsand services,attractingand retainingtalentandmanagementcapacity,theeffectiveuseof availableresources(includingfinancialresources)andobtainingfuturefinancialresourcesto helpgrowthe businesseffectivelyand efficiently.

Recommendation

Akey componentof theIndustrysinvestmentand ownershipmodelisto ensurethatthe interestsof themembersofthe PortfolioCompanyboardare aligned.Allmembersofthe boardshouldseektounderstand,supportandfurtherdevelopthe businessstrategyofthePortfolioCompanyandshould challengethatstrategyinthe contextoftheirindividualunderstandingof market,product,serviceandfinancialdevelopmentsasappropriate.TheGP representativesalsobringadditionalvalueoverandabovetheir ownpersonalknowledge,skillsandexperience,havingthe wealthofknowledgefromacrosstheGP firmtodraw uponforthe benefitofthe PortfolioCompanywhenrequired.

Question

Whatis theboardsrolein relationtothe identificationandassessmentoftherisks andopportunitiesof thePortfolioCompany?

Explanation

Akey elementofa PortfolioCompanysbusinessstrategyexecutionisthe identificationandassessmentof riskand opportunity,includingdecisionsonwhatlevels ofrisk areacceptable,whatrisksareassociatedwitheachopportunity,how suchrisks canbe mitigatedandcontrolledandhowto managethebusinessaccordingly.

Recommendation

Allmembersofthe boardshouldparticipateinrisk andopportunityidentificationandassessmentacrossall businessareas,includingthereviewoffinancialandnon-financialfactors.

Question

Whatis theboardsrolein relationtothe managementof riskof thePortfolio Company?

Explanation

Thecomponentsofrisk managementincludethe clearcommunicationofthe valuesofthe PortfolioCompanyand itsappetiteforrisk,for examplewhenpursuingnewbusinessopportunities,theallocationof rolesandresponsibilitiesandthedesignandimplementationof policiesandproceduresrelatingtotheidentification,controlandmanagementofrisk, andthe measurementofandtimely reportingontheimpact ofrisk onperformance.

Recommendation

Eachmemberof theboardis responsibleforrisk identificationandmanagementand shouldtakean activerolein ensuringthatthemanagementof thePortfolioCompanyestablisheffectivepoliciesandproceduresthatadequatelyaddresstheidentificationandcontrolofrisk. Membersofthe boardshouldactivelyandregularlyseekassurancethatriskmanagementproceduresarein placeandareoperating effectively.

Question

Howshouldthe boarddeterminewhatconstitutesa reasonablestructureandlevelof remunerationforPortfolioCompanyemployeesandmanagement?

Explanation

RemunerationandrewardmechanismsforinvestmentsinPortfolioCompanieswill includeincentiveswhich aredeterminedbythe GP(typicallyforseniorlevelexecutives)aswell asthose determinedbytheboardof thePortfolioCompany.Sometimesthese activitieswillbeled bya remunerationcommittee.

ThestructureandremunerationofPortfolioCompanyexecutivesandseniormanagementshouldprovideanincentivefor excellentlong-termperformanceandrewardforsustainableresults.Balancingremunerationin thecontextofthe relevantindustry,theexpertiseandcontributionof individualsand thelong-termneedsof thebusinessarekeyroles ofthe board.

Recommendation

Frequentlyin PrivateEquityandVentureCapitalinvesting,thePortfolioCompanyexecutiveswill havebuiltin incentivisationatthetime thatthe originalinvestmentby theFundis structuredandexecuted.The boards(or remunerationcommittees)role shouldthereforebe moreappropriatelyfocusedon ensuringthatexistingincentivescontinueto beappropriateforboththe businessandtheshareholdersas thecircumstancesof thebusinesschangeovertime.

Theboardshoulddeterminethe appropriatelevelsof remunerationofPortfolioCompanyexecutivesand regularlyevaluateand reviewremunerationlevelsand,where appropriate,introducechangesthereto.Conflictsof interestinestablishingorreviewingremunerationlevelsforboardmembersshouldbe avoidedwhereverpossibleandmanagedopenlyandconstructivelyinall cases.

3.4.6. Exerci se of GP consents

Thelevelof GP(investor)consentsthatare deemedappropriate,willbe agreedwhennegotiatingtheInvestmentAgreement.This isconsideredin thesectionGPs consenttoPortfolioCompanyactionsandboardappointmentsabove.

Question

WhatfactorsshouldtheGP takeintoaccountwhenevaluatingshareholderconsentissues ina PortfolioCompany?

Explanation

Normally,an investmentwill bestructuredinsuch away thatcertainproposalsof thePortfolioCompanywillrequireconsentfrominvestors,includingtheFund.These shareholderconsentsshouldbedifferentiatedfromconsentsrequiredfrommembersofthe PortfolioCompanysboardwherethe GPhas appointedone ormoreexecutivesto theboard.

Recommendation

TheGP shouldensurethatwhen givingorwithholdingconsentitacts inthe bestinterestsofthe Fundandin accordancewith itspolicies.Executiveswho areon theboardof aPortfolioCompanynormallyhavetoact inthe bestinterestsofthe PortfolioCompany.Itmay thereforebe advisabletohavea differentmemberof theGPstafforrepresentativeexercisingshareholderconsents.

3.4.7. Exercise of influence on responsible investment factors

Question

Howshoulda GPexerciseits influencewith regardtoresponsibleinvestmentpoliciesrelatingto aPortfolioCompany?

Explanation

AGP maybe ina positionofconsiderableinfluenceas regardsthedevelopment,implementationandmonitoringofESG policieswithinPortfolioCompanies.

TheGP,ideallythroughthe informationproducedandprovidedbythe PortfolioCompany,shouldbein apositionto identify,monitorandwherenecessary,supportthemitigationofrelevantrisks andrecognitionandpursuitof opportunitiesin responsibleinvestmentmatterswithinthePortfolioCompany.These maymanifestthemselvesin awide varietyofwaysfromthe specificationof and

capitalinvestmentinto anew productionfacilitythroughtothecriteriaappliedtopotentialadd-oninvestmenttargetsforthePortfolio Company.

Recommendation

TheGP shouldensureappropriateboardlevel awarenessofresponsibleinvestmentmattersrelevanttothe countryandsectorofthePortfolioCompany,includingfamiliaritywithappropriateexternalguidanceissuedbynational,supranationalandprivatebodies.

AGP shouldaimto ensureitsown andits PortfolioCompaniesawarenessand dueconsiderationofresponsibleinvestmentguidanceandCodesof Conductasapplicableto thesectorsand geographicregionsinwhicheach PortfolioCompanyoperates.

3.4.8. Responsibilities in relation to other stakeholders

Question

Towhatextentdoes theGP haveresponsibilitiesin relationtootherstakeholders?

Explanation

Thenatureof PrivateEquityandVentureCapitalinvestmentsissuchthat,in certainjurisdictions,it isnot uncommonto operatewithdifferentclassesof securitieswithdifferentrightsandobligationsattachedtothem.

Additionallyall PrivateEquityandVentureCapitalinvestmentswillhaveother stakeholdersincluding,butnot restrictedto,employees,customers,suppliers,regulators,tradeunionsand thewidercommunity.

Recommendation

TheGP shouldactopenly,honestlyandwith integrity,balancingtheinterestsofthe PortfolioCompany,andthe needsofeffectivedecision-makingwithan informedunderstandingoftheneedsandinformationrequirementsofother stakeholders.

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3.4.9. Follow-on investments

Question

WhatprovisionshouldtheGP makeforfollow-oninvestments?

Explanation

Itmaybe necessaryordesirabletomake furtherinvestmentsintoaPortfolioCompany(e.g.tofund futureexpansionplans orto re-financeapoorlyperformingPortfolioCompany).

Theopportunitytomakea follow-oninvestmentina successfulPortfolioCompanymaygive riseto aconflictof interestwheretheGPis managingmorethanoneFundthat hasinvested,orwhere theGPor itsassociateshaveinvesteddirectlyin thePortfolioCompany.

Recommendation

TheFundsconstitutionshouldmake provisionfor furtherinvestmentsintoa PortfolioCompanybyallowingthe GPto retainanappropriate

amountofcapitalto makeappropriatefollow-oninvestment(s)wherenecessaryaftertheend oftheInvestmentPeriod.Howsuchfollow-onsaredealt withis somethingthatshouldbeclearly setoutinthe Funddocuments.

Decisionstomakesuch follow-oninvestmentsshouldbesubjectedtothesamerigourandmadeinthesamemannerastheoriginaldecisiontoinvestand shouldbesupportedbyadequatewrittenevidencethat demonstratesa clearbenefittothe Fundinmakingthefurtherinvestmentandthat thedecisionis supportedby theFundspolicies.

Anyconflictofinterestthatarises outof anopportunitytomakeafollow-oninvestmentshould beresolvedinaccordancewiththeGPsconflictofinterestresolutionprocedures.

3.4.10. Underperforming investments

Question

Whatstepsshouldbe takenwhenan investmentfailsto meetthetargetsestablishedin itsbusinessplan?

Explanation

Unfortunatelynotall investmentswill succeed,andwhileit maynotbepossibletosavean investmentmadeinto aPortfolioCompanywithafundamentalstructuralproblem,itmay bepossibleto turnaroundapoorperformancerecordor preservevalue inan investmentthrough:

meetingwiththemanagementof thePortfolioCompanytodiscussperformanceandto agreestrategiesandtacticsthroughwhichturnaroundcanbe achieved;

increasingthefrequencyanddepthofmonitoringoftheinvestmentand meetingswithmanagement;

agreeingtheneedforandtypeofremedialactionrequiredwithmanagement.This mightincludetheintroductionofexpertadvisoryfirmstohelp solveissues,developnewapproachesandidentifynewopportunities;

supportingthe companywith outsideresources; introducingchangesin thePortfolioCompanysmanagement

team,perhapsintroducinga seniorleveltrouble-shooter;and

agreeingtoreschedulepayments(e.g.loan orfixedpaymentcommitments)toallow aPortfolioCompanybreathingroomwithits bank(s).

GPsshouldbe awarethatwhilebankruptcylawsmay varyfromcountrytocountry,theymayimposea personalliabilityona PortfolioCompanysdirectors(includingshadowdirectors)if theypermitthePortfolioCompanyto carryontradingin certaincircumstances.

Recommendation

Assoon asinformation,receivedaspartof themonitoringprocess,revealsthatan investmentis notperforming,the GPshouldlooktotakerapid actionandmeet withthe managementof thePortfolioCompanyand,asnecessarywhere theunderperformanceis financial,otherprovidersof financesuchas banksandco-investors,to agreeremedialactionplansand anyadditionalinformationrequirements.

Whenmanagingunderperforminginvestments,theGP shouldensurethatsufficientresourcesremaincommittedto themonitoringandmanagementofotherinvestments.Ifthe GPhas appointeddirector(s)to theboard,if permittedintheparticularjurisdiction,considerationshouldbe giventohavinga differentexecutiveresponsiblefor exercisingthe Fundsrights asshareholdertoreduceconflictsofinterest.It isimportantthatcommunicationwithLPs remainsopenandclear inorderto manageexpectationsinrelationto theinvestment.

GPsandPortfolioCompaniesshouldconsiderthe needfortimelyprovisionof informationto andcommunicationwith stakeholderswhenaninvestmentis indifficultly.The timingofcommunicationwithemployeescan beparticularlycomplex.

3.5 Disposal of an investment

Disposal of an investment is a vital stage in the lifeof a Fund. The outcome of the disposal process willdetermine the return to LPs and will establish the basison which the GPs performance will be judged (by theLPs, those to whom the GP markets future Funds andby the wider community).

The disposal process will also involve interaction withother parties, such as co-investors and the Portfolio

Company, and can also give rise to conflicts of interest.It is important that these are appropriately managedby the GP.

3.5.1. Implementation of divestment planning

Question

Whenshouldthesale ofan investmenttake place?

Explanation

Establishingthe appropriatepointto disposeofan investmentis notsimplyamatter ofthe GPexercisingitsjudgmentto decidewhenvaluehasbeen maximisedorthe extentofa lossminimised.Theremaybeconsiderationsotherthanpaper profitsorlossthat arerelevantwhen consideringan Exit(e.g.the futureprospectsof thePortfolioCompanyandthe GPsreputationwithinthebroadercommunity).TheGP mayalsohave setout adivestmentstrategytoLPsin theFund,co-investorsand othersyndicatemembers,whichcouldimpactuponwhenan investmentcan berealised.

Recommendation

TheGP should,asfar asis possible,disposeofinvestmentsat atimeandin amannerthat accordswith anyexistingdivestmentstrategyandmaximisesthereturnto theFundsLPs.GPs shouldbemindfuloftheaim todivestthe Fundsassets withinthelifetimeof theFund.

3.5.2. Responsibil ity for divestment decision-making

Question

Whoshouldmake thedecisionto realiseaninvestment?

Explanation

Anydecisionto realiseaninvestmentinvolvesacomparisonofthepresentvalueofan investment,its potentialfuturevalue andtheopportunitiesto realisethatvaluein thefuture.It isimportantthattheGPsdecisionto disposeofan investmentis subjecttothe samechecks,levelofanalysis andproceduresthatan investmentdecisionissubjectto.

Recommendation

TheGP shouldestablishaprocessfor decidingwhetherandhowtodisposeof aninvestment.Whereverpossiblethis processshouldmirrortheprocessthat isfollowedwhenconsideringaninvestmentdecisionandany proposeddivestmentshouldbe subjecttoequally

rigorouschecks.

3.5.3. Warranties and indemnities

Question

Shouldwarrantiesand indemnitiesbe givenonExit?

Explanation

Apurchaserofa PortfolioCompanymayseek arangeofwarrantiesand indemnitiesfrom theFund.Negotiationoverthesewilloftenbe akey issueforthe GPwhendisposingof aninvestment.Duringnegotiations,the GPmust considertherisksand detrimenttotheFundin givingsuchwarrantiesandindemnitiesagainstanyenhancementof returnthattheycouldbring.

Whendecidingwhethertogive awarrantyorindemnity,theGP shouldalsotakeinto accounttheremaininglifeof theFundand thefactthatinthe futureitmay bedifficulttodrawdown cashor re-drawdistributionsfrominvestorstomeet liabilitiesinthe eventofa claim.Itmaybe necessarytoestablishan escrowaccount,and timelimitationsandfinancialcapsshould definitelybe consideredand negotiatedwherepossible.

Recommendation

GPsshouldnormallyonly givewarrantiesandindemnitiesonbehalfoftheFundon adisposalwherethis isexpectedto producean enhancedreturnforinvestors,or thewarrantiesrelatepurelytotitle tosharesownedbythe Fundandauthoritytoenter intothetransactiondocuments.The liabilityundersuchclausesshould becappedinquantumandtimeandtheGPshouldseektoensurethattheFundisabletomeet theseliabilities.Anescrowaccountis commonlyused tofulfilthispurposeandcouldbesetup atthetimeoftheExit.InordertoachieveanaddedlayerofsecuritythattheFundwillbeabletomeetanyliabilities,theoriginalFunddocumentationshouldcontainaninvestorclawbackprovision,enablingacertain percentageofdistributionsto beclawedback frominvestorsshould thisbecomenecessaryevenaftertheend ofthe lifeofthe Fund.Thisprovisionshouldbelimitedin timeandamount,as investorswill otherwisenotagreetoit. TheGP mayalsotake outinsurancethataffectsthe Fundsabilitytogivewarrantiesandindemnitiesand mayhelpto meettheexpectationsof apotentialpurchaser.

3.5.4. Cash vs. shares/earn-outs on realisation

Question

Shouldacash Exitalwaysbe sought?

Explanation

AGPs obligationis toseek thebest returnsfromaninvestmentfortheFundand theGP mustconsideropportunitiesto effectnon-cashdisposalsinlightof this.Itmay bethat,for example,there isno cashpurchaserfor aninvestment,orthat acash priceis offeredbut atalowervaluationthana shareforshareswapinto aquotedvehicle,orthat theFundcan participatein thefuturevalueof aninvestmentthroughanearn-out.

Anydecisiontoaccept anon-cashdisposalis alsolikelyto involveadditionalcosts.For example,therewillbe acost insafeguardingandadministeringanyquotedinvestmentsheldby theFund.Therearealsorisksof fallsinthe market.

Cashreturnedis alsoan importantmeasureof performance;LPsmayalsohaveconcernsaboutreceivingDistributionsinspecie andtheremaybe restrictionsupona holdersabilitytosell quotedsecurities,alsoknownas lock-upperiods.

Recommendation

GPsshouldcarefullyassessany non-cashofferconsiderationin anExitbalancingthe immediatevalue ofanycash offer;thelifecycle oftheFund;the needto returncashtoLPs; thepotentialfuturevalueandExit opportunitiesin anysecuritiesoffered;andthe abilitytohedgeagainstdownsidemarketrisks.

3.5.5. Sa le of a Portfolio Company between Fundsmanaged by the same GP

Question

ShouldoneFundmanagedby theGP bepermittedtopurchasetheinvestmentsof anotherFundmanagedbythe sameGP?

Explanation

Althoughitmightbe therighttime foroneFundto Ex

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