Networking and Topnotch Speakers Drive Turnout for 9th Annual Michigan PE Conference

More than 120 professionals from private equity groups, investment banks, law firms and business organizations in the Midwest and across the U.S. attended the 9th Annual Michigan Private Equity Conference on Oct. 17 in the Michigan Union. Below are some of the participants’ comments about the event and the opportunities it afforded.

“This conference brings a lot of attention to the Great Lakes region and attracts players who are interested in this area. We do more than network. We develop collaborative and lifelong relationships.” William Loftis, managing partner, Blue River Financial Group, Grand Blanc, Mich.

“We work with a lot of PE people on the deal side and do work for PE holding companies. At the conference, we can see what opportunities PE fund managers are considering and where the industry is going.” – Matt Grimes, director in the Financial Advisory Services Group, AlixPartners, Detroit office

“I’m a Wolverine and a corporate finance lawyer, who represents sponsors, institutional investors and high-net-worth individuals. At this conference, I meet incredible people, including lenders and PE investment advisers, all in one spot. I also learn about private equity funds and service providers and how they connect.” Laura Hult, attorney, Dickinson Wright PLLC, Columbus, Ohio office

“The University, the private equity community and the content of the conference are what attract me. I love the networking, and I like to hear what other private equity firms are doing, so I can provide feedback to my client base, which includes PE firms.” Chris Jenkins, assurance manager, Plante Moran, Southfield, Mich.

“I am attending the conference because of Dr. Brophy, who is a recognized leader in the private equity field, and the high caliber of the speakers. I think Michigan is recognized globally for having leading medical centers and a strong history of discovery work in the life sciences. I am anxious to evaluate investment opportunities and find partners in the region to work with.” Chris McFadden, associate, Top Tier Capital Partners, San Francisco

“The conference offers an opportunity to network with a lot of people. Excellent speakers provide a broader, improved view of the M&A landscape.” – Michael Allie, director and M&A adviser, Blue River Financial Group, Grand Blanc, Mich.

Startup School 2014: Building a Company on a Specific “Why”

Austin Green, BBA ’16 Traveled to Y Combinator’s Startup School and Shares Lessons Learned from Investors and Founders

This past weekend, I had the opportunity to represent the Ross entrepreneurship community at Y Combinator’s Startup School — a one-day conference and networking event hosted in Cupertino, CA by the most prestigious seed accelerator in the nation. The conference included talks given by prominent technology founders and investors whose advice was extremely motivating and useful for those considering a startup.

During the networking hours I spent my time sharing ideas with entrepreneurs from all over the globe and promoting Ann Arbor’s great technology community. I learned a lot, and a couple of key takeaways from the event were to build a company upon a specific “why” and stay ruthlessly focused on the product.

Danae Ringelmann, co-founder of Indiegogo, reflected on her journey from an investment banker to the founder of the largest crowd-funding platform. According to her, a startup will survive the hard times if it is built upon a “why” that the founders are passionate about. A company’s “why” also informs the company’s strategy, attracts amazing employees and ensures that the company is building something that people need. Often, entrepreneurs fail because they lose their vision. By staying focused on their company’s “why”, i.e. why the company will improve the world, everything else will fall into place. After establishing the “why” at the core of the company, entrepreneurs must be ruthlessly dedicated to their product.

Ron Conway, founder of SVAngel, is considered the father of angel investing with early-stage investments in Google, Facebook and PayPal. He has invested in over 700 startups and has advised thousands of entrepreneurs. Ron’s vast experience allows him to make insights into common personality traits of successful founders. His observations have led him to believe that the best founders are absurdly focused on their product. These founders have an obsessive conviction to make sure every aspect of their product is perfect. This impressive dedication allows them to look past the small details of running a company and stay committed to what matters most – their product.

Although the conference portion of the event was valuable, what really made the day special was the networking portion. I was able to compare my entrepreneurial education at Ross with students from around the globe. This truly made me appreciate the thriving tech community in Ann Arbor and the extensive resources offered by the Zell Lurie Institute.

I plan on staying in touch with the fellow attendees I met with at Startup School and endeavor to create a partnership between the Ross Entrepreneur and Venture Club and other university entrepreneurial, student-run organizations. Thank you to the Zell Lurie Institute for allowing me to attend Startup School 2014 and I look forward to seeing more University of Michigan students in attendance for the 2015 event.

PE Firms Face Steep Regulatory Hurdles in the Post-Dodd-Frank Era, Says a Panel of Legal and Compliance Experts

Private equity firms are now operating in a highly regulated world that has transformed the way business is conducted, said a panel of legal and compliance experts at the Michigan Private Equity Conference on Friday, Oct. 17.

The heightened regulatory and record-keeping requirements stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010, and subsequent regulations issued by the Securities and Exchange Commission that impose significant new registration and compliance burdens on managers of private equity funds, hedge funds, fund of funds and, to a lesser extent, venture capital funds. Two separate SEC enforcement actions involving two different investment advisory firms, Ranieri Partners and Clean Energy Capital LLC, have sent a chill through the industry.

“Traditionally, private equity has been a handshake deal,” said Josh Westerholm, a partner at Kirkland & Ellis LLP. “Post-Dodd-Frank, there has been a sea change of culture. Now firms are looking at investor relationships differently.”

Audrey DiMarzo, principal and general counsel at Rizvi Traverse Management, reports seeing a “learning curve on both sides” of the regulatory equation. “It’s been a matter of educating the SEC about the PE industry, and educating firms about the need to follow policies, produce documentation, formalize relationships and pay more attention to details at every level.”

Prior to the Dodd-Frank Act, many PE fund managers avoided registering with the SEC by relying on the “private investment adviser” exemption, which exempted firms that had fewer than 15 clients over the course of the preceding 12 months and that did not act as an investment adviser to the public or to any company registered under the Investment Company Act of 1940. Title IV of the Dodd-Frank Act ─ known as the “Private Fund Investment Advisers Registration Act of 2010 ─ replaced the private investment adviser exemption with new and much narrower exemptions. Now, only private fund managers with less than $150 million of assets under management are exempt from registration with the SEC. All other PE firms are required to register, effective July 2011, and are subject to periodic, on-site SEC inspections.

Registered firms must comply with a number of requirements. The panelists discussed several of these key provisions and their implications:

Registration of Brokers

“If you’re paying a placement agent 1% for every dollar they bring in, the SEC views it as a transaction-based fee and that agent needs to be registered,” Westerholm advised. Added DiMarzo: “If we use an agent for fundraising, we make sure that person is registered.”

The panelists cited a 2013 enforcement proceeding in which the SEC brought charges against New York-based PE firm Ranieri Partners, a former senior executive and an unregistered broker who violated securities laws when soliciting more than $500 million in capital commitments for private firms managed by the firm. The broker acted as a hired consultant for Ranieri and was paid fees by the firm, but never registered as a broker with the SEC. The SEC imposed stiff penalties on both the firm and the executive for “aiding and abetting” the broker’s violations and the broker was barred from the securities industry.

Recordkeeping Obligations

The SEC is “digging in its heels and taking an expansive view” on the documentation of transaction fees and expenses, the proper allocation of expenses between PE sponsors and LPs and the disclosure of those expenses to LPs, said Ian Rivera, a principal consultant at ACA Compliance Group. “There is no dollar threshold for expenses that are misallocated.”

A recent enforcement proceeding illustrates the hard line the SEC is taking on violators. In 2014, the SEC brought charges against an Arizona-based PE fund manager and his investment advisory firm for orchestrating a scheme to misallocate their expenses to the funds they manage. The SEC Enforcement Division alleged that the fund manager and Clean Energy Capital LLC improperly paid more than $3 million of the firm’s expenses for rent, salaries and employee benefits by using assets from 19 private equity funds that invest in private ethanol production plants. No disclosure of the payment arrangement was made in fund offering documents. When the private equity funds ran out of cash to pay the firm’s expenses, CEC and the fund manager loaned money to the funds at unfavorable interest rates and unilaterally changed how they calculated investor returns to benefit themselves. The SEC alleged that the firm and fund manager violated the antifraud provisions of the federal securities laws, and made violations in disclosure, compliance, custody and reporting.

Compliance Programs and Policies

Registered advisers must adopt written policies and procedures designed to prevent violation of the Private Fund Act and its rules. “The SEC is looking at your firm’s policies and whether you are following them in the way you told your investors,” DiMarzo said. “Make sure your financial staff knows what the rules and procedures are.”

Disclosures to Adviser’s Clients

PE firms also are required to make disclosures annually to their advisory clients on matters such as products, management, material adverse financial or disciplinary matters, conflicts of interest and privacy policies. “The SEC is deep-diving into disclosures and asking for documents,” Rivera reported.

“Savvy limited partners also are beginning to ask the same questions as the SEC: Did you get any deficiencies at the last SEC exam?” Westerholm said. “LPs are going down a checklist and asking for copies of compliance policies. The LP community has moved to become another set of regulatory eyes.” Added DiMarzo: “If you don’t get nice closure from the SEC, LPs get skiddish.”

New Investment Trends are Recalibrating the PE Industry, Say Expert Panelists

Limited partners are pursuing niche strategies and driving new investment trends that are impacting overall LP allocations and middle-market private equity, a panel of experts told investors attending the 2014 Michigan Private Equity Conference on Oct. 17.

One of the headline-grabbers is the emergence and rapid growth of the private equity secondary market, which focuses on the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. To meet burgeoning demand, many mainstream private equity and global investment advisory firms have set up specialized teams or programs dedicated to the origination, structuring, execution and monitoring of secondary transactions in the private equity and hedge fund markets.

“When I joined Blackstone, we were seeing $2 billion to $3 billion of transaction volume in secondaries,” said Brian Kolin, a director in the Strategic Partners Group, Blackstone’s secondary private fund-of-funds business, which was acquired from Credit Suisse in August 2013. “Deal flow rose to nearly $20 billion in 2008 and then dropped off to approximately $6 billion to $9 billion during the recession. Now we are seeing very nice growth. The volume in secondaries hit $28 billion in 2013. In the first half of 2014, it was up to $16 billion.”

“Secondary investment has evolved and is now its own asset class,” said Jeremy Duksin, a senior member of Credit Suisse Private Fund Group’s secondary advisory team. “In the past, secondaries were viewed as a distressed asset, where PE firms were looking for liquidity. Now, secondary investment has become a direct strategy where PE firms are seeking to buy out minority investors’ stakes.”

The panelists identified several factors that are fueling the momentum and maturation of the secondary market. On the supply side:

  • New regulations and tighter oversight in the U.S. and Europe are compelling banks, funds, insurers and other institutions to pare down or sell off assets.
  • Impatient limited partners are opting to sell their interests in PE funds early to receive liquidity for their funded investments as well as a release from any remaining unfunded obligations.
  • General partners with funds that have become elongated are selling assets to salvage value, achieve liquidity for investors, clean up portfolio holdings and ease administrative burdens.

On the demand side:

  • Institutional investors and dedicated firms are looking at secondaries as a more efficient way to gain increased exposure to diversified PE portfolios with a shorter investment period, usually 3 to 4 years.
  • General partners raising new funds are initiating stapled secondaries, where a secondary buyer purchases an interest in an existing fund from a current investor and then makes a new commitment to the new fund being raised by the GP.

“It’s hard to lose money in the secondary market, but you’re not getting the home runs,” Kolin said.

Two other niche plays by institutional investors ─ co-investment and direct investment ─ are shaking up the alternative investment industry, the panelists said. Sid Murdeshwar, a vice president of the Co-Investment team at AlpInvest Partners, reported he is enhancing total returns by co-investing alongside some of the best and brightest minds in private equity and cherry-picking assets. Institutional investors who co-invest also benefit from low-or-no-fee structures and the opportunity to dial up, at a low cost, on potentially high-return investments made by PE fund managers. “We also get to see how the sausage is made, so to speak, and where the sponsor fits within our deal flow,” Murdeshwar remarked.

Increasingly, major investors such as Singapore’s sovereign-wealth vehicle GIC Pte. Ltd. and large pension funds such as the Canada Pension Plan Investment Board are making direct investment in companies and infrastructure projects. Many have hired their own advisory teams and going head-to-head against private equity firms for deals in the primary and secondary investment space. Whether this trend will continue is uncertain.

“We’ve seen more direct investment recently, but we use a sponsor-driven model to do primary and secondary investments,” Murdeshwar said. “We don’t want to compete against the folks we are co-investing with. And we just don’t have the staff for direct investment.”

“The large Canadian LPs are talking about it, but I don’t know whether other LPs have the capacity to compete in direct investment,” Duksin remarked. “Outside of the major sovereign-wealth organizations, I don’t believe it will show up [on the radar].”

Emerging from Bankruptcy Protection, Detroit Now Offers Attractive Opportunities for New Businesses and Investors, Say Kevyn Orr and Ken Buckfire at the Michigan PE Conference

As Detroit emerges from municipal bankruptcy protection, the Motor City is dusting off the cobwebs of corruption, polishing its tattered financial image and courting new businesses and investors who can help jump-start its transformation into a thriving 21st century metropolis.

Speaking at this year’s Michigan Private Equity Conference on Oct. 17, former Detroit Emergency Manager Kevyn Orr and one of his key advisors, investment banker Kenneth Buckfire, president of Miller Buckfire, presented a scorecard detailing Detroit’s progress through its painful three-year restructuring process and their predictions for its post-bankruptcy trajectory. Their pitch to private equity investors gathered in the Michigan Union’s Rogel Ballroom was upbeat and optimistic.

“I believe there are tremendous financial opportunities to invest in Detroit,” Buckfire said. “The city’s challenge will be to convince you that Detroit is worth considering for investment.”

“The opportunities appear greater than I’ve seen in Miami, New York and Washington D.C.,” contended Orr, noting that those cities also experienced troubled times before undergoing a successful economic recovery. “Detroit has the same type of texture, but it’s got to wake up.” Orr, a 1983 Michigan Law School graduate, was appointed to his Emergency Manager post by Michigan Gov. Rick Snyder in March 2013 to restructure the city and shore up its finances. Four months later, in July, Detroit filed for Chapter 9 bankruptcy protection, becoming the largest city in U.S. history to do so.

With its financial and creditor-related roadblocks now in the rear-view mirror, Detroit is refocusing attention on the attributes that make it an attractive location for investment dollars, Orr and Buckfire said. These include:

  • A strategic location along the Detroit River, a major shipping channel
  • Proximity to Canada, one of America’s largest trading partners
  • Access to fresh water needed for many manufacturing processes
  • Low acquisition costs for real estate and companies
  • 44,000 land parcels available for redevelopment
  • Nearly 700,000 underserved residents who need new housing, retail outlets, financial institutions and other services

Making Detroit a safe place to live, work and invest has become a priority for state and local officials, according to Orr. Among the steps being put in place to achieve that goal are:

  • Spending $150 million annually for the next 10 years on reinvestment in city services, especially public safety providers, such as police, fire and EMS
  • Working with DTE Energy to restore street lighting throughout the city by next March
  • Establishing a seven-person Oversight Commission, which would include the governor and Detroit’s mayor along with other state leaders and appointees, to oversee the city’s finances, budgets, debt issuance and revenue estimates for at least 20 years
  • Promoting greater regional cooperation, including a proposal to create a Great Lakes Water Authority that would enable Detroit to lease its water system’s infrastructure to suburban communities and use fees and payments to finance an estimated $500 million to $800 million in bonds to repair the antiquated system

Encouraging signs of the city’s nascent turnaround, Orr noted, include the inflow of young people to the downtown area and the launch of several mega-projects scheduled for completion over the next three to five years. These projects include:

  • The M-1 Rail project, a 3.3-mile circulating streetcar line along Woodward Avenue between Congress Street in downtown and West Grand Boulevard in the New Center area; it represents an unprecedented public-private partnership and a model for urban transit
  • The new $650 million Red Wings hockey arena and sports-entertainment district on the northern edge of downtown orchestrated by the Ilitch family; the arena is envisioned as a springboard for five new neighborhoods that will transform the urban landscape
  • The New International Trade Crossing bridge project, which would link Detroit and Windsor, facilitating the movement of goods between the U.S. and Canada; backers hope to see the new bridge open to traffic by 2020

In their parting shots, Orr and Buckfire emphasized that support from the business and investment community is critical for Detroit’s long-term recovery.

“If the city is able to maintain its credit rating and keep going, it will rise from the ashes and experience a renaissance,” Orr said. “But we need everyone’s help.”

“You cannot have a great state without a great city,” Buckfire concluded. “Detroit has a long and painful history, but we’ve closed the chapter on it.”

Where Are They Now: Heath Silverman, MBA ’08, Head of International Business, Edmodo

According to Stewart Thornhill, executive director of the Institute, there are two types of entrepreneurs—those who have the desire to run their own company and be their own boss, and those who want to use their entrepreneurial skills to benefit a larger corporation. Heath Silverman, Ross MBA ’08, falls into the latter category.

Prior to Ross, Heath already had the entrepreneurial bug. Since graduating from University of California at Berkeley, with an undergraduate degree in cognitive science, Heath had started two companies. However, he still felt that he needed a deeper business skill set that could come from enrolling in an MBA program. He was looking for total business immersion in conjunction with a strong, well-rounded general management education.

Heath chose to pursue his MBA at Ross and dove into the graduate program headfirst. He immersed himself in programs offered through the Zell Lurie Institute, including Dare to Dream, the Zell Commercialization Fund (formerly the Frankel Commercialization Fund), the Michigan Business Challenge, and entrepreneurial MAP. He also served as co-president of the student-led Entrepreneur and Venture club. Through these experiences, Heath gained real-world insight and grew his professional network.

Following graduation in 2008, Heath landed roles at larger organizations, where he served as a product manager at Amazon.com and in various positions at Intel Corporation, including product m and venture investing. In the investment role he was surrounded by high-caliber colleagues and was granted the flexibility to take calculated risks that were backed by large company resources. Heath’s career goals centered on entrepreneurial pursuits within his job roles including the deep involvement in the early stages of Amazon Web Services’ international expansion and the development of education services at Intel, an important new layer of the company’s education solutions offered around the world. Heath touts his ability to run international business at Edmodo to his experience of being on all different sides of the equation.

Edmodo is a K-12 social learning platform enabling teachers and students to connect and collaborate. It was founded six years ago by two Chicago-area high school administrators and has grown into a powerful, global network used by more than 40 million educators and students across 190+ countries. Heath is passionate about the company’s mission and is happy to apply his combined startup know-how and “big company experience” to the rapidly growing company. “I’ve tried it all,” he says, “and that’s what has helped me understand what I’m really passionate about.”

When asked what advice he would offer current Ross MBA students, Heath says, “You don’t have to have everything perfectly planned out in advance; people with ‘perfect plans’ often end up a couple years down the road feeling unfulfilled wondering how they got to where they are. You should always be inquisitive, exploring and opportunistic. Every six months, I ask myself if I am still learning, feeling challenged, and excited about what I am doing, and if not, I make a change.”

Michigan PE Conference Keynote Bon French Says the Mainstreaming of Alternatives is Reshaping the Asset Management Industry

The world of asset management, particularly private equity, has changed enormously in the past 30 years, said keynote speaker T. Bondurant French, CEO of Adams Street Partners, during a Fireside Chat discussion with CVP Director David Brophy at the 2014 Michigan Private Equity Conference on Oct. 17. “When I started with Adams Street in 1980, I thought I was late to the venture business, which already had a 25-year history,” he remarked. “The changes since then have been nothing short of mind bending.” Adams Street Partners is a global private equity investment management firm.

Over the last three decades, the private equity industry has spread from the U.S. to every continent except Antarctica. Adams Street alone has investors in 33 countries. Today the industry is raising $400 billion a year (venture capital and buyouts combined) versus $7 billion in the mid-1980s. Managers, who once numbered in the hundreds, now number in the 10s of thousands globally. PE funds have gone from single digits to more than 250 globally during that 30-year time frame. “In 1980, venture capital was a prohibited investment for public pension funds in 40 of 50 states,” French remarked. “This restriction required numerous educational seminars and retreats to convince public pension investment staffs and state legislatures to rethink their rules.”

For other alternatives, such as hedge funds and real estate, the growth has been even greater. French reported that global assets under management in alternatives (private equity, hedge funds, real estate, commodities and infrastructure) hit the $7.2 trillion mark at the end of 2013. “With their premium fees, alternatives now constitute almost 30% of the total asset management industry revenues while comprising only 12% of industry assets,” he stated. “Alternative allocations, including private equity, now have become a mainstream part of institutional investors’ asset allocations.” Many investors have indicated they plan to maintain or increase their allocations to alternatives in the next three years.”

The drivers behind the accelerated adoption of alternatives are structural, rather than cyclical, forces, according to French. These drivers include:

  • Concern with traditional asset classes in an era of increased volatility and macroeconomic uncertainty
  • Changes in thinking about portfolio construction
  • A desire for specific portfolio outcomes, such as inflation protection or volatility dampening
  • A search for higher yield on behalf of institutional investors, particularly defined-benefit pension funds seeking to close their asset-liability gap

The mainstreaming of alternatives is driving a trillion dollar convergence of traditional and alternative asset management. “Mega-funds are now in an ‘arms race’ to expand across all alternatives through acquisitions and organic internal start-ups,” French said. “Within the private equity category, many firms have gone beyond buyouts to include secondary capability and primary fund-of-funds capabilities. Several firms have taken their management companies public.” This expansion of product lines by hedge funds, PE firms and traditional asset managers, who previously had well-defined niches in the investment management landscape, has contributed to a blurring of roles and heated competition for an overlapping set of client and product opportunities in the growing alternatives market.

Other forces also are impacting the asset management industry, especially private equity. Under the Dodd-Frank Act, increased regulatory scrutiny by the U.S. Securities and Exchange Commission has compelled private equity firms to devote more time and staff to documentation activities and preparation for SEC exams. “We now have a seven-person legal team, which has increased our costs,” French said. “The biggest regulatory burden is in the Europe Union where we have to register under the AIFMD (Alternative Investment Fund Managers Directive) in every single country. Institutional investors there are seeing dramatically reduced opportunities from U.S. private equity fund managers.”

Turning to the Midwest, French observed that the venture capital industry has seen an increased concentration of assets and shrinkage in the number of managers. He estimated the top 20 VCs control nearly 70% of the assets, following a “huge shakeup” in the industry. Angel investors, French noted, are becoming more sophisticated and taking on a broader role, and the proliferation of business incubators is driving the growth and development of start-ups in Chicago, Detroit, Ann Arbor and other locales. “The bio space is more of a level playing field here in the Midwest, where there are so many small bio companies,” he added.

Overall, French characterized private equity as a win-win-win scenario for companies, investors and nations. “It’s a win for entrepreneurs and management teams because they receive new equity capital,” he said. “It’s a win for investors because it has been a successful investment class. And it’s a win for countries because it creates jobs, wealth and goods and services.”

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