Beroni Group: Managing General

Partners-Limited Partner
Relationships

Group 3

Delivered to: Viney Sawhney, Peter Gianonatti

Students: Yi You,
Fernando Garcia de Rojas,
Pedro Morais,
Carolina Pierry,
Dennis Pei,
Ahmed Idrees

1a) How should Jack Draper deal with allocation of deal flow between the different
funds that had overlapping mandates, and/or between one of his current funds and an
eventual successor fund? Explain your answer. (There are many optional ways to invest,
e.g, BAF II first; BAF III first; proportionately between BAF II and BAF III;
discretionary investment-by-investment decision)

Typically, new funds should not be raised unless assets of the previous fund have
already been allocated. Although Mr. Draper should first finish investing BAFII, where there
is one more year left in the investment period and $135 million left to invest, he will ask both
Advisory Committees to co-invest in this attractive deal. He should divide the deal based on
the 10% threshold that funds typically have on investment concentration. So that means that
up to $35 million should go to BAF II and up to $50 million to BAFIII (using only closed
funding and not additional funding). If the deal is smaller than that, he should divide the deal
evenly between the two funds, where he will not favor one versus the other. He does not want
to upset existing Limited Partners who were with him from the beginning, nor does he want
new Limited Partners to think they are not being treated fairly. These decisions should be made
on a case by case basis and there should not be any set guidelines on the funds about co-
investment opportunities with other funds.

Mr. Draper could also approach Gulf Developments to see if they want to co-invest in
the deal outside of BAFII, as they are the only Limited Partners not participating in BAFIII.
That way, he keeps his relationship with Gulf Developments and is not perceived in favoring
one fund versus the other.

1b) Should allocations be fixed or discretionary? Explain why.

Allocation of funds should be fixed. This is because Private Equity is governed by

clearly set guidelines which assist the GPs, LPs and the Advisory committees in arriving at
their investment decisions. For example, if a decision is made to invest in a new fund, decisions
are made concerning how funds will be allocated to the new investment plan. A strategic
guideline is usually set which is followed when allocating resources to a new fund investment.

1c) Regarding the impending deal, which AC should he approach first? Explain why.

In relation to the impending deal, Jack Draper should approach the BAF II advisory
committee first. This is because it is the mandate of the committee to oversee success ending
of the BAF II investment and also ensure that all LPs who had fully committed to the fund are
fully paid their shareholding value before another fund is established. Profits gained from the
fund should also be shared according to the agreed guidelines before the fund is terminated and
LPs establish a new fund (Acharya, 2013).

1d) In addition to approaching one of the ACs first, with what sort of proposal
should he present to that AC in order to minimize potential tension among the differently-
invested LPs?

In regard to approaching one of the advisory committees first, Jack Draper should
approach the committee with proposal concerning withdraw of one of their key LP, Gulf
Developments. He should discuss with the advisory committee implications of the withdrawal
and how it will directly affect BAF II.

In his proposal, Jack Draper should give suggestions on what the advisory committee
should consider in order for a successful liquidation of the BAF II. In case the advisory
committee sees it not fit to dissolve the fund, they should be at free will to give strategies which
should be used in ensuring that LPs withdrawal does not have a negative impact on the fund.

2a) How should Jack Draper deal with downward pressure on his management
fees as more assets came under management?

Jack Draper could lower his costs and provide his clients with lower fees as his team
that has been working on acquiring new investments will shrink its work hours and work load
on BAF II. He can cut back on some stuff that was needed when the AUM was at its peak.
With lower AUM the required work and the required staff can be significantly reduced. If Jack
Draper wanted to keep his team what he could do is make them start working on his new fund
BAF III. This way the fees will be lowered in his BAF II, which would please the limited
partners.
With the reduction of fees, the limited partners will be return investors with The Beroni
Group, as they know he has their best interests in mind. It will show that it makes sense to
lower management fees as AUM gets lowered and Jack understands that and is willing to accept
and accommodate lowering fees. Also by Jack putting his team to work on the BAF III fund
he can continue to pay his team and the investors in that fund will be accepting of that. By
doing this Jack will also be able to provide better returns for his clients, as the money that is
saved from the management fees will be put back into the clients pocket.

2b) Since some costs were fairly steady regardless of how much capital is under
management (such as rental costs, back office staff, etc.), how could he reject investor
demands to lower management fees?

If costs have been fairly the same as throughout the fund and all the back staff is needed
Jack can take the route of rejecting the management cuts. What Jack Draper can say to his
clients is that the management fees were placed in the beginning of the fund as the costs of
labor, rent, and backroom staff fees were accounted for and will be kept for the fund to be run
smoothly. What Jack can also do is let investors know that the even though the assets under
management have decreased the assets that are still being managed need to be managed well
for them to have a good return. If they start neglecting the remaining assets that are being

managed to save money they can have a bigger loss at the end of the when they will need to
liquidate the remaining assets. This will stop the limited partners, as they would not want to
risk neglecting the assets they have and would rather pay fees now and have a bigger return
when the fund has closed.

3) Since the senior Beroni Group principals served on the deal teams and Advisory
Committees of more than one fund, how could he help his investors feel comfortable
that the principals (and staff) would allocate their time appropriately between the
respective funds?

Beroni Group principals served on more than one team and advisory committees and
investors have fear that they might be incompetent in managing their funds. In dealing with
this doubt, Jack Draper should give prior successful funds which the principals have managed
in the past. The investors should be informed that those principals managed those funds using
managerial skills of that time and yet emerged successful (Huther, 2015).

In the recent fund investments, the same principals have participated in more than one
fund and achieved successful projects. In comparison with the projects they have been
managing, investors should have confidence in them that they will do an excellent job.

4) How could Jack Draper help his investors get comfortable with the prospect of
de facto cross- liability that is, if one of his funds were to run into difficulty, how could
he ring fence other unrelated funds to ensure there were no negative financial or time
effects on the GP and the managers? The concerns are:
Cross-liability if one of his funds were to run into difficulty, that could result in a
negative financial effect on the other funds
Staffs attention to their investments is being compromised because of the other funds.

In ensuring that investors get comfortable with the prospect of de facto cross-liability,
Jack Draper should ensure that all fund investments have a defined expiration period. It should
be ensured that information concerning the timelines of different fund investments is
communicated with transparency. Also any fund faces financial crises should be shared with
the investors so that they get to know how the investments are performing.

Guidelines could also be established to safeguard any fund which faces financial
distress. The guidelines should provide solutions and alternatives on what should be done in
ensuring that resources can be transferred from one fund to another without reducing the value
of either fund.

5a) How could Jack balance the needs and requests of EuroBank, one of his oldest
and largest investors, with the quite legitimate expectation of other LPs in BAF II and
BAF III that EuroBank not be shown favoritism, and that a portion of EuroBankss
interest be forfeited and distributed to them?



Jack should balance the needs and requests of Euro bank by examining the interests of
the investors. Decisions made in relation with strategies to be undertaken by the Euro Bank
should be those which address interests majority of the investors.

In the case where the needs and requests of the Euro Bank do not seem to address
interests of the majority of investors, Jack should seek opinion of the majority of the LPs
together with their principals who should assist in arriving at a decision which is fair to
everyone.

5b) Would he be faced with a flood of defaults and withdrawal requests if he were
to treat EuroBank gently?

Yes, Jack Draper would be faced with a flood of defaults and withdraw requests if he
treated the Euro Bank issues gently. This is because the fund had full support and commitment
of its LPs and investors and any action to alter their investment would be received negatively.
Also most of the LPs disliked each other and in case of any issue affecting their investment
would explode causing some members to withdraw their investment commitment and hence
lead to the downfall of the fund (Sorensen, 2014).

5c) What fiduciary duty did he owe to the non-defaulting LPs in BAFII and
BAFIII that had apparently managed their finances more prudently than EuroBank?

Jack Draper owed to the non-defaulting LPs in BAF II and BAF III right to ensure that
their funds were well managed. He himself was liable for any action that would negatively
affect their interests. He should therefore ensure that in any action undertaken, interests of LPs
are withheld upright.

5d) Would the GPs risk breaching the limited partner agreements to implement
EuroBankss proposal? (Page 2 of the case states, GPs of BAF II have some discretion
over enforcement of the forfeiture provision)

Yes, It would be GPs risk of breaching the LPs agreements if Euro Banks proposal
was implemented. The Euro Banks proposal had not been incorporated in the Limited
Partnerships agreements. It therefore did not have any right to be implemented.

In case where Euro Banks proposal was the only solution available to secure LPs
funds, it would have been mandatory that the limited partner agreements would be corrected in
order to provide a clause which would allow the Euro Bank proposal to be implemented. No
clause existed and therefore implementing Euro Banks proposal would be a direct breach of
the limited partners agreements.

REFERENCES:

Acharya, V. V. (2013). Corporate governance and value creation: Evidence from

private equity. Review of Financial Studies, , 26(2), 368-402.
Huther, N. R.-W. (2015). Paying for performance in private equity: evidence from
management contracts. Duke University.
Sensoy, B. A. (2014). Limited partner performance and the maturing of the private
equity industry. Journal of Financial Economics, , 112(3), 320-343.
Sorensen, M. W. (2014). Valuing private equity. Review of Financial Studies, , 27(7),
1977-2021.