INVESTOR SERVICES PRIME BROKERAGE PERSPECTIVES. Aligning Interests: The Emergence of Hedge Fund Co-Investment Vehicles

Transcription

1 INVESTOR SERVICES PRIME BROKERAGE PERSPECTIVES Aligning Interests: The Emergence of Hedge Fund Co-Investment Vehicles First Qurter 2014

2 In this edition of Prime Brokerge Perspectives, we exmine the growing prevlence of hedge fund co-investment vehicles long with their pplicble terms, structures nd the strtegies for which they re being used most frequently. The purpose of this Perspectives piece is to provide n overview of hedge fund co-investment structures for mngers interested in lunching such vehicles nd for institutionl lloctors considering them for investment. In doing so, this report seeks to identify common fetures of, nd trends mong, hedge fund coinvestments in order to provide mngers nd investors with cohesive orgniztionl frmework tht they cn use to ssess co-investment opportunities. This report lso explores the incentives for mngers to bring such structures to mrket nd for institutionl lloctors to invest in them. Introduction Although co-investments hve long been stple component of the privte equity industry, they hve become more prevlent in the hedge fund ecosystem only recently. For definitionl purposes, coinvestment structure my be thought of s vehicle tht prticiptes in n investment on co-mingled bsis or on behlf of single investor longside, or in lieu of, n investment mnger s min fund, which my be limited in the extent to which it cn deploy cpitl in the pertinent investment opportunity. Becuse co-investments hve long been common mong privte equity firms, limited prtners hve estblished expecttions s to how they will be structured nd the mechnisms by which they will be offered. By contrst, becuse co-investment vehicles re newer phenomenon in the hedge fund ren, they tend to be offered more episodiclly, nd there is derth of stndrdiztion for hedge fund lloctors when ssessing such opportunities. Accordingly, hedge funds tht offer co-investments to their investors trend tht is becoming incresingly common employ rnge of non-stndrdized structures. Furthermore, the terms on which hedge funds offer such opportunities to lloctors tend to be somewht idiosyncrtic depending on the underlying investment opportunity. This report is bsed on interviews with hedge fund mngers, institutionl investors nd investment fund ttorneys. The piece first provides n overview of the privte equity co-investment nlogue. Prt II discusses evidence of incresed ppetite mong hedge fund lloctors for co-investment opportunities. Prt III exmines the incentives for hedge fund mngers to offer, nd for investors to llocte to, co-investment opportunities. The report next discusses the rnge of structures vilble for hedge fund co-investment vehicles long with fee terms nd other fetures. Finlly, this Perspectives piece outlines certin legl considertions bout which mngers should be wre when considering such products. The privte equity precedent Privte equity co-investments provide n nlogue for hedge funds tht re pondering such opportunities. Privte equity firms hve trditionlly offered coinvestments to their fund limited prtners long with their operting prtners nd, in certin instnces, to other privte equity fund sponsors. Privte equity co-investments re typiclly structured s minority investments in portfolio compnies tht re pltform cquisitions of the min fund. Certin privte equity sponsors lso sometimes lunch dedicted 1 J.P. Morgn Q1 2014

3 co-investment vehicles designed to mke severl such investments. These vehicles my hve similr terms to the sponsor s min fund except with respect to fees, which lmost invribly re lower. Privte equity firms typiclly offer co-investments in instnces where there is cpcity constrint, such s when sponsor is seeking to invest in compny to tke control but is limited in the mount of cpitl tht it cn invest either becuse of concentrtion limits in the fund s governing documents or becuse the fund lcks sufficient dry powder or scle to grner control position. In such scenrio, the co-investors will invest longside the min fund, thereby enbling the sponsor to chieve its investment purpose through dded cpcity. In stndrd privte equity co-investment scenrio, the co-invest vehicle will invest long with the sponsor s min fund in holding compny tht functions s the prent of the portfolio compny, which is the cquisition trget. Alterntively, the co-investors my invest in the trget directly t the operting compny level rther thn investing through holding compny, or blocker (see figure 1). Privte equity co-investors re most typiclly existing limited prtners in the sponsor s min fund, which hve brgined for coinvestment rights during the fund subscription process. Other existing limited prtners my hve the option to co-invest through most fvored ntion, or MFN, rights, which provide them with the option to benefit from ny unique rights for which other limited prtners hve brgined. Privte equity sponsors often use the potentil for co-investments s n incentive to grner commitments from lrger limited prtners for their min funds. Consequently, privte equity co-investment vehicles my choose to wive mngement nd performnce fees. Some privte equity co-investment vehicles chrge performnce fees but no mngement fees since the effort needed to mnge co-investment vehicle is less significnt thn tht needed to mnge sponsor s min fund with multiple underlying investments. Sizeble limited prtners with lrger potentil fund commitments such s public pensions nd sovereign welth funds typiclly enjoy more brgining power nd cn therefore insist on de minimis or no fees. Smller investors with lower fund commitments hve less leverge nd often gree to some level of mngement nd/or incentive fee in order to ccess co-investment opportunities. The privte equity precedent illustrtes certin of the prospective synergies mong mngers nd lloctors with respect to co-investments: Mngers cn obvite cpcity limittions tht my exist for vriety of resons nd thereby chieve the scle necessry to ttin control positions in trget compnies to effect leverged buyouts or similr trnsctions. For privte equity lloctors, co-investments offer dded ccess to potentilly ttrctive investments with reduced fees. Such fee reductions my in turn result in improved economics for investors since the J-curve impct from the min privte equity fund is mitigted. 1 FIG-01 Privte Equity Co-investment Structure Limited Prtners Co-Investors Privte Equity Fund Generl Prtner Direct Investment Low or no fees nd crry Operting Compny J.P. Morgn Q

4 Hedge fund co-investments nd investor interest An emergent trend Anecdotl evidence suggests tht growing number of hedge fund mngers re coming to mrket with co-investment opportunities nd tht investors incresingly re seeking them out. In recent months FIG-02 Investors Willing to Prticipte in Co-investments by Alloctor Segment Endowment nd Foundtion Consultnt Pension Fmily Office Insurnce Compny Fund of Funds Registered Investement Advisor Bnk FIG-03 Investors Willing to Prticipte in Co-investments by Geogrphic Region North Americ Europe nd Middle Est Asi 32% 38% 46% 46% 0% 10% 20% 30% 40% 50% 60% 70% 80% 36% 60% 59% 46% 0% 10% 20% 30% 40% 50% 68% 74% Source: J.P. Morgn Cpitl Introduction Group Institutionl Investor Survey for % 60% Source: J.P. Morgn Cpitl Introduction Group Institutionl Investor Survey for 2014 during meetings with lloctors cross the U.S. nd Cnd, numerous groups hve requested informtion from J.P. Morgn s Cpitl Introduction Group (CIG) on mngers offering co-investments either for individul trdes or on more progrmmtic bsis. Empiricl dt lso suggests tht such trend is underwy. According to the forthcoming J.P. Morgn Cpitl Introduction Group Institutionl Investor Survey for 2014, 52 percent of the lloctor respondents indicted willingness to prtke in hedge fund co-investment opportunities. The trend ws most pronounced mong endowments nd foundtions; 74 percent stted tht they would prticipte in hedge fund co-investments. Similrly, 68 percent of the consultnts surveyed indicted tht they would prtke in co-investment opportunities s did 60 percent of the pensions tht took prt in the survey (see figure 2). With respect to geogrphy, 57 percent of the survey respondents in North Americ indicted willingness to prticipte in co-investment opportunities s compred with 46 percent of the investors surveyed in Europe nd the Middle Est nd 36 percent of those in Asi (see figure 3). Trend ctlysts Mngers nd investors interviewed for this report proffered severl hypotheses s to the ctlysts underlying the growing prevlence of hedge fund co-investments, one which seemed prticulrly slient given its historicl context. Before the finncil crisis, it ws common prctice mong hedge fund mngers, including those with more liquid strtegies, to run side pockets for less liquid ssets longside their min fund vehicles where those ssets would be segregted until reliztion. Hedge fund limited prtnership greements (LPAs) contined provisions for those illiquid trnches but were rrely the subject of negotitions mong investors. In the yers subsequent to the finncil crisis, the prctice of mngers segregting ssets in illiquid side pockets hs become hevily disfvored. Tody, fund LPAs typiclly do not llow mngers to crete side pockets nd, in the rre instnces when they do, investors re given cler opt-out rights. As one mnger hypothesized, therefore, these developments hve resulted in reltive derth of equity cpitl vilble for hedge fund investments in less liquid opportunities. Consequently, hedge fund mnger seeking to trget such investments must do so through seprte structure outside its min fund except for de minimis portion of such investment for which there my be limited cpcity in the primry fund vehicle. Accordingly, demnd for such investment opportunities mong lloctors must now be stisfied to significnt extent vi co-investment vehicles. 3 J.P. Morgn Q1 2014

5 Incentives for co-investing: mnger nd investor perspectives Mngers Hedge fund mngers tht hve brought co-investment vehicles to mrket, or tht re considering doing so, tend to fll into two generl ctegories. First, mong equity-bised mngers, number of shreholder ctivists hve introduced innovtive co-investment structures to llow them greter flexibility s they position size s prt of corporte governnce cmpigns. Second, co-investment vehicles re lso becoming incresingly common mong credit-oriented mngers tht invest in less liquid, longer-durtion ssets, including vrious credits, specil situtions, reorgniztions nd cpitl structure rbitrge. Overll, mngers in ech ctegory tend to be longer-bised nd generlly less trding-oriented, though there re certinly exceptions. While there re numerous incentives driving mngers in both ctegories to offer co-invest opportunities, those drivers cn be distilled into few common themes: 1. Position sizing nd concentrtion limits Activist investors seek to influence corporte outcomes by cquiring significnt stkes in trget compnies tht re sufficient to llow them to obtin bord sets. Activist mngers my be constrined in building such stkes becuse of explicit portfolio concentrtion limits in their governing fund documents nd/or becuse of selfimposed position limits in their risk mngement guidelines. Offering investors the opportunity to co-invest longside the min fund cn obvite such constrints nd llow the mnger to chieve the scle needed to mss lrge enough stke in given compny for bord set representtion. Co-investment vehicles cn help credit-oriented mngers solve for similr problems. For exmple, in the restructuring context, hedge fund my seek to cquire control position in compny through vrious levels of the cpitl structure prior to Chpter 11 proceeding so tht it cn guide the incourt reorgniztion. Concentrtion limits nd risk mngement guidelines my gin prevent such funds from doing so. Even bsent such constrints, fund my lck sufficient cpcity to mss the necessry position. Offering co-investment opportunities cn negte those impediments. 2. Speed of execution Irrespective of the underlying hedge fund strtegy, investments tht re suitble for co-investments frequently rise under time constrints nd re required to be cted on in close to rel time. A lrge fund of hedge funds (FoF) tht ctively seeks out co-investments recounted n instnce where one of their underlying mngers with reltive vlue fund ws seeking to trde new bond issue but hd insufficient liquidity vilble for the trde. Becuse the mnger needed to ct on the opportunity with reltive speed, the FoF ws ble to use co-invest vehicle tht ws sufficiently cpitlized to fcilitte the trde. In the ctivist context, mngers frequently seek to mss positions reltively quickly prior to Schedule 13D filing. Hving dedicted co-invest vehicle with committed cpitl cn enble such mngers to ct with the requisite speed where there re cpcity issues. J.P. Morgn Q

6 Investors Co-investments re potentilly ttrctive for lloctors becuse they offer ccess to high-conviction ides with lower fees nd, therefore, potentilly enhnced returns. 1. Speed of execution Institutionl investors typiclly lck the infrstructure to ct with the speed tht hedge fund co-investments often require. Therefore, by llocting cpitl to dedicted co-investment vehicle either directly through mnger or through n intermediry such s FoF institutionl investors cn essentilly purchse, or outsource, the bility to ct with the requisite speed since such vehicles re structured to drw cpitl s needed when trdes tht re suitble for co-investments rise. (Whether institutionl investors tht llocte cpitl to co-investment opportunities do so directly or through intermediries depends on investors underwriting nd diligence cpbilities.) It should be noted tht co-investment vehicles tht re formed before the underlying investment opportunities rise cn help lloctors solve the forementioned problems. By contrst, vehicles tht re formed on shorter timeline s opportunities rise will be suitble only for subset of nimble investors tht re flexible enough to ct with the requisite speed such s certin fmily offices. For this ltter ctegory of co-investment vehicles comingled funds or funds of one will be pproprite but seprtely mnged ccounts (SMAs) will not since SMAs re more dministrtively cumbersome for investors. More specificlly, with SMAs, investors ber responsibility for the selection of prime broker, custodin nd fund dministrtor nd for debit risk. Given the speed with which co-investment opportunities sometimes rise, the SMA formt will not be prcticble. 2. Reduced fee structures As in the privte equity context, hedge fund co-investment vehicles typiclly chrge lower fees. Frequently, there is no mngement fee nd lower performnce fee, often in the vicinity of 10 percent in excess of specified hurdle or high wter mrk depending on how the vehicle is structured. 3. Alignment of interests Mngers typiclly offer co-invest opportunities for higher-conviction ides. Becuse those opportunities re offered long with dvntgeous fee terms, mny investors believe tht co-investing provides strong lignment of interest with fund mngers. 4. Enhnced trnsprency Hedge fund co-investment vehicles frequently provide investors with opt-out rights or require ffirmtive consent for specific dels or trdes. Accordingly, such vehicles often provide investors with heightened trnsprency. 5. Underwriting nd diligence Although hedge fund mngers typiclly offer co-investments to existing investors, in some instnces such opportunities re offered to lloctors tht re not yet invested in mnger s primry fund. For such lloctors, which my be considering n investment in mnger s flgship vehicle, co-investments offer mens to perform due diligence on the mnger for its co-mingled fund product. This is prticulrly so for lrger FoFs tht run co-investment progrms. In turn, coinvestments my help mngers develop potentil pipeline of investors for their flgship products. FIG-04 Mnger nd Investor Incentives for Co-investing Incentives Mnger Applicbility Investor Applicbility Speed nd ese of execution Overcoming concentrtion limits Position sizing Reduced fees (higher potentil returns) Alignment of interests Enhnced trnsprency Product differentition nd ccess to unique opportunities Opportunity for underwriting nd diligence 5 J.P. Morgn Q1 2014

7 Structures Becuse co-investments re reltively new phenomenon mong hedge funds, the structures tht mngers re using tend to be idiosyncrtic rther thn stndrdized. However, certin ptterns re evident for vrious mnger types with respect to the structurl permuttions used for co-investment vehicles. Activist models Activist hedge funds tht re using co-investment vehicles to present investors with high conviction ides nd overcome cpcity limittions tend to employ truncted privte equity-like structures rther thn trditionl hedge fund structures. Unlike true privte equity funds, the durtions of which cn be up to ten yers or longer, ctivist co-investment vehicles tend to hve terms tht re closer to three yers. While the underlying investments re typiclly public equities nd thus highly liquid, they tend to hve longer durtions since ctivists need to mss nd then mintin sufficiently lrge positions to effect corporte chnges through bord representtion over time. It would be typicl, for exmple, for such structure to hve one-yer investment period followed by twoyer hrvest. These vehicles tend to shre other privte equity-like trits, including: Specified subscription periods Cpitl clls (i.e., n equity drw-down structure) Defined commitment periods Distribution wterflls for distributions of cpitl (including mnger hurdle rte) With these vehicles, ctivists re generlly seeking to lock up cpitl for stted term, which will be clled (i.e., drwn down) on n investment-by-investment bsis during specified commitment period. These vehicles frequently, though not lwys, permit recycling of cpitl during the investment period. Moreover, the durtions, i.e., terms, of such vehicles re often subject to one or more extensions of up to yer (typiclly subject to vote of the limited prtners). Notwithstnding the privte equity-like nture of these funds, ctivist mngers tht hve sponsored co-investment vehicles hve introduced number of innovtive fetures to llow for greter flexibility nd to more closely lign the structures of those vehicles with the underlying investment strtegies nd the instruments being purchsed (typiclly publicly trded securities). Such innovtions include: Open-ended (i.e., evergreen) commitment periods Limited redemption fetures subsequent to n initil lock-up period Opt-out or veto rights for individul investments Illustrtive exmple One mnger recently introduced co-investment fund tht provides cler exmple of the innovtions tht shreholder ctivists re using. The vehicle is privte equity-like in tht it hs cpitl commitment nd drwdown structure. However, the fund lso permits limited prtners to cncel ny portion of their commitment tht the mnger does not drw down in the first yer subsequent to the investor s subscription. Ech investment (which is mde to overcome cpcity limits longside the mnger s min fund) is mde through seprte specil purpose vehicle (SPV), typiclly Delwre LLC. Investors cpitl in ech SPV is locked up until the erlier of three yers from the dte of the investment or liquidtion. The term of ech SPV is subject to two one-yer extensions first t the mnger s behest nd, therefter, subject to mjority vote of the limited prtners. Risk limits provide for mximum percentge of ech investor s overll commitment tht my be llocted to ny single investment. Investors lso hve the right to opt out of ny future investment subject to certin notice requirements. Becuse of the investment-by-investment SPV structure, ny new investors tht commit to the fund re essentilly buying into future dels only. Consequently, existing limited prtners re protected from dilution in their current investments tht were mde through the co-investment fund. As is typicl of co-investment vehicles, the fund chrges reduced fees: Mngement fees No mngement fee on committed cpitl 1% on net sset vlue (NAV) of invested cpitl Performnce fees 15% on relized profits (del-by-del bsis) subject to high wter mrk on previously relized investments Fees While there is of course vrition mong the fee nd relted terms tht ctivist co-investment funds chrge to investors, certin ptterns re evident nd the fee levels tend to fll within rnge: Mngement fees 0-1% on invested cpitl only Performnce fees 10-15% on relized investments My be subject to high wter mrk Hurdle rte 6-8% preferred return on contributed cpitl (when pplicble) Hurdle rte typiclly depends on risk/return profile of underlying investment(s) J.P. Morgn Q

8 Single trde co-investments At the opposite bookend to the privte equity-like structures tht ctivist mngers tend to use re single trde, or single del, co-investment SPVs, which typiclly re more purely hedge fund-like. As with the ctivist models discussed bove, these co-investment vehicles re used mostly s overflow structures to obvite cpcity constrints. Mngers lso use these vehicles when they hve limited liquidity to execute trde. Although not lwys the cse, single del co-investment vehicles re most often employed by mngers with shorter-term, trding-oriented strtegies. Unlike trditionl hedge fund structures, single trde co-investment vehicles hve finite subscription periods. Redemption fetures vry, but investors usully hve stted liquidity rights subsequent to n initil lock-up period, the length of which will vry depending on the durtion of the underlying investment. These SPVs re run like seprte hedge funds nd therefore usully hve their own prime brokerge greements nd investment mngement greements between the mnger nd the limited prtner(s). Single trde co-investment vehicles re structured both s co-mingled funds nd s single investor funds. While such vehicles could be structured s SMAs, this is less preferble since the underlying trdes tend to rise nd must be cted upon quickly. When n SPV is structured to ccommodte single investor, the fund documents usully provide time by which the investment will be liquidted nd cpitl distributed in lieu of trditionl redemption feture. Certin investors interviewed for this report tend not to prefer single-trde co-investments becuse these vehicles lck the benefits of netting tht multi-investment vehicle provides. Single-trde co-investments lso offer no recourse to the mnger s min fund. A subset of those investors therefore will only invest in single trde SPVs on fund of one or SMA bsis where the investor typiclly hs more leverge to negotite nd cn therefore demnd more dvntgeous terms. Becuse of the netting risk, single trde co-investments my be more pproprite for investors with more tolernce for risk nd voltility. Credit-oriented co-investments In contrst to more trding-centric mngers tht tend to employ single del co-investment vehicles, creditoriented mngers (including those tht invest in less liquid credits, specil situtions, reorgniztions nd direct lending) generlly use commitment-bsed structures tht re derivtive of privte equity. 4 Like the ctivist exmples, these co-investment vehicles resemble truncted privte equity funds in tht they hve specified investment nd hrvest periods the lengths of which depend on the prospective durtion of the underlying investment(s). For exmple, such co-investment vehicle might hve one-yer commitment period nd three-yer hrvest with two FIG-05 Single Trde Co-investment Vehicle Representtive Terms Stndrd Hedge Fund Structure Single Investment SPV Term Indefinite Specified liquidity provisions my pply Subscriptions Rolling Fixed period Commitment period Open-ended Open-ended Subject to liquidity rights Redemptions / other liquidity rights Allowed on rolling bsis Not permitted during initil lock-up Permitted periodiclly therefter, or Specified horizon for liquidtion / distribution of cpitl Mngement fee 1.64% (men) 2 Bsed on NAV None Performnce fee 18.99% (men) 3 Subject to high wter mrk Typiclly up to 10% bove specified benchmrk 7 J.P. Morgn Q1 2014

9 one-yer extensions subject to percentge vote of the limited prtners. In contrst to the privte equity precedent, however, co-investment vehicles in this ctegory sometimes offer redemption fetures, thereby incresing their ttrctiveness for investors. Illustrtive exmple In one instnce, mnger lunched co-investment vehicle to ccommodte overflow cpcity for n investment in trde clims in pir of distressed finncil institutions. Investors in the fund hve the right to redeem on periodic bsis during the life of the fund. Although none of the limited prtners in the fund hve thus fr exercised their right to redeem, the mnger rrnged finncing through revolving bnk credit fcility to replce ny commitments tht were redeemed. Additionlly, becuse the underlying investments re sufficiently liquid, the mnger nticiptes being ble to sell positions to stisfy redemption requests if necessry. Fees nd other terms Unsurprisingly, the terms nd other fetures of co-investment vehicles in this ctegory lck stndrdiztion. Nonetheless, the rnge of fees nd other terms tht mngers nd investors reveled for this report is distilled in figure 6. Legl considertions Co-investment vehicles offer mngers number of benefits, including the bility to mke trdes nd tke positions in which they otherwise would be limited becuse of cpcity or other constrints. At the sme time, though, co-investments my give rise to legl nd regultory issues bout which mngers contemplting such products should be wre. While full legl nlysis of hedge fund co-investments is fr beyond the scope of this report, some key considertions re outlined below. Alloction policies The process of llocting investment opportunities between current nd prospective investors is key item for hedge fund mngers to consider when lunching co-investment vehicle. Hedge fund mngers hve fiduciry duty to their investors, which includes n obligtion to llocte suitble investment opportunities to them. While certin mngers interviewed for this piece offer co-investments to ll of their limited prtners on pro rt bsis, in mny instnces it will be imprcticl to do so. Accordingly, mngers might consider hving in plce cler policies nd procedures governing the processes by which they llocte investment opportunities to co-investments nd clerly disclosing those policies nd procedures to ll of mnger s investors. FIG-06 Credit-bised Co-investment Vehicle Representtive Terms Stndrd Privte Equity Structure Credit-centric Co-investment Vehicle Term Finite term (e.g., 10 yers) Finite Typiclly up to 6 yers Commitment period Fixed Rnge: 4 6 yers Fixed Rnge: 1 2 yers Subscriptions Finite subscription period Typiclly fixed Redemptions None None, or Permitted on rolling bsis Mnger use of revolving credit fcility Mngement fee 1.50% 2.00% Bsed on committed cpitl during investment period Possible step-down therefter Performnce fee 15% - 20% Bsed on net relized gins Distribution wterfll structure Rnge: 0.00% % Up to 20% bove hurdle rte (e.g., 8%) Sliding scle lso used e.g., 10% on first 10% of ny pprecition bove hurdle; 20% on pprecition in excess of 10% therefter J.P. Morgn Q

10 Liquidity rights On relted point, hedge fund mngers must ensure tht ll investors in co-investment vehicle, whether they re new or existing investors in min fund, hve the sme liquidity rights nd redemption fetures. Regultory reporting obligtions As with mnger s min fund, ny co-investment vehicle will need to be listed on Form ADV nd my require filing seprte Form PF. Furthermore, mnger must ensure tht the co-investment vehicle stisfies ll of the exemptions pursunt to the Investment Compny Act of Conclusion It is likely tht investor demnd for co-investment opportunities will continue to increse s prt of the overll trend of customiztion within the hedge fund industry. As mngers introduce co-investment vehicles with greter frequency, nd s investor ppetite for the flexibility tht such vehicles provide continues to grow, the structures nd terms used re likely to become incresingly stndrdized in the wy tht they hve for privte equity co-investments to some extent. In the mentime, we welcome inquiries from both mngers nd investors regrding opportunities, terms nd structures for hedge fund co-investments. 1 There is typiclly J-curve during the inception of privte equity fund s cpitl is drwn nd limited prtners re chrged fees but re not yet receiving ny return of cpitl in the form of distributions. 2 Source: J.P. Morgn Cpitl Introduction Group 2013 Hedge Fund Terms Anlysis, bsed on men mngement fee cross strtegy types. 3 Ibid. 4 It should be noted tht, for both the ctivist models nd credit-centric co-investments, institutionl investors tend to mke lloctions from their hedge fund progrms, not privte equity. For more informtion, plese visit: jpmorgn.com/investorservices Contct Us: Alessndr Tocco lessndr.tocco@jpmorgn.com Kenny King, CFA kenny.king@jpmorgn.com Christopher M. Evns c.m.evns@jpmorgn.com

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Morgn ), nd J.P. Morgn does not gurntee this Mteril in ny respect, including but not limited to, its ccurcy, completeness or timeliness. Informtion for this Mteril ws collected nd compiled during the stted timefrme, if pplicble. Pst performnce is not necessrily indictive of future results nd J.P. Morgn in no wy gurntees the investment performnce, ernings or return of cpitl invested in ny of the products or securities detiled in the Informtion. J.P. Morgn hs no obligtion to updte ny portion of this Mteril. This Mteril my not be relied upon s definitive, nd shll not form the bsis of ny decisions. It is the user s responsibility to independently confirm the informtion presented in this Mteril, nd to obtin ny other informtion deemed relevnt to ny decision mde in connection with the subject mtter contined in this Mteril. Users of this Mteril re encourged to seek their own professionl experts s they deem pproprite including, but not limited to, tx, finncil, legl, investment or equivlent dvisers, in reltion to the subject mtter covered by this Mteril. J.P. Morgn mkes no representtions (nd to the extent permitted by lw, ll implied wrrnties nd representtions re hereby excluded), nd J.P. Morgn tkes no responsibility for the informtion presented in this Mteril. This Mteril is provided for informtionl purposes only nd for the intended users use only, nd no portion of this Mteril my be reproduced or distributed for ny purpose without the express written permission of J.P. Morgn. The provision of this Mteril does not constitute, nd shll not be construed s constituting or be deemed to constitute, solicittion of, or offer or inducement to provide or crry on, ny type of investment service or ctivity by J.P. Morgn. Under ll pplicble lws, including, but not limited to, the US Employee Retirement Income Security Act of 1974, s mended, or the US Internl Revenue Code of 1986 or the Finncil Services nd Mrkets Act 2000 (Regulted Activities) Order 2001, s mended, no portion of this Mteril shll constitute, or be construed s constituting or be deemed to constitute investment dvice for ny purpose, nd J.P. Morgn shll not be considered s fiduciry of ny person or institution for ny purpose in reltion to Mteril. This Mteril shll not be construed s constituting or be deemed to constitute n invittion to tret in respect of, n offer or solicittion of n offer to buy or sell ny securities or constitute dvice to buy or sell ny security. This Mteril is not intended s tx, legl, finncil or equivlent dvice nd should not be regrded or used s such. The Mteril should not be relied upon for complince. An investment in hedge fund is specultive nd involves high degree of risk, which ech investor must crefully consider. Returns generted from n investment in hedge fund my not dequtely compenste investors for the business nd finncil risks ssumed. An investor in hedge funds could lose ll or substntil mount of its investment. While hedge funds re subject to mrket risks common to other types of investments, including mrket voltility, hedge funds employ certin trding techniques, such s the use of leverging nd other specultive investment prctices tht my increse the risk of investment loss. Other risks ssocited with hedge fund investments include, but re not limited to, the fct tht hedge funds: cn be highly illiquid; re not required to provide periodic pricing or vlution informtion to investors; my involve complex tx structures nd delys in distributing importnt tx informtion; re not subject to the sme regultory requirements s mutul funds; often chrge higher fees nd the high fees my offset the fund s trding profits; my hve limited operting history; cn hve performnce tht is voltile; my hve fund mnger who hs totl trding uthority over the fund nd the use of single dviser pplying generlly similr trding progrms could men lck of diversifiction, nd consequentilly, higher risk; my not hve secondry mrket for n investor s interest in the fund nd none my be expected to develop; my hve restrictions on trnsferring interests in the fund; nd my ffect substntil portion of its trdes on foreign exchnges. J.P. Morgn my (s gent or principl) hve positions (long or short), effect trnsctions or mke mrkets in securities or finncil instruments mentioned herein (or derivtives with respect thereto), or provide dvice or lons to, or prticipte in the underwriting or restructuring of the obligtions of, issuers mentioned herein. J.P. Morgn my engge in trnsctions in mnner inconsistent with the views discussed herein. IRS Circulr 230 Disclosure: JPMorgn Chse & Co. nd its ffilites do not provide tx dvice. Accordingly, ny discussion of U.S. tx mtters included herein (including ny ttchments) is not intended or written to be used, nd cnnot be used, in connection with the promotion, mrketing or recommendtion by nyone not ffilited with JPMorgn Chse & Co. of ny of the mtters ddressed herein or for the purpose of voiding U.S. tx-relted penlties JPMorgn Chse & Co. All rights reserved. All product nmes, compny nmes nd logos mentioned herein re trdemrks or registered trdemrks of their respective owners. Access to finncil products nd execution services is offered through J.P. Morgn Securities LLC ( JPMS ) nd J.P. Morgn Securities plc ( JPMS plc ). Clering, prime brokerge nd custody services re provided by J.P. Morgn Clering Corp. ( JPMCC ) in the US nd JPMS plc in the UK. JPMS nd JPMCC re seprtely registered US broker deler ffilites of JPMorgn Chse & Co., nd re ech members of FINRA, NYSE nd SIPC. JPMS plc is uthorized by the Prudentil Regultion Authority nd regulted by the Finncil Conduct Authority nd the Prudentil Regultion Authority in the UK. J.P. Morgn Securities (Asi Pcific) Limited is regulted by the Hong Kong Monetry Authority nd the Securities nd Futures Commission of Hong Kong. Other investment bnking ffilites nd subsidiries of J.P. Morgn in other jurisdictions worldwide re registered with locl uthorities s pproprite. Plese consult for more informtion.