Exhibit B – Private Equity Manual

PRIVATE EQUITY
MANUAL
ERS PRIVATE EQUITY
Private Equity Manual

Contents
Contents............................................................................................................................................................................. 1
Purpose .............................................................................................................................................................................. 2
Definitions .......................................................................................................................................................................... 2
General .......................................................................................................................................................................... 2
Strategies ....................................................................................................................................................................... 4
Economics ...................................................................................................................................................................... 5
Metrics ........................................................................................................................................................................... 6
Structures ....................................................................................................................................................................... 7
Investment Process ............................................................................................................................................................ 8
Overview ........................................................................................................................................................................ 8
Portfolio Construction .................................................................................................................................................... 8
Annual Tactical Plan ................................................................................................................................................... 8
Specific Investments ................................................................................................................................................... 8
Classification .............................................................................................................................................................. 9
Diversification............................................................................................................................................................10
Portfolio Management ..................................................................................................................................................11
Monitoring ................................................................................................................................................................11
Reporting...................................................................................................................................................................12
Annual Private Equity BoT Presentation ............................................................................................................................12
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Purpose
The Private Equity Manual has the purpose of providing ERS’ Board of Trustees with greater understanding of Private
Equity (“PE”) terms, procedures and reports to facilitate the staff’s communication and presentation of Private Equity
Portfolio status and development.

Definitions
General

Term Description
General Partners (GPs) ▪ The managers that run the private equity fund.
▪ Make all investment and exit decisions.
Limited Partners (LPs) ▪ The investors in the private equity fund.
▪ Examples: endowments. pension funds, high net worth individuals, etc.
▪ LPs have no input into investment and exit decisions.
▪ Since LPs are not involved in investment decisions, they are not liable for
outcomes.
Commitment ▪ The amount each LP contractually agrees to give the fund.
▪ Includes investment principle and fees.
▪ Once committed, the LP cannot exit the fund - but they can sell their
ownership/stake.
Investment Period ▪ The time period over which GPs can add new platform companies to their
portfolio.
▪ Usually 4-6 years.
▪ Add-on investments can continue to be made after the investment period.
Capital Calls ▪ Fees and investment capital are called over time.
▪ The fund is usually making distributions before all capital is called.
▪ Thus, rarely does the commitment = exposure.
Capital Distributions ▪ Process by which capital is returned to investors
Uncalled or Unfunded ▪ Total commitment less contributions to date. The unfunded commitment is the
Commitment remaining capital the LP is obliged to pay to the GP of the fund for future
investments.
Vintage ▪ The definition can vary, but usually is the year the fund is raised or makes its
first investment.
▪ As capital is called over time, funds are benchmarked against other funds of the
same vintage.
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Term Description
PE Advisor/Consultant ▪ A firm that provides advisory services for a fee. Different consultants can be
hired for an individual investor operating on different parts of their investment
portfolios and/or strategies. Consultants can be: Discretionary: Makes all
investment decisions on behalf of an institution, but within specific guidelines.
Non-Discretionary: The investor retains the decision on whether or not to invest
in the consultant's recommendations.

PE Program Benchmark ▪ The Whilshire Trust Universe Comparison (TUCS) report for pension systems
greater than $5 billion dollars.
Fund Benchmark ▪ Primary and Fund of Fund vehicles are benchmarked to Burgiss' Private I
Database. The database is broken down by vintage and strategy for better
representation of returns.
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Strategies

Term Description
Leveraged Buyout (LBO) or ▪ Majority equity investments in companies acquired typically with the use of
Buyout financial leverage.
▪ Companies are usually more mature and generate operating cash flows.
Venture Capital & Growth ▪ Equity investments in the launch, early development, or expansion of a business
Equity - often technology related.
▪ Venture Capital can be sub-divided into early stage, mid stage and late stage.
▪ Minority equity investments in more mature companies that are growing
quickly.
▪ Companies use capital to expand or restructure operations, enter new markets
or finance a major acquisition without a change of control.
Distressed or Special ▪ Equity or debt securities of a distressed company, or a company where value
Situations can be unlocked as a result of a one-time opportunity (e.g. a change in
government regulations or market dislocation).
Secondary investments ▪ Investments made in existing private equity assets including private equity fund
interests or portfolios of direct investments in privately held companies.
Energy and Natural Resources ▪ Investments in a wide variety of companies engaged in the production and sale
of energy, including exploration, fuel extraction, manufacturing, refining and
distribution (Energy) or companies engaged in the production or transmission of
electrical power (Power).
▪ Investments in natural resources that require some type of extraction,
development or conversion to realize their value.
Subordinated or Senior Debt ▪ A relatively recent developmental area for private equity.
▪ As banks have withdrawn from lending due to regulatory requirements, funds
have been raised to meet the demand for senior and junior debt products.
Co-Investment ▪ Direct investment made by a limited partner in a company/asset backed by a
fund. The limited partner therefore acquires two separate stakes in the
company/asset: one indirectly through the fund and one directly in the
company/asset.
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Economics

Term Description
Organizational / ▪ Fees that are paid to raise and operate the Fund.
Administrative Fees ▪ Capital is drawn by the GP from LPs against their commitment.
Management Fees ▪ Fees that the GP uses to pay salaries and non-reimbursed expenses while
investing and harvesting the Fund’s capital.
▪ Usually range from 1.0-2.5% per year.
▪ Fees can be substantial for large funds (a $1 billion fund with 2.0% fee charges
$20 million per year).
▪ Note: All fees have to be paid back to investors (part of Preferred Return
calculation).
Portfolio Company Fees ▪ Fees that the GP charges its portfolio companies for various services.
▪ Capital is NOT drawn from LPs.
▪ It is common to offset any fees received from portfolio companies against the
management fee.
Preferred Return ▪ A minimum annual return the GP agrees to achieve for the LP - usually 8%.
▪ Gives the LP a semi-guaranteed return.
▪ Frequently mischaracterized as a fee.
Carried Interest ▪ In reality, it is profit sharing between the LPs and the GP.
▪ Capital is NOT drawn from LPs.
Economic Costs ▪ Term utilized to describe Management Fees and Carried Interest.
▪ For Buyouts Funds, "2 and 20" are descriptive of commonly seen economic
costs - or 2% management fee and 20% carried interest.
Waterfall ▪ European Waterfall: distribution schedule is applied at an aggregate fund level.
With this schedule, all distributions will go to investors and the manager will not
participate in any profits until the investor’s capital and preferred return have
been fully satisfied. A drawback is that the majority of the manager’s profits
may not be realized for several years after the initial investment.
▪ American Waterfall: distribution schedule is applied on a deal-by-deal basis, and
not at the fund level. The American schedule spreads the total risk over all the
deals and is more beneficial to the general partners of the fund. This structure
allows for managers to get paid prior to investors receiving all their invested
capital and preferred return, though the investor is still entitled to these.
Savings ▪ Reduction of economic costs through negotiations or sourcing of co-investment
opportunities, which usually include zero management fee and zero carried
interest.
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Metrics

Term Description
Net Asset Value (NAV) ▪ The total value of a fund’s portfolio less liabilities. The NAV of LP interest is
valued on the LPs contribution to its commitment.
Total Value to Paid-In (TVPI) ▪ The ratio between the total value that the LP has derived from its interest in the
partnership – i.e. distributed cash and securities plus the value of the LP’s
remaining interest in the partnership – and its total cash investment in the
partnership, expressed as a multiple. It is important to note that this measure
does not reflect the time value of money, and therefore will not show whether
one partnership has returned value to LPs more quickly or more slowly than
another. However, it is one measure of ‘profit’ or ‘loss’ for the LP.
Net Internal Rate of Return ▪ The net IRR earned by an LP to date after fees and carry. The internal rate of
(Net IRR) return (IRR) is based upon the realized cash flows and the valuation of the
remaining interest in the partnership. IRR is an estimated figure, given that it
relies upon not only cash flows but also the valuation of unrealized assets. The
IRR estimates shown are both those as reported by the LP and/or GP and those
that ERS' system has calculated internally, based upon cash flows and
valuations, provided for individual partnerships.
Distributed to Paid-In (DPI) ▪ The proportion of the called-up capital that has been distributed or returned
back to LPs. This will include cash and stock distributions, with the latter valued
as at the date of distribution and treated in the same way as a cash distribution.
Quartile Ranking ▪ This shows which quartile of the relevant peer group the fund falls into. When
calculating the quartile ranking, equal weight is placed on IRR and multiple. Top-
quartile funds are funds with an IRR or multiple equal to or above the upper
quartile benchmark; second-quartile funds are funds with an IRR or multiple
equal to or above the median-quartile figures but below the upper-quartile
figures, etc.
Economic Exposure ▪ Net Asset Value plus Uncalled Commitments
Reporting Lag PE Quarterly reporting usually is received by LP's 45 days after the closing of the
quarter. This is due to the time for all companies (some of which are in the
process of developing their financial departments) to close accounting books
and report to PE managers, who then need to consolidate and close their own
books.
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Structures

Term Description
Commingled Fund ▪ An investment structure that pools investments from multiple external
investors into one account managed or advised by the fund manager. Investors
share in the assets of the fund.
Fund-of-Funds (FoF) ▪ Specialist fund manager, raising funds from the capital of institutional investors
with which investments in other private capital funds are made. It may provide
exposure to funds that would otherwise be inaccessible to smaller investors.

Fund-of-One (Fo1) ▪ An investment structure that has only one LP.

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Investment Process
Overview
ERS PE investments involve the purchase of unlisted, illiquid common and preferred stock, and to a lesser degree,
subordinated and senior debt of companies that are in most instances privately held. The Private Equity Portfolio
executes investments either through closed-end fund structures via limited partnership interests (includes direct
partnerships, fund-of-one and/or commingled fund-of-funds vehicles) or through co-investments.

Co-investments are made alongside general partners with whom ERS has a limited partnership relationship. The co-
investments fall outside the scope of ERS’ existing limited partner relationship with the general partner, and are
generally offered as an option on a “deal-by-deal” basis. These investments are generally made into a special purpose
vehicle (“SPV”) controlled by the general partner. The SPV will typically be governed by terms substantially similar to the
main limited partnership, but typically the SPV will generally call for low or no fees and/or carry for the general partner.

All PE investments in the ERS portfolio are made in a manner consistent with the whole portfolio approach and the
exclusive benefit requirements of the Texas Constitution. The selection and management of private equity assets are
guided to maintain prudent diversification of assets and management responsibility, and to preserve investment capital.

Portfolio Construction
Annual Tactical Plan
Annually, PE staff works alongside the PE Consultant to prepare a Tactical Plan which reviews the current status of the
portfolio, recent historical and prospective market conditions and proposes the steps to be taken over the next 12-
month period to further implement the long-term strategic plan. Employing a projection model, the plan will develop a
dollar commitment target for the year. The Tactical Plan will be provided to the Board for review and approval at the PE
Program Annual Review.

Specific Investments
PE Staff, assisted by the PE Consultant, identifies and evaluates limited partnerships, co-investments, and, as
appropriate, other investment vehicles that are in compliance with ERS’ investment policies. PE Staff is responsible for
the due diligence evaluation of the prospective investments. Staff prepares a detailed data sheet, investment
recommendation and presentation based on its findings in due diligence. The due diligence process consists of the
following components:

• Initial Consideration-Pipeline
• Site visits/ Phone Calls / Zoom Meetings
• Reference Checks
• Background Checks
• Additional Documents such as: due-diligence questionnaire, firm sourcing, investing and exiting processes,
audited financial statements, etc.
Screening and selection will be made with a view to maximize the risk adjusted rate of return, within the parameters
and allocations of each private equity strategy as described in the Diversification portion of this document. Manager
evaluation criteria includes, and is not limited to:
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Track Record Investment Professionals

length, rate of return, timing, realized investments, etc. relevant experience, complimentary skills, tenure, etc.

Organization Investment Strategy

sufficient support, controlled growth, low turnover, etc. clear, articulated, logical, established, unique, etc.

Assets Under Management Business Practice Management

institutional and sophisticated clients, long-term clients, etc. credibility, performance of portfolio functions, reporting, etc.

Fit Within Strategic & Tactical Plans Terms & Conditions

fill under-weighting, target of Annual Tactical Plan, etc. partnership size, economic terms, governance, etc.

Consideration of Emerging Fund Managers

in compliance with HB 2559 of 81st Legislature, which added subsections (g), (h), and (i) to Section 815.301 of Texas Government Code

For investments approved by the Investment Committee, Staff is responsible for all aspects of negotiation,
documentation and legal reviews and closings. Staff may request the Consultant to assist in various aspects of its duties.

Classification
Data obtained through the due-diligence is gathered and evaluated to define attributes utilized to classify and categorize
PE approved commitments.

• Fund Structure:
o Primary Vehicle: An investment vehicle where over 50% of capital is deployed towards assets and not
blind pools of capital commitments.
o Co-Investment Vehicle: An investment vehicle where the PE Portfolio obtained significant economic
cost reductions. This vehicle can hold one or more investments and may include different strategies.
o Fund-of-Funds: A limited partnership where the GP commits capital to other blind pools of capital
following a specified strategy.
• Strategy:
o For PE Portfolio Strategies, please refer to the Terms section of this document.
o Staff evaluates GP’s track record to allocate investment according to strategies. Factor considered
include and are not limited to: sector focus, forecasted cash flows, ownership percentage, height in
the capital structure, developmental stage, etc. Analysis of allocated track record and due-diligence
documents, along with expectation for future investments, guide PE Staff in determining the best
strategy assignment for each opportunity.
• Geography:
o Geographies assignments include: North America, Latin America, Europe, Asia, Africa, Middle East and
Global.
o Analysis of track record and expectations for future investments are considered to define the
geography of ERS’ PE commitments. Any geography must represent over two thirds of expected
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capital deployment to be assigned as geographical focus. If no single geography can be identified, then
commitment will be considered “Global.”
• Industry Sector:
o PE Staff utilized the Global Industry Classification Standard developed by MSCI and Standard & Poor’s
to allocate its commitments.
o Analysis of track record and expectations for future investments are considered to define Sector
allocation for ERS’ PE commitments. A Sector must represent over two thirds of expected capital
deployment to be assigned as the focus. If no single Sector can be identified, then commitment will
be considered “Generalist.”
Diversification
• Investment Strategy: The following private equity strategies and investment types will be considered eligible
for the ERS’ portfolio. Long-term ranges are established for each strategy to be achieved at full investment.

Portfolio
Strategy Range
Buyouts 35% to 60%
Venture Capital & Growth Equity 10% - 30%
Special Situations 0% to 5%
Secondaries 5% to 30%
Energy & Natural Resources 5% to 20%
Subordinated, Senior or Distressed Debt 0% to 15%

• Geography: Over the long-term, the PE Portfolio should seek diversification with regard to major regional
areas both domestically (e.g. Northeast, Mid-Atlantic, Southeast, Midwest/Plains, Southwest/Rockies, West
Coast, Pacific Northwest, etc.) and internationally (e.g. Europe, Latin America, Asia, etc.). International private
equity investments shall comprise no more than 50% of the private equity investment allocation, and shall be
diversified in the context of the total portfolio.
• Industry Sector: ERS’ PE Portfolio will seek to diversify by industry sector (e.g., Biotechnology, Financial
Services, Healthcare, Medical, Media/Communications, Technology, Consumer/Retail, Basic Industry, Other,
etc.). If any one industry classification represents more than 20% of the Private Equity Portfolio, a review of
the System’s holdings and exposures in that industry category will be undertaken.
• Life Cycle: Commitments to partnership investments will be staged over time. It is ERS’ long-term goal to
spread out investment timing such that new commitments will be made each fiscal year. This objective will
have the effect of dollar-cost-averaging ERS’ portfolio over business cycles and helps insulate the portfolio
from event risk.
• Investment Sponsor: Investments will be made such that at full investment a maximum of 20% of the total
private equity allocation, based on combined net asset value and uncalled commitments, can be invested at
any point in time with any single general partner, entity, related organization, or associated co-investments.
No single PE investment strategy will comprise more than 70% of the allocation, based on combined net asset
value and uncalled commitments. The System is permitted to own up to 25% of any particular commingled
partnership, or a combined 25% of a single commingled partnership and its affiliated co-investment vehicles
in which ERS has participated, subject to the partnership sponsor limitation above. The ERS may own up to
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100% of fund-of-funds vehicles that invest in partnerships, not directly in companies (i.e., fund-of-one
vehicles).
Portfolio Management
Monitoring
PE Staff is responsible for maintaining communication with the general partners of the investments, maintaining an
awareness of the progress and level of performance of each partnership investment. This monitoring consists of periodic
phone calls, video conferences and face-to-face visits, (including annual meetings) with the fund manager. Any relevant
press material will be documented as well and will be communicated to the Investment team.

The Private Equity conducts research to keep itself informed of the overall market conditions relative to the investments
and the investments’ competitive position in the applicable investment strategies. The Staff will also be responsible for
attending to amendments, resolutions and other investment related matters.

On a quarterly basis, the PE Team will conduct a formal review of its portfolio. PE Staff will seek the following
information, either through standard reporting, GP meetings/calls, Burgiss’ Private I Information System or by request as
part of its quarterly monitoring process:

• Fund Financial Statements

• ERS Capital Account Statement
• Portfolio Company Updates
• Form ADV (as amended)
Staff organizes a Quarterly Review Meeting to consolidate, discuss and define fund and company ranking for the PE
Portfolio. The Team will assign a ranking using quantitative and qualitative analysis.

• Quantitative Analysis: All active Primary Funds and Fund of Funds are split up by strategy and plotted on a
graph, which contemplates financial returns (TVPI) and vintage. Each strategy’s graph also provides quartile
breakdowns for Burgiss’ Private I Database of funds. This allows the team to assign color status to each fund:
o Green: Determined as the return profile of (75th) and (50th) quartile funds.
o Yellow: Determined as the return profile of (50th) and (25th) quartile funds.
o Red: Determined as the return profile of (25th-below) quartile funds
• Qualitative Analysis: All investment vehicles are discussed, analyzed and assigned a color status. The
investment professional responsible for the fund leads the discussion as team members question and also add
macro and micro content to the analysis. PE Staff will use the Quantitative Analysis in conjunction with the
qualitative review process to rank funds, make judgments and make upgrades/downgrades to the quantitative
rankings as appropriate. It should be noted that benchmarking a fund quantitatively within the first three to
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four years does not provide a meaningful indication of how a fund will perform over its life; either on an
absolute basis or on a relative peer group basis. Topics examined include, but are not limited to:
o General Partner’s original underwriting base case
o Current and future expected market conditions
o Fund’s lifecycle
o Fund’s realized returns, unrealized and partially realized returns and amount of remaining uncalled
commitments
o General Partner’s senior management / partner retention
o Fund’s transparency and reporting accuracy
o Significant fund valuation changes
o Audited financial reports
o Performance in relation to strategy benchmark
After the ranking review is complete, this information is presented to the ERS Board of Trustees as part of the Quarterly
Review Report.

Reporting
In addition to the Annual Tactical Plan produced each fiscal year, the PE Team compiles additional reports. A typical
representation of these reports is included in the table below. Other reports may be generated as necessary on an ad-
hoc basis.
Distribution
Category Report Name Description Prepared By IC BoT ED IAC CIO PE
Quarterly NAV, cash flow and returns analysis
Quantitative Ranking
Review Quarterly Review Report PE Staff     
Qualitative Ranking
Quarter's investment activities summary
Monthly cash flows and NAV analysis
Review Monthly PE Summary FYTD investment activities analysis PE Staff     
FY Tactical Plan Status
Monthly NAV, cash flow and returns analysis
Monthly & 12 Month reconciliation
FYTD cash flow analysis
Review Monthly PE Review PE Staff  
FYTD investment activities
Investment pipeline
Quaterly returns and value creation analysis
Portfolio cash flows and returns
Portfolio allocation and diversification
Review Quarterly Portfolio Report PE Consultant 
Fund status report
PE market update and stats
Official memo requesting IC's approval
Manager's track record and attribution
Action Investment Recommendation Manager's strategy and operations description PE Staff    
Manager's team description
Other due-diligence findings
Consultant Investment PE Consultant’s independent investment review
Review PE Consultant    
Recommendation
Memo:
IC = Investment Committee
Bot = Board of Trustees
EO = Executive Director
IAC = Investment Advisory Committee
CIO = Chief Investment Officer
PE = PE Staff

Annual Private Equity BoT Presentation