Download Constructing the Appropriate Private Equity Investment

NCPERS Annual Conference:
Constructing the Appropriate
Private Equity Investment Program
Leveraging Fund-of-Funds to Enhance Returns
May 6, 2015
All data is in US$ unless indicated otherwise.
Confidential and Proprietary, in whole and in part.
This document is only intended for Qualified Investors in the US. It is not intended for and should not be distributed to, or relied upon, by members of the public or retail
investors. Please do not redistribute this document.
Outsourcing Private Equity Investing
Successful private equity investing requires specialized capabilities across many functions. Resource
limitations may drive the need for outsourcing.
SOURCING new investments requires consistent market
presence to access the best managers
SCREENING new investments requires access to current market
information and data for competitive analysis
EVALUATING new investments requires dedicated resources to
conduct in-depth quantitative and qualitative analysis
NEGOTIATING terms of new commitments requires an
understanding of best practices in aligning General Partner-Limited
Partner interest
MONITORING existing investments requires dedicated resources
to regularly engage with General Partners
2
Providing a Defined Solution
Fund-of-funds can complement an existing portfolio to provide a defined solution like diversification or
access to non-traditional managers.
Venture Capital
Sector Specialists
• Greater potential for
excess returns
• Deep industry
expertise
• Access to innovative
sectors
• Operating
experience
• Theme-based
investing
• Grasp of inherent
industry cycles
Small Managers
• Growth discipline
• More focus on value
creation, than on
financial engineering
• Less strategy “drift”
New Managers
Diverse Managers
• Differentiated
investment approach
• Unique insights and
investment
capabilities
• More nimble and
creative in both
sourcing and
structuring
• Differentiated
networks and
sourcing capabilities
3
Case Study: Optimizing Portfolio Exposure
Stage Stage
Exposure
Sector
Exposure
Sector
Exposure
Actual
Actual
Small Buyout
$60.0
Other
25
$50.0
20
$40.0
Technology
Financial Services
15
Large Buyout
10
$30.0
Early Stage
$20.0
$10.0
5
$0.0
0
Healthcare
Consumer Related
Late Stage
Business Services
Manufacturing
Size Dispersion
Multi Stage
Growth Equity
Vintage
Year
Exposure
Vintage
Year Exposure
Fund Size Exposure
Strategy Exposure
Actual
Actual
< $100M
70
2005
6
60
5
50
4
40
3
30
> $500M
20
2
10
1
0
$100M - $250M 2008
0
2006
2007
$250M - $500M
4
Case Study: Risk Management (Fund Level)
Global Economic
Growth Risk
Interest Rate Risk
Inflation Risk
Moderate
Low - Negligible
Low
Liquidity Risk
Leverage/
Financing Risk
Governance
Risk
Significant
Low - Moderate
Low - Moderate
5
Case Study: Risk Management (Partnership Level)
Global
Economic
Growth Risk
Interest
Rate Risk
Inflation
Risk
Liquidity
Risk
Leverage/
Financing
Risk
Governance
Risk
Fund A
Fund B
Fund C
Fund D
Fund E
Fund F
Fund G
Fund H
Fund I
Fund J
Fund K
Fund L
Fund M
Fund N
Fund O
Negligible
Low
Moderate
Significant
High
6
Contact:
Amit Tiwari
Director, Invesco Private Capital
[email protected]
7
Appendix
Invesco Private Capital
Seasoned Investment
Team
 Eight dedicated investment professionals in New York, San Francisco
and London
 Three industry veterans, each with over 20 years of private equity experience
30-Year
Investment
History
 Over $4.0 billion committed to more than 475 private equity funds
since 19811
Strong
Historical
Track Record
 Strong returns over a 30-year period achieved across multiple
investment cycles1
 Strong deal flow of quality manager funds, both established and New
& Next Generation
 Consistent selection of strong GPs within individual vintage years
Source: IPC. As of 6/30/14.
1 Including predecessor firms.
9
Invesco Private Capital
This is what differentiates us
Market Leadership &
Consistent
Performance
 30-year history of investing in Fund-of-Funds
Bias Toward
Small Funds
 Small & mid market buyout funds under $1 billion
 Consistent track record with top quartile performance over many
market cycles
 Early stage venture funds under $300 million
New & Next Generation  Complement 75% allocation to industry-leading funds with 25% allocation to new & next
generation funds
Market Focus
 Portfolios enhanced by selective inclusion of high-potential next generation partnerships
Disciplined Growth &
Investment Focus
 Raise pools of capital no greater than $500 million
 Maintain lean investment team that operates collaboratively as a single investment
committee
10
Constructing the Appropriate
Private Equity Investment Program
May 6, 2015
Presented by: Miguel Gonzalo, CFA, Partner & Head of Investment Strategy
Important Considerations
This presentation (the “Presentation”) has been provided to the recipient on a confidential and limited basis and for
educational purposes only. This Presentation is not investment advice or an offer or sale of any security or investment
product or investment advice. Offerings are made only pursuant to a private offering memorandum containing important
information. Statements in this Presentation are made as of the date of this Presentation unless stated otherwise, and
there is no implication that the information contained herein is correct as of any time subsequent to such date. The
recipient agrees not to copy, reproduce or distribute the Presentation, in whole or in part, to any person or party without
the prior written consent of Adams Street Partners.
12
Private Equity Investing
■
Primary
Investments
Private equity is appealing from a total
portfolio perspective because of:
‒ Potentially attractive, risk-adjusted
returns
‒ Imperfect correlation with other asset
classes
Diversified
Portfolio
Secondary
Investments
‒ Market inefficiency; transactions are
negotiated
Direct
Investments
‒ Very strong economic alignment
between portfolio company
management and investors
13
Global Private Equity & Venture Capital Index and
Benchmark Statistics
2014 update
Global Private Equity & Venture Capital Index 1
Barclays Capital Government/Credit Bond Index 2
Global Private Equity Only Index 1
MSCI World Index 2
Global Venture Capital Only Index 1
S&P 500 Index 2
30%
27.5%
24.2%
25%
20%
19.7%
17.0%
15.2%
15.1%
14.9%
15.8%
15%
15.0%
15.7%
13.9%
13.2%
13.5%
12.0%
11.6%
12.2%
9.8%
10%
9.5%
10.9%
9.6%
8.1%
7.1%
5%
7.0%
6.2%
5.6%
4.1%
4.3%
4.6%
1-year
5-year
10-year
4.9%
4.1%
0%
1.
2.
15-year
20-year
The index is an end-to-end calculation based on data compiled from 3,968 funds: 1,522 U.S. venture capital funds, including fully liquidated partnerships, formed between 1981 and 2014, and 1,171 U.S.
private equity funds and 1,275 global ex U.S. private equity & venture capital funds, including fully liquidated partnerships, formed between 1986 and 2014. Pooled end-to-end return, net of fees, expenses,
and carried interest (Source: Cambridge Associates LLC 9/30/14).
Sources: Barclays, MSCI Inc., and Standard & Poor’s. MSCI data provided “as is” without any express or implied warranties. Total returns for MSCI Developed Markets indices are net of dividend taxes.
14
Private Equity Subclasses
Source: Preqin as of December 31, 2014
15
Global Private Equity Allocation
Unconstrained Benchmark: Public Markets +300-500 basis points
Developed
Markets
20-30%
Emerging
Markets
10-15%
North
America
60-70%
Strategy Type
Co-Investment
7%
Subclass
Other
5-20%
Secondary
20%
Primary
73%
Venture
Capital
25-40%
Buyouts /
Growth Capital
50-70%
Primary Buyout Fund Sizes
Mega/Large
$2B+
25%
Small/Medium
$200M-2B
75%
Consistent commitment pace over time
Hypothetical portfolio allocations for illustrative purposes only.
16
Final Outcome Risk
Global Private Equity
Simulated Portfolio Return
7%
Portfolio TVPI
6%
Median:
Mean:
Dispersion1 :
Probability (>1.0x):
Probability (>1.2x):
Probability (>1.4x):
Probability (>1.6x):
Probability (>1.8x):
Probability (>2.0x):
Probability (>4.0x):
Probability (%)
5%
4%
3%
Global Private Equity
Single LBO Fund
1.70
1.72
1.72
1.80
0.17
100.0%
100.0%
99.0%
72.6%
24.3%
7.0%
0.0%
0.70
88.9%
79.4%
67.6%
55.7%
43.9%
33.3%
0.6%
1
Standard deviation of TVPI, measured at intervals of 0.02
2%
0%
<=0.02
0.1-0.12
0.2-0.22
0.3-0.32
0.4-0.42
0.5-0.52
0.6-0.62
0.7-0.72
0.8-0.82
0.9-0.92
1-1.02
1.1-1.12
1.2-1.22
1.3-1.32
1.4-1.42
1.5-1.52
1.6-1.62
1.7-1.72
1.8-1.82
1.9-1.92
2-2.02
2.1-2.12
2.2-2.22
2.3-2.32
2.4-2.42
2.5-2.52
2.6-2.62
2.7-2.72
2.8-2.82
2.9-2.92
3-3.02
3.1-3.12
3.2-3.22
3.3-3.32
3.4-3.42
3.5-3.52
3.6-3.62
3.7-3.72
3.8-3.82
3.9-3.92
4-4.02
4.1-4.12
4.2-4.22
4.3-4.32
4.4-4.42
4.5-4.52
4.6-4.62
4.7-4.72
4.8-4.82
4.9-4.92
>=-5
1%
Portfolio TVPI
Global PE
Single LBO Fund
■
A global diverse portfolio should have optimal mix of secondaries and co-investments in initial investing years
■
They provide diversification and help mitigate J-Curve
■
More primary GP diversity allows for greater probability of achieving target IRR and multiple
■
A global diversified portfolio offers the best return for unit of risk (Sharpe ratio) for many investors
The return data presented herein is based on historical portfolio company data of ASP funds of funds’ underlying private equity fund investments and represents simulated partnership funds; these
returns are hypothetical and are intended to be used for illustrative purposes only. This return data does not reflect actual performance of any Adams Street Partners fund or any private equity fund
in which an Adams Street Partners fund of funds invests. There can be no guarantee that any portfolio constructed in a manner similar to the simulation presented herein will achieve returns in the
ranges of hypothetical portfolio performance presented herein. Past performance is not a guarantee of future results.
17
Private Equity: Risk and Return
As of June 30, 2013
2.5
Multiple of Invested Capital
2X Levered
S&P 500
2
2.0
Diversified Private Equity
MSCI Emerging
Markets Equity
1
Single Private 3
Equity Fund
MSCI World
S&P 500
1.5
1.0
0%
5%
10%
15%
20%
25%
30%
35%
Historical Experience of Capital Loss 4
Data is as of 6/30/2013. This analysis is an update to the original study completed by Adams Street Partners with data as of 6/30/2011. Study is available upon request. For private market investments,
this exercise defines the final multiple of invested capital as the sum of cumulative investment distributions and total investment value divided by invested capital, from the initial investment date to
liquidation. For public market investments, the final multiple of invested capital is defined as the sum of cumulative dividends/distributions and total investment value divided by invested capital, for the five
year period from the initial investment date. The five year period was used as the best representation of the duration of the private market investments that were analyzed.
1.
(Cambridge and Thomson): Based on returns of periods of four consecutive vintage years, 1980-2010. The Thomson Reuters Private Equity Fund Performance Survey and Cambridge Associates
LLC are recognized sources of global private equity data that may not include all private equity funds and may include some funds which have investment focuses that Adams Street Partners does
not invest in. Neither source includes secondary investments in private equity funds.
2.
(2X Levered SP500): Based on return of the ProShares Ultra S&P500 ETF (SSO).
3.
(Single PE Fund): Based on the mean return for a single PE fund in the Thomson Reuters database, vintage years 1980-2010.
4.
“Historical Experience of Capital Loss” is defined as the number of investments, expressed as a percentage of the total sample, that returned a final multiple of invested capital of less than 1.0.
Historical Experience of Capital Loss is determined over five year intervals for public market investments, and from initial investment date to liquidation for private equity investments.
For illustrative purposes only; not intended to predict the performance of any portfolio.
18
Smaller Investments Have Consistently Generated
Higher Multiples
Realized US buyout deals (By deal size and investment year)
As of December 31, 2014
<=25MM
4.0x
25-100MM
3.5x
3.3x
3.5x
3.4x
3.0x
>100MM
2.7x
2.6x
2.5x
2.6x
2.7x
2.5x2.5x
2.5x
2.3x
2.0x2.0x
2.0x
1.8x
1.5x
2.0x
1.9x
1.7x1.7x
1.7x
1.4x
1.3x
1.0x
0.5x
0.0x
1994-1998
1999-2001
2002-2004
2005-2006
2007-2008
2009-2011
1994-2011
Source: Adams Street Partners Investment Research Explorer (ASPIRE) as of December 31, 2014.
US buyout investments of funds in which Adams Street Partners’ Core Portfolios invested on a primary basis, which investments were realized or substantially realized (all investments of which more than 90%
of total value or initial investment cost have been realized) as of December 31, 2014. “Core Portfolios” are funds and separate accounts (excluding special mandate funds and non-discretionary separate
accounts) of which Adams Street Partners is the general partner, manager or investment adviser (as applicable) and for which Adams Street Partners makes discretionary investments in private equity funds.
Core Portfolios include separate accounts no longer with Adams Street Partners. This data is for educational purposes only and does not reflect performance of any particular Adams Street Partners fund.
Multiples are gross of Adams Street Partners’ and underlying general partners’ fees, expenses and carried interest, which reduce returns to investors.
Past performance is not a guarantee of future results. There can be no guarantee that partially realized investments will ultimately be liquidated at values reflected in this data.
19
Why Secondaries?
Private Equity Fund Cash Flow Profile
Contributions
Distributions
Cumulative Cash Flows
Advantages
Target Secondary
Investment Period
1
2
3
4
5
6
7
8
9
10
Fund Duration (Years)
Investment Period
11

Attractive risk/return
proposition

J-Curve mitigation

Faster return of capital

Risk management through
price

Vintage diversification

Low loss rates

Market-driven value play
12
Harvest Period
20
Venture and Buyout Returns Have Been Countercyclical
■
US PE returns by vintage year show that LBO and VC investments do not always follow the
same cycles
■
The cyclicality of returns allows for a diversification benefit for portfolios consisting of both subclasses
Net IRRs of US VC and PE Firms
By Fund Vintage Year (as of 9/30/14)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
VC Net IRR
Source: Burgiss as of September 30, 2014.
LBO Net IRR
21
Private Investors Benefit From Pre-IPO Value Creation
Market capitalization at IPO
$81.7 Billion
$8.9 Billion
$8.3 Billion
$225 Million
Cisco
$560 Million
Amazon
1980’s – 1990’s
Source: Capital IQ as of 4/1/2015.
$690 Million
Microsoft
Workday
LinkedIn
Facebook
2000 – Present
22
Summary
■
Private equity provides return enhancement and diversification
■
A strong private equity program needs to be diversified over time, subclass, sector, and geography
■
Secondary investing helps jump start a private equity program from an investment and performance
perspective
■
Technology shifts have positively impacted private equity opportunity set
■
Private equity investors benefit from pre-IPO value creation
■
Terms are improving for Limited Partners at scale
23
Appendix
24
Glossary
General Partner (GP)
The team that oversees the investment of a specific private equity fund.
Limited Partners (LPs)
The investors in a limited partnership.
Commitment
A limited partner's obligation to provide a certain amount of capital to a fund.
Primary Investments
An original limited partner commitment to a private equity fund sometimes referred to as blind pool
commitments.
Secondary Investments
Generally refers to the purchase of investment commitments from an existing LP.
Buyout Co-Investment
A minority investment in a company made alongside of a GP.
Vintage Year
The year of fund formation and first takedown of capital.
IRR (Internal Rate of Return)
The discount rate that equates the net present value (NPV) of an investment's cash inflows with its
cash outflows.
Subclasses
Venture Capital
Early-stage (which provide capital for businesses in the conceptual stage, or where products are
not fully developed and revenues and/or profits may not exist) and later-stage (which provide
growth or expansion capital for more mature businesses) venture capital partnerships.
Buyout
Partnerships that provide equity capital for acquisition transactions or refinancings.
Mezzanine/subordinated debt
Partnerships that provide intermediate capital between equity and senior debt in acquisition or
refinancing transactions.
Restructuring/distressed debt
Restructuring partnerships make new equity investments in financially or operationally distressed
companies; distressed debt partnerships purchase debt of companies in distress.
Special Situations
Partnerships with a specific industry focus, or unique opportunities falling outside the regular
subclasses.
Sources: Thomson Reuters and Adams Street Partners, LLC
25
Miguel Gonzalo, CFA
Partner & Head of Investment Strategy, Chicago
■
As a Partner and Head of Investment Strategy, Miguel combines our bottom up
investment research with top down forward-looking views in order to construct
portfolios that meet our clients’ objectives. Miguel collaborates with investors
to formulate strategies that leverage Adams Street Partners’ global capabilities.
■
Miguel has worked closely with investors in the management of their portfolios,
including the development and ongoing monitoring of their private equity
programs since 2000. He is actively involved in the portfolio construction and
ongoing monitoring of the various fund of funds programs and separate
accounts. In addition, he maintains relationships with investment consultants
to ensure continuity with client objectives.
■
Prior to joining the Private Equity Group in 2000, Miguel was Head of the
Performance Analysis Group in the Asset Allocation/Currency Group of Brinson
Partners where he oversaw the design and management of the Firm's
performance attribution and analytics systems.
■
Miguel is a member of the Adams Street Partners Portfolio Construction
Committee, the CFA Society of Chicago and the CFA Institute
EDUCATION:
University of Notre Dame,
BA
Northwestern University,
MBA
YEARS OF INVESTMENT/
OPERATIONAL EXPERIENCE:
22
26
Long History as a Private Equity Leader
1972: Began direct
investing
1979: Established
industry’s first fund of
funds
1970s
1985: Established first
private equity
performance
benchmarks with
Venture Economics
(formerly known as
Thomson Reuters)
1980s
1986: Began
secondary investing
1988: Helped NVCA
establish valuation
guidelines for PE
industry
Established one of
first dedicated
secondary funds
1992: Helped
establish AIMR/CFA
performance
guidelines for the
industry
1996: Began annual
fundraising process
1990s
1997: Opened London
office (began
international investing
program)
1999: Began
dedicated research in
Asia
2000: Inducted into
Private Equity Hall of
Fame
2001: Became
independent,
employee-owned firm
2004: First
commitment to India
2000s
2010s
2005: First
commitment to China
2011: Opened Beijing
office
2006: Opened Menlo
Park and Singapore
offices
2012: 40 Years in
Private Equity
2007: First
commitment to Russia
2014: Opened Tokyo
Office
2009: First
commitment to Latin
America
27
Washington State Investment Board
Constructing the Appropriate Private Equity Investment
Program
Tom Ruggels
Senior Investment Officer – Private Equity
Washington State Investment Board
WSIB Private Equity Program
Through September 30, 2014

Since inception (October 1981):
– $44.3 billion fund commitments
– $38.5 billion paid-in capital
– $40.8 billion distributions received
– $20.6 billion net gain
– 13.3% net IRR
– 1.5x net multiple

Current portfolio:
– $18.3 billion valuation
– Across 207 active funds
– $10.2 billion undrawn commitments
– ~80 general partner (GP) relationships
– ~40 “core” GP relationships
WSIB Private Equity Program Management

The target allocation to private equity is 23% of the retirement fund portfolio

Private Equity invests only in funds – i.e. no direct investments

Eight internal staff dedicated to private equity

Hamilton Lane is the Board’s private equity consultant

Private Markets Committee evaluates recommendations from staff and
consultant

Committee makes recommendations to the Board

All investments are approved by the full Board
WSIB Private Equity Portfolio Diversification
September 30, 2014
By Strategy Type
By Geography
Distressed
Buyout Small
Debt
Venture Capital 5.6%
2.1%
/Growth Equity
Buyout Mid
7.4%
17.7%
Special
Situations
/Multi-Strategy
Mezzanine
11.1%
0.1%
Buyout Mega
32.0%
Buyout Large
24.0%
Europe
21.7%
Asia
8.3%
Rest of World
3.2%
North America
66.8%
Building a Program – Key Considerations
Governance

Who recommends investments?
– Staff
– External advisor(s)
– Combination

Who approves investments?
– Full Board
– Committee of Board
– Staff
– External advisors
Building a Program – Key Considerations
Targeted Investment Structures

Fund investments (limited partnerships)
– Primary
– Secondary
– Fund of Funds

Separately managed accounts

Co-investments

Direct investments
Building a Program – Key Considerations
Risk Profile

Stage of investment
– Venture capital
– Growth equity
– Buyouts

Geographic coverage
– U.S. only
– Developed international
– Emerging markets

Where in capital structure?
– Equity strategies only
– Debt strategies
Building a Program – Key Considerations
Staffing

People make the difference
– Must be able to attract, develop and retain quality staff
– Retention is challenging for many public funds
– Competing with private sector and larger plans for talent
– In some cases, outsourcing may be the best option
– Continuity is very important
– Institutional memory
– Relationship building
– Consistency of strategy

More than just investment staff
– Back office/accounting/reporting
– Legal support
Keys to Success

People

Partners

Portfolio construction

Patience