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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