PitchBook Returns Benchmark Fall 2010

TheBenchmarkingReport

PitchBook

Fall 2010

Private Equity | Venture CapitalFund Returns | Fundraising | Capital Overhang

The PitchBook DifferenceBetter Data. Better Decisions.

[email protected] [2]

Private Equity: Data | News | Analysis

COPYRIGHT © 2010 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means – graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems – without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.

Private Equity & Venture Capital Overview .......................... 3-4 Average IRR by Vintage ................................................. 3 Private Equity & Venture Capital Horizon IRR ............... 4 Median 1-Year Returns by Fund Type ............................ 4Private Equity ........................................................................ 5-8 Private Equity Horizon IRR ............................................. 5 1-Year Change in Total PE Portfolio Value ..................... 5 PE Fund Return Multiples by Vintage Year .................... 6 PE Fund Performance Quartiles by Fund Size ................ 6 Private Equity Fundraising ............................................. 7 Private Equity Fundraising Overhang ............................ 7 Selected Closed & Open PE Funds ................................. 8Venture Capital ..................................................................... 9-12 Venture Capital Horizon IRR .......................................... 9 1-Year Change in Total VC Portfolio Value ..................... 9 VC Fund Return Multiples by Vintage Year .................... 10 VC Fund Performance Quartiles by Fund Size ................ 10 Venture Capital Fundraising Overhang .......................... 11 Selected Closed & Open VC Funds ................................. 12Fund of Funds ........................................................................ 13Global Private Equity & Venture Capital ................................ 14About PitchBook..................................................................... 15

Table Of Contents




Overview

Average IRR by Vintage Year

Despite a 24-month period that included the near collapse of the financial system, a complete freezing of debt markets and a global recession second to only the Great Depression, the private equity and venture capital industries continue to demonstrate their biggest strength of creating long term value in portfolio companies. The results of this value creation can be clearly seen in the impressive returns generated by PE and VC investors across fund vintages, sizes, geographies and investment strategies, as well as the continued commitment of capital from limited partners. Both PE and VC investors, however, continue to face a number of near- and medium-term challenges, such as the need for investment liquidity opportunities and an economy not far from its nadir. Other challenges are more structural, such as years of lackluster average returns for VC and a significant capital overhang for PE.

This report contains detailed information on U.S. and global PE and VC fund IRRs, returns multiples, fund quartiles, fundraising and capital overhang to provide a complete picture of each industry’s performance over the last decade. A number of observations are apparent from the data, including the outperformance of public markets by PE, the even stronger performance from global funds, the critical importance of fund selection and the effects of the overall economy on private equity and venture capital returns.

Average IRR (net of fees) by vintage year & fund type. Funds newer than 2006 are not displayed since they have yet to realize a significant portion of their investments (J-curve effect).

Private equity funds have had five straight vintages with IRRs averaging over 10%.

Mezzanine funds are the second best performers with returns not too far below PE funds for most vintages followed by fund of funds which track close to the average IRR of all fund types.

The average venture fund IRR has been negative for every vintage since 1999, bottoming out with the 1999 vintage at -11.6% and peaking with the 2003 vintage at -3.4%.

Vintage Year

Source: PitchBook




Private Equity & Venture Capital Horizon IRR

Median 1-Year Returns by Fund Type

The 1-, 3- and 5-year Horizon IRRs as of 3/31/2010 for private equity and venture capital are displayed in this chart along with the 1-, 3- and 5-year annualized returns for public equities markets. The chart shows that over the last year the recent rise in public markets has caused PE and VC funds to underperform the public markets. However, PE and VC funds are long-term investors. Thus, a better measure of the industry’s performance is their 3- and 5-year returns, which show both PE and VC outperforming the public market benchmarks. Private equity in particular outperforms with a 3-year IRR of 1.5% and a 5-year IRR of 14% versus -6% and 0% returns for public markets over the same time periods.

The charting of 1-year returns over the last decade provides an interesting look at the performance of the industry in different economic climates and across all parts of the business cycle. The impact of the recent financial crisis is clear with all funds, except mezzanine, turning in a 1-year IRR for 2008/2009 of -18%. The middle of the decade, when the U.S. economy was strong and expanding, provided an ideal environment for investors with five straight years of returns between 5% and 15.5% for most fund types.

Median 1-Year Rolling Horizon IRR by Fund Type

Source: PitchBook

Sources: PitchBook Russell Investments




Private Equity The early and mid-2000s were favorable years for private equity investing as displayed by its industry-leading average IRRs year after year, impressive average return multiples and top quartile returns in excess of 17%. The past two years have been difficult for PE though, with most portfolios taking significant writedowns as shown by below-par TVPI for most non-mature funds. But with a 30.8% rise in PE portfolio values and a 14% 1-year IRR for the year ending 1Q 2010, performance is rebounding, signaling that conditions are beginning to return to some state of normalcy. The data also shows that a nuber of key challenges remain for PE, including finding liquidity opportunities, growing portfolio companies and putting to work the $485 billion of dry powder amassed from fundraising over the last the last eight years.

Private Equity Horizon IRR

This graph shows the 1-, 3-, and 5-year Horizon IRRs of PE funds by fund size as of 3/31/2010. For the 12 months ending 3/31/2010, the under $100M funds had the best 12 months with an IRR of 20%. Looking longer term, a better judge of actual PE fund performance, the $100M to $250M bucket is leading significantly with a 5-year horizon IRR of 21% with the rest of the fund groups returning around 14%. The effects of the financial crisis on PE returns can clearly be seen with the steep drop in 3-year returns for all fund types from their 5-year return level.

1-Year Change in Total PE Portfolio Value

The value of the portfolios held by private equity funds rose by 30.8% from 1Q 2009 to 1Q 2010 (represented by the yellow bars on the right and left). The 30.8% increase can be explained by a 28.6% rise in portfolio valuations and a net increase in new investment (investment minus exits) of 2.2%. Funds over $5 billion accounted for 70% of the total increase in value over the past year (blue bars). This large increase relative to the other fund sizes is likely due to mega-funds’ reliance on public markets for portfolio company valuations, which, as shown on page 4, were up roughly 40% during this time period.

Source: PitchBook

Source: PitchBook

Weighted Change in NAV by Fund Size

StartingValue

EndingValue

*For the unweighted analysis please contact PitchBook Research at [email protected]




PE Fund Return Multiples by Vintage Year

PE Fund Performance Quartiles by Fund Size

This graph shows the distributed over paid-in (DPI), remaining value over paid-in (RVPI) and total value over paid-in (TVPI) of private equity funds by vintage years as of 3/31/2010. Mature private equity funds are well into the positive; however, for the 1999–2002 vintages that are nearing the end of their fund lives, their ultimate return will be strongly affected by the exits of their remaining portfolio companies (the red area in the graph). As would be expected, fund vintages 2005 and younger are still in the process of investing and improving portfolio companies, so TVPI is at 1x or below with very little distributed back to limited partners.

The 25th percentile, median and 75th percentile IRRs for mature (pre-2006) U.S. private equity funds by size. For example, funds over $5 billion have a median return of 4.2% with a 25th percentile of -7% and a 75th percentile of 12.88%.

The data reveals a lack of variance between the IRR quartiles of different private equity fund sizes, suggesting that no single fund size seems to significantly outperform or underperform the rest of the industry. The importance of fund manager selection, however, is clearly illustrated by the spread between lower and upper quartile funds regardless of fund size. For example, the lower quartile funds for the $100M to $250M size range have returns of below -4.3% versus the top quartile funds which have IRRs of above 15.6%. Mature PE funds as a whole are strong performers with well over half of all funds posting positive returns and half with returns of over 7.7%.

Source: PitchBook

Source: PitchBook

25th PercentileMedian

75th Percentile

J-Curve




U.S. Private Equity Fundraising

U.S. Private Equity Fundraising Overhang

Fundraising since the third quarter of 2009 continued to trend upward with 22 funds totaling $32.5 billion closed during the second quarter of 2010, rising from 21 funds totaling $21 billion closed during the first quarter. This trend is good news for the PE industry as it shows a continued belief in the asset class and its long-term investment prospects from limited partners. However, fundraising levels are still below the totals of recent years and will likely remain so for the near future as firms and LPs digest the $777 billion that was raised by U.S. private equity funds from 2006 through 2008.

This graph shows the capital overhang of U.S. private equity funds by fund size and vintage year as of 3/31/2010. The U.S. private equity dry powder is estimated to currently be $485 billion, $425 billion of which is attributable to funds raised since the beginning of 2007. Funds above $1 billion comprise the largest portion of the overhang at 82% or $400 billion. Middle-market focused funds have a much smaller capital overhang of roughly $85 billion, representing about 18% of the total overall overhang. This PE capital overhang will likely continue to affect fundraising, investment and exits for years to come.

Source: PitchBook

Source: PitchBook




Selected Funds Closed in 2010

Selected Funds Currently in Market

FundMadison Dearborn Capital Partners VIAvista Capital Partners IIResource Capital Fund VStarwood Capital Global Hospitality Fund IISankaty Middle Market Opportunities FundLovell Minnick Equity Partners IIIAEA Mezzanine Fund IIProspect Partners IIIArgosy Investment Partners IVThe Azalea Fund III

FirmMadison Dearborn PartnersAvista Capital PartnersResource Capital FundsStarwood Capital GroupSankaty AdvisorsLovell Minnick PartnersAEA InvestorsProspect PartnersArgosy CapitalAzalea Capital

Fund Size ($M)$4,100$1,800$1,000

$956$900$455$420$200$180

$83

FundMega-Funds: Crestview Partners II Trident V Blum Strategic Partners IVMiddle-Market Funds: Arlington Capital Partners II Snow Phipps II Forest Hill Partners Thayer Hidden Creek Partners IILower-Middle Market Funds: Alpine Investors Fund IV Riverlake Equity Partners Fund II

Firm

Crestview PartnersStone Point CapitalBlum Capital Partners

Arlington Capital PartnersSnow Phipps GroupForest Hill PartnersThayer Hidden Creek Partners

Alpine InvestorsRiverlake Partners

Target Size ($M)

$2,500$2,250$1,500

$750$700$300$250

$100$100

Source: PitchBook

Source: PitchBook

http://www.pitchbook.com/Request_a_Demonstration.html




Venture Capital

Venture Capital Horizon IRR

1-Year Change in Total VC Portfolio Value

Venture capital investors and their portfolio companies have faced a number of challenges over the last 10 years, including a shrinking pool of exit opportunities, a volatile business environment and an overabundance of capital. These and many other issues have combined to result in a decade of stagnant returns averaging on the wrong side of 0%. The result has been a decrease in investment in the industry compared to other alternative assets and increasing calls for venture investors to effect fundamental changes in the way they do business. There are bright spots for venture capital however, including the 14% rise in VC portfolio value this past year and the positive returns being generated by investors across a significant number of funds, especially through upper quartile funds, which have returns well into the 15% range and higher.

The Horizon IRRs for venture capital funds over the last 1, 3 and 5 years paints a less-than-idyllic picture of average returns for venture capital funds of all sizes. When categorized by fund size and time period, the average IRR for VC funds is at best 7% and at worst -18%. Looking at the 5-year IRR is the best measure of the industry’s performance due to its long-term investment horizon, and it shows that the average return is around 0%. The one outlier is the $500M-$1B fund group, which at 3% is just above what the public markets returned over the same time period. The Horizon IRR is a useful guide for gauging the interim progress of a fund grouping, but only the end-of-life IRR characterizes the true return.

Portfolio valuations for venture capital funds rose over 14% for the 12 months ending 3/31/10 with the biggest contribution coming from funds between $150 million and $250 million. The primary driver for this increase in value is somewhat obscured behind mark-to-market accounting, capital calls and fund distributions, but, with resurgent public markets and a dearth of both capital calls and distributions, the change in NAV seems to be largely attributable to rising valuations from the public markets and portfolio company growth. As deal flow returns over the coming quarters, changes in portfolio value will increasingly rely on the capital calls made by the general partner.

Source: PitchBook

Source: PitchBook

Weighted Change in NAV by Fund Size

StartingValue

EndingValue

*For the unweighted analysis please contact PitchBook Research at [email protected]




VC Fund Returns Multiples by Vintage Year

VC Fund Performance Quartiles by Fund Size

A look at the average TVPI, RVPI and DPI for venture capital funds by vintage year shows that the average VC fund for almost all vintages is valued a bit below cost. The chart, however, clearly shows that VC funds are holding onto a significant portion of their portfolio as evidenced by the large fraction of RVPI (red portion of the bars) extending all the way back to the 2000 vintage. The lukewarm IPO and exit environment over the last few years has forced investors to retain their investments longer than normal in hopes of better exit opportunities and valuations. Without these exits, it is still too early to pass judgment on VC performance, since the majority of the last decade’s VC investments remain unrealized.

This chart shows that it is not all bad news for VC returns, as over half of all VC funds have positive IRRs and the $150M-$250M fund group has the highest 75th percentile point of any PE or VC fund group at 20.4%. When looking at other VC performance data, it is important to keep in mind that roughly half of all VC funds do have positive returns and that, as this chart shows, the upper quartile funds usually have very strong returns. Additionally, this chart illustrates the importance of fund selection, as the difference between the bottom and top quartile funds for VC is as much as 27 percentage points.

The 25th percentile, median and 75th percentile IRRs for mature (pre-2006) U.S. venture capital funds by size. For example, funds over $1 billion have a median return of 1.56% with a 25th percentile of -4.5% and a 75th percentile of 2.89%.

Source: PitchBook

Source: PitchBook

25th PercentileMedian

75th Percentile

J-Curve




U.S. Venture Capital Fundraising Overhang

U.S. Venture capital firms continue to hold $81.66 billion of dry powder in reserve, which is nearly 51% of the total capital raised by VC funds since the beginning of 2003. 2003 and 2004 vintages are almost fully invested with just a small portion of the capital reserved for follow-ons. 2005 and 2006 vintages also appear to have invested most of their capital, but these funds have a larger store of dry powder for follow-on investments remaining. Funds sized between $500M and $1B have the largest overhang at $25.2 billion, followed by funds sized between $250M and $500M with $24.6 billion.

Source: PitchBook





Selected Funds Closed in 2010

Fund

New Enterprise Associates 13

Battery Ventures IX

Redpoint Ventures IV

Venrock Associates Fund VI

Draper Fisher Jurvetson Fund X

Founders Fund III

Greycroft II

Glynn Partners II

Alerion Investment Partners II

Early Stage Partners II

Firm

New Enterprise Associates

Battery Ventures

Redpoint Ventures

Venrock Associates

Draper Fisher Jurvetson

The Founders Fund

Greycroft Partners

Glynn Capital Management

Alerion Partners

Early Stage Partners

Fund Size ($M)

$2,500

$750

$400

$350

$350

$250

$130.7

$111

$70.7

$55Source: PitchBook

Selected Funds Currently in Market

Fund

DAG Ventures IV

TPG Biotechnology Partners III

Polaris Venture Partners VI

Adams Capital Management IV

Onset Ventures VI

HLM Venture Partners III

NewSpring Healthcare II

SSM Partners IV

Prolog Fund III

Saratoga Ventures VI

Firm

DAG Ventures

TPG Ventures

Polaris Venture Partners

Adams Capital Management

ONSET Ventures

HLM Venture Partners

NewSpring Capital

SSM Partners

Prolog Ventures

Saratoga Ventures

Target Size ($M)

$600

$550

$400

$300

$250

$200

$150

$125

$50

$25Source: PitchBook




US Fund of Funds Return Multiples by Vintage Year

Private equity and venture capital fund of funds offer a number of benefits to their limited partners such as diversification, access to top funds and professional fund selection and management. The data on U.S. fund of funds shows that they, on average, tend to outperform venture capital funds but underperform private equity funds, yet their returns show a high correlation to the movement of both venture and private equity. To see this, refer to the charts on pages 3 and 4 displaying average IRR and rolling 1-year IRR. The two charts below provide a closer look at the performance data for fund of funds by fund size and vintage year. All fund of fund strategies are aggregated together, including private equity, venture capital and secondary.

Fund of fund multiples show strong returns for mature funds with average fund TVPI multiples all above 1x and as high as 1.42x. The RVPI for the mature vintages remains relatively high and, like PE and VC funds, a significant part of the final returns will be dependent on the remaining exits in the underlying fund portfolios. Fund of funds still early in their lifecycle, though, have an average TVPI that outperforms PE and VC funds for every vintage year since 2005.

Fund of Funds Horizon IRR

Looking at the 3- and 5-year performance, the most notable trend to emerge is the divergence in performance between funds under $250M and over $5B (5-year return of 1%) from funds between $250M and $1B (5-year return of 9%-14%). The 5-year return for the two weakest fund sizes is close to the public market returns shown on page 4, while the $500M to $1B fund group’s Horizon IRR of 14% is equal to the average 5-year return for the top PE fund size groups shown on page 5.

Fund of Funds

Source: PitchBook

Source: PitchBook

The PitchBook DifferenceBetter Data. Better Decisions. Private Equity: Data | News | Analysis


The charts below display performance multiples (TVPI, RVPI and DPI) for private equity and venture capital funds primarily investing in companies located outside of the United States. The TVPI multiple for global funds reveals that they are actually outperforming U.S.-focused funds for 5 of the mature PE vintages and 6 of the mature VC vintages since 1998. Looking closer at this outperformance reveals that for these vintage years global PE funds average a .25x higher return and for VC the return is closer to 0.5x higher. For every single vintage year from 1998 through 2004, global PE and VC funds also have a higher DPI ratio, meaning they have distributed a higher portion of their portfolio back to their LPs than U.S. funds. Conversely, for younger funds (2006-2010), global partnerships are underperforming U.S.-focused funds across nearly every vintage for both PE and VC.

Global Private Equity

Global PE Fund Multiples by Vintage Year

Global VC Fund Multiples by Vintage Years

Source: PitchBook

Mature global private equity funds are returning more than their U.S. counterparts with an average TVPI of 1.6x, RVPI of 0.4x and DVPI of 1.2x. The 2001 vintage was particularly impressive with a TVPI of 2.41x, making it the highest returning vintage for both U.S. and global PE and VC funds. Global funds are also outperforming U.S. funds in terms of their much higher ratio of distributed value as compared to total value. Global funds also begin to realize investments and distribute returns nearly a year earlier than their American counterparts.

Source: PitchBook

Global venture capital funds are currently performing better than U.S. VC funds for all mature vintages with an average TVPI of 1.25x, RVPI of 0.6x and a DPI of 0.65x. The 1999 and 2002 fund vintages are doing especially well with an average TVPI of 1.63x. Global VC funds are slower to exit than global PE funds but do appear to be slightly faster than their U.S. VC counterparts. For mature global VC funds, like U.S. VC funds, their relatively high RVPI ratio shows a significant amount of value still being held in portfolios

J-Curve

J-Curve

The PitchBook DifferenceBetter Data. Better Decisions. Private Equity: Data | News | Analysis

Your Single Source for Quality Private Equity DataOnly PitchBook tracks the entire private equity lifecycle and every party involved: limited partners, �inancial sponsors & investors, target companies, service providers and key professionals. By dynamically linking these parties, PitchBook makes it easy to identify relationships and networks. Additionally, it actively researches target companies the entire time they are in an investor’s portfolio, so you’ll always be up-to-date on the crucial details of a transaction and the company’s progress.

Broadest Private Equity CoverageThe PitchBook Platform contains information on over 25,000 private equity-backed companies, investors and service providers, across every industry segment, every deal size and every private equity deal type from announcement to exit.

Deepest Level of DetailPitchBook’s mission is to provide hard-to-�ind information on private equity: the details you can only �ind through direct contact with key players and painstaking background research.

PitchBook researches deal amounts and valuations, target company �inancials and price multiples, capitalization structures, deal terms, investor information and service provider contact information. It also tracks deal stakeholders and participants – not just �inancial sponsors and investors, but also the many other �inancial, legal and advisory �irms associated with taking a deal through to completion.

Deal monitoring and research through the entire lifecycle. Without exception, PitchBook actively researches and reports on companies from announcement to �inal exit. PitchBook captures the full �inancing story, much more than just a snapshot of the deal’s announcement.Full spectrum coverage. PitchBook covers the full spectrum of private equity deals: all sizes, all industries and all types.

No shortcuts. It takes meticulous research to produce complete, consistent, timely and accurate information, and we devote the manpower and resources necessary to make this happen.

What Makes PitchBook Different

The PitchBook Platform Places Powerful Intelligence at Your Fingertips:

Detailed Reports

Sortable Results

Excel Downloads Customizable Dashboard

*Advanced Searches allow selection of criteria from more than 130 search options

Advanced Searches*

Visit us at www.pitchbook.com

Request a Demo



PitchBook Returns Benchmark Fall 2010

Documents

upper quartile

top quartile

year horizon

75th percentile

selected funds

total pe portfolio

contact pitchbook

venture capital