Private Equity: A frontier or nearing center stage?

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Private Equity:

A frontier or nearing

center stage?

Professor Eli Talmor

November 2016

Private equity: 5X increase in AuM over 12 years

Source: 2016 Preqin Global Private Equity Report.

861 952 1224

1691

2258 2277 2480

2791

3084

3327

3823 3972

4165

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2003 2005 2007 2009 2011 2013 2015

NAV

Dry Powder

All private equity AuM

US$ Billions

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Record distributions and positive net cash flows to LPs

3

2015 distributions (35% more than in 2007) 443 US$ bn

5th year

0

1

2

3

2008 2009 2010 2011 2012 2013 2014

US Europe Asia-Pacific

Net cash flows to LPs in 2015 217

US$ bn

4

Pension fund investment return by asset class

Median 10 year annualized return as of June 2015

Source: Bison, October 2016

Private equity: Resilience and alpha in downturns

2.8

6.2

PE-backed companies Speculative gradecompanies

Annualized rate of default in the 2008–09 recession:

Consistent with long-term annualized default rate (1970-2002):

1.2 1.6

4.7

PE-backed companies All corporate bondissuers

Speculative gradecompanies

5

Sources: Endowment filings as of June-2014, and the 2014 NACUBO-Commonfund Study of Endowments

Largest US Endowment Funds SIZE US$ bn

10-year Return

PE Target Allocation *

PE Long-Term Annualized Return

Harvard $36.4 8.9% 18% (+7%) 20-yr @ ~ 24%

Yale $23.9 11.0% 31% (+10%) 20-yr @ ~ 36%

Stanford $21.4 9.9% 23% (+9%) 10-yr @ ~ 17%

Princeton $21.0 10.5% 25% ( - ) [actual @ 32%]

10-yr @ ~ 14.3%

University Endowments – Leaders in PE Investing

* 2015 Target allocation (relative to 2008 allocation)

Average allocation

to PE among US

Endowments 11%

£1.7bn Oxford Endowment Fund:

• 18% in private equity in 2014

• Up from 8% in 2012, and just 2% in 2008

• Returning 13.6% net annualised since

2009

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Private equity expansion around the world (in ‘000)

2016

2015

33 - 40%

25 - 30% Shadow Capital

Co-investment

Separate managed accounts

Direct investments

8

2014 10 - 20%

Private equity secondaries

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10 funds raised $19bn in 2015

8% average discount to NAV of funds sold in 2015 (18% for VC)

Secondaries transactions 1998 – 2015F (in $bn)

Source: Coller Capital, Dow Jones

0

5

10

15

20

25

30

35

40

45

1998 2000 2002 2004 2006 2008 2010 2012 2014

968 541 361 201 195 193 83 57 223

Private Capital: Types, sub-asset classes etc.

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Natural Resources Energy / Power Oil & Gas (upstream, midstream &

downstream) Agriculture / Farmland Timberland Metals & Mining Other / Diversified

Private Debt Direct lending Senior debt (acquisition) Senior debt (origination) Distressed debt Unitranche Subordinated / Mezz (acquisition

vs. origination) CLO Royalty financing Asset-backed financing Venture debt Funds-of-funds

Real Estate Core Core-plus Value added Opportunistic Distressed Debt Mezz FoF’s / Secondaries

$ 2.8 trillion NAV ($ bn, Jun-2015)

PE debt assets under management

11 Source: Preqin Private Debt Online, 2015

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Challenges ahead

Positive net distributions

Shift in long-term retirement pools

Increasing regulatory initiatives

Asset allocation and portfolio construction

Thank You