AVCJ Malaysia Data Presentation: The Truth Behind the Numbers Bowen White Associate Director Global Private Equity Initiative
The Global Private Equity Initiative (GPEI) INSEAD’s Private Equity “Think - tank” Leverage school’s global presence and 1,800+ alumni in Private Equity Global and Asia-focused research & content Created a suite of bespoke publications over its 8-year history
Agenda 1. Performance, Growth & Diversification through 2016 2. Macro, Valuations & PE Activity 3. LP Allocation Trends
Out-performance through the Cycle Private Equity vs Public Equity, through Q4 2016 20% 10-year 5-year Return Return Private Public Annualized 15% Return Equity Equity 10% 10-year 8.8% 5.2% 5% 5-year 11.8% 11.0% 0% -5% 2001 2003 2005 2007 2009 2011 2013 2015 Private Equity Public Equity Source: INSEAD-Pevara, Bloomberg 1. Performance, Growth & Diversification through 2016
Behind the Numbers The Global Financial Crisis did not sink the ship Pre-Crisis vintages produced ~1.4x MoM (median funds) Top Quartile Managers Best of the best (top 5%) consistently add ~1.0x to median money multiples Private Equity is not an Index Time, resources, commitment is a prerequisite Source: INSEAD-Pevara 1. Performance, Growth & Diversification through 2016
Private Equity Private Capital Strong Performance drives Growth & Diversification of Assets Under Management ($billions) 6.3x 4457 4169 3741 3882 3277 3043 2758 2446 2251 2254 1687 1227 956 863 757 706 741 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Secondaries Co-investment Mezzanine Natural Resources Infrastructure Real Estate Distressed PE Private Equity Source: Preqin 1. Performance, Growth & Diversification through 2016
Behind the Numbers Convergence between PE and VC Large VC funds & PE’s increased focus on technology, mega-rounds Large Hybrid PE Managers Driving growth in Private Equity Alternatives Defining a Competitive Edge With growth comes commoditization 1. Performance, Growth & Diversification through 2016
The Macro Picture 2. Macro, Valuations & PE Activity
Behind the Numbers Which Wonderland? Benign – A well-distributed Global GDP forecast @ 2.7%, benign inflation, de-levaraged developed markets Headwinds – Geopolitical & Policy (US) Uncertainty, Chinese Debt Liquidity – records reached in 2017 $1.5 trillion on S&P 500 balance sheets $541 billion in Private Equity dry powder (April) U.S. Leveraged loan issuance hit a record $202 billion (Q1) Source: World Bank, Preqin, PNC 2. Macro, Valuations & PE Activity
Impact on PE Valuations Purchase Price Multiples (EV/EBITDA) – Liquidity-fueled Inflation US Mid-market LBOs APAC PE-Backed M&A 12 18 16.6 17.0 10.7 15.5 16 10.2 10 9.6 14.0 9.3 13.8 13.4 14 8.8 13.1 12.8 12.2 12.6 8.4 8.3 8.2 8.1 7.9 8 12 9.8 6.6 10 6 8 4 6 5.9 5.4 4 5.3 5.2 4.8 4.7 4.6 4.5 4.5 4.3 2 3.3 2 0 0 2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016 Equity Debt* Purchase Price * Debt and other capital; Source: PNC, Bain 2. Macro, Valuations & PE Activity
Impact on VC Valuations VC Mega-Rounds – A Sign of the Times 2% 3% 2% 5% 2% 4% 7% 4% 18% 7% 12% 10% 15% 11% 14% 16% 14% 15% 61% 51% 12% 63% 37% 28% 24% 21% 18% 13% 11% 1996- 2001- 2006- 2011- 2016- 2000 2005 2010 2015 2017 $1000+ $250-1000 $100-250 $50-100 $10-50 $0-10 Source: Preqin 2. Macro, Valuations & PE Activity
Record Divestment, Anaemic Investment Capital Calls – Distributions (US$ billions) Q3’16 Q2’11 Q3’12 350 Investment Exit Supercycle Supercycle 300 250 200 150 100 50 0 2002 2004 2006 2008 2010 2012 2014 2016 Capital Calls Distributions Source: INSEAD-Pevara 2. Macro, Valuations & PE Activity
LP Allocation Trends 3. LP Allocation Trends
LP Allocation Trends Private Equity AUM – by Fund Size 2500 2000 1500 1000 500 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 > 10 $bn 5-10 $bn 2.5-5 $bn 1-2.5 $bn <1 $bn Source: Preqin 3. LP Allocation Trends
Behind the Numbers Calpers Reduces LP Relationships Targets a cut in PE relationships from 100 (2015) to 30 (2020) Power shift to LPs (GP-LP Model) Lower fees & expenses, moved aggressively into co- investments Hybrid Manager Model Opportunity to deepen/consolidate relationships with LPs 3. LP Allocation Trends
Fund Size, Risk-Return Mega Funds protect on the downside, All Other Funds produce outperformers TVPI quartiles, global funds, vintage years 2001-2015 2.5 2.0 1.5 1.0 0.5 Mega Funds All Other Funds Top Quartile 3rd Quartile 2nd Quartile Bottom Quartile . Mega funds: fund size greater than $2.5 billion; Source: INSEAD-Pevara 3. LP Allocation Trends
Behind the Numbers Average Returns are the Same Mega Funds: 1.49x TVPI… All Other Funds: 1.47x Allocating to All Other Funds Requires resources and expertise for LPs to identify outperformers (it is expensive). Mega Funds Indicative of PE Industry Institutionalization Compliance and risk management baked into large PE firms, policies and guidelines on how to conduct business. 3. LP Allocation Trends
Geographic Comparison Global versus Asia, China through Q4 2016 20% 10-year 5-year Return Return Annualized 15% Global Asia Return 10% 10-year 8.8% 7.8% 5% 5-year 11.8% 10.7% 0% -5% 2001 2003 2005 2007 2009 2011 2013 2015 Global Asia China Source: INSEAD-Pevara, Bloomberg 3. LP Allocation Trends
Q&A Food for thought: Does cyclicality matter? Should you try to time the market? If so, how should your strategy adjust? Q&A THANK YOU
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