Data Presentation: The Truth Behind the Numbers Bowen White - - PowerPoint PPT Presentation

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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

Annualized Return

Private Equity Public Equity 10-year 8.8% 5.2% 5-year 11.8% 11.0%

• 5%

0% 5% 10% 15% 20% 2001 2003 2005 2007 2009 2011 2013 2015 Private Equity Public Equity

Out-performance through the Cycle

Private Equity vs Public Equity, through Q4 2016

• 1. Performance, Growth & Diversification through 2016

Source: INSEAD-Pevara, Bloomberg

5-year Return 10-year Return

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

• 1. Performance, Growth & Diversification through 2016

Source: INSEAD-Pevara

706 741 757 863 956 1227 1687 2251 2254 2446 2758 3043 3277 3741 3882 4169 4457 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

Private Equity  Private Capital

• 1. Performance, Growth & Diversification through 2016

6.3x

Strong Performance drives Growth & Diversification of Assets Under Management ($billions)

Source: Preqin

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

4.8 5.9 4.5 3.3 4.3 4.5 4.6 4.7 5.3 5.4 5.2 8.1 9.3 8.3 6.6 8.4 8.2 7.9 8.8 9.6 10.7 10.2

2 4 6 8 10 12 2006 2008 2010 2012 2014 2016 Equity Debt*

15.5 12.8 9.8 13.1 13.8 13.4 12.2 12.6 14.0 16.6 17.0

2 4 6 8 10 12 14 16 18 2006 2008 2010 2012 2014 2016 Purchase Price

US Mid-market LBOs APAC PE-Backed M&A Purchase Price Multiples (EV/EBITDA) – Liquidity-fueled Inflation

* Debt and other capital; Source: PNC, Bain

• 2. Macro, Valuations & PE Activity

Impact on VC Valuations

VC Mega-Rounds – A Sign of the Times

13% 21% 24% 18% 11% 63% 61% 51% 37% 28% 15% 10% 11% 14% 12% 7% 4% 7% 14% 15% 2% 2% 4% 12% 16% 2% 3% 5% 18% 1996- 2000 2001- 2005 2006- 2010 2011- 2015 2016- 2017 $1000+ $250-1000 $100-250 $50-100 $10-50 $0-10

Source: Preqin

• 2. Macro, Valuations & PE Activity

50 100 150 200 250 300 350 2002 2004 2006 2008 2010 2012 2014 2016 Capital Calls Distributions

Record Divestment, Anaemic Investment

Capital Calls – Distributions (US$ billions) Investment Supercycle Exit Supercycle

Q3’16 Q2’11 Q3’12

Source: INSEAD-Pevara

• 2. Macro, Valuations & PE Activity

LP Allocation Trends

• 3. LP Allocation Trends

500 1000 1500 2000 2500 2000 2002 2004 2006 2008 2010 2012 2014 2016 > 10 $bn 5-10 $bn 2.5-5 $bn 1-2.5 $bn <1 $bn

LP Allocation Trends

Private Equity AUM – by Fund Size

• 3. LP Allocation Trends

Source: Preqin

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

0.5 1.0 1.5 2.0 2.5 Mega Funds All Other Funds Top Quartile 3rd Quartile 2nd Quartile Bottom Quartile .

Fund Size, Risk-Return

Mega Funds protect on the downside, All Other Funds produce outperformers

TVPI quartiles, global funds, vintage years 2001-2015

• 3. LP Allocation Trends

Mega funds: fund size greater than $2.5 billion; Source: INSEAD-Pevara

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

• utperformers (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

• 5%

0% 5% 10% 15% 20% 2001 2003 2005 2007 2009 2011 2013 2015 Global Asia China

Geographic Comparison

Global versus Asia, China through Q4 2016

Annualized Return

Global Asia 10-year 8.8% 7.8% 5-year 11.8% 10.7%

5-year Return 10-year Return

• 3. LP Allocation Trends

Source: INSEAD-Pevara, Bloomberg

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