[PPT] - Private Equity: Opportunities and Challenges Presentation to: CFA PowerPoint Presentation

SLIDE 1

Private Equity: Opportunities and Challenges

Presentation to: CFA Society of Pittsburgh November 16, 2011 Eric L. Thunem Managing Director Portfolio Advisors, LLC

SLIDE 2

Alternative Investments

Hedge Funds Leveraged Buyouts S i l Sit ti Infrastructure R l E g y Venture Capital Special Situations Distressed Debt Real Estate Managed Futures Secondaries Mezzanine Natural Resources Secondaries Co-Investments Private Equity Funds Timber O h

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Timber Other

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Private Equity

Provides capital to companies not quoted on a public stock exchange
Multiple uses:
Multiple uses:
Develop new products and technologies
Expand working capital

F ili h

Facilitate company growth
Strengthen a company’s balance sheet
Resolve ownership and management issues
Domestic and International Strategies include:
Buyouts:

Large, Middle Market, Small-Cap

Venture Capital:

Seed/Early-stage, Late-stage, Multi-stage

Special Situations:

Distressed Debt, Mezzanine, Multi-Strategy/Opportunistic

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SLIDE 4

Where Private Equity Fits

Company Growth Cycle

Early Stage; Entrepreneurial; Established; Mature;

Venture Capital

Development High Growth Level Growth Cyclical

Buyouts, Sub Debt Restructuring Special Situations

rofit Revenue/Pr

Private

Mostly Public

R Time

3

SLIDE 5

Avenues for Investing in Private Equity

Start your own Business
Control, Management, Focus
Concentrated Risk
Invest in a Privately Held Company
Influence, Shared Ownership
Single-Company Risk
Participate as a Limited Partner in a PE Fund
Passive Ownership, Diversified Holdings

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Single-Manager Risk, Limited Vintages
Invest in a Private Equity Fund-of-Funds
Broader Diversification – Industry, Manager, Geography, Vintage
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Diversified Risk, Fees may Lower Overall Returns

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SLIDE 6

Perspectives

Entrepreneurs and Business Owners
Active Partners, Value Add, Liquidity
Ownership, Control
Limited Partner Investors and their Advisors
Returns, Diversification, Long-Term Horizon
Illiquidity, Perceived Risk, Lack of Information, Fees
General Partner Investors / Sponsors
Returns, Active Strategies, Timing

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Deal Flow, Fund-Raising, Exit Environment
Other Constituencies
Other Constituencies
Banks, Regulators, Politicians, Media

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SLIDE 7

Entrepreneurs / Business Owners

Private Equity Opportunities
PE managers can add value to enterprises
Potential source of expansion financing
Additional expertise in specific industries
Governance and corporate best practices

Li idi f i l f

Liquidity for generational transfer
Private Equity Challenges
Ownership changes
Control may shift
Leverage can become a growth driver

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SLIDE 8

New Companies/Small Businesses

* Headd, B. Redefining Business Success: Distinguishing Between Closure and Failure, 2002 # Shane, S. Startup Failure Rates – The Real Numbers, 2008 ^ Phillips & Kirchhoff. Small Business: Critical Perspectives 1989

* Source: smallbusinessplanned.com

Two years: 7 out of 10 Five years: 5 out of 10

Survival rates for new employer firms

(U.S. Department of Commerce statistics, March 2010)

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ve ye s: 5 ou o Ten years: one third 15 years: one quarter

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New Companies/Small Businesses

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Source: State of Washington, Department of Revenue, excise tax data 2002 through 2005

SLIDE 10

Global Buyout Annual Investments

7 000 $200

Amount Invested ($billions) Number of Deals

6,000 7,000 $160 $180 $200 4,000 5,000 $100 $120 $140 2,000 3,000 $40 $60 $80 1,000 $0 $20 $

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q11

Source: Thomson Reuters Venture Economics, October 27, 2011

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SLIDE 11

Global Venture Capital Annual Investments

18 000 $160

Amount Invested ($billions) Number of Deals

14,000 16,000 18,000 $120 $140 $160 8 000 10,000 12,000 $80 $100 $120 4,000 6,000 8,000 $40 $60 2,000 $0 $20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q11

Source: Thomson Reuters Venture Economics, October 27, 2011

Q

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Basic Mechanics: Hypothetical Cash Flow

$400

$1 million commitment

$200 $300 $100 $200

$100

$0

$300
$200

1 2 3 4 5 6 7 8 9 10

Annual Drawdown Annual Return of Capital

Years

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Basic Mechanics: Hypothetical Net Invested

$1 million commitment

$600 $800 $1,000

Cumulative Return ($)

$200 $400 $600

$200

$0

65% 80%

$800

$600
$400

65% to 80% Net Invested

$800

1 2 3 4 5 6 7 8 9 10

Years

SLIDE 15

Private Equity Performance: Time Horizons

30%

24.2%

20% 25%

9 4% 17.0% 10.3% 11.9%

15% IRR %

4.3% 9.4% 2.2% 6.2% 6.5%

5% 10% 0%

3 Months 6 Months 9 Months 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years

Source: Thomson Reuters Venture Economics, November 10, 2011. Data as of 6/30/2011

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SLIDE 16

Private Equity Performance: Stages

20%

13.4% 15.4% 12.8% 12 4% 15.1% 14.9% 16.0% 12 0%

15%

12.4% 11.7% 9.4% 9.9% 12.0%

10%

IRR %

5% 0%

All Venture Capital Seed/Early Stage Later Stage Balanced Stage All Buyouts Small Buyouts Medium Buyouts Large Buyouts Mega Buyouts Generalist All Private Equity

S Th R V E i N b 10 2011 D f 6/30/2011

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Source: Thomson Reuters Venture Economics, November 10, 2011. Data as of 6/30/2011

SLIDE 17

Private Equity Performance: Vintage Years

21.5%

25%

16.1% 19.3% 17.5% 19.4%

15% 20%

RR %

12.3% 11.6% 8.0%

10% 15%

IR

6.1% 4.6% 6.7% 5.2% 1.8% 5.4%

5%

0.3%

0%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Thomson Reuters Venture Economics, November 10, 2011. Data as of 6/30/2011

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SLIDE 18

Importance of Manager Selection

10 Year Returns: Upper Quartile vs. Lower Quartile Managers 20% 25% 19.5% 15% 9.7% 9.4% 5% 10% 2.9% 0% Private Equity Large Cap Equity International Equity Core Fixed Income

17 Source: Clearbrook Perspectives, 2010 (eVestment Alliance and Cambridge Associates)

SLIDE 19

Performance Persistence

100% 24% 28% 10% 10% 22% 31% 70% 80% 90% 100% 27% 29% 28% 33% 50% 60% 70%

Q4 Successor Fund Q3 Successor Fund Q2 Successor Fund

39% 33% 24% 26% 24% 20% 30% 40%

Q1 Successor Fund

24% 12% 0% 10% Q1 Predecessor Fund Q2 Predecessor Fund Q3 Predecessor Fund Q4 Predecessor Fund

18 2011 Preqin Private Equity Fund of Funds Review

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Private Equity Investment Options

Investing through fund-of-funds can provide greater diversification

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Investor

Fund of Funds Fund of Funds

# f PC

250 t 400 1 2 Private Equity Private Equity Direct Investment A Private Equity Fund

# of PCs: 15 to 20
“Single manager” risk
# of PCs: 250 to 400
Lowest risk

Private Equity Fund Private Equity Fund

# of Portfolio Companies (PC): 1
Single company, highest risk

PC1 PC1 PC2 PC3 PC1 PC2 PC3 PC20

. . . . . . . .PC20

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SLIDE 21

Global Fund-of-Funds Annual Fundraising

Amount Raised ($billions) Number of Funds

200 250

$50 $60 $70

100 150

$30 $40 $50

50 100

$10 $20 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q11

Source: Preqin, November 8, 2011

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SLIDE 22

General Partners / Sponsors

Opportunities
Recurring management fees are possible
Long-term significant capital gains are possible
Investment strategies may involve active roles
Historically lower level of public scrutiny

M h l i i i

Managers may have some control over exit timing
Challenges
Regulatory oversight is increasing
Deal flow may not be truly proprietary
Traditional exit routes may exhibit volatility
Big payday may happen only after LPs get returns
Fund raising
Fund-raising
Competition

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SLIDE 23

Global Buyout Annual Fundraising

400

$350 Amount Raised ($billions) Number of Funds

300 350

$250 $300

200 250

$150 $200

50 100 150

$50 $100 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q11

Source: Thomson Reuters Venture Economics, October 27, 2011

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SLIDE 24

Global Venture Capital Annual Fundraising

1,600

$180 Amount Raised ($billions) Number of Funds

1,200 1,400

$120 $140 $160

600 800 1,000

$80 $100 $120

200 400 600

$20 $40 $60

Source: Thomson Reuters Venture Economics, October 27, 2011

$0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q11

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Source: Thomson Reuters Venture Economics, October 27, 2011

SLIDE 25

Other Impacts/Influences on LPs and GPs

Overall economic climate

P bli it k t

Public equity markets
Banks and other debt providers

F d l d l

Federal and state regulators
Media outlets; broad and industry-specific

P li i

Politics
Perceptions

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SLIDE 26

Regulatory Environment

SEC, CFTC, FSA
FASB ASC 820 (formerly known as FAS 157)
Dodd-Frank Act
Registration if assets >$150 million
Extraterritoriality (non-US firms marketing in US)
Volcker Rule
No more private equity for banks (?)
Alternative Investment Fund Managers Directive
European Securities and Markets Authority
US firms with EU investments (?)
IRS – carried interest no longer treated as capital gains (?)

g p g ( )

Private Company Flexibility and Growth Act (proposed)
FINRA rules – ban on “spinning” hot IPO shares
Second Market scrutiny by SEC and FINRA

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Pay-to-Play rules restricting intermediaries in fund-raising

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THANK YOU

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Private Equity: Opportunities and Challenges

Presentation to: CFA Society of Pittsburgh November 16, 2011 Eric L. Thunem Managing Director Portfolio Advisors, LLC

Alternative Investments

Hedge Funds Leveraged Buyouts S i l Sit ti Infrastructure R l E g y Venture Capital Special Situations Distressed Debt Real Estate Managed Futures Secondaries Mezzanine Natural Resources Secondaries Co-Investments Private Equity Funds Timber O h

Timber Other

Private Equity

F ili h

Large, Middle Market, Small-Cap

Seed/Early-stage, Late-stage, Multi-stage

Distressed Debt, Mezzanine, Multi-Strategy/Opportunistic

gy pp

Where Private Equity Fits

Company Growth Cycle

Early Stage; Entrepreneurial; Established; Mature;

Development High Growth Level Growth Cyclical

rofit Revenue/Pr

Private

R Time

Avenues for Investing in Private Equity

p, g

ve s c

ge , Geog p y, ge

Perspectives

, g , g

Entrepreneurs / Business Owners

Li idi f i l f

New Companies/Small Businesses

Two years: 7 out of 10 Five years: 5 out of 10

Survival rates for new employer firms

ve ye s: 5 ou o Ten years: one third 15 years: one quarter

New Companies/Small Businesses

Global Buyout Annual Investments

7 000 $200

Amount Invested ($billions) Number of Deals

6,000 7,000 $160 $180 $200 4,000 5,000 $100 $120 $140 2,000 3,000 $40 $60 $80 1,000 $0 $20 $

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q11

Global Venture Capital Annual Investments

18 000 $160

14,000 16,000 18,000 $120 $140 $160 8 000 10,000 12,000 $80 $100 $120 4,000 6,000 8,000 $40 $60 2,000 $0 $20

Limited Partners and their Advisors

Basic Mechanics: Hypothetical Cash Flow

Basic Mechanics: Hypothetical Net Invested

65% 80%

65% to 80% Net Invested

Private Equity Performance: Time Horizons

30%

20% 25%

15% IRR %

5% 10% 0%

Private Equity Performance: Stages

IRR %

Private Equity Performance: Vintage Years

RR %

IR

Importance of Manager Selection

Performance Persistence

Private Equity Investment Options

Investing through fund-of-funds can provide greater diversification

Investor

Global Fund-of-Funds Annual Fundraising

General Partners / Sponsors

M h l i i i

Global Buyout Annual Fundraising

Global Venture Capital Annual Fundraising

Other Impacts/Influences on LPs and GPs

P bli it k t

F d l d l

P li i

Regulatory Environment

g p g ( )

y y

Scanned Article

THANK YOU