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Home My WebLink AboutReports - 2020.01.23 - 32681Oakland County ERS Private Equity Secondary Review January 22, 2019 1 Research Team Structure 2 Research Group TIM KOMINIAREK, CAIA® Equity/Real Asset Team 20+ years of experience BA: University of Illinois at Urbana- Champaign MS: DePaul University PHILIP SCHMITT, CIMA® Research Director 20+ years of experience BA: Portland State University MBA: University of Portland EVAN SCUSSEL, CFA®, CAIA® Research Director 20+ years of experience BA: University of Rhode Island MBA: University of Connecticut JULIE BAKER, CFA® Equity Team 20+ years of experience BS: University of Florida MBA: Kennesaw State University KADMIEL ONODJE, CAIA® Asset Strategy Team 10+ years of experience BS: University of Florida MBA: Stetson University MATTHEW OGREN Fixed Income Team 2 years of experience BS: Marquette University KEVIN LAAKE, CFA® Equity Team 20+ years of experience BS: University of Virginia MBA: University of Maryland ROB MILLS, CAIA® Real Asset Team 20+ years of experience BS: Oakland University AUSTIN BREWER, CFA® Asset Strategy Team 4 years of experience BS: Oklahoma State University KAI PETERSEN, CFA® FSA, EA, MAAA, FCA Asset Liability Consultant 25 years of experience BA: St. Olaf College BEN BALDRIDGE, CFA®, CAIA® Fixed Income Team 12+ years of experience BS: Milliken University JOSEPH IVASZUK Operational Due Diligence 20 years of experience BA: Western Connecticut State University MBA: Western Connecticut State University JEFFREY KARANSKY Equity Team 10+ years of experience BS: Rollins College MBA: Crummer Graduate School of Business at Rollins College JEREMY FISCH Associate 1 year of experience BA: University of Central Florida MS: University of Tampa ELIZABETH WOLFE Associate 1 year of experience BS: Marquette University ZAC CHICHINSKI, CFA®, CIPM® Equity Team 9+ years of experience BA: University of Washington JOSUE CHRISTIANSEN, CIPM® Equity Team 9+ years of experience BS: Florida Atlantic University MBA: Florida Atlantic University JUSTIN ELLSESSER, CFA®, CAIA® Equity Team 7+ years of experience BSBA: Shippensburg State University DAVID JULIER Real Asset Team 18+ years of experience BA: University of Michigan MBA: Indiana University 3 Prioritization of Asset Classes & Strategies Prioritize Asset Classes Does it solve an immediate need within client portfolios? Is there a compelling market opportunity currently? How many approved managers do we have/need in the space? Can another asset class achieve the same goal with less cost/complexity? Strategies Does the strategy bring something new/different to our approved list? What’s the longevity of the key decision-makers? How does the risk-adjusted track record compare to peers? Are the fees low relative to peers? 4 Asset Class Coverage Domestic Equities Non-US Equities Fixed Income Real Assets Private Equity Other Strategies Large Cap Mid Cap Small Cap Multi Cap Enhanced Passive Large Cap Small Cap Emerging Markets International Small Cap Global Enhanced Passive Stable Value Short Duration Intermediate Duration Core Core Plus High Yield Bank Loans Global Emerging Markets Absolute return/ opportunistic Private Debt Enhanced Passive Core Real Estate Value-Add Real Estate Opportunistic Real Estate REITs Infrastructure MLPs Natural Resources Passive Buyout Venture Growth Equity Special Situations Secondaries FOF Co- Investments Target Date Funds Multi-Asset GTAA Long/Short Equity Multi-strategy Funds of Hedge Funds 5 Private Equity Overview 6 Venture Capital: Capital invested in a new or young company (seed capital) Growth Equity: Capital used to expand a company’s operations or resources Co-Investments: Invest directly in a private company rather than investing in a fund Buyouts: Capital used to purchase control of an established company (private or public) Secondaries: Private equity partnership interests purchased from a current limited partner, often at a discount to fair market value Mezzanine Financing: Financing in the form of junior debt, which often receives equity warrants Distressed/Special Situations: Debt provided to a company in or near bankruptcy, which is often used to take control of the company Risk / ReturnWhat is Private Equity 7 Private Equity Visualized 30% 20% 10% 0% -10% -20% -30% 1-Year 2-Years 3-Years 4-Years 5-Years 6-Years 7-Years 8-Years 9-Years 10-Years Time After Capital Is CalledReturnsSecondaries show high returns early due to the discount to current net asset value (NAV) paid by the investor Mezzanine has a less pronounced J-Curve and returns have a high income/yield component Buyout’s tend to create value sooner than VC Venture Capital takes longer to realize returns but has the highest return/risk potential 8 PROS Higher expected returns than public equities Less efficient asset class Portfolio diversification Insulation from equity market volatility due to less frequent mark to market valuations Exposure to talented, innovative investors CONS Higher expected risk than public equities “J-Curve” effect Illiquid and long term Higher fees Lack of information transparency Administration can be tedious and time-consuming Multi-year commitments required to achieve vintage year diversification and maintain portfolio allocation Private Equity –Pros and Cons 9 Secondaries provide solutions that address some of the downside to direct private equity,but also bring additional risks. PROS “J-Curve” mitigation Lower blind pool risk Lower loss rates Broad diversification across fund types and vintage years Potential access to high-demand funds and/or more restricted GPs Accelerated build-up of a PE portfolio CONS Lower TVPI return expectations relative to private equities Increased reliance on leverage to drive returns Increased competition in an increasingly efficient market Cyclical to the market environment Multi-year commitments required to maintain portfolio allocation Private Equity Secondaries –Pros and Cons 10 The Case for Private Equity Investors are turning to alternative asset classes,such as private equity,to enhance the modest return expected from traditional equity and fixed income products Private Equity has a performance target of 200-300 bps above public equity Non-perfect correlation allows diversification benefit Source: JP Morgan Correlation Matrix Private Equity US Large Cap 0.810 US Mid Cap 0.820 US Small Cap 0.760 International Eq 0.820 US Aggregate 0.030 US High Yield 0.650 International FI 0.250 US Core Direct RE 0.250 HF Diversified 0.610 11 Current Market Environment 12 Current Private Equity Market Environment Purchase price multiples have risen to 10.2x EBITDA Leverage multiples have stayed flat after a steady climb from 2009 to 2014 Source: Thomson One 13 The number of funds in the market has consistently grown since 2012 Currently targeting $977B of capital raise Dry powder (committed but uninvested capital) at all time high levels $1,213B Continues to compete with newly raised capital Source: Preqin Current Private Equity Market Environment 14 Secondary transactions had reached a record level of $72 billion in 2018 Since 2006, there has a been a 6.0x increase Dry powder (committed but uninvested capital) at all time high level of $111B Still low compared to the overall private equity market Source (top): Preqin Greenhill, Setter, Coller, Evercore, NYPPEX Source (bottom): Preqin Current Private Equity Secondaries Market Environment 15 Funds closed and capital raised has increased since 2015 while 2018 fell short of previous years However, the overall number of funds in the market continues to increase 82% increase in number of secondary funds since 2014 Source: Preqin Current Private Equity Secondaries Market Environment 16 Increased market demand for secondaries, combined with the rising utilization of leverage has narrowed pricing discounts since the early part of the decade Source: Greenhill, “Global Secondary Market Trends & Outlook, January 2019” Current Private Equity Secondaries Market Environment 17 Candidate Overview 18 Our due diligence process seeks managers possessing many critical qualities. The following are a few of the most important traits we emphasize in our evaluation: Demonstrated Solid Track Record: o Access to Top Tier Managers o Asset Allocation Expertise o Portfolio Diversification o Creative/Proactive Investment Philosophy Stable Group of Experienced Investment Professionals Competitive Fee Structure Capable Legal and Back Office Infrastructure Strong, Ethical Organizations: o Policies Addressing Conflicts of Interest o Policies Addressing Allocations Between Funds Candidate -Selection Criteria 19 Based on our research process, we present the following candidates: Firm Fund Ardian ASF VIII B, L.P. Hamilton Lane Advisors (Hamilton Lane)Hamilton Lane Secondary Fund V Pomona Capital (Pomona)Pomona Capital X Portfolio Advisors Portfolio Advisors Secondary Fund IV The source of data and figures provided on subsequent slides is generally the respective managers. Certain data represents AndCo's view and could differ from the manager's interpretation. Candidates 20 Firm Overview Firm Firm Inception Ownership AUM Annual Pacing Headquarters/ #of Offices Private Equity Professionals # of GP Relationships Ardian 1996 54% held by key management & employees. 41% held by outside interests (~12% insurance company, ~9% individuals & family offices, ~10% AXA, ~14% Other) $96B Discretionary $7B across all PE strategies Paris; New York, San Francisco, London, Frankfurt, Zurich, Singapore, Beijing, Seoul 75+600+ Hamilton Lane 1991 Publicly Traded -Ticker HLNE 45% Employee-Owned $65.9B Discretionary $415.7B Advisory $30B Primary $1B Secondary Suburban Philadelphia/ 16 offices globally 120 (30 Dedicated to Secondaries) 450+ Pomona 1994 100% owned by Voya Financial $5.3B $500M New York, NY 15 600+ Portfolio Advisors 1994 100% Employee-Owned $23.5B $18B Discretionary $2.5B HQ: Darien, CT Other Offices: Zurich, Hong Kong 100+ (6 Dedicated to Secondaries) 250+ Firm Overview 21 Investment TeamFirmKey Decision-Makers Team Stability Ardian The Fund of Funds 13-member investment team committee is chaired by Vincent Gombault (Global Head of Fund of Funds and Private Debt activities), Benoit Verbrugghe (Head of Ardian US), and Olivier Decannière (Head of Ardian UK). Two Directors transferred internally, one Managing Director, Jenhao Han, left in 2016. He was Head of Asia. Hamilton Lane The 21-person secondary deal team is led by Tom Kerr, Global of Head of Secondaries. Deals are formally approved by Hamilton Lane’s secondary investment committee which comprises Kerr, Secondaries MDs Keith Brittain, Dennis Scharf and Richard Hope, as well as eight additional senior Hamilton Lane professionals. No senior level departures on the secondaries deal team over the past five years. Pomona The fund is managed and led by the firm’s seven Partners: Michael Granoff, Fran Janis, John Stephens, Lorraine Hliboki, Jim Rorer, Sebastien Bowen and Patrick Madaus. The investment team's primary responsibilities include deal origination, due diligence, underwriting, negotiation, monitoring and risk management. There has been six senior-level departures in the last five years. Portfolio Advisors The team is led by Hugh Perloff, Managing Director and Head of Secondaries. Perloff was one of the original employees of PA, joining in the 1998. He is joined by Managing Director Patrick Gerbracht, who joined PA in 2008, and four dedicated team members. One departure in the past five years. MD Ryan Butler left the industry in 2015 Investment Team 22 Strategy OverviewFirmFund Offering Strategy Focus Ardian ASF VIII B L.P. Focus on buyout & growth equity funds and portfolios of interests where at least 50% of original commitments have been drawn, on aggregate (target 70-90%+). A focus on high quality assets with predictable cash-flows where Ardian has a high degree of coverage through its monitoring database. The emphasis will be on non-auctioned, one-to-one seller processes. The team will target large & complex transactions where price is not the determining factor (i.e. structuring, speed of execution, facilitation of team spin-outs from captive managers). Hamilton Lane Hamilton Lane Secondary Fund V, LP Fund of Funds vehicle with a flexible approach, targeting the entire spectrum of secondary market transactions from traditional acquisition of individual portfolio and fund interests to more complex structured transactions Pomona Pomona Capital X L.P. Fund seeks long-term capital appreciation with enhanced liquidity and lower risk profile via its mid-sized funds and focus on seasoned funds managed by high-quality managers. Buyouts will remain a predominate focus, with additional allocations to Growth Equity & Venture, as well as opportunistic allocations to Mezzanine Credit & Energy. Portfolio Advisors Portfolio Advisors Secondary Fund IV L.P. Secondary Fund focused on the middle market buyout space in private equity. The fund will also have allocations to venture capital, distressed, natural resources, special situations, and fund of funds. Fund (Strategy) Overview 23 Key DifferentiatorsFirmKeyStrengths Points to Consider Ardian An industry leader with a nearly solitary focus on large, LP-led transactions A 75+ member dedicated secondaries team ensures significant deal flow Team continuity. Senior members have been together for over a decade. Leverage is expected to drive 25% of fund returns and has increased with each subsequent fund raise over the past decade. Carried interest at 15% is slightly higher than the industry average (~12.5%). Hamilton Lane Large dedicated secondaries team has remained stable among its senior ranks Secondaries deal team leverages one of the largest primary equity platforms in the marketplace to source deal flow. Hamilton Lane possesses one of the largest private equity fund databases in the marketplace No carry is allocated directly to the secondaries deal team and 75% of carry is paid to the parent. Potential for focus to be an issue given secondaries is a small percentage of the firm’s business. Hamilton Lane became a public company in 2017 and employee-ownership has declined from 55% to 45% in the past year. This may be a catalyst for an acceleration in retirements during the life of the fund. Pomona Deep and experienced team with a long track record of 25 years of secondary investing through multiple cycles Pomona has demonstrated the ability to acquire assets at a mid-teens or better discount to NAV versus the industry of mid-single digits Pomona’s sweet spot is on transaction sizes less than $500m where it believes there is less competition and greater market inefficiencies Six Pomona investment professionals have departed over the last five years, though only one was actively sourcing secondary deals for Fund IX. Pomona will occasionally utilize transactional leverage via special purpose vehicles and leverage may max out at 30% of commitments. Terms are not finalized for Fund X. Portfolio Advisors Large and robust private market platform to generate deal flow Experienced and stable team dedicated to the strategy Favorable terms for LPs when compared to peers Competitive returns have been generated without the use of leverage outside a small line of credit that is only used for capital call consolidation Primarily focused on sub $100M transactions, which tends to represent a less efficient area of the market Smaller dedicated team relative to larger peers. Initial fund was incepted in 2008, allowing the team to take advantage market dislocations post the GFC. As such, we do not have performance to evaluate through a downturn. Key Firm/Fund Differentiators 24 Key Fund TermsFirmTarget Size/ Hard Cap Minimum Commitment Target # of Transactions Portfolio Characteristics First Close Final Close Target Net Return Fund Lifecycle Ardian $12B/$13.5B $5M (negotiable) 20-30 5-yr commitment average size >$500m Approximately 60%/35%/5% U.S./Europe/Asia >90% Buyout 09/2018 Q1 2020 15-16% Net IRR 1.5-1.6x Net TVPI 10-years from initial close plus three one- year extensions or longer (pending LP approval) Hamilton Lane $3B/TBD $5M 50-60/3-yr commitment (up to two 1-yr extensions) >70% North America >50% Buyout 4/2019 Q3 2020 Mid to high teens Net IRR 1.4-1.6x Net TVPI 10 years from final close, two one-year extensions Pomona* $2.0B/$2.5B $10M 20-40/5-yr commitment 66% 33% U.S./Europe Up to 20% in primary and direct co-investments 6/2020 TBD High teens Net IRR; 1.6x –2.0x Net TVPI 10-years from initial close plus two one- year extensions Portfolio Advisors $1.5B/TBD $5M (subject to waiver) 35-45/5-yr commitment >75% U.S. >50% Buyout ~20% Venture 12/2019 Q4 2020 15-18% Net IRR 1.5-1.8x Net TVPI Later of 12/31/2030 or one year after all holdings liquidated *Terms for Pomona Fund X estimated base on terms for Pomona Fund IX. Fund X to be launched in January 2020. Key Fund Terms 25 Key Fund TermsFirmInvestment Management and Monitoring Fee Preferred Return GP Commitment Carried Interest Ardian Commitment: $5M (negotiable) •1.00% of the total commitment amount during investment period •0.75% of net asset value plus acquisition costs of the fund’s assets thereafter 8%1%15% Hamilton Lane Commitment: <$50M •Years 1-3: 1.0% of total commitments •After investment period, lesser of 1.0% of NAV or 90% of prior year’s management fee rate 8%1%12.5% Pomona Commitment: <$50M •1.25% through 4th anniversary of initial close date •1.00% through 6th anniversary of initial close date •0.85% through 9th anniversary of initial close date •0.50% of NAV thereafter •Full Term Average Fee: 0.97% (Fees charged on commitment) •Potential early close fee discount 8%2%12.5% Portfolio Advisors If LP commits before 03/31/2020: •During Investment Period: 1) 1.125% on invested capital or 2) 0.80% on committed •After Investment Period: 1.125% on NAV of Fund Standard Fee Schedule: •During Investment Period: 1) 1.25% on invested capital or 2) 0.85% on committed •After Investment Period: 1.25% on NAV of Fund 10%3%10% Key Fund Terms 26 Performance Comparison 27 Ardian Performance Secondaries Fund Name Vintage Year Fund Capitalization ($M) % of Fund Invested No. of committed underlying funds IRR**Unlevered IRR**TVPI**Unlevered TVPI** Avg. Discount to NAV Loss Ratio % of $ Invested ASF I 1999 220 99%187 52%N/A 2.12x N/A N/A 11.0% ASF II 2001 480 93%135 29%N/A 1.79x N/A 17%0.9% ASF III 2004 1,040 84%130 62%49%1.93x 1.65x 21%2.2% ASF IV 2006 2,854 95%246 12%11%1.62x 1.49x 11%6.0% ASF V 2011 5,085 97%503 19%17%1.78x 1.51x 15%0.0% ASF VI 2014 6,000 95%912 16%14%1.58x 1.34x 9%0.0% ASF VII 2015 7,500 79%667 19%13%1.43x 1.24x 9%0.0% ASF VIII 2018 12,000*22%111 60%23%1.21x 1.09x 2%0.0% As of June 30, 2019 *Target Fund Size ** Assumes no impact from transactional debt, but does not adjust for credit facility (estimated 50-100 bps positive IRR impact) Important notice This document’s content shall not replace the Fund’s legal documentation provided, or the ones that will be provided, notably the Private Placement Memorandum, Limited Partnership Agreement and Subscription Agreement. Investments in private equity funds are accepted only from eligible investors on the basis of the final version of legal constituent documents of such funds. Any decision to invest by these investors in private equity funds should be made only after they have conducted appropriate due diligences, investigations and consultations with their own legal, tax and accounting advisors as they may deem necessary to evaluate the merits and risks involved in making such investment and to make an independent determination of the suitability and the consequences of such investment. It shall not be viewed as investment advice, and does not constitute an offer to sell, a solicitation of any offer to buy, nor does it serve as the basis for any contact for the purchase or sale of any investment. This document contains information, including details of investment performance, in respect of funds which are closed to new investors. Past performance is not necessarily indicative of future returns on these or other funds. The value of investments may fall as well as rise. Details of investment performance are based on the judgment and experience of ARDIAN and may not reflect the actual return realized by any fund or any investor. Any projections or other estimates in these materials, including estimates of returns or performance, are forward-looking statements based upon factors that are beyond ARDIAN’s control and have no binding contractual force. Actual events may differ from those assumed. Other events which were not taken into account may occur and may differ significantly from those presented. Private equity investments are illiquid and there is no guarantee that they can be sold at valuation levels. The term ARDIAN mentioned in the present document refers to one or several entities which constitute the ARDIAN group depending on the applicable situation. Professional clients as defined in Article 4(10) and Annex II of Directive 2014/65/EU. Ardian Track Record 28 Hamilton Lane Performance Secondaries Fund Name Vintage Year Fund Capitalization ($M) % of Fund Invested No. of committed underlying funds IRR1,2,5 Unlevered IRR*TVPI3,5 Unlevered TVPI* Avg. Discount to NAV Loss Ratio % of $ Invested Hamilton Lane Secondary Fund I 2005 $359.7 98%44 4%N/A**1.2 N/A**21%6.2% Hamilton Lane Secondary Fund II4 2008 $590.7 101%71 14%14%1.5 1.46x 21%2.8% Hamilton Lane Secondary Fund III4 2012 $909.1 91%110 14%12%1.4 1.39x 20%1.4% Hamilton Lane Secondary Fund IV4 2016 $1,916.5 80%130 25%16%***1.2 1.27x 11%0.2% Hamilton Lane Secondary Fund V 2019 Target: $3B N/M N/M N/M N/M N/M N/M N/M N/M As of June 30, 2019 *shows returns only without the impact of fund credit facility. **there was no credit facility used for Fund I so performance is same as reported ***performance shown does not exclude the benefits of transactional leverage used on one deal in Fund IV which added a total gross 130bp to the Fund’s IRR With respect to underlying funds, performance is based upon the most recent reported market valuations received from the general partners at the time the track record was prepared. For funds that did not yet receive a June 30, 2019 reported market valuation, Hamilton Lane uses the “Adjusted Market Value” methodology which reflects the most recent reported market value from the general partner adjusted for interim net cash flows through June 30, 2019. This performance is subject to change as additional reported market values are received from the general partners. With respect to underlying co/direct investments, the performance presented in the track record is based on June 30, 2019 investment values prepared by third-party valuation providers which is then reviewed and approved by Hamilton Lane. The portfolio investments in which the Partnerships have invested may have not yet issued their financial statements for June 30, 2019. The estimated investment values therefore rely on the information available at the time of approval by Hamilton Lane. 1 Internal Rate of Return ("IRR") is calculated on a pooled basis using daily cash flows. Net IRR is presented net of management fees, carried interest and expenses charged by the general partners of the underlying investments as well as net of Hamilton Lane management fees, carried interest and expenses. IRR is calculated on a pooled basis using daily cash flows. It should be noted that the IRRs of Fund I, Fund II, Fund III, and Fund IV are initially impacted by the purchase discounts (or premiums) paid at the closing of a transaction, the impact of which will diminish over time as the IRRs reflect subsequent changes in the valuations of the underlying investments. 2 Note that secondary portfolio IRRs can be initially impacted by purchase discounts (or premiums) paid at the closing of a transaction, the impact of which will diminish over time. 3 Total Value Paid-In ("TVPI") multiple represents total distributions from underlying investments to the fund plus the fund’s market value divided by total contributed capital. Net TVPI is net of all management fees, carried interest and expenses charged by the general partners of the underlying investments as well as by Hamilton Lane. 4 Hamilton Lane Secondary Fund II, Fund III and Fund IV have utilized or are currently utilizing revolving credit facilities, which provide capital that is available to fund investments or pay partnership expenses and management fees. The usage of the credit facilities delays drawing capital from the investors and impacts the timing and amount of distributions to the investors as credit facility drawdowns will be paid down at later dates with either investor capital contributions or with distributions from investments. The usage of a credit facility also affects the fund’s return and magnifies the performance on the upside if a fund is producing positive performance or on the downside is the fund is producing negative performance. A credit facility also impacts the point in time when performance fees can be collected by the manager. 5 IRR and TVPI represent net performance figures. Hamilton Lane Track Record 29 Pomona Capital PerformanceFund Name Vintage Year Fund Capitalization ($M) % of Fund Invested No. of Committed Underlying Funds IRR Unlevered IRR****TVPI Unlevered TVPI**** Avg. Discount to NAV Loss Ratio % of $ Invested Pomona Capital I 1994 42 97%18 38%N/A 1.9x N/A 12%0.0% Pomona Capital II 1995 79 96%38 25%N/A 1.6x N/A 20%0.9% Pomona Capital III 1996 101 98%15 9%N/A 1.5x N/A 7%0.0% Pomona Capital IV 1998 213 100%35 7%N/A 1.4x N/A 12%2.6% Pomona Capital V 2001 582 99%75 12%N/A 1.4x N/A 21%0.0% Pomona Capital VI 2005 821 89%43 5%N/A 1.3x N/A 20%0.7% Pomona Capital VII 2007 1300 85%159 8%7%1.3x 1.2x 24%2.9% Pomona Capital VIII 2012 1746 62%173 18%13%1.5x 1.3x 14%0.0% Pomona Capital IX**2016 1774 26%>200 >50%*NM***1.3x 1.1x 15%0.0% As of June 30, 2019 *Due to the early nature of these investments, Pomona does not believe that such high IRRs are sustainable, and are likely to decrease **PC IX is still investing, all numbers subject to change ***At this point in the Fund’s term, management believes that the unlevered net internal rate of return (unlevered net IRR) may not be an appropriate performance measurement due to the current percentage of capital funded by the limited partners as well as the short duration of such investment in the Fund. Management expects to report the unlevered net IRR within six months after the limited partners contribute 55% of committed capital to the Fund. **** Assumes no credit facility impact or any benefit from transactional debt Pomona Track Record 30 Portfolio Advisors Performance Secondaries Fund Name Vintage Year Fund Capitalization ($M) % of Fund Invested No. of committed underlying funds Net IRR Unlevered IRR*Net TVPI Unlevered TVPI* Avg. Discount to NAV Loss Ratio % of $ Invested Portfolio Advisors Secondary Fund, L.P.2008 1,128 102%347 14%14%1.65x 1.65x 22%2.8% Portfolio Advisors Secondary Fund II, L.P.2012 910 112%259 16%15%1.44x 1.44x 10%0.3% Portfolio Advisors Secondary Fund III, L.P.2016 1,518 71%189 42%N/M 1.30x 1.30x 11%0.0% Data as of 3/31/2019 * Assume no credit facility impact “Vintage Year” generally represents the year that a partnership first begins to draw capital. "Fund Capitalization" represents the amount of partner capital commitments to each PA-sponsored vehicle. "% of Fund Invested" represents the "Total Exposure" of each fund divided by the "Fund Capitalization." “Total Exposure” represents (i) the total commitments to underlying secondary transactions (and co-investments, if applicable) in a given portfolio at a stated time for which a purchase and sale agreement and/or letter of intent was signed,valuing such investments at the purchase price stated in the applicable document, plus (ii) the unfunded commitment. IRR Methodology. “IRR” (the internal rate of return) is defined as the implied discount rate that will make the net present value of a stream of cash flows sum to zero. “Net IRR” is calculated based on all of the cash flows between the specified PA-sponsored vehicle and the limited partners of such vehicle. The actual Net IRR to any individual investor in any PA-sponsored fund would however differ slightly from the Net IRR presented based on certain factors including as applicable the closing in which such investor participated, the fee series selected and/or the sectors/classes selected. The Net IRRs are based on Reported Value as of March 31, 2018. "Reported Value" represents the value of each respective fund’s or sector’s, as applicable, underlying fund investments' net assets, as of March 31, 2019, as reported on the underlying fund's financial statements. The value of a fund's assets on its financial statements reflects the "fair value", as determined by each underlying fund's general partner, in almost all cases, in accordance with U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards,and includes valuations of unrealized investments. Prospective clients and/or investors must understand that (i) such valuations may be materially higher or lower than the cost of such investments and may vary over time, (ii) such valuations may or may not be based on valuations provided or verified by third parties independent of the underlying fund's general partner, and (iii) the ultimate realized value of any investment may be materially different than the fair value reported on the underlying fund's financial statements. "Net TVPI" represents Reported Value plus Distributions divided by Contributions at the PA-sponsored vehicle limited partner level. This figure is net of all fees and expenses. "Avg. Discount to NAV" represents only secondary transactions,and excludes co-investments. Portfolio Advisors Track Record 31 Investment Manager and Fund Narratives 32 Firm Overview Headquartered in Paris,France,with 15 offices globally,Ardian was founded in 1996 by Dominque Senequier as AXA Private Equity,a subsidiary of AXA.The firm was initially organized to make direct private equity investments for AXA’s balance sheet.Senequier hired Vincent Gombault in the late 1990s to build its secondaries business and the firm launched Ardian Secondaries Fund I in 1999.In 2013,Ardian spun out of AXA,and became majority employee-owned across approximately 200 of the firm’s more than 600 employees.Today,Ardian is 55%employee-owned with the remainder held by AXA (~10%), five private family offices (10%),and three corporate entities (~25%).The firm has a staff of over 650 and manages or advises close to $100 billion across five business segments:Fund of Funds,Direct Funds,Infrastructure,Private Debt and Real Estate. Team Overview ASO VIII will be managed by the firm’s more than 75-person Fund of Funds team which oversees more than $50 billion across secondary,early secondary and primary fund strategies,operating in a single integrated platform.The team is organized to follow funds via general partner specific groups per geography instead of via segregated secondary/primary groups.Approximately 28 investment professionals are based in the U.S. (New York/San Francisco),40 in Europe (London Paris,Frankfurt &Zurich),and 11 in Asia (Singapore,Beijing &Seoul).The Fund of Funds 13-member investment committee is chaired by Vincent Gombault (joined Ardian in 1998 -Global Head of Fund of Funds and Private Debt activities),Benoît Verbrugghe (1999–Head of Ardian US),and Olivier Decannière (2001–Head of Ardian UK). Strategy Overview ASO VIII intends to capitalize Ardian’s leadership position in secondaries with a focus on large,LP-led transactions primarily in the traditional buyout category.Fund VIII is targeting a $12.5 billion fundraise,which is notably higher than Funds VII and VIII ($6 billion and $7.5 billion,respectively),but the firm believes the fund size increase is commensurate with the opportunities it sees in the marketplace and the significant growth in transaction volumes over the past five years.The team expects to complete 20-30 transactions with target deal sizes from $250M -$3 billion,with a preference for transactions larger than $500M.Ardian expects NAV growth will drive approximately 65%of returns,with the remainder split between leverage (~25%)and the price discount (~10%).Ardian’s goal is to be the first phone call for large limited partner sales and it has historically executed transactions for multiple repeat sellers. ASO VIII seeks high-quality assets with predictable cash flows.Buyout represented approximately 90%of the portfolio in Funds VI and VI.They focus on funds where at least 50%of original commitments have been drawn with an aggregate drawn target of 70%-90%. Ardian seeks out deals where they are already invested in 80%of the funds through its primaries or secondaries platform.The firm maintains a 1,500+fund database with more than 10,000 companies,of which active models are maintained on more than 400 funds and 5,000 underlying companies.The fund will be diversified geographically with a focus on North America and Western Europe.It will also be broadly diversified by sector with no single focus. Expectations ASO Fund VIII seeks to generate a 1.5-1.6x net multiple and 15%-16%net IRR.Ardian has historically exceeded (or remains on pace)to exceed this net multiple target for its ASF funds outside its 2006 vintage.We believe these return targets are possible,assuming the exit environment remains healthy over the next five years,although the current,more competitive pricing environment may indicate there is some downside risk.Ardian relies on leverage to drive approximately 25%of its returns.Leverage has contributed approximately 2%to IRR and 0.2 –0.3 to the multiple to Fund V and Fund VI’s returns. The fund’s first close was held in September 2018.Investments will be made over a five- year period from the time of the final close,which is expected in March 2020.Ardian will likely take advantage of its flexibility to raise the fund size above $12B (hard cap $13.5B)to accommodate LP demand,which represented $11.9 in commitments as of early Nov 2019. Points to Consider Ardian’s fund leverage has crept up since the early part of the decade.Net/Debt to EBITDA for transactions completed in 2018 was 4.8x.While below the industry average (at 5.5x)and Ardian’s 2007 leverage multiples (5.7x),it is still up notably from the 3.6x –4.2x applied earlier in the decade.This high leverage has coincided with a narrowing of NAV discounts, which may negatively impact the firm’s ability to generate its return target. In addition to fund level leverage to bridge capital calls,Ardian will utilize transactional leverage by creating a SPV to acquire specific portfolios.Typically,a five-year loan is taken out on a percent of the portfolio expected to be realized within the first 24 months of the transaction.Importantly,the total deal level debt within Ardian deals cannot exceed 35%of the fund size at any point in time and the max indebtedness on any of ASF’s historical portfolios was 29.4%(ASF VI). Fees include a 15%carry subject to meeting an 8%preferred return.We consider the 8% preferred return to be in line with industry standards,the 15%carry to be modestly above the 12.5%we typically see,but within normal industry ranges. Summary We believe Ardian’s size,scale and focus in the secondaries market positions it well to take advantage of the significant growth in secondaries transaction volume and rising deal sizes expected over the next decade and support clients re-upping in ASO VIII.The firm is a market leader based on transaction volumes and is often the first phone call for larger LPs seeking to divest their private equity portfolios.Ardian is well-staffed with a 75+person Fund of Funds team,with most senior team members having been with the firm for more than 10 years.The firm’s large database allows the team to quickly underwrite larger transactions in the marketplace.Further,we like how the firm is clear on its niche,specializing in global LP buyout and growth equity funds,while preferring to avoid VC funds,GP-led transactions and Emerging Markets funds.Ardian’s approach to leverage appears sound,preferring to avoid fund level leverage and applying leverage at the transaction level.However,it remains a point to consider and is expected to drive approximately 25%of returns. Ardian –ASO VIII B, LP 33 Firm Overview Hamilton Lane Advisors (HL)was founded in 1991 in Philadelphia,Pennsylvania as a private equity advisory firm for large public pension plans.The firm focused almost exclusively on advisory mandates until 1998,when HL gained its first separate account client and launched its first fund-of-funds.Today HL employs more than 350 professionals across 16 offices globally,representing more than $50B in discretionary assets and more than $350B in advisory assets.The firm also provides a wide array of discretionary and non- discretionary services including strategic portfolio planning,due diligence,legal,monitoring and reporting,board presentations,performance analysis and benchmarking.For example, HL partnered with software provider Bison in 2016 to launch its analytics and data platform Cobalt. In early 2017,HL completed an initial public offering (NASDAQ Ticker:HLNE).As of September 30,2019,the firm’s directors and executive officers held approximately 38%of the economic interest in HL and 73%of the total voting interest Team Overview HL’s secondary deal team is led by Tom Kerr,Global of Head of Secondaries and is comprised of 21 investment professionals including six Managing Directors.Most of the team is based in Bala Cynwyd,PA,HL’s current headquarters in suburban Philadelphia, although five are located in London and one MD is based in Hong Kong.Kerr joined HL in 1999 and assumed his current title in 2007.Deals are approved by HL’s secondary investment committee which comprises Kerr,Secondaries MDs Keith Brittain,Dennis Scharf and Richard Hope,as well as eight additional senior HL professionals including:Chairman Hartley Rogers,CEO Mario Giannini,Head of Fund Investments Andrea Kramer,MD Tara Blackburn,Head of Europe Jim Strong,Vice Chairman Erik Hirsch,Head of Investments Brian Gildea,MD Dennis Scharf,and Vice Chairman Juan Delgado-Moreira. Strategy Overview HL Secondary Fund V (Fund V)seeks to identify secondary opportunities outside the broad auction market,where the deal team can leverage the firm’s large private equity market position.The approach is designed to be flexible,targeting the entire spectrum of secondary market transactions from the traditional acquisition of individual and portfolio fund interests to more complex structured transactions.Fund V has a target fund size of $3B.Despite the fund size growth (>50%versus Fund IV),secondaries market transactions have grown at a faster rate the past three years.HL has historically closed on less than 2%of deals reviewed. HL believes its positioning as a market leader in the deployment of primary capital (>$30B annually)benefits secondary deal flow,including its ability to close on deals where there is less competition.First,HL positions itself as a long-term capital provider for GPs, representing more than just secondary dollars,and HL sits on more than 350 Advisory Boards.Second,the firm’s robust database,representing more than 4,400 funds and 60,000 companies provides detailed look throughs for the team when underwriting companies.HL typically has greater than 80%asset coverage on transactions completed.The fund will be diversified by strategy,with the majority in buyouts and growth funds.The firm may also invest in VC,credit,energy and special situations,as it has in prior funds.Additionally,it will be diversified by geography,with 60-80%in North America and Europe,and the remainder in Asia and rest of the world. Expectations Fund V seeks to generate a 1.4x –1.6x net multiple and mid to high teens net IRR on its transactions.We believe the fund has the potential to achieve this target range but that there is downside risk to these return estimates given the more competitive pricing environment in the industry. The fund intends to deploy capital over a three-year investment period.We expect the secondaries deal team to continue its path toward participating in more complex secondary transactions,which represent 42%of Fund IV commitments versus 31%in Fund III. Points to Consider HL’s fund leverage may represent up to 30%of total commitments excluding the fund credit facility.The average fund level leverage in Fund IV thus far has been approximately 10%of the initial fund size.Deal level leverage will be considered if there’s high visibility into underlying cash flows and the team is comfortable with both unlevered returns and owning the deal even if exits are delayed or the market experiences a downturn. HL carried interest is structured such that 75%of carry is paid to the parent first with the remainder to be allocated to a bonus pool shared throughout the firm.As such,the secondaries team is not guaranteed to receive most of the carry.With that said,turnover on the secondary deal team has been low. The fund’s GP commitment of 1%is in line with industry minimums,but lower than preferred. The 12.5%carry appears in line with the industry. Summary We believe Hamilton Lane is well-positioned to take advantage of secondaries opportunities in the marketplace,while Secondary Fund V’s mid-sized portfolio should allow the deal team to be selective.The firm boasts a large and tenured secondaries deal team,with a global presence,led by Tom Kerr,who has served as lead since 2007.As a market leader in secondary transactions,the secondaries deal team is able to leverage the broader resources of HL in two capacities.First,GPs are more likely to approve HL as a secondary buyer for LP transfers either because of an existing relationship or to boost its chances of receiving a future primary funding.Second,the secondaries deal team can access HL’s robust fund database to underwrite transactions quickly.While HL’s carry structure is somewhat unorthodox in that the majority goes to the parent as opposed to the dedicated teams,the secondaries team has remained stable over time.The team’s utilization of leverage appears to be modest relative to larger peers,yet clients should be aware of Fund V’s ability to employ leverage up to 30%of fund commitments. Hamilton Lane Advisors LLC –Hamilton Lane Secondary Fund V 34 Firm Overview Headquartered in Darien,CT,Portfolio Advisors (PA)was founded in 1994 and has offices globally.The firm is focused on investing across private markets in equity,credit,and real estate.It currently manages a total of $20+billion in assets with more than $18 billion residing in the firm’s various commingled funds.The firm employs over 100+professionals and maintains more than 250+GP relationships investing,on average,$2.5 billion in private markets per year.Secondaries makes up the second largest fund series at the firm at over $4 billion,with the largest being its Global Private Equity Funds series at over $7 billion in AUM. The firm is independent,and 100%employee owned. Team Overview PA has a dedicated six-person secondaries team.The team is led by Hugh Perloff,one of PA’s first 10 employees who joined the firm in 1998.PA founded the team in conjunction with the launch of PASF I,by first moving Perloff from his role on the primaries team over and hiring Patrick Gerbracht from competitor Pomona.The other four professionals include a Senior VP (Justin Lux),a VP (Tim Henn),and two Associates (Jorge Rossello and Patrick Brown).The team has seen little turnover with the senior professionals having been managing the PASF strategies since Fund I.Perloff originally joined the firm as CFO,but quickly transitioned to the primaries team where he established relationships with several GPs during his duties.Lux has a background in distressed investing,Rossello worked in banking focused on the energy sector and Henn has a background in restructuring. Strategy Overview PASF IV’s strategy will leverage PA’s extensive platform which includes more than 250 GP relationships,200 advisory board seats,and $2.5 billion in private capital deployment annually. The team views this platform as a key source for deal flow and manager insight when viewing potential transactions,along with making PA a desired LP for GPs.Over 70%of closed investments for PASF involve GPs where PA has a relationship through a commitment somewhere on their platform.The fund is targeting a raise of $1.5 billion,similar in size to PASF III. It intends to be diversified across market segments and managers but will have a focus on the middle market buyout space,where 41%of their historic transactions have taken place. Historically PASF has bid in the large buyout market as well,but the team intends to stop this practice by potentially adding more focus to middle market opportunities.Along with buyout, PASF is expected to invest in venture which historically has represented 22%of their deals. The team attempts to target venture funds that are more mature,thereby gaining access to investments that have progressed into the late venture /traditional growth phase by the time they’ve invested.The fund is also expected to contain smaller allocations to distressed,natural resources,special situations,and fund of funds.The average transaction size is $25 -$75 million,but the team can bid on larger deals in the $200-$300 million range.The team will often target select funds in larger secondary transactions.Roughly 40%of closed transactions at PA are carve outs of larger deals in the market.PASF also does not use leverage outside a small line of credit that is only used for capital call consolidation,representing 5%of fund commitments,and must be paid off annually. Expectations PASF IV targets a gross IRR of 20%,based on historical returns we would expect them to produce a net multiple of 1.5x and a net IRR in the mid-teens.Fund I exceeded this expectation,while Fund II is on track to potentially meet these number and Fund III is too early to call. The fee structure and GP commitment for the fund stands out compared to its peers.PA invests heavily in all its strategies,PASF IV is expected to have a GP commitment of 3%, three times higher than the average 1%for secondaries strategies.It also has a favorable preferred return of 10%relative to the normal 8%,as well as a competitive 10%carry.In addition,the fund will charge its management fee on invested capital during its investment period,before changing to cost of portfolio post investment period.This is LP friendly compared to the normal charge on committed capital.This should result in LPs only being charged for funds that the team has put to work versus simply committed from the beginning of the fund. Points to Consider While the performance for PASF Funds I –III has been strong,the firm does not have a fund with a vintage prior to the GFC.This creates some uncertainty around how the fund may perform in a downturn,though the lack of leverage in the strategy should be a positive in such a scenario. Managing Director Ryan Butler left the industry in 2015,representing the team’s only notable departure. Summary We believe the size and scope of PA’s full platform and its ability to provide deal flow in addition to a seasoned and stable team,favorable fees,and a history of strong returns despite lack of leverage supports a positive case for investing in PASF IV.The firm has a focus in private markets and is well known through its large annual commitments of over $2 billion annually,its multitude of GP relationships which number over 250,and its diverse group of product offerings across asset classes.This platform provides a consistent source of deal flow and visibility into underlying managers during secondary selection processes and puts the firm on the list of acceptable purchasers for many restrictive GPs.The team is experienced and stable.The team has diverse backgrounds and significant experience in multiple areas of the market.The same team has executed the strategy successfully since its 2008 inception.The fees are favorable to LPs,with a preferred return that is 2%higher than most of their competitors,management fees charged on invested as opposed to committed capital during the investment period,and a GP commitment that is three times the normal market amount.Finally,the historical returns for the prior PASF funds have been solid when compared to their peers despite the team’s lack of leverage use. Portfolio Advisors LLC –Portfolio Advisors Secondary Fund IV 35 Firm Overview Founded in 1994 and headquartered in New York,Pomona established itself as an early investor in secondaries with the launch of its first secondaries fund that same year.The firm possesses an integrated platform with $12B in capital commitments including $4.9B in primaries,$6.9B in secondaries and $200M co-investments.The secondaries are invested in the firm’s commingled funds,while the primaries platform is all invested in separate accounts. Pomona staffs 45 employees,nearly all are based in its New York office,with additional offices in London and Hong Kong. In 2000,Pomona entered into a strategy partnership with the former U.S.insurance and asset management arm of the ING Group,now Voya Financial (Voya).Pomona is now 100%owned by Voya,who receives approximately 50%of Pomona’s carry and management fees but has no day-to-day management authority.Pomona manages over $3B in private equity capital for Voya,including $2.5B in primaries and more than $500M in secondaries. Team Overview Pomona is managed by seven investment partners including co-founders Michael Granoff and Fran Janis,Lorriaine Hliboki (joined Pomona in 2007),Jim Rorer (2004),Sebastian Bowen (2010),Patrick Madaus (2011),and John Stephens (2011).The investment team is based in New York except Bowen who is based in London.Women serve in more than one third of Pomona’s senior roles,including Controller and multiple Managing Directors and Partners. Strategy Overview Pomona seeks long-term capital appreciation with enhanced liquidity and lower risk profile via its mid-sized funds and focus on seasoned funds managed by high-quality managers.We expect Pomona Capital X to have a similar footprint as Funds VIII and IX,with two-thirds or more of the fund invested in the U.S.,and the remainder primarily invested in Europe.Buyouts will remain a focus (61%of Fund VIII and 86%of Fund IX to date),with additional allocations to growth equity &venture,as well as opportunistic allocations to mezzanine credit &energy. The team targets less competitive situations where they believe they have distinct edge in the marketplace,such as transactions that include managers where they have a prior relationship. For example,in Pomona Capital VIII and IX,80%of assets purchased represented GPs where Pomona had an existing relationship.In Fund IX,27%of committed capital was allocated to exclusive transactions,24%-GP directed,22%-limited competition (2-4 buyers)and 27%- repeat sellers. Pomona seeks to be selective,executing five to seven transactions annually representing $400-$600M in total assets.The team actively prices 200 funds each quarter,approximately 100 funds where Pomona has exposure,as well as the top 100 funds in the marketplace they may want to own.Pomona then develops a 12-20 fund wish list that is refreshed every quarter based on anticipated opportunities.Discounts to NAV have averaged 14%and 15%, respectively in Funds VIII and IX respectively,versus the industry average in the mid-single digits. Expectations Pomona X is expected to have $2B target size,modestly higher than Fund IX ($1.8B).This should allow the firm to remain selective in the marketplace and continue to close on transactions with above average discounts to NAV. We believe Pomona X will target similar return profile of Fund IX for its investments,a 15% Net IRR and at least 1.5 net multiple.While Pomona may achieve this return profile,we also see downside risk to these estimates as NAV discounts continue to compress driven in part by the rising use of leverage. . Points to Consider Pomona X will be launching in January 2020 and its subscription documents are not yet available for review.We have been informed that the portfolio approach and terms will be similar to Fund IX,although Pomona is considering changing its incentive for LPs participating in the initial close.Instead of a 12.5 bps management fee discount,investors may be offered the opportunity to allocate 8%of their portfolio to co-investments.This change had not been finalized as November 2019. Pomona utilizes a credit facility (LIBOR +155 bps)with an annual renewal to assist with hedging currency and manage capital calls.The maximum allowable leverage is 30%of aggregate subscription and the average leverage in Fund IX has been $215M.The firm will also occasionally utilize transactional leverage via special purpose vehicles (one transaction in Fund VIII and four transactions in Fund IX). Managing Director Oliver Gardey left Pomona this past summer to lead the listed private equity program at U.K.Asset Management.Pomona stated that Gardey was more responsible for fundraising in Europe,while Sebastian Bowen has always headed up sourcing.However,Gardey’s departure was the catalyst for Bowen being promoted to lead on Pomona’s European efforts. Summary We expect Pomona to continue to drive competitive returns in the secondaries marketplace by continuing to leverage its longstanding relationships with general partners,through both its primaries and secondaries commitments.The team is diverse and experienced,led by co-founders Michael Granoff and Fran Janis,who oversee a senior staff,including VPs and above,that average 12 years with the firm.As a specialist in both traditional LP portfolio sales and customized complex solutions,Pomona has demonstrated the ability to be selective in pursuing transactions such that the firm’s average discount on assets purchased has historically exceeded the market average (~1,000 bps lower since 2012).We reviewed multiple secondaries transactions during our onsite visit where Pomona was able to win the bid based on limited competition and/or cherry pick the funds they wanted to purchase out of large deals.Clients considering Pomona X should be aware that the firm utilizes both fund level and transactional leverage to enhance returns.This leverage has historically been capped at 30%of the portfolio. Pomona Capital –Portfolio Capital X 36 Funding Private Equity / Pacing Private Equity Funding Challenges Balancing current allocations,commitments,and target allocations Timing of contributions and distributions are unknown PE fund allocations rarely reach 90%of commitment Pacing:the processes of managing commitments to reach the target allocation. Generally,Boards will commit 125%to 150%of their target allocation in an attempt to reach the target allocation. Timing of commitments and distribution are partially a function of the investment strategy.0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Sample Funding % Uncommited Capital % Distributions Value as % of Commitment 37 Alternative Investments: Broadly, investments in assets or funds whose returns are generated through something other than long positions in public equity or debt. Generally includes private equity, real estate, and hedge funds. Buyouts: Investments made to acquire majority or control positions in businesses purchased from or spun out of public or private companies or purchased from existing management/shareholders public equity shareholders in “going private” transactions, private equity funds or other investors seeking liquidity for their privately –held investments. Buyouts are generally achieved with both equity and debt. Examples of various types of buyouts include:small, middle market, large cap, and growth Carried Interest: Also known as ‘carry’ or ‘promote’. A performance bonus for the GP based on profits generated by the fund. Typically, a fund must return a portion of the capital contributed by LPs plus any preferred return before the GP can share in the profits of the fund. The GP will then receive a percentage of the profits of the fund (typically 20-25%). For tax purposes, both carried interest and profit distributions to LPs are typically categorized as a capital gain rather than ordinary income. Capital Commitment: The total out-of-pocket amount of capital an investor commits to invest over the life of the fund. This commitment is generally set forth on an investor’s subscription agreement during fundraising and is accepted by the GP as part of the “closing” of the fund. Catch–up: A clause in the agreement between the GP and the LPs of a private equity fund. Once the LPs have received a certain portion of their expected return, often up to the level of the preferred return, the GP is entitled to receive a majority of the profits (typically 50%-100%) until the GP reaches the carried interest split previously agreed. Co-investments: Investment made directly into a company alongside a General Partners investment, rather than indirectly through a fund Crossover Funds: Contain both private and public securities in their portfolio. While this isn’t a new concept, managers of these funds may employ a long/short strategy with respect to that portion of their portfolio that is held in the public securities. Distressed Debt Investing: Practice of purchasing the debt of troubled companies, defaulted, on the verge of default, or seeking bankruptcy protection. Investors have been referred to as “vultures” as they pick the bones of troubled companies. Investment structures of focus include subordinated debt, junk bonds, bank loans, and obligations to suppliers. It is a way to gain an equity stake in the company as debt owed is forgiven in return for stock. They may try to help the troubled company regain its strength earning significant returns as the value of the distressed debt recovers. Or Investors may be helping impatient creditors to cut their losses and wipe a bad debt off their books. The Distressed Debt investor in return, waits for the company to correct itself and the value of the debt to recover. If a distressed company with under assessed strength is identified, the return can be quite large. Distribution: When an Investment by a private equity fund is fully or partially realized (resulting from the sale, liquidation, disposition, recapitalization, IPO or other means of realization of one or more or more portfolio companies in which a GP has chosen to invest) the proceeds of the realization9s)are distributed to the investors. These proceeds may consist of cash, or, to a lesser extent, securities. EBITDA Multiple: A common earnings multiple in private equity. It is the total valuation of a deal divided by earnings before interest, taxes, depreciation, and amortization. Efficient Frontier: The set of portfolios that maximizes the expected rate of return at each level of portfolio risk. Fund of One: Similar to a fund of funds but has a single investor as the sole limited partner. Portfolio can be constructed to investor’s unique objectives and preferences. Investor retains opt-out and termination discretion. General Partner (GP): A class of partner in a partnership. The GP makes the decisions on behalf of the partnership and retains liability for the actions of the partnership. In the private equity industry, the GP is solely responsible for the management and operations of the investment fund while the LPs are passive investors, typically consisting of institutions and high net worth individuals. The GP earns a percentage of profits. Internal Rate of Return (IRR): The compound interest rate at which a certain amount of capital today would have to accrete to grow to a specific value at a specific time in the future. Basically, it is the average return on capital over the lifetime of the investment. This is the most common standard by which GPs and LPs measure the performance of their private equity portfolios and portfolio companies over the life of the investment. IRRs are calculated on either a net (i.e., including fees and carry) or gross (i.e., not including fees and carry) basis. J-Curve: The IRR of a private equity investment plotted versus time. The J-curve refers to the fact that net IRRs in the early years of a fund are generally negative, dominated by drawdowns for fees and investments. As investments accrete in values and are gradually liquidated, returning capital and profits, the fund works through the J-curve and begins to show positive IRRs and multiples of investors’ capital. Glossary 38 Leverage: The use of debt to acquire assets, build operations and increase revenues. By using debt (in either the original acquisition of the company or subsequent add-on acquisitions), private equity investors are attempting to achieve investment returns beyond which they could achieve using equity capital. Increasing leverage on a company also increases the risk that assets and revenues will not increase sufficiently to generate enough net income and cash flow to service the increased debt load. Leveraged Buyout (LBO): The purchase of a company or a business unit of a company by an outside investor using mostly borrowed capital. Limited Partner (LP): A passive investor in a Limited Partnership. The GP is liable for the actions of the partnership while the LPs are generally protected from legal actions and any losses beyond their original investment. The LPs receive income, capital gains and tax benefits. Management Fee: A fee paid to the Investment Manager for its services, typically as a percentage of aggregate capital commitments. Management fees in a private equity fund typically range from 1.25% to 2.5% of commitments during the fund’s investment period, and then step down to the same or a lower percentage based on the fund’s “invested capital” remaining in investments. Venture capital funds tend to have higher management fees than traditional private equity funds. Mezzanine Debt: Financing provided by a bank or specialized investment fund to invest in a debt instrument of lower credit quality relative to the senior debt in a company but ranking senior to any equity claims. The instrument may include equity features such as warrants or options. Multiple of Invested Capital (MOIC): The total return on an investment as measured by (Total Money Out)/(Total Money In). Multiple of cost and IRR are the two most common measures of performance in private equity. Preferred Return: Also sometimes called the ‘hurdle rate’. Preferred returns are typically found in buyout funds. After the cost basis of an investment is returned to the LPs, they will also receive additional proceeds from the investment equal to a stated percentage, often 8%. Once the preferred return is paid, then the GP will be entitled to its carried interest on all profits realized from the investment. Private Equity: The private equity sector purchases the private stock or equity-linked securities of non-public companies that are expected to go public or provides the capital for public companies (or their divisions) that may wish to go private. Since securities are non-public and investments are illiquid, investors in the marketplace must be prepared for investment horizons from 5 to 10 years. Investment vehicles can take the form of LPs, LLCs, Corporate Funds, and Fund of Funds. Areas of specialization within each strategy include industry, geography, stage of financing, and “special situations”. “Private Equity” is a generic term that encompasses four distinct strategies in the market for private investing: Venture Capital, Leveraged Buyout, Growth Equity, Special Situation/Distressed Debt Investing Public Market Equivalent (PME): A private equity benchmark that represents the performance of a public market index expressed in terms of an IRR, using the same cash flows and timing as the investor’s investment activity in private equity. The PME serves as a proxy for the return the investor could have achieved by investing in the public market. The PME benchmark return assumes cash flows are invested at the end of each day Secondary Investment: Investment made directly into a company, rather than indirectly through a fund Special Situations: Private Equity funds that do not fall into the category of buyout or venture capital funds. Special situations funds include distressed debt. Special situations funds typically follow investment strategies that result in more rapid draw-downs and return of capital than traditional private equity funds. Stage of Financing relates to the timing of the investment. Seed (start up) invest at the very beginning and face the highest potential return, longest holding period, and greatest risk. At the end of the spectrum is late term financing, getting in after the initial setup and majority of the work has been completed. The expected return turnaround time is shorter and thus, smaller in size versus seed financers. Venture Capital is the supply of private equity financing to start up companies that do not have a sufficient track record to attract investment capital from traditional sources. Typically invest in smaller less mature companies, usually in high growth industries. Start ups lack tangible assets that can be used for collateral and are unlikely to produce positive earnings for several years. Venture capitalists provide management insight, have the right to hire and fire key managers, provide access to consultants, accountants, lawyers, investment bankers, and other business that might purchase the start up company’s product. Focus of the VCs attention includes business plans, intellectual property rights, operating history, start up management team, legal issues, and exit plans. Exit plans may include strategic sales or initial public offerings. Vintage Year: The year in which a private equity fund had its final closing. Glossary 39 IMPORTANT DISCLOSURE INFORMATION This material is confidential and not intended for distribution to the public.AndCo Consulting (“AndCo”)compiled this report for the sole use of the client for which it was prepared.AndCo uses the material contained in this evaluation to make observations and recommendations to the client, however the strategies listed may not be suitable for all investors and there is no guarantee that the strategies listed will be successful.Any information contained in this report is for informational purposes only and should not be construed to be an offer to buy or sell any securities, investment consulting,or investment management services.Additionally,the analysis provided,while generally comprehensive,is not intended to provide complete information on each of the management organizations or their underlying strategies.Please refer to their respective Form ADVs, pitch books,and/or offering documents for complete terms,including risks and expenses. Information is based on sources and data believed to be reliable,but AndCo cannot guarantee the accuracy,adequacy or completeness.The information provided is valid as of the date of distribution or the as-of date indicated and not as of any future date,and will not be updated or otherwise revised to reflect information that subsequently becomes available,or circumstances existing or changes occurring after such date. The source of data and figures provided is generally the respective managers,including their Form ADVs,pitchbooks,offering documents and other similar documentation.Additional information included in this document may contain data provided by 3rd party subscriptions,index databases or public economic sources. Return data presented in the “Track Records”is provided for historical and informational purposes only.The results shown represent past performance and do not represent expected future performance or experience.Past performance does not guarantee future results.Returns stated are net of fees,which may include:investment advisory fees,taxes and other expenses.When client-specific performance is shown,AndCo uses time-weighted calculations,which are founded on standards recommended by the CFA Institute.In these cases,the performance-related data shown are based on information that is received from custodians.As a result,this provides AndCo with a reasonable basis that the investment information presented is free from material misstatement. RISK FACTORS As presented in this report,although investing in private equity funds can be beneficial,it is also important to consider the associated risks.Investing in private equity funds is higher risk,may involve speculation,and is not suitable for all investors.Prospective investors should be aware of the long- term nature of an investment in private equity funds.Investments (direct or indirect)in private equity are typically illiquid.Other general risks and important considerations associated with private equity funds include,but are not limited to:volatilities in political,market and economic conditions; extensive and frequently changing regulation;downturns in demand;changes to private equity values and taxes;valuation and appraisal methodologies;interest rates;and environmental issues.The risks outlined herein do not purport to cover all risks or underlying factors associated with investing in infrastructure funds.Please refer to the respective offering documents for complete information. 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