Private Equity Institutional Investor Trends for 2016 Survey

Transcription

1 Private Equity Institutional Investor Trends for 216 Survey

2 probity n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character. On an ongoing basis, Probitas Partners offers research and investment tools for the alternative investment market to aid its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team s broad knowledge of the market.

3 Contents The Private Equity Fundraising Environment... 2 Private Equity Institutional Investor Survey... 3 Overview of Survey Findings... 3 Profile of Respondents... Sectors and Geographies of Interest... 1 Emerging Markets U.S. Middle-Market Funds Venture Capital Distressed Private Equity Credit-Focused Funds... 3 Real Asset Funds Secondary Market Co-Investments and Direct Investments Fund Structures and Key Terms... 3 Investor Fears and Concerns Our View of the Future Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 1

4 The Private Equity Fundraising Environment Fundraising in 21 slowed significantly in the third quarter, though a boom in fourth quarter fundraising, as has happened in the last two years, could bring the full-year total up to 21 s level. The trends that underlie the top line numbers in Chart I: Funds targeting North America make up more than % of all fundraising. Mega buyout funds in the United States and Europe are raising large funds that are boosting overall commitments but most of these funds are targeting smaller funds than they raised at the last market peak. After rebounding significantly in 21, interest in Asia has slowed so far in 21 due to increased concerns about China. The overhang of undrawn commitments has also increased over the last two years, reaching an all-time high of $1.3 trillion. A boom in fourth quarter fundraising, as has happened in the last two years, could bring the full-year total up to 21 s level. Chart I Commitments to Global Private Equity Partnerships USD in billions Q YTD Source: PREQIN, does not include funds-of-funds Private Equity Institutional Investor Trends for 216 Survey 2 21 Probitas Partners

5 Private Equity Institutional Investor Survey Probitas Partners conducted its annual online survey in late September/early October 21 to gauge investor interest, opinions, and perspectives on investing in private equity. This survey is designed to track emerging trends and to compare investors changing views over a longer period of time. One hundred and four responses were received from senior investment executives globally, representing such institutions as public and corporate pension plans, funds-of-funds, insurance companies, family offices, endowments and foundations, and consultants and advisors. Overview of Survey Findings The following summarizes the top-line findings from the survey: Steady interest in private equity. Investors are focused on redeploying the large amounts of capital that have been returned to them over the last three years, though the strong pace of new commitments over this period means a number of investors are nearing the top of their allocations.... though one of investors strongest fears is that the market is nearing the top of the cycle. This fear runs across geographies and across different types of investors. Continued focus on smaller buyout and growth capital funds. Investors remain focused on smaller and middle-market buyout and growth capital funds in the United States and Europe that pursue strategies where they believe managers can deliver recurring added value.... but many investors fear that purchase price multiples in these sectors are too high. Even as investors express interest in the sector, they are concerned that the high prices now being paid will drive down future returns. Buyout and growth capital sector-focused funds are of interest to investors. Though interest in the energy sector has fallen with turmoil in the oil and gas markets, there is strong interest in healthcare and technologyfocused funds. Interest in emerging markets has remained fairly steady overall. However, certain countries, like Russia, attract little interest due to political issues and falling oil prices, while interest in Brazil has also fallen significantly with economic problems and political turmoil. Despite the advent of Unicorns, interest in venture capital remains muted. Interest in the sector mainly comes from North American investors focused on U.S. venture capital; European and Asian investors remain unimpressed. 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 3

6 Profile of Respondents There were 1 respondents to the survey; most respondents were from pension plans, funds-of-funds, insurance companies, and family offices (Chart II). Respondents were geographically diverse, with strong participation from the United States, Europe, and Asia (Chart III). As Chart IV details, more investors are near their target allocations, with less room to back new relationships. Funds-of-funds are different allocations are not really relevant as their ability to invest is driven by their ability to raise fund vehicles or separate accounts. Chart II Respondents by Institution Type I represent a: 1% 1% 3% 29% Funds-of-Funds Manager Consultant/Advisor 3% % 8% 17% Insurance Company Family Office 1% 1% 13% Public Pension Endowment/Foundation Corporate Pension/ Private Pension Plan Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Sovereign Wealth Fund/ Government Entity Taft-Hartley or Industry Pension Plan Bank Other Private Equity Institutional Investor Trends for 216 Survey 21 Probitas Partners

7 Chart III Respondents by Firm Headquarters My firm is headquartered in: 7% United States % Canada 3% Western Europe % 8% 1% 22% Japan Asia ex-japan Australia Middle East Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey

8 Chart IV Current and Target Private Equity Allocations As far as our current private equity allocation, we are: Roughly at our target and are looking to maintain that level of exposure Under our target allocation and actively committing to private equity to achieve that target Roughly at our target but considering increasing the target Over our target and are looking to reduce exposure to meet that target Over our target but seeking to increase the target Looking to reduce our target and exit the asset class A fund-of-funds or consultant to which the question does not apply Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey 6 21 Probitas Partners

9 What drives investors to invest? Consistent with Probitas Partners past surveys, all other reasons are secondary to pursuing the best available managers and funds, though the focus on best managers has become increasingly important to investors since the Global Financial Crisis (Chart V). Proven, top quartile managers can be difficult to access, and since funds typically come to market every three to five years, many investors feel compelled to commit to these managers when they are available and open. Pension plans are more likely to target funds that will provide them access to coinvestments, with 2% of them focused on this strategy. Chart V Drivers of Sector Investment Our sector investment focus in 216 will be driven by (choose no more than two): My institution simply pursues the best funds and managers available in the market A focus on those private equity sectors I believe will outperform others in this vintage year 16 Maintaining established relationships with fund managers returning to market this year 1 Targeting funds that will provide access to co-investments The strategies that my clients have directed us to pursue 1 11 My need to deploy significant amounts of capital allocated to private equity My institution s need to diversify its private equity portfolio My need to decrease exposure to private equity Other 2 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 7

10 More respondents are looking to increase commitments as 216 approaches, continuing the allocation rebound after the bottom of the fundraising market in 29 (Chart VI). There is a strong focus this year (as there has been in the past) on re-ups with a limited look at developing new general partner relationships (Chart VII). Based on our discussions with investors, many are continuing to triage their relationships, looking to upgrade their portfolio quality by not re-upping with fund managers that had weak returns over the last cycle and putting more money to work with fewer selected managers. Only 3% of respondents targeted separate accounts as their primary means of investing in private equity. There is a strong focus...on re-ups with a limited look at developing new general partner relationships. Chart VI Private Equity Allocations For 216, we or the clients we advise are looking to commit across all areas of private equity (in USD): Other <$ MM $ MM $1 MM $1 MM $2 MM $2 MM $ MM $ MM $1 B >$1 B Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey 8 21 Probitas Partners

11 Chart VII Manager Relationships During 216, we would expect our primary focus to be: Evaluating re-ups with current general partner relationships with a limited look at new relationships 63 Actively pursuing relationships with new managers Evaluating re-ups with current general partner relationships 7 Evaluating re-ups with current general partner relationships, looking to decrease the number of relationships significantly Pursuing separate accounts with a smaller number of managers Our 216 commitments have already been completely allocated Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 9

12 Sectors and Geographies of Interest Chart VIII details the sectors of interest to investors for 216: Middle-market buyouts and growth capital in the United States and Europe dominate interest, as has been the case in most of our previous surveys. Interest in distressed debt increased from 2% in 21 to 31% this year. Interest in energy-focused funds declined from 31% last year to 2% this year in the midst of market turbulence in the sector. Table I compares the top-ranked areas of interest from our 27 survey (the one immediately before the Global Financial Crisis) and the current survey. The latest survey contained more options than 27 but U.S. middle-buyout funds still lead. U.S. venture capital ranked third in 27 and only eighth in 216, though that ranking is actually a significant rebound from fifteenth place in 21. Among North American investors, venture capital in 216 ranked fourth, with 7% targeting it. Distressed debt was just off the 216 table in the seventh position with 31% targeting it. Table I Institutional Investors Focus of Attention Among Private Equity Sectors Top Five Responses: Sector % Targeting Sector % Targeting U.S. Middle-Market Buyouts 9% U.S. Middle-Market Buyouts 76% European Middle-Market Buyouts 2% U.S. Small-Market Buyouts 6% U.S. Venture Capital 3% European Buyouts Pan-European 3% Distressed Debt 3% Asian Funds 2% Growth Capital Funds Developed Markets European Middle-Market Buyouts Country or Region-Focused 2% 1% Source: Probitas Partners Private Equity Institutional Investor Trends for 27 Survey and 216 Survey Private Equity Institutional Investor Trends for 216 Survey 1 21 Probitas Partners

13 Chart VIII Private Equity Sectors of Interest During 216, my firm or my clients plan to focus most of our attention on investing in the following sectors (choose no more than seven): U.S. Middle-Market Buyouts ($ million to $2. billion) 76 U.S. Small-Market Buyouts (<$ million) 6 European Buyouts Pan-European Growth Capital Funds Developed Markets European Middle-Market Buyouts Country or Region-Focused U.S. Large Buyouts ($2. billion to $ billion) Distressed Debt Funds U.S. Venture Capital Pan-Asian Funds Asian Country-Focused Funds Direct Lending/Credit Strategies Infrastructure Funds Energy Funds Restructuring Funds Secondary Funds Mega Buyout Funds (>$ billion or equivalent) Mezzanine Funds 16 Emerging Markets (ex-asia) 13 Fund-of-Funds Mining Funds European/Israeli Venture Capital Agriculture Funds Timber Funds Cleantech/Green-Focused Funds Shariah-Compliant Funds Other Niche Sectors Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 11

14 U.S. middle-market buyouts top ranking in the survey reflects, in part, the fact that 2% of the respondents were from the United States or Canada. Most investors prefer local funds and strategies when building out their core portfolio, and then extend their portfolios geographically as they gain knowledge and experience, and seek greater diversification. Charts IX and X, respectively, provide a look at the private equity world through the eyes of European and Asian/Australian/Middle Eastern respondents, while Chart XI focuses on North American respondents. Interestingly, Chart IX shows U.S. middle-market buyouts as the top ranked interest for European investors, while European county-focused and Pan-European funds ranked second and third, respectively. Pan-Asian and Asian country-focused funds also charted well among European investors, as did direct lending funds. U.S. venture capital was of less interest than it was to overall respondents though it outscored European venture capital by a significant margin. Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

15 Chart IX Private Equity Sectors of Interest; European Respondents During 216, I plan to focus most of my attention on investing in the following sectors (choose no more than seven): U.S. Middle-Market Buyouts ($ million to $2. billion) 78 European Middle-Market Buyouts Country or Region-Focused 7 European Buyouts Pan-European 2 Growth Capital Funds Developed Markets Pan-Asian Funds Asian Country-Focused Funds U.S. Small-Market Buyouts (<$ million) Direct Lending/Credit Strategies Infrastructure Funds U.S. Large-Buyouts ($2. billion to $ billion) Distressed Debt Funds Mezzanine Funds U.S. Venture Capital Mega Buyout Funds (>$ billion or equivalent) Restructuring Funds Emerging Markets (ex-asia) Energy Funds Secondary Funds European/Israeli Venture Capital Cleantech/Green-Focused Funds Mining Funds Fund-of-Funds Agriculture Funds Timber Funds Shariah-Compliant Funds Other Niche Sectors 13 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 13

16 As shown in Chart X, Asian/Australian/Middle Eastern investors look on Asian markets more favorably, though both U.S. middle-market buyouts and Pan- European buyouts are major sectors of choice. A number of investors make infrastructure investments out of their private equity allocations rather than separate infrastructure allocations. Asian respondents were much more interested in infrastructure than other respondents, driven by very strong support from Japan. These investors had little interest in energy or U.S. venture capital funds, while two respondents to the Other Niche Sectors option said that they were targeting Asia/China venture capital. Asian respondents were much more interested in infrastructure than other respondents. Private Equity Institutional Investor Trends for 216 Survey 1 21 Probitas Partners

17 Chart X Private Equity Sectors of Interest; Asian/Australian/Middle Eastern Respondents During 216, I plan to focus most of my attention on investing in the following sectors (choose no more than seven): U.S. Middle-Market Buyouts ($ million to $2. billion) 8 Infrastructure Funds European Buyouts Pan-European 38 U.S. Large-Buyouts ($2. billion to $ billion) 3 Asian Country-Focused Funds Direct Lending/Credit Strategies Pan-Asian Funds 27 European Middle-Market Buyouts Country or Region-Focused Secondary Funds Growth Capital Funds Developed Markets Mezzanine Funds Distressed Debt Funds 1 U.S. Small-Market Buyouts (<$ million) Energy Funds Fund-of-Funds Emerging Markets (ex-asia) Mega Buyout Funds (>$ billion or equivalent) Agriculture Funds Cleantech/Green-Focused Funds Timber Funds Restructuring Funds U.S. Venture Capital Mining Funds Shariah-Compliant Funds European/Israeli Venture Capital Other Niche Sectors 8 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 1

18 North American respondents were much more interested in U.S. venture capital, distressed debt, and energy than respondents from other geographies. There was much less interest in infrastructure funds, though that may reflect that in North America infrastructure investments were much more likely to be made through separate infrastructure allocations. Asian-focused funds also generated less interest from North American respondents. Chart XI Private Equity Sectors of Interest; North American Respondents During 216, I plan to focus most of my attention on investing in the following sectors (choose no more than five): U.S. Middle-Market Buyouts ($ million to $2. billion) 8 U.S. Small-Market Buyouts (<$ million) 66 Growth Capital Funds Developed Markets 1 U.S. Venture Capital 7 Distressed Debt Funds European Buyouts Pan-European European Middle-Market Buyouts Country or Region-Focused U.S. Large Buyouts ($2. billion to $ billion) Energy Funds Restructuring Funds Direct Lending/Credit Strategies Pan-Asian Funds Mega Buyout Funds (>$ billion or equivalent) Secondary Funds Asian Country-Focused Funds Emerging Markets (ex-asia) 13 Mezzanine Funds Infrastructure Funds 8 9 Mining Funds Fund-of-Funds European/Israeli Venture Capital Agriculture Funds Timber Funds 2 2 Shariah-Compliant Funds Cleantech/Green-Focused Funds Other Niche Sectors 6 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

19 As far as general geographic interest, the three major geographies North America, Western Europe, and Asia continue to dominate investor interest (Chart XII). Notably, interest in Asia rebounded somewhat from 9% last year to 6% this year. Interest in emerging markets outside of Asia remained scattered with no geography dominant. Chart XII Private Equity Geographical Focus During 216, I anticipate that the three primary areas of geographical focus for our programs will be: North America Western Europe Asia Emerging Markets Globally Latin America Central and Eastern Europe Sub-Saharan Africa MENA Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 17

20 As far as European markets, interest in the United Kingdom and the Nordic Region tied this year, a slight shift from last year s results which had the United Kingdom somewhat ahead (Chart XIII). Germany ranked third, and the top three markets strongly outpaced the rest of Europe. Italy rebounded slightly from last year s very low level, while interest in Spain and France continue to be relatively low. There was no interest in Eastern Europe as the ongoing Ukrainian crisis and continued political issues between Russia and the West dimmed investor enthusiasm. Chart XIII Most Attractive European Markets For European country/regionally-focused funds, I find the most attractive markets to be (choose no more than three): Nordic Region United Kingdom Germany Benelux Spain France Italy Central Europe (Poland, Czech Republic, Hungary, etc.) 8 Eastern Europe (Russia, Ukraine, Georgia, etc.) 1 2 I only invest via Pan-European funds I only invest via fund-of-funds I do not invest in Europe Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

21 As Chart XIV highlights, European investors view their home market similarly to global investors in terms of greatest areas of interest, but with even more focus on the United Kingdom and the Nordic Region. The biggest difference between European and other investors is a much stronger interest in Spain and Central Europe, as well as the fact that fewer Europeans invest in Europe solely through funds-of-funds. Chart XIV Most Attractive European Markets; European Respondents For European country/regionally-focused funds, I find the most attractive markets to be (choose no more than three): Nordic Region 8 71 United Kingdom 8 76 Germany France Benelux Spain 1 29 Italy 8 Central Europe (Poland, Czech Republic, Hungary, etc.) 3 1 Eastern Europe (Russia, Ukraine, Georgia, etc.) 1 I only invest via Pan-European funds 1 1 I only invest via fund-of-funds I do not invest in Europe 13 Other Overall Respondents European Respondents Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 19

22 Chart XV highlights global respondents interest in Asian geographies going into 216. China remains the top Asian geography of interest among all parties; interest rebounded from only 38% in 21 s survey to % this year. The biggest differences between Asian respondents and overall respondents is a much greater interest in Japan, driven by the fact that a large number of Japanese investors responded to the survey. In addition, Asian investors are much more interested in Indonesia than other respondents and are much less interested in India. Table II highlights how investor interest within the Asian market changed over the last ten years. In 27, China, India, and Japan enjoyed nearly equal investor interest. Since then, interest in both India and Japan has stagnated (though interest in both actually increased significantly since last year) while interest in China has surged. Interest in Southeast Asian funds has only become substantial over the last five years, driven in part by investors desire to diversify away from China exposure. There are still a number of investors who do not invest in Asia I do not invest in Asia would have been the sixth ranked answer in 216 with 1% of responses. Table II Which Geographies in Asia Are of the Most Interest? Top Four Response: Country/Region % Targeting Country/Region % Targeting China 28% China % India 28% Southeast Asia 27% Japan 2% India 26% I do not invest in Asia 2% Japan 19% Source: Probitas Partners Private Equity Institutional Investor Trends for 27 Survey and 216 Survey Private Equity Institutional Investor Trends for 216 Survey 2 21 Probitas Partners

23 Chart XV Most Attractive Asian Markets For Asian country-focused funds, I find the most attractive markets to be (choose no more than three): China Southeast Asia India Japan Australia South Korea Indonesia Vietnam Taiwan I only invest via Pan-Asian funds I only invest via fund-of-funds I only invest via global funds I do not invest in Asia Other Overall Respondents Asian/Australian/Middle Eastern Respondents Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 21

24 Emerging Markets China continues to lead investor interest by a wide margin, thought interest in India increased significantly, bringing it into second place, driven by hopes that the new government will be increasingly friendly to business (Chart XVI). Interest in Brazil fell noticeably in the past year amid economic difficulties and political turmoil. With difficulties in Brazil, a number of investors have been looking to diversify their exposure; interest in Pan-Latin American funds remained strong and there was increased interest in Peru and Mexico as well. Elsewhere in Asia, there was a notable increase in interest in South Korea as well as a large decline in interest in Indonesia. Interest in Brazil fell noticeably in the past year amid economic difficulties and political turmoil. Interest in Russia, the other BRIC country in our survey, remained very weak as the Ukrainian crisis and political conflict with the West continued to play out. Though there has been a lot of talk about sub-saharan Africa as the latest hot emerging market, interest in our survey remained stable from last year at 6%. The number of respondents stating that they did not invest in emerging markets continued its three-year decline, falling from 32% in 21 to 2% in 21 and finally 16% this year. Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

25 Chart XVI Most Attractive Emerging Markets Which emerging markets do you find most attractive (choose no more than four): China India Pan-Asia South Korea Southeast Asia Brazil Pan-Latin America Indonesia Mexico Peru Central Europe (Poland, Czech Republic, Hungary, etc.) Sub-Saharan Africa Colombia Vietnam Turkey Middle East/North Africa South Africa Chile Eastern Europe (Russia, Ukraine, Georgia, etc.) Russia I only invest via global emerging market funds I only invest via emerging market funds-of-funds I do not invest in emerging markets Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Note: South Africa was added for the first time to the Survey this year, we have no data for Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 23

26 The prospect of strong long-term economic growth that could positively impact returns drove investor interest in emerging markets. However, the number of respondents who felt compelled to invest in emerging markets on that theory dropped from 77% four years ago to % (Chart XVII). As it was last year, a desire to diversify their private equity portfolio was the second most popular reason to invest in emerging markets. The primary reason investors do not invest in emerging markets is their perception that the risk/return profile in developed markets is more attractive a perception that has remained the same over the last three years (Chart XVIII). Chart XVII Interest in Emerging Market Private Equity My interest in emerging market private equity is driven by (check all that apply): Strong long-term economic growth in a number of these countries Desire to diversify my private equity portfolio by geography to achieve benefits of lack of correlation 33 I am less interested in emerging markets in general than in exposure to a few specific countries with large opportunities 16 Lower forecast returns in the established markets of private equity make this sector relatively more attractive 12 As an institutional investor from an emerging market, I am looking to support my home markets 2 Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey 2 21 Probitas Partners

27 Chart XVIII Disinterest in Emerging Market Private Equity For those not interested in emerging markets, I am not interested because (check all that apply): I find the risk/return profile in developed markets more attractive I am uncomfortable with the degree of political, currency, or economic risk in emerging markets 32 These markets are not developed enough and it is difficult to find experienced managers with strong track records I am not staffed properly to perform due diligence on these markets that basically offer emerging manager risk as well as emerging markets risks As an organization, we are satisfied to get emerging markets exposure through publicly-traded securities 19 My private equity program is relatively new, and we are focused on building exposure in our core, home markets before diversifying 6 Other 1 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 2

28 U.S. Middle-Market Funds Fund managers in the large, homogeneous U.S. market are predominantly differentiated by investment strategies rather than geographic differences. The majority of respondents indicated a strong preference for funds that generated returns via operational improvements and were staffed with operating professionals. This is consistent not only with past survey results but also across all investor types (Chart XIX). There is a strong interest in buy-and-build strategies, with the least interest being for regionally-focused funds. As far as industry sector-focused funds, both healthcare and technology are the biggest areas of focus, though 31% of respondents simply target strong track records (Chart XX). Both European and Asian respondents are more interested in retail/consumer strategies, and Asian respondents are much less interested in energy funds. Within the energy sector, an area with a wide diversity of strategies, midstream oil and gas funds and diversified funds attract the most interest, though North American respondents are more focused on upstream strategies (Chart XXI). Chart XIX Most Attractive U.S. Middle-Market Sectors Which of these sectors/strategies in the U.S. middle market do you find most appealing (check all that apply): Funds focused on operational improvements heavily staffed with professionals with operating backgrounds 79 Funds focused on buy-and-build strategies 63 Restructuring/turnaround funds Funds focused on single industries (i.e., energy, retail, healthcare, media) 37 Funds focused on growth companies, often investing without majority control 31 Regionally-focused funds 18 Strategy is irrelevant, a demonstrable superior track record is my only concern 22 I only invest via funds-of-funds I do not invest in the U.S. middle market 8 Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

29 Chart XX Interest in Industry-Focused Funds As far as funds focused on single industries, I am most interested in (choose no more than three): Healthcare Technology 1 3 Energy 3 Retail/Consumer 27 Financial services Media/Telecommunications 1 12 Agribusiness 3 Industry is irrelevant, I simply focus on the best managers 31 I do not invest in industry-focused funds 1 Other 3 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Chart XXI Interest in Sectors within Energy In the energy sector, I am most interested in (choose no more than three): Midstream oil and gas funds 37 Diversified funds with broad mandates 33 Upstream oil and gas funds 3 Energy/power infrastructure funds Distressed energy funds 1 1 Renewable energy funds 8 Energy debt funds I do not invest in funds focused on energy 3 Other 3 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 27

30 Venture Capital Investor interest in technology only funds decreased somewhat from 29% last year to 21% this year, while interest in cleantech only funds has continued to dwindle to a very low level (Chart XXII). Endowments and foundations remain much more active in venture capital than other investors and focused on early stage investments, with 7% of those respondents targeting that stage. Since 27, the number of respondents not investing in venture capital has more than doubled, from 17% then to 37% now though this year it noticeably improved from 2% saying they did not invest in the sector in 21. Endowments and foundations remain much more active in venture capital than other investors. European investors are the most negative on the sector, with 6% of respondents saying they do not invest in venture capital at all, though Asian/Australian/ Middle Eastern investors were not far behind at 2%; North American investors were more positive, with only 3% not targeting venture capital. Chart XXII Most Attractive Venture Capital Sectors In venture capital, I focus on funds active in the following sectors or stages (choose all that apply): Funds investing in multiple sectors 19 Technology only funds 21 Life science only funds 16 Cleantech only funds 2 Venture debt funds 3 Multi-stage Late stage Mid-stage Early stage 3 Seed stage 2 I am focused solely on historic returns I only invest via fund-of-funds I do not invest in venture capital 37 Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

31 Distressed Private Equity There are several distinct distressed strategies, but many fund managers pursue a combination of these approaches within the same fund. Most respondents prefer strategies with a value-added focus that generate higher multiples of return. In all our previous surveys, restructuring/turnaround funds and distressed debt for control funds have switched back and forth for the lead in the sector (Chart XXIII). For the first time this year we asked investors about their interest in special situations funds; there was strong interest in these funds across geographies and they were actually the leading distressed strategy for European investors with 62% of them targeting it. Opportunistic credit funds (with a strong focus on assets other than corporate debt) are another area of focus for investors. While some investors have expanded their distressed debt category to include opportunistic credit, others consider it a straight credit or fixed income product, and therefore is not included in their alternatives allocation. Chart XXIII Distressed Investments Within the distressed debt/restructuring sector, I am most interested in (choose no more than two): Distressed debt for control funds (loan-to-own) 8 Restructuring/turnaround funds (focused on equity, not debt) Special situations funds (usually combining debt and equity) 3 Opportunistic credit (mispriced debt, small loan portfolios, etc.) 3 Distressed debt: active/non-control funds (often hold through restructuring) 18 Distressed debt trading funds 1 Distressed debt hedge funds 3 I do not invest in this sector 12 Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 29

32 Credit-Focused Funds Over the past four years, investors have been increasingly focused on the private credit sector as they look at opportunities created by the strained bank markets. Respondents to the survey are more focused on the mezzanine, opportunistic credit, and senior credit sectors, though a number of investors make their commitments to these strategies outside their private equity allocations (Chart XXIV). Among this year s respondents, North American investors are more likely to invest in senior debt out of their private equity allocations with 3% doing so, while % of insurance company respondents invest in mezzanine through their private equity allocations. Few respondents to the survey were interested in Business Development Companies ( BDCs ) or other publicly listed vehicles. Chart XXIV Credit In the credit sector, my firm: Mezzanine Senior Debt BDCs/Publicly Listed Opportunistic Credit Invests as part of private equity allocation Is considering investing in this sector Invests but not as part of a private equity allocation Does not invest in the sector at all Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Note: Some sectors total greater than 1% as a few investors had multiple responses Private Equity Institutional Investor Trends for 216 Survey 3 21 Probitas Partners

33 Real Asset Funds Interest in real assets has been growing among sovereign wealth funds and pension plans with significant long-term liabilities and a desire to pursue strategies that could be resilient in times of high inflation. Oil and gas was the only sector that attracted strong interest where the bulk of the investments made were coming from private equity allocations, though those investing in oil and gas through private equity allocations dropped from 9% last year to 3% this year (Chart XXV). However, the other sectors also attracted interest from general real asset, inflation hedging allocations, or from specific allocations in sectors such as infrastructure or timber. Large investors (those seeking to commit $ million or more to private equity in 216) are much more interested in real assets, while family offices are much less interested in the sector. Chart XXV Real Assets In the real asset sector, my firm: Oil & Gas Infrastructure Metals & Mining Agricultural Farmland Timber Ships or Aircraft Invests as part of private equity allocation Is considering investing in this sector Invests but not as part of a private equity allocation Does not invest in the sector at all Source: Probitas Partners Infrastructure Institutional Investor Trends for 216 Survey Note: Some sectors total greater than 1% as a few investors had multiple responses 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 31

34 Secondary Market The number of investors who are active in key areas of the secondary market increased this year; those purchasing direct positions decreased from % last year to 1% this year, while those investing in secondary funds decreased from 9% last year to % this year (Chart XXVI). However, the number of investors who have sold or are considering selling positions in the secondary market has risen to an all-time high of %, up from 31% last year; among North American respondents, % look to be active in selling funds. For the first time this year we asked whether investors actively invested in fund restructurings through secondaries; 17% of overall respondents, and 21% of just North Americans did so. Chart XXVI Secondary Market Investments In the secondary market, my firm (choose all that apply): The number of investors who have sold or are considering selling positions in the secondary market has risen to an all-time high of % Actively invests in secondary funds 1 Actively purchases direct positions in funds in the secondary market Has sold or is considering selling funds in our portfolio for portfolio management purposes Actively invests in fund restructurings through secondaries 17 Provides advice to clients on secondaries 1 Actively purchases direct positions in companies in the secondary market 13 Is not active in secondaries in any manner 19 Other 6 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

35 Co-Investments and Direct Investments Interest in co-investments remained relatively consistent over the last year, with large investors who often have more resources to deploy being more active (Chart XXVII). Only 6% of large investors said that they did not pursue co-investments or direct investments at all. Family offices are more likely to invest directly in companies, with % of them targeting that strategy. Chart XXVII Directs and Co-Investments Regarding directs and co-investments, my firm (choose all that apply): Has an active internal co-investment program Only opportunistically pursues co-investments Provides advice to clients on co-investment or direct investments Invests directly in companies Requires or prefers a co-investment as a means of diligencing a new fund manager Has an outsourced co-investment program Does not invest in co-investments nor directly invests in companies Other All Respondents Large Investors Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Note: Large Investors denotes those survey respondents who plan to commit $ million or more to private equity in Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 33

36 Fund Structures and Key Terms As with most of our past surveys, the level of general partner financial commitment to a fund remains the most important term for investors as it is a key factor in assuring alignment of interest between limited partners and general partners (Chart XXVIII), with the overall level of management fees closely behind. Though there is a degree of commonality in the issues investors focus on, there are distinct differences as well; Chart XXIX compares the responses of European respondents to Asian/Australian/Middle Eastern respondents to provide an example. As far as strict adherence to the ILPA Principles or the inclusion of a strong Environmental, Social and Governance ( ESG ) policy, both of which are frequently discussed, neither of these issues ranked highly, though responses varied tremendously: 33% of pension plan respondents targeted strict ILPA compliance and 2% were focused on strong ESG policies; None of the family office respondents were focused on strict ILPA compliance; 3% of European respondents felt that strong ESG policies were important while 1% felt strict compliance with the ILPA Principles were important; For North Americans, 1% thought strict adherence to the ILPA Principles was important while only 7% felt strong ESG policies should be targeted; None of the Asian/Australian/ Middle Eastern respondents targeted ESG policies as an issue of focus [while] 3% of European respondents felt that strong ESG policies were important. None of the Asian/Australian/Middle Eastern respondents targeted ESG policies as an issue of focus and only 8% felt that strict ILPA compliance was important. In past surveys we asked investors in more detail about the ILPA Principles and found that, though few investors insisted on strict compliance, a majority of investors of all types used them as a starting point for terms negotiations. Private Equity Institutional Investor Trends for 216 Survey 3 21 Probitas Partners

37 Chart XXVIII Issues Regarding Fund Structure The issues I focus on most when investing or advising a client as far as terms or structure of a fund are (choose no more than four): Level of general partner financial commitment to the fund 62 Overall level of management fees Distribution of carried interest between the senior investment professionals 7 Structure or inclusion of a key man provision Cap on fund size Carry distribution waterfalls 36 Ownership of the management company 3 Transaction fee splits 31 Level of carried interest 29 Structure or inclusion of a no-fault divorce clause Strict adherence to the ILPA Principles Sharing of carry and/or investment decision making with a third-party sponsor Inclusion of a strong Environmental, Social, and Governance policy 1 Other 2 Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 3

38 Chart XXIX Issues Regarding Fund Structure: European Respondents vs. Asian/Australian/Middle Eastern Respondents The issues I focus on most as far as terms or structure of a fund are (choose no more than four): Level of general partner financial commitment to the fund Overall level of management fees Carry distribution waterfalls Cap on fund size Distribution of carried interest between the senior investment professionals Structure or inclusion of a key man clause Transaction fee splits Inclusion of a strong Environmental, Social, and Governance policy Ownership of the Management Company Strict adherence to the ILPA Principles Sharing of carry and/or investment decision making with a third-party sponsor Level of carried interest Structure or inclusion of a no-fault divorce clause Other European Respondents Asian/Australian/Middle Eastern Respondents Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

39 Investor Fears and Concerns The greatest fear of most private equity investors was their perception that too much money was coming into all areas of private equity, followed very closely by the concern that the private equity market feels like it is at the top of the cycle (Chart XXX). Concerns that the market may be at the top of a cycle with the resulting risk of a decline in the offing was actually the greatest fear of insurance companies (79%), large investors (6%), and Europeans (6%). Even though middle-market buyouts in North America and Europe were by far the area of strongest interest for investors, the third-ranked fear of investors, at 1%, was that purchase price multiples for middle-market buyouts are too high and threaten future returns. This was actually the number one concern of North American investors, % of whom selected it. Venture capital is a smaller section of most investors portfolios, but it is notable that fears particular to the sector that another technology bubble is forming, or that access to top quartile managers is too difficult and new managers are unattractive are very low. However, among endowments and foundations who tend to have a larger exposure to venture capital, their third-ranked fear was that another technology bubble is forming, with 37% of them mentioning that. A number of investors submitted their own concerns under the Other category; a selection of those responses are detailed below: Lack of transparency for portfolio company fees charged by general partners. The industry has been relatively disciplined compared with However, the buildup of dry powder and increasing fund sizes will inevitably change that since the money has to be invested at some point. The impact of future rate rises on the industry is untested. Fees (management fees and carry) are compressing returns to limited partners, making the asset class less desirable versus public market alternatives. 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 37

40 Chart XXX Greatest Fears Regarding the Private Equity Market My three greatest fears regarding the private equity market at the moment are: Too much money is pursuing too few attractive opportunities across all areas of private equity 1 The current private equity market feels like we are at the top of the cycle 9 Purchase price multiples in middle-market buyouts are too high and threaten future returns 1 Purchase price multiples in large-market buyouts are too high and threaten future returns 33 Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors 28 Large firms in the market are becoming generalized asset managers and moving away from key investment strengths 2 Private equity is most effective as a niche market and too much money is being raised in all private equity sectors 19 Increased competition among limited partners is limiting my access to co-investments Generational transitions at a number of long-lived firms are generating concern about those firm s future success Too much money pursuing too few experienced private equity professionals in the hot emerging markets Another technology bubble is in the process of forming 11 Access to top quartile venture capital managers is impossible without previous relationships, and new managers are unattractive 9 We do not have adequate staff in place to deal with issues in my current portfolio The number of funds in my portfolio is too large for my firm to effectively monitor My current strategy prevents me from pursuing interesting opportunities in the private credit sector 6 I find myself increasingly at odds with other limited partners due to preferential treatment 3 Given central bank policies, I am not sure there will ever be a wave of distressed opportunities Decreased leverage availability will hurt companies needing working capital or re-financing 1 2 Other Source: Probitas Partners Private Equity Institutional Investor Trends for 216 Survey Private Equity Institutional Investor Trends for 216 Survey Probitas Partners

41 Table III highlights investors concerns pre-global Financial Crisis and compares them to their fears going into 216. Concerns about too much money coming into the market were among the top issues in both 27 and 216. In 27 investors were very aware that there was too much debt and too much equity available in the buyout market and that the strong returns leading up to 27 and beyond were unlikely to continue. Investors are now concerned that purchase price multiples for middle-market buyouts are too high and that we are at the top of a market cycle leading to concerns for future returns. In the 216 survey, a quarter of respondents were concerned that large firms in the market were becoming asset managers focused on growing assets under management and were moving away from their key investment strengths an issue that was not topical in 27. Table III What Keeps You Up at Night? Top four responses: Issue % Targeting Issue % Targeting Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors 1% Too much money is pursuing too few attractive opportunities across all areas of private equity 1% The amount of leverage in the buyout market is unsustainable, and over the next two years credit problems will hurt performance of recent vintage funds 8% The current private equity market feels like it is at the top of the cycle 9% There is too much money available in the large buyout market and this will dramatically impact future returns 39% Purchase price multiples in middle-market buyouts are too high and threaten future returns 1% Private equity is most effective as a niche market and too much money is being raised in all sectors of private equity 3% Purchase price multiples in large-market buyouts are too high and threaten future returns 33% Source: Probitas Partners Private Equity Institutional Investor Trends for 27 Survey and 216 Survey 21 Probitas Partners Private Equity Institutional Investor Trends for 216 Survey 39