Albourne Update Private Equity SDCERA Board of Retirement. February 20 th 2014

Transcription

1 Albourne Update Private Equity SDCERA Board of Retirement February 20 th 2014

2 Agenda 1) Program History 2) Current allocation vs. targets 3) Portfolio composition 4) Performance 5) Future Pacing 6) Market Update 2

3 Program History 1996 First Private Equity investment 2009 Private Equity Strategy Review : Move to Increase Private Equity exposure Allocation to 10% Move to Larger investments to produce a focused portfolio Albourne hired to provide Private Equity service Private Equity Secondary Sale of Legacy portfolio 3

4 Glossary of Terms Drawdown Structure: A vehicle where a given amount is committed then drawn down by the fund manager at its discretion over the fund s investment period which might be as long as six years. Distributed to Paid-In (DPI) Total Value to Paid-In (TVPI) Internal Rate of Return(IRR): A time and capital weighted measure of growth. Net Asset Value (NAV): The estimated market value of the fund s current holdings. Public Market Equivalent Performance (PME): The performance of matched cash-flows to those invested in a private market fund if they had instead been invested in a public index. Vintage Year: The year the fund made its first investment. 4

5 Glossary of Terms (cont) J-curve: The J-curve is the period of time during the first few years of a fund s life when it typically shows negative returns and cash-flows due to: 1. Front-loaded fees as a % of invested capital 2. Unseasoned investments which are yet to show the benefit of any value-add that may be created by the private market manager 3. Lack of Distributions J-curves are deeper and longer for Buyout & Growth strategies, and shorter and shallower for Distressed & Special Situation strategies Source: Goldman Sachs 5

6 Funding Status The plan is currently underweight exposure to Private Equity but recent commitments are expected to bring Market Value exposure into the Target Range shortly Target Market Value & Range Target Market Value: $960m As of Q Based on Total SDCERA Portfolio NAV of $9.6bn 6

7 Portfolio Composition by Vintage Year NAV is currently largely made up of immature vintages still in the J-curve, but 1/3 rd is from pre-crash vintages The 2013 vintage will become a significant driver of performance over the next few years Vintage Year Exposure (NAV) Vintage Year Exposure (NAV + Unfunded) As of Q Includes Drug Royalty III which has been set as a 2014 Vintage investment based on date of expected first drawdown 7

8 Portfolio Composition by Strategy The portfolio is predominantly Buyout and Growth although this will gradually shrink as commitments to Niche investments are drawn down Exposure by Asset Class (NAV) Strategy Exposure (NAV) Niche 3% Exposure by Asset Class (NAV+Unfunded) Strategy Exposure (NAV + Unfunded) Niche 10% Distress & Special- Situations 40% Buyout & Growth 57% Distress & Special- Situations 37% Buyout & Growth 53% As of Q

9 Portfolio Composition by Geography The portfolio is well-diversified globally with a focus on developed markets Geographic Exposure (NAV) As of Q Only covers funds which consistently report geographic exposures 9

10 Private Equity Portfolio Performance In 2010 the underperforming non-strategic parts of the portfolio were sold Including these legacy assets the portfolio has slightly underperformed its benchmark Excluding these legacy assets the portfolio has met its benchmark Until the recent equity rally of the last two years the portfolio was outperforming its benchmark Since Inception Performance 3Q Q 2013 Including Terminated Funds Since Inception Performance 3Q Q 2013 Excluding Terminated Funds 20.0% Portfolio IRR Russell bps 20.0% Portfolio IRR Russell bps 15.0% 15.0% 10.0% 10.0% 5.0% 5.0% 0.0% 0.0% -5.0% -5.0% Portfolio Since Inception Return: 7.2% Russell bps PME: 10.4% Portfolio Since Inception Return: 10.7% Russell bps PME: 11.2% As of Q PME shows performance of a cash-flow matched investment in the Russell 3000 Index + 300bps using Long-Nickels methodology and quarterly cash-flows. 10

11 Program Performance by Strategy Buyout & Growth: Distress & Special-Situations: Niche: Corporate equity investments where the investment manager may take control of the company or provide capital for expansion. Debt and equity investments in companies and assets that typically cannot be financed in the public markets. Other private market strategies that invest in a variety of non-traditional assets and instruments (e.g. drug royalties) that are often diversifiers to public credit and equity. Funds Committed ($m) Paid In (% of Committed) Unfunded ($m) Distributions ($m) NAV ($m) DPI TVPI IRR PME Buyout & Growth % x 1.3x 9.7% 10.8% Distress & Special Situations % x 1.3x 12.5% 13.6% Niche % x 1.0x 4.7% 20.9% Total Portfolio 54 1,354 50% x 1.3x 10.7% 11.2% PME shows performance of a cash-flow matched investment in the Russell 3000 Index + 300bps using Long-Nickels methodology and quarterly cashflows. As of Q Excludes terminated funds 11

12 Program Performance by Vintage Vintage Funds Committed ($m) Paid In (% of Committed) Unfunded ($m) Distributions ($m) NAV ($m) DPI TVPI IRR % x 1.5x 8.4% % x 1.6x 9.7% % x 1.5x 12.1% % x 2.0x 20.5% % x 1.9x 21.8% % x 2.2x 28.0% % x 1.3x 5.9% % x 1.4x 7.6% % x 1.3x 5.9% % x 1.2x 5.6% % x 1.3x 10.4% % x 1.1x 6.8% % x 1.1x 8.8% % x 1.0x nm % x % x 0.9x nm % x - - Total Portfolio 54 1,354 50% x 1.3x 10.7% As of Q Excludes terminated funds Includes Drug Royalty III which has been set as a 2014 Vintage investment based on date of expected first drawdown 12

13 Fund performance: Buy-out & Growth Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI Capital International PE Fund III % 0 22% 2.0x 2.0x HarbourVest International Fund III Partnership % 3 9% 1.5x 1.5x Oak Hill Capital Partners & Bermuda % 0 12% 1.8x 1.8x Code Hennessy & Simmons IV % 0 12% 1.5x 1.6x TA IX % 0 22% 2.4x 2.4x TA Subordinated Debt Fund I % 0 16% 1.5x 1.5x Thomas H. Lee Equity Fund V % 2 14% 1.5x 1.6x Blackstone Capital Partners IV % 9 37% 1.9x 2.4x TPG Partners IV % 6 16% 1.3x 1.9x Graham Partners Investments II % 7 8% 0.6x 1.4x Providence Equity Partners V % 3 2% 0.8x 1.1x Northgate Private Equity Partners II % 9 8% 0.7x 1.4x Bain Capital Fund IX % 5 8% 0.7x 1.5x Bain Capital IX Coinvestment Fund % 1 8% 0.8x 1.6x Blackstone Capital Partners V % 12 6% 0.4x 1.3x Blackstone Capital Partners V-S % 2 3% 0.2x 1.1x Charterhouse Capital Partners VIII % 5-1% 0.5x 1.0x As of Q Excludes terminated funds 13

14 Fund performance: Buy-out & Growth (cont) Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI TA Subordinated Debt Fund II % 2 7% 1.0x 1.2x TA X % 8 5% 0.6x 1.2x Hellman & Friedman Capital Partners VI % 10 9% 0.7x 1.4x Capital International PE Fund V % 6 6% 0.6x 1.2x Greenbriar Equity Fund II % 7 3% 0.2x 1.1x Northgate Private Equity Partners III % 11 5% 0.3x 1.2x Emerging Europe Growth Fund II % 7-1% 0.1x 1.0x Bain Capital Fund X % 14 5% 0.2x 1.2x Hellman & Freidman Investors VII x 10 3% 0.1x 1.0x Onex Partners III % 13 8% 0.2x 1.1x Baring Asia PE Fund V % 26 8% 0.0x 1.1x Capital International PE Fund VI % 14-26% 0.0x 0.8x EQT VI % 16-19% 0.0x 0.9x Blackstone Capital Partners VI % 29 9% 0.1x 1.1x FountainVest China Growth Fund II % 6-56% 0.0x 0.8x TPG Asia VI % 10-45% 0.0x 0.9x New Mountain Partners IV % 0-100% 0.0x 0.0x As of Q Excludes terminated funds 14

15 Fund performance: Distress & Special Situations Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI OCM Opportunities Fund II % 0 8% 1.5x 1.5x OCM Opportunities Fund III % 0 12% 1.5x 1.5x Cerberus Institutional Partners Series % 2 27% 2.7x 3.0x Lexington Capital Partners V % 2 19% 1.5x 1.7x OCM Opportunities Fund IV % 0 28% 1.6x 1.6x Paul Capital Partners VIII-B % 6 9% 1.0x 1.3x Lexington Capital Partners VI-B % 6 7% 0.7x 1.3x OCM Opportunities Fund VI % 1 9% 1.4x 1.6x Cerberus Institutional Partners Series % 12 8% 0.6x 1.5x Coller International Partners V % 6 9% 0.6x 1.4x OCM Opportunities Fund VII % 2 8% 1.1x 1.4x Paul Capital Partners IX % 9 5% 0.6x 1.2x OCM Opportunities Fund VII B % 3 18% 1.5x 1.8x Blackstone/GSO Capital Solutions I % 48 16% 0.4x 1.2x Gores Capital Partners III % 38-1% 0.2x 1.0x Gores Small Capitalization Partners % 5-11% 0.2x 0.9x Oaktree European Principal Fund III % 36 8% 0.1x 1.2x GSO Capital Solutions II % 0 0% As of Q Excludes terminated funds 15

16 Fund performance: Niche Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI Drug Royalty II % 11 11% 0.5x 1.1x RMF 2 Co-Investment Fund LP % 4-30% 0.0x 0.8x Drug Royalty III* % 0 0% As of Q Excludes terminated funds *Drug Royalty III set as a 2014 Vintage investment based on date of expected first drawdown 16

17 Cumulative Cash Flows ($m) NAV as % of Total Plan Future Pacing Total Portfolio Size: $9.6bn Total Portfolio Growth Rate: 7.75% Private Equity NAV Target: 10.0% Commitment pace: $50-350m p.a. Cash flow will likely decrease for a period as commitments are drawn down. Expect a split of allocation between Distressed, Buyout & Growth, and Niche strategies. $m -$100m SDCERA Private Equity Portfolio Cumulative Cash Flows 20% 18% SDCERA Private Equity Portfolio NAV as % of Total Plan (Q Q3 2018) -$200m -$300m -$400m -$500m -$600m -$700m -$800m Historical Cumulative Cash Flows High Case Projected Cash Flows Base Case Projected Cash Flows Low Case Projected Cash Flows -$900m % 14% 12% 10% 8% 6% 4% 2% Max NAV Target (15%) High Case Projected NAV NAV Target (10%) Base Case Projected NAV Low Case Projected NAV Low NAV Target (5%) 0% Chart shows possible range of outcomes based on a pace of $250m pa As of Q

18 Market Update: Buyout and Growth There is a large backlog of PE backed companies waiting to exit The recent IPO market has helped but there is a long way to go Source: Preqin Fund Manager Profiles and Preqin Performance Analyst 18

19 Multiple of EBITDA Market Update: Buyout and Growth Valuations have remained high driven by the availability of credit US Middle Market Buyouts Average LTM EBITDA Multiple 10.0x 9.0x 8.0x 7.0x 7.5x 7.1x 6.7x 6.4x 6.7x 7.0x 7.2x 8.5x 8.1x 9.3x 8.7x 6.6x 8.4x 8.2x 7.9x 8.8x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Other Source: S&P Capital IQ Leveraged Commentary & Data, January 2014 Note: Middle Market Buyouts defined by companies with TTM EBITDA <$50m 19

20 Market Update: Buyout and Growth Fundraising has picked up but is still a lot lower than the time period $bn U.S. Private Equity Fund Raising Source: Dow Jones LP Numbers may not total exactly due to rounding Buyouts/Corporate Finance Funds Of Funds Mezzanine Secondary & Other Venture Capital (Yearly Totals) 20

21 ($bn) Average annual % Distressed of ML HY Index Cov-Lite Issuance $bn Market Update: Distressed and Special Situations Current default rates remain low New issuance of low grade credit is at record levels which will fuel future opportunities US High Yield and Leveraged Loans Market Covenant-Lite Loan Issuance Total Leveraged Debt Outstandings US HY Distressed Ratio 60% 300 2,500 2, % 40% ,500 1, % 20% 10% 0% Cov-Lite Issuance % of Total Issuance Source: Credit Suisse Leveraged Finance Strategy and Bank of America Source: S&P LCD 21

22 Disclaimer IMPORTANT NOTICE The information in this presentation (the Information ) is for informational purposes regarding the Albourne group, which includes Albourne Partners Limited, Albourne America LLC, Albourne Partners Japan Co., Ltd., Albourne Partners (Asia) Limited, Albourne Partners (Singapore) Pte. Ltd., Albourne Partners (Bermuda) Limited, Albourne Partners Deutschland AG, and Albourne Partners (Cyprus) Limited (each an Albourne Group Company and collectively, the Albourne Group ). The Information is an invitation communicated by the relevant Albourne Group Company, as more fully described below, to subscribe to such Albourne Group Company s investment advisory services in jurisdictions where such invitation is lawful and authorised. The Information does not constitute an invitation, inducement, offer or solicitation in any jurisdiction to any person or entity to acquire or dispose of, or deal in, any security, any interest in any fund, or to engage in any investment activity, nor does it constitute any form of investment, tax, legal or other advice. In the United States, the Information is being furnished, subject to United States law, by Albourne America LLC (registered as an investment adviser with the United States Securities and Exchange Commission) to persons that Albourne America LLC believes to be an Accredited Investor as that term is defined in Regulation D under the Securities Act of 1933, and a Qualified Purchaser as that term is defined in Section 2(a)(51) of the Investment Company Act of In Canada, the Information is being furnished, subject to Canadian law, by Albourne America LLC to persons that Albourne America LLC believes to be a Permitted Client within the meaning of the National Instrument In the United Kingdom, the Information is being furnished, subject to English law, by Albourne Partners Limited (authorised and regulated by the Financial Services Authority with registered number ) to an investment professional, high net worth company or unincorporated association, high value trust or other person specified in articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotions) Order In each of Japan, Hong Kong, Singapore, Bermuda and Germany the Information is being furnished respectively by: Albourne Partners Japan Co., Ltd. (authorised and regulated by Director of Kanto Local Financial Bureau, with reference number 1528) subject to Japanese law; Albourne Partners (Asia) Limited (regulated by the Securities and Futures Commission of Hong Kong with Central entity number AKX858) subject to Hong Kong law; Albourne Partners (Singapore) Pte. Ltd. subject to Singapore law; Albourne Partners (Bermuda) Limited subject to Bermuda law and Albourne Partners Deutschland AG subject to German law, and in all cases, to persons whom the relevant Albourne Group Company believes to be a financially sophisticated, high net worth and institutional investors capable of evaluating the merits and risks of hedge funds, private equity funds and/or any other alternative investment securities (collectively, Funds ). To the extent that the Information is supplied in any jurisdiction other than the United States, Canada, the United Kingdom, Japan, Hong Kong, Singapore, Bermuda or Germany the relevant Albourne Group Company is Albourne Partners Limited and the Information is supplied subject to English law. If you are not the kind of investor described above in the jurisdictions listed above, or if in your jurisdiction it would be unlawful for you to receive the Information, the Information is not intended for your use. The Information and the services provided by any Albourne Group Company is not provided to and may not be used by any person or entity in any jurisdiction where the provision or use thereof would be contrary to applicable laws, rules or regulations or where any Albourne Group Company is not authorized to provide such Information or services. In the United States, interests in Funds are made through private offerings pursuant to one or more exemptions provided under the United States Securities Act of 1933, as amended. You should carefully review the relevant offering documents before investing in any Funds. 22

23 Disclaimer No part of the Information in this presentation is intended as an offer to sell or a solicitation to buy any security or as a recommendation of any firm, Fund or security. You should be aware that any offer to sell, or solicitation to buy, interests in any such Funds may be unlawful in certain states or jurisdictions. There can be no assurance or guarantee that the Albourne Group s performance record or any Albourne Group Company s performance record will be achievable in future. There is no assurance that any client of an Albourne Group Company will necessarily achieve their investment objective or that such client will make any profit, or will be able to avoid incurring losse s. Funds are speculative, involve a high degree of risk, and are illiquid: you could lose all or a substantial amount of any investment you make in such Funds. Furthermore, such Funds are not subject to all the same regulatory requirements as are mutual funds; may involve complex tax structures and delays in the distribution of important tax information; often charge higher fees than mutual funds and such fees may offset the Funds trading profits; may have a limited operating history; may be highly volatile, and there may not be a secondary market for interests in such Funds. There may be restrictions on redemptions and transfer of interests in such Funds, and such interests may otherwise be illiquid. Such Funds may also be highly leveraged and may have a fund manager with total investment and/or trading authority over the Fund. It should also be noted that in the case of hedge funds, there may be a single adviser applying generally similar trading programs with the potential for a lack of diversification and concomitantly higher risk; hedge funds may also effect a substantial portion of trades on foreign exchanges, which have higher trading costs. On the other hand, private equity funds may have a limited number of holdings and concomitantly higher risk. You are solely responsible for reviewing any Fund, the qualifications of its manager, its offering documents and any statements made by a Fund or its manager and for performing such additional due diligence as you may deem appropriate, including consulting your own legal, tax and compliance advisers. To the extent any of this presentation s Information contains information obtained from third parties, (a) the Albourne Group makes no representations or warranties, express or implied, as to the accuracy or completeness of information in this presentation; and (b) the Albourne Group and all third party contributors disclaim all liability for any loss or damage, which may arise directly or indirectly from any use of or reliance upon any such data, forecasts or opinions or the Information generally. This document has been supplied free of charge and shall not form part of the services provided under any service agreement you may have with any relevant Albourne Group Company. Potential conflict of interest: Each Albourne Group Company advises clients that are affiliates with or are connected with the management company of hedge funds or private equity funds that are the subject of its research reports, which may create an incentive for the Company to favour the management company in its reports. The Albourne Group will take reasonable steps to manage any potential conflict of interest. In appropriate cases, the relevant Albourne Group Company will decline to act for one or more potential or existing clients Albourne Partners Limited. ALBOURNE is a registered trade mark of Albourne Partners Limited and is used under licence by its subsidiaries. 23