The Northern Trust Experience

Transcription

1 The Northern Trust Experience ACCESS. EXPERTISE. SERVICE. Are Alternatives Still Alternative? November 4, 2010 Robert P. Morgan SVP, Director of Private Equity 2010 Northern Trust Corporation northerntrust.com

2 Increases in Alternatives Allocations Allocations to Alternatives are expected to grow from 14% in 2009 to 19% in 2012 Among alternative allocations, private equity is expected to increase from 22% of allocation to 24% Source: 2010 Russell Investments Global Survey of Alternative Investing 2 The Northern Trust Experience

3 Investor Sentiment Survey interviews revealed the crisis had made many institutions more aware of risk management in general, and specifically in the systematic risk of global equities. The higher correlations between global equity sectors, styles and regions since 2008 have increased interest in alternative strategies that can help to diversify portfolios and reduce equity beta exposure. Source: 2010 Russell Investments Global Survey of Alternative Investing 3 The Northern Trust Experience

4 Investor Sentiment market dynamics have also shown that volatility and turmoil can offer opportunities for return generation in the hands of skilled, less constrained managers. What s more, the financial crisis has emphasized the importance of diversification, inflation protection and manager downside risk while striving to maximize returns over the long run. Our results suggest that investors understand and value alternatives for their potential to address these risk and return objectives. Source: 2010 JP Morgan Market Pulse: Alternative Assets Survey 4 The Northern Trust Experience

5 Why Private Equity as an Asset Class? Private equity has outperformed public equity indices over the 3, 5, 10, 15 and 20 year time horizons. As of 3/31/10 1 Year 3 Year 5 Year 10 Year 15 Year 20 Year S&P % -4.2% 1.0% -0.7% 7.8% 8.7% DJIA 46.9% -1.5% 3.3% 2.3% 9.0% 9.8% NASDAQ 56.9% -0.3% 3.7% -6.3% 7.4% 8.9% Private Equity 22.4% 1.3% 10.4% 7.2% 12.0% 12.3% Source: Cambridge Associates as of 3/31/10 5 The Northern Trust Experience

6 Structural Advantages of Private Equity Exposes a portfolio to a whole new set of firms, talent, and companies Private equity funds participate in a more inefficient deal market- buy and sell decisions are often based on factors other than price The term structure of funds allows firms to build companies for the long term without fear of redemptions - focus is on a five year plan as opposed to quarterly plan Unlike public equity managers, private equity fund managers generally have control of the entities in which they invest A sense of urgency, accountability, and discipline, allow for efficient decision-making and focuses companies on value enhancing projects Economic alignment of interest among investors, fund managers, and management teams Private equity can be tax-efficient for taxable investors (there may also be some estate planning benefits) 6 The Northern Trust Experience

7 Why Private Equity Now? Recession vintage years in particular have historically provided the opportunity for outsized returns in private equity. Why? Significantly reduced liquidity in the market leads to lower purchase prices for private equity firms Cash flow has stabilized and earnings visibility has increased Liquidity is returning to the market Buyout Fund Returns by Vintage Year Return Drivers: Net IRR (% ) 40% 1991 Recession 2001 Downturn GDP Growth (% ) 6.0% BUY (Entry Valuation) 30% 4.0% BUILD (Grow the Company) 20% 2.0% SELL (Exit Valuation) 10% 0.0% 0% NM Upper Quartile Return for Vintage Real GDP Growth (2.0%) Note: Past performance does not guarantee future results. 7 The Northern Trust Experience Source: Venture Economics, Bureau of Economic Analysis.

8 Current Market Trends Average Purchase Price (1) Equity Contribution (2) Purchase prices have rebounded quickly Public market rebound Tax selling Increased availability of debt Dry Powder at fund managers Buying off cyclically lower cash flows Equity contributions increased as lenders pulled back Reduced risk in the capital structure Operational improvement vs. financial engineering to drive returns Lenders returning to the market Source: S& P M&A Stats, August 2010 (1) Purchase price as a multiple of EBITDA (2) Common equity contribution at acquisition 8 The Northern Trust Experience

9 Private Equity Key Considerations The appeal of private equity lies in its potential to deliver on three main goals for investors: Performance enhancement Diversification Portfolio risk reduction Private equity possesses many structural advantages that help investors accomplish these goals Having recognized this, investors are increasing allocations to the asset class 9 The Northern Trust Experience

10 The Northern Trust Experience ACCESS. EXPERTISE. SERVICE. Thank you. November 4, 2010 Robert P. Morgan SVP, Director of Private Equity 2010 Northern Trust Corporation northerntrust.com