Investment Opportunities in Private Markets

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2 Investment Opportunities in Private Markets 2017 NCPERS Annual Conference and Exhibition May 22, 2017 For institutional investor use only. Not for use with or distribution to the public.

3 The mighty middle market U.S. middle market defined Nearly 200,000 firms in all industry segment and geographies U.S. middle market impact 3 rd largest global economy 1/3 of U.S. jobs (~48 million) Representing 3.0% of all U.S. companies 33% of private sector GDP +2.3mm new jobs in 2014 Annual revenue ranging from $10mm to $1bn More than $10 trillion in annual revenue +1.1mm new jobs in 2013 Source: National Center for the Middle Market, as of Q For institutional investor use only. Not for use with or distribution to the public. 3

4 US non-investment grade corporate debt market EBITDA of $10MM EBITDA of $100MM Credit Facility of $350MM Senior Small + Senior = Middle Market Senior Loans Market participants: Limited Number of Lenders the "Club CPP Antares, Madison Capital, Churchill, etc. Yields = 6% to 8%, Floating Rate Large + Senior = Broadly Syndicated Loans Market participants: CLOs, Mutual Funds, Insurance Companies, Asset Managers Yields = 4% to 5%, Floating Rate Seniority Junior Small + Junior = Mezzanine + Second Lien Market participants: Mezzanine Funds, BDCs, Credit Opportunities Funds Yields = 9%+, Typically Fixed Rate Large + Junior = High Yield Bonds Market participants: Mutual Funds, Insurance Companies, Asset Managers Yields = 6% to 7%, Fixed Rate Small Size Large For institutional investor use only. Not for use with or distribution to the public. 4

5 How do we define the middle market? Middle market Broadly syndicated Size of credit facility $25 to $350 million >$350 million Company EBITDA $10 to $100 million $100+ million Lenders per facility 2 to to 100+ Spread/LIBOR floor 400 to 600 bps/ to 400 bps/100 Upfront fees Up to 2.0% Up to 0.5% Covenants Traditional Covenant-lite Sourcing Club/origination Buyer model Liquidity Relatively illiquid Liquid Level of diligence Extensive primary due diligence Less due diligence For institutional investor use only. Not for use with or distribution to the public. 5

6 Banking Consolidation Drives Opportunity Declining middle market senior loan supply driven initially by consolidation of regional banks who were active lenders to the middle market historically TRAVELERS GROUP CITICORP CITIGROUP EUROPEAN AMERICAN BANK BANAMEX BANK ONE JP MORGAN CHASE MANHATTAN CHEMICAL BANKING CONTINENTAL BANK FLEET FINANCIAL GROUP CHASE MANHATTAN BANK OF AMERICA JP MORGAN CHASE SUMMIT BANCORP SOUTHTRUST BANKBOSTON FLEETBOSTON FINANCIAL WACHOVIA WACHOVIA CORESTATES FINANCIAL WACHOVIA FIRST UNION FIRST UNION Source: Federal Reserve; GAO For institutional investor use only. Not for use with or distribution to the public. 6

7 Yield and credit risk Despite lower credit risk, middle market loans offered a higher current yield, 6.82%, compared to broadly syndicated loans, 5.73%, because they are relatively illiquid Middle market loans offered a significantly lower default rate, 3.42%, compared to broadly syndicated loans, 4.93%, and high-yield bonds, 4.45% Middle market loans had lower loss rates and higher recovery rates than broadly syndicated loans due to more conservative structuring and other protections Investment performance and correlations Yield Asset class Current 1 ( ) Historical Default rate Loss rate Recovery rate Middle market loans % 7.47% 3.42% 0.67% 80.39% Broadly syndicated loans % 6.25% 4.93% 1.18% 76.05% High-yield debt % 9.43% 4.45% 2.84% 42.24% 1 As of June 30, Defined as loans of $200 million or less, based on S&P LSTA Leveraged Loan Index. 3 Defined as loans greater than or equal to $200 million, based on S&P LSTA Leveraged Loan Index. High-yield debt based on BoA Merrill Lynch US High Yield Index. 4 High-yield debt based on BoA Merrill Lynch US High Yield Index. Average default, loss, and recovery rates are based on trailing 12-month time frames. Sources: S&P LCD, S&P Credit Pro, BoA Merrill Lynch. The sector performance described above does not reflect portfolio or product performance, and does not consider transactions costs or investment management fees. For institutional investor use only. Not for use with or distribution to the public. 7

8 Historical and relative credit performance Middle market loans are generally structured more conservatively than broadly syndicated loans Lower leverage multiples, higher interest coverage and tighter covenant packages Middle market loans consistently outperform broadly syndicated loans in key credit metrics Average credit statistics, * Investment Senior debt/ebitda Total debt/ebitda EBITDA/ Cash int. Middle market LBO 3.68x 4.33x 3.43x Large LBO 4.42x 5.05x 2.96x * Source: S&P LCD, period from 1/1/01 to 12/31/16; represents unadjusted EBITDA ** Source: S&P LCD, S&P Credit Pro.; Middle market loans include total facility sizes of less than $200 million and broadly syndicated loans denote total facility sizes of greater than or equal to $200 million The sector performance described above does not reflect portfolio or product performance, and does not consider transactions costs or investment management fees. For institutional investor use only. Not for use with or distribution to the public. 8

9 Middle market private credit options Investment structures include funds, business development companies, and middle market CLOs The use of modest leverage leads to potentially enhanced returns 1 For illustrative purposes only, based on historical yield experience. 2 Net yield reflects impact of leverage, financing costs and investment management fees. Actual investment performance will differ based on ultimate realizations, and will be reduced by impairments and defaults. For institutional investor use only. Not for use with or distribution to the public. 9

10 Where is the allocation coming from? Private credit allocation Part of private equity allocation General alternatives allocation Part of opportunistic investments allocation Other Part of more than one specific allocation Part of fixed income allocation Source: Prequin For institutional investor use only. Not for use with or distribution to the public. 10

11 Nuveen TIAA 730 Third Avenue New York, NY nuveen.com / TGAM.com Please note investments in middle market loans are subject to certain risks. Please consider all risks carefully prior to investing in any particular strategy. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk. Churchill Asset Management is a registered investment advisor and majority-owned, indirect subsidiary of Teachers Insurance and Annuity Association of America. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. Nuveen, LLC, formerly known as TIAA Global Asset Management, delivers the expertise of TIAA Investments and its independent investment affiliates Teachers Insurance and Annuity Association-College Retirement Equities Fund, 730 Third Avenue, New York, NY INST-O12/17 11

12 NCPERS 2017 Annual Conference & Exhibition INNOVATIVE. For institutional INTELLIGENT. investor use INVESTMENTS only. Not for use with or distribution to the public. May 2017

13 The Investable Universe The investable universe is wide but private equity investment trails relative to other more efficient asset classes. Global Assets under management, $ trillion $60 $57 Public Markets Private Markets $50 $46 Assets $40 $30 $37 $ CAGR Trends Global Equities Global Bonds Private Debt Real Assets Private Equity Buyouts Hedge Funds Traditional Investment: +5% $20 Real Assets & Hedge Funds: +11% Private Equity: +9% Venture Capital $10 $2 $2 $2 $2 $2 $2 $2 $1 $1 $1 $1 $ Time Period Public Markets Real Assets Private Equity Hedge Funds $3 Growth Equity Special Situations INNOVATIVE. INTELLIGENT. INVESTMENTS 1

14 What Is Venture Capital (Venture Or VC)? KEY VALUE CREATION LEVERS Type of private equity capital for investing in high potential return, early-stage, and newer growth companies Assist in the development of new products and services Provide managerial and technical expertise Add value to the company through active participation Can generate a return through an eventual realization event such as an IPO or sale of the company INVESTMENT IMPLICATIONS Take higher risks with the expectation of higher rewards Have a long-term orientation (three to ten years, depending on the type of investment) INNOVATIVE. INTELLIGENT. INVESTMENTS 2

15 Venture Capital Is The Catalyst Of Innovation The growth of many of today s top technology companies was catalyzed by VC U.S. Venture Fundraising U.S VC Backed Exits $50 $1,000 $40 $800 $30 $600 $20 $400 $10 $200 $ $ INNOVATIVE. INTELLIGENT. INVESTMENTS 3

16 Venture Capital State Of The Market 01 Venture capital valuations have moderated and Fairview expects liquidity in the industry to increase given high public market valuations 02 Experienced GPs are adjusting in a number of ways 03 LP venture capital co-investments are on the rise 04 Rise of highly successful, specialty venture capital investment firms who have become established franchises 05 Innovation continues unabated INNOVATIVE. INTELLIGENT. INVESTMENTS 4

17 Why Venture? Long-term results often exceed other asset classes and exposure to venture capital adds a layer of diversification. 60% 50% 40% Private Equity 55% Lower correlations to public markets and the reduction of systematic risk are advantages to venture capital investing. Returns 30% 26% Public Equities 20% 10% 15% 14% 10% 11% 11% 12% 10% 9% 14% 11% 12% 17% 15% 15% 15% 16% 14% 9% 8% 7% 8% 7% 8% 0% 2% U.S. Venture Capital Index 1% 1% U.S. Early Stage U.S. Late & Expansion U.S. Private Equity Index Nasdaq Dow Jones Industrial Average S&P 500 Asset Class 1 Year 5 Year 10 Year 20 Year INNOVATIVE. INTELLIGENT. INVESTMENTS 5

18 Venture Capital Case Study: Twitter s Fund Raising Timeline $16,000.0 $14,000.0 $12,000.0 Seed/Early Stage Expansion Stage Later Stage Venture Capital $14,160.0 Public Equities $10,000.0 $8,851.5 $9,700.0 $10,180.0 $8,000.0 $6,000.0 $4,000.0 $3,434.4 $2,000.0 $ $0.1 $5.6 $23.0 $58.0 $0.1 $29.8 $86.5 $250.4 Seed 2007 Series A 2007 Series B 2008 Series C 2009 $1,078.8 $160.4 $365.5 Series D 2009 Series E 2010 $765.5 Series F 2011 $1,065.5 $1,067.3 $1,067.3 Pre IPO 2011 IPO Valuation Cumulative Capital Raised Selected Round Participants: More than 15 institutional investors prior to IPO Over 18 million shares traded daily INNOVATIVE. INTELLIGENT. INVESTMENTS 6

19 Institutional Investors Can Access VC in Multiple Ways Invest directly in portfolio companies Invest directly in VC funds Invest through an intermediary such as a fund of funds Elements of a Successful Venture Capital Investment Program Diversification by stage, sector and vintage year Access to top quartile funds with appropriate allocations Mix of established next generation venture managers INNOVATIVE. INTELLIGENT. INVESTMENTS 7

20 Thank You Any Questions? INNOVATIVE. INTELLIGENT. INVESTMENTS 8