Private Equity Overview

Transcription

1 Private Equity Overview Presentation to VACo/VML Pooled OPEB Trust Annual Meeting September 9, 2016 John Shearburn Managing Director

2 Legal Considerations This presentation (this Presentation ) is being furnished on a confidential basis solely for informational purposes and may not be reproduced or provided to others without the prior written consent of Warburg Pincus LLC (together with certain of its affiliates, Warburg Pincus or the Firm ). By accepting delivery of this Presentation, each recipient agrees to the foregoing and that it will cause its representatives and advisors to so agree. This Presentation does not constitute an offer to sell, or a solicitation of an offer to buy, an interest in any security or Warburg Pincus private equity fund or other investment vehicle. The information set forth herein does not purport to be complete and is subject to change. The Firm has no responsibility to update any of the information provided in this Presentation. An investment in a Warburg Pincus Fund may only be made on the basis of the information contained in a confidential private placement memorandum, as and when available. Historical return information in this Presentation is not necessarily indicative of future performance. Investments in private equity do not have the same diversification and liquidity profiles as the indices selected for general comparison purposes. This Presentation may also include pro forma values and forward-looking statements, which are inherently uncertain and based on assumptions that could change as a result of a portfolio company s operating performance, capital markets risks and general economic conditions. Unless otherwise indicated, financial information is as of June 30, 2016, and Warburg Pincus funds or individual portfolio companies may have experienced, in certain instances, negative performance since such date. There can be no assurance that future Warburg Pincus funds or individual portfolio companies will achieve comparable results as those presented herein or will be able to implement their investment strategies or achieve their investment objectives. Gross and net IRRs and multiples include the value of unrealized investments, and aggregate IRRs for more than one fund are computed on a sequential cash flow basis unless otherwise noted. Individual fund IRRs are calculated on a sequential cash flow basis. Net IRRs and net multiples are after fees, expenses and general partner carried interest. Fund-level returns do not necessarily reflect the return achieved by any individual investor. Please see Important Disclosures and Notes to Performance Information on slides for important disclosures and related information regarding the performance information set forth herein. Additional information regarding the calculation of financial metrics and comparisons presented herein is available upon request. In addition to the private equity funds described in this Presentation, Warburg Pincus raised a separate real estate fund in 2006 Warburg Pincus Real Estate I, L.P. Performance data presented herein does not include the results of such real estate fund. The recipient acknowledges it is aware that federal and state securities laws prohibit any person who has material, non-public information about a company from purchasing or selling securities of such a company or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. This Presentation has not been approved by an authorized person in the United Kingdom in accordance with Section 21 of the Financial Services and Markets Act 2000 and therefore it is being delivered in the United Kingdom for information purposes only to a very limited number of persons and companies who are persons who have professional experience in matters relating to investments and who fall within the category of persons set out in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ) or are high net worth companies within the meaning set out in Article 49 of the Order or are otherwise permitted to receive it. Any other person who receives this Presentation should not rely or act upon it. August

3 Agenda 1 Defining Private Equity 4 Warburg Pincus Overview 2 Growth of the Asset Class 5 WP XII Case Studies 3 Industry Trends 6 Q&A 3

4 What is Private Equity? A Basic Definition Long-term investing with the goal of building stronger, more valuable companies Most private equity investments are in privately held companies Done via Limited Partnerships that raise capital from institutional investors ( LPs ) PE funds are typically structured as 10 to 12 year, long-term investment vehicles Private equity firms act as the General Partner and invest capital alongside limited partners The funds purchase companies that the General Partners believe have significant growth potential or value The funds provide capital, time, energy, talent and resources to the companies with the goal of creating value and improving the company s performance Profits generated by a combination of revenue / operating earnings growth, leverage and multiple expansion 4

5 Stages of Private Equity Investing Private Equity firms may invest in different stages of a company: Venture Capital Seed and Early Stage Financing for start-up companies Investment to develop a product or technology or otherwise build a company addressing a large market potential Higher risk-higher reward stage of investing Growth/Development Middle Stage Primary investment into a company that has a successful model and large growth opportunity Late Stage (e.g., Buyouts, Recaps and Special Situations) Acquisition of a more mature company Look for attractive price, leading management team, stable cash flow and improved performance potential Relative to Venture Capital, lower risk-lower reward stage of investing 5

6 The Case for Private Equity Why invest in Private Equity? Opportunity for Superior Returns investors may, over the long-term, earn excess returns over the public markets Risk and Reward investors may improve the risk and reward characteristics of an investment portfolio Improve portfolio diversification Earn higher absolute returns Opportunity investors receive access to investment opportunities that they would not be able to access on their own What is the role of Private Equity in business? Source of capital for companies that are candidates for growth Can be driver of economic growth and innovation Private equity backed portfolio companies employ millions of people around the world Historically consistent source of return / income for Limited Partners as an asset class 6

7 How Does Private Equity Generate Returns? Buying Well Private markets are often less efficient and buyers can also reap an illiquidity discount Sweat Equity Operational focus on fixing companies, growing companies, making significant operational improvements active ownership Focus on Performance Revenue growth, operating margin growth, free cash flow, and return on capital and the governance that maintains the focus on these areas Thinking Long Term, with Urgency -- Not driven by quarterly earnings, public share price, or research reports but must generate returns over 4 to 5 year period Aligned Interests PE managers make money if their companies do well and their investors / company executives make money executives have skin in the game Leverage PE-owned companies, particularly LBOs, tend to have higher levels of leverage than public companies Multiple Expansion Market timing the aim of selling company at a higher exit multiple than when acquired -- also, well run, growthy private companies can sometimes command a higher multiple 7

8 PE Performance is Leading to Higher Allocations PE Has Outperformed Other Asset Classes Over the Long Term (1) 15% Public Pension Fund Returns Growth of U.S. Public Pensions Allow for New Commitments (2) No. of US Based Public Pension Funds 12% 10% 7% 8% % 200 5% % H (1) Source: 2015 PEGCC Public Pension Fund Analysis. Represents median 10-yr Annualized Return (2) Source: Preqin 8

9 Growth of Alternative Assets Recent history has seen a steady increase in allocation to alternative assets Assets Under Management (1) ($ trillion) Total Alternative Assets Private Equity (2) (1) Preqin. Represents AUM at December 31. (2) Private Equity includes Buyout, Growth and Venture; Excludes Distressed PE, Mezzanine, Real Estate, Infrastructure, Other 9

10 Historical View of Private Equity Fundraising Global PE Fundraising by Year ($ Billions) (1) $800 3,000 $700 2,500 $600 $500 2,000 $400 1,500 $300 1,000 $200 $ $ H Aggregate Capital Raised (bn USD) Funds in the Market (1) Source: Preqin, includes all funds closed through June 30, Data on Funds in the Market is only available from 2006 forward. 10

11 Warburg Pincus Funds and Milestones History Firm founded Raised first institutional fund Began investing in Europe Began investing in China and India Sold Completed Warburg leadership Pincus transition Asset Management Completed 100 th portfolio company IPO Raised WP Energy Raised WP XII COMPANION FUND COMPANION FUND $15,100 COMPANION FUND (1) $13,400 $11,200 Fund Size ($ MM) $41 $101 $341 $1,100 $1,700 $2,000 $800 $5,000 $2,500 $5,300 $8,000 $4, EMW WPA WPCP WPCC WPI WPV WPVI WPEP WPIP WP WP IX WP X WP XI WPE WP XII Ventures VIII (1)WPE is also a companion fund to WP XII. 11

12 Warburg Pincus Overview Strictly Confidential, Proprietary and Trade Secret Firm History Growth-focused Deep Industry Expertise Experienced Global Investor 15 PE funds totaling $70 billion Invested in more than 750 companies More than 185 investment professionals Alignment of interests core to firm s culture Capital to grow companies Utilize lines of equity Entrepreneurs-in- Residence ( EIR ) Deep domain expertise in five core sector groups Part of the ecosystems of industries No allocation pressure to invest by sector Investing outside of US since 1983 Nine offices Emerging markets pioneer, particularly in China and India Global Thesis-Driven Growth Investing at Scale Industry and geographic teams develop specific investment theses 16% average annualized portfolio company EBITDA growth (1) $150 million average equity commitment (2) (1) Represents annualized aggregated EBITDA growth rate of 376 companies since WPEP (1998). Not all portfolio companies were held for the entire holding period and actual results by any individual portfolio company may have been higher or lower. (2) Average Warburg Pincus equity commitment since Warburg Pincus IX, equity commitments include equity investments and unfunded lines of equity. 12

13 Experienced Global Investor Strictly Confidential, Proprietary and Trade Secret One Integrated Firm Investing Globally Investing in Europe for over 30 years Investing in Asia for over 20 years 9 offices worldwide San Francisco Nearly one-half of investment professionals based outside the U.S. Global experience valued by management teams No allocation pressure for a geographic group to invest NORTH AMERICA 50% TO 60% New York London São Paulo EUROPE 10% TO 15% REST OF WORLD UP TO 10% Mumbai ASIA 20% TO 30% Beijing Shanghai Hong Kong Singapore Emerging Markets Pioneer 170 investments in China, India, Central and Eastern Europe ( CEE ), Brazil, Africa and the Middle East $12.9 billion invested, $14.4 billion gross realized, $9.8 billion carrying value in China, India, CEE, Brazil, Africa and the Middle East Attractive emerging market returns 39 investment professionals in China 12 investment professionals in India Experienced investors in CEE and Brazil Note: Presented for illustrative purposes only. There can be no assurance as to the actual asset type or geographic breakdown of Warburg Pincus investments and there will be no formal allocation targets in such respect. 13

14 How We Make Money As of June 30, % Increase in Operating Profits Sources of Returns (1) 17% 18% Multiple Expansion Leverage 65% of the firm s returns have come from increasing the operating profits of the firm s portfolio companies Multiple expansion has increased the firm s profits by only 17% With a focus on growth investing, leverage does not play a significant role in generating profits (1) See footnotes (1) and (2) on following page 14

15 How We Make Money As of June 30, 2016 Value Creation and How We Make Money As a growth oriented investor, Warburg Pincus focuses on the ability to grow companies, improve operational performance and deliver value. To help identify the true sources of value in the Warburg Pincus portfolio and assess that our profits are primarily the result of growth in operating earnings, we have applied the following analysis that calculates the drivers of our returns Methodology (1) and Assumptions: Value creation is segmented into four different components that comprise the equity value of a company: revenues, margin, multiple and net debt The equity value at both the initial investment date and at the exit/valuation date are measured to determine the appreciation of the equity value of the company over the relevant time period The methodology assumes that there is one entry (date of initial investment) and one exit (date of last realization or valuation date) Compounded annual growth rates of each component are calculated based on the operating performance of each portfolio company Returns are calculated on a deal concurrent basis and weighted by ownership percentage in the company The Data: Data were gathered for 388 out of 472 Warburg Pincus portfolio companies from Warburg Pincus Equity Partners, LP (1998) through Warburg Pincus XII, LP (2015), which represents $48 billion (out of $50 billion) invested. (2) The data set provides coverage of over 96% of the dollars invested in these funds through June 30, 2016 and includes all companies in the portfolio as of June 30, 2016 The data set includes the companies with the five largest losses and five largest gains in each fund (1) Warburg Pincus analysis based on the methodology as described by Professor Oliver Gottschalg and Dr. Bernd Kreuter in the paper Buyout Value Creation: The difference between small, medium and mega deals, October We believe the methodology is an appropriate method to help identify sources of value. As with any analysis of this type, the methodology relies on certain good faith assumptions that are inherently subjective. A similar analysis with different assumptions may yield different results. (2) Data were excluded for portfolio companies predominantly from Warburg Pincus Equity Partners (1998) and Warburg Pincus International Partners (2000) where entry financial metrics are not readily available. 15

16 Warburg Pincus XII (2015) Investment Performance (as of 6/30/16) (1) Fund Size $13.4 billion Fund Stage Active Gross IRR / Net IRR NM / NM Gross Multiple / Net Multiple NM / NM IRR Quartile / Percentile NM / NM Multiple Quartile / Percentile NM / NM Remaining / Total Portfolio Companies 12/12 Average Equity Commitment (2) $87 million In Portfolio Companies Pending Portfolio Companies (3) Note: A full list of the firm s investments and track record from inception to date is available upon request. (1) Warburg Pincus XII held its final closing in November of 2015 and investment performance is therefore omitted. (2) Includes equity investments and unfunded lines of equity. (3) Represents deals announced/closed since June 30,