Private Markets Overview. October 2015

Transcription

1 Private Markets Overview October 2015

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3 Agenda What Are Private Market Investments 1 Why Consider Private Market Investing 13 Challenges 20 What Do We See in Real Portfolios 26 How Much to Allocate 29 Building a Portfolio to Outperform 33 Appendix 42 Proprietary and Confi dential

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5 What Are Private Market Investments

6 The History of Private Market Investments An industry in existence for 40+ years, where strategies and geographies evolve with changing macro-economic conditions 1980s RJR Nabisco Drexel Burnham Lambert/High Yield Highly leveraged buyouts Severe market correction ERISA rules change Pensions enter landscape Early 90s Traditional LBOs Proliferation of buyout funds European LBOs Early 2000s "Mega" funds Financial engineering Rise in European activity VC flattens Outstanding returns Late 2000s/Today Lehman collapse Credit crunch Bank lending stopped Rise in credit related funds Focus on distressed companies Emerging markets 1970s 1980s 1990s 2000s Present 1970s VC Focus (early stage) KKR, Forstmann Little, TH Lee Leveraged buyouts ( LBOs ) begin Mid 90s Israel VC industry begins Late 90s Tech Boom VC craze Massive Fundraising Tech bubble burst Mid 2000s "Mega Mega" funds Globalization Public-to-Private VC growing slowly Rise in Asian activity Page 2 Proprietary and Confi dential

7 t 1. Capital Committment 2. Investmen What is Private Equity? Portfolio Company A Private Equity Fund III, LP Portfolio Company B Portfolio Company C Portfolio Company D Portfolio Company E A professionally managed pool of capital that invests primarily in private companies or securities How it Works The Process The Terms 1. Capital Commitment Investor makes a capital commitment to a fund manager in year 1 3. Harvesting Period Period 2. Investment Period Over the next 4-5 years the fund manager calls capital for investments in portfolio companies Capital Committed: An investor s financial obligation to provide a set amount of capital to the fund Capital Contributions: Capital contributed from an investor s capital commitment to fund partnership investments, organizational expenses and management fees Distributions: Cash or stock disbursed to the investors from a fully or partially realized investment 3. Harvesting Period Typically, in years 6-10, fund manager begins to exit portfolio company investments, sending capital back to investors in the form of distributions. Partial realizations can occur as early as year 2-3. Proprietary and Confi dential Page 3

8 Private Markets Investment Strategies Examples of portfolio companies in prior HL Funds-of-Funds U.S. Buyout and Europe Buyout Equity investments where a company, business unit or assets are acquired from the current shareholders, typically with the use of financial leverage. These companies are generally mature and generating operating cash fl ows. Venture/ Growth Equity Investments in startup and early stage, high risk/high potential companies; investments in relatively mature companies looking for growth over the long term. Credit/Distressed Investments in securities of companies that are either already in default, under bankruptcy protection, or in distress and heading toward such a condition. The most common distressed securities are bonds and bank debt. Emerging Markets Secondaries Predominantly growth capital and buyout investment opportunities due to the nature of these economies. Encompasses Latin America, Asia-Pacifi c, Emerging Europe, Sub-Saharan Africa, Middle East and North Africa. Investments in existing portfolios or direct investments at a discount based on remaining life and funded capital percentage. These opportunities are generally already delivering positive returns and therefore valuable to include in the early years of a fund-of-funds. Co-Investments Direct investments in a portfolio company alongside the lead general partner. Most co-investments are on the same terms as the general partner, minority positions, and/or passive investments. Page 4 Proprietary and Confi dential

9 Company Lifecycle & Applicable Private Equity Strategies Private equity managers invest in companies of critical stage to create value Create/develop new companies or new technologies Restructure, refocus or revitalize inefficient operating companies Acquire growth companies in fragmented industries Lend to companies enable to borrow from banks Decline Maturity Rapid Growth Restructuring/ Revival Company Formation Venture/ Growth Capital Regular Buyouts Distressed/ Turnaround/ Value-Oriented Buyout Regular Buyouts Proprietary and Confi dential Page 5

10 Private vs. Public Universe Over 11,000 private U.S. companies with annual revenues over $100 million vs. approximately 2,700 public U.S. companies with the same annual revenues Private equity represents a target-rich environment, the market potential of which is dramatically larger compared to publicly-traded companies Number of Private US Companies By LTM Revenue ($M)* 1,285 companies 12% 1,567 companies 14% Number of Public US Companies By LTM Revenue ($M)* 1,289 companies 47% 974 companies 36% $100-$499 $500-$1,000 $1,001+ * Source: Capital IQ (Jan. 2014) 8,184 companies 74% $100-$499 $500-$1,000 $1,001+ * Source: Capital IQ (Jan. 2014) 454 companies 17% Page 6 Proprietary and Confi dential

11 Private vs. Public Universe Over 28,000 private European companies with annual revenues over 100 million vs. approximately 2,700 public European companies with the same annual revenues Private equity represents a target-rich environment, the market potential of which is dramatically larger compared to publicly-traded companies Number of Private European Companies By LTM Revenue ( M)* Number of Public European Companies By LTM Revenue ( M)* 3,039 companies 11% 3,217 companies 11% 982 companies 37% 1,284 companies 48% 100-$ $1,000 1,001+ * Source: CaplQ (January 2014) 22,402 companies 78% 406 companies 15% 100-$ $1,000 1,001+ * Source: CaplQ (January 2014) Proprietary and Confi dential Page 7

12 How to Access the Private Equity Market? Invest Directly in a Fund Investor Private Equity Fund General Partner Private Equity Fund General Partner Private Equity Fund General Partner Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Invest in a Commingled Fund-of-Funds Invest in a Fund-of-Funds for One (Separate Account) Investor Investor (99%) General Partner/ Manager (1%) Other Investors Other Investors Fund-of-Funds Limited Partnership Private Equity Fund General Partner Private Equity Fund General Partner Private Equity Fund General Partner Private Equity Fund Private Equity Fund Private Equity Fund Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Portfolio Company Page 8 Proprietary and Confi dential

13 Lifecycle of a Private Equity Partnership Investment Phase Value Creation Harvest Return Secondary Primary 0 J-Curve effect Year 3 Year 6 Year 9 The J-curve: During the first few years of a fund s life, when capital is initially drawn, valuations appear to decline relative to the paid-in capital This is the result of management fees and other organizational expenses, which are paid based on total committed capital In the early stages of a fund s life, these costs represent a large portion of total contributed capital, resulting in negative valuations Secondary investments and other strategies that are able to distribute capital early in a fund s life help mitigate the J-curve *This graph is for illustrative purposes only. The actual profi le of any given investment in a fund may vary substantially. Proprietary and Confi dential Page 9

14 Understanding Private Equity Exposure and Cash Flows Commitment Exposure commitment pacing requires careful planning $10M commitment never fully exposed As cash goes out, cash also comes back in while PE is illiquid, cash returns can be generated as early as 2-3 years and the entire commitment is not fully exposed all at once Example: Maximum cash out-of-pocket is roughly half of commitment Cash fl ow positive for the year in years 5-6 Full commitment returned in form of distributions in years 7-8 Investment Life Cycle: $10M Commitment to a Fund-of-Funds Cash Flow (millions) Annual net cash flow becomes positive Cumulative cash flow break even point Maximum cash out-of-pocket -$4.9M Maximum exposure to PE Year Market Value Annual Capital Calls Annual Distributions Cumulative Net Cash Flow Please refer to endnotes in Appendix Page 10 Proprietary and Confi dential

15 Horizon Model Investment Pacing Model takes into account client s current Private Market Asset exposure and expected commitment amounts Forecasts cash infl ows / outfl ows and portfolio valuations, based on proprietary database of historical data Used to align client s Private Market allocation to its target % and help determine new investment pacing Projects potential performance of funds over life of each fund commitment Portfolio NAV vs. Target Allocation $ in millions Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 NAV - Existing NAV - New Commitments PE and RA Allocation (10.0%) Proprietary and Confi dential Page 11

16 Horizon Model Investment Pacing Current Portfolio NAV and Cash Flows Over Time U.S.D. in Millions NAV: Target Allocation Current Allocation Year 1 Allocation Year 2 Allocation Year 3 Allocation Year 4 Allocation Year 5 Allocation Year 6 Allocation Year 7 Allocation Year 8 Allocation Year 9 Allocation 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year Distributions Contributions Net Cash Flow Cumulative Net Cash Flow U.S.D. in Millions Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Page 12 Proprietary and Confi dential

17 Why Consider Private Market Investments

18 Searching for Yield Fixed income yields remain stubbornly low Yield Ranges - Past 20 Years Min, Current, and Max Yield 25% 20% 21.8% 15% 16.7% 10% 5% 0% 8.0% 8.5% 8.5% 6.9% 6.0% 4.9% 3.9% 4.1% 3.4% 2.8% 2.0% 1.8% 1.5% High Yield US Corporate Mortgage (30-Yr) US Treasury (10-Yr) Emerging Maket Minimum Yield Current Yield Maximum Yield Source: Barclays, Bloomberg. Indices: Barclays U.S. High Yield Index, Barclays U.S. AAA Corporate Index, Federal Reserve 30Y Mortgage rate, US 10Y Treasury, Barclays Emerging Market Agg. Bond Index. Current as of 9/30/2015 (October 2015) Page 14 Proprietary and Confi dential

19 Public Equity Returns Public equities have been strong recently, but markets have seen two major corrections in the past 15 years Public Equity Market Performance MSCI World Index MSCI World Source: MSCI World Price Index. As of 4/30/2015 (May 2015) Proprietary and Confi dential Page 15

20 IRR: Private Equity Outperforms Private Equity IRR vs. PME IRR Average spread of 693 bps Top quartile spread of 1,143 bps All Private Equity Performance vs. Public Markets All Private Equity Funds vs. MSCI World TR Index 30% 25% Net IRR 20% 15% Top Quartile Average: 16.5% All PE Average: 12.5% 10% 5% 0% Vintage Year Public Market Equivalent* All Private Equity Pooled IRR All Private Equity Top Quartile Source: Hamilton Lane Fund Investment Database, MSCI. As of September 30, 2014 (January 2015) Page 16 Proprietary and Confi dential

21 10-Year Performance 10-Year Asset Class Performance - As of 03/31/2015 Asset Class Annualized Total Return Annualized Volatility Sharpe Ratio Private Equity 13.4% 16.6% 0.61 Domestic Equities 8.4% 17.0% 0.30 International Equities 6.5% 20.3% 0.16 Emerging Market Equities 10.7% 24.9% 0.29 High Grade Bonds 6.3% 6.5% 0.45 High Yield Bonds 8.0% 12.4% 0.38 Hedge Funds 5.7% 7.8% 0.30 REITs 8.5% 26.1% 0.20 Commodities -1.0% 20.4% N/M Source: Hamilton Lane Fund Investment Database (March 2015) Indices used: Hamilton Lane All Private Equity with volatility de-smoothed; Russell 3000 Index; MSCI World ex US Index; MSCI Emerging Markets Index; Barcalys Aggregate Bond Index; Credit Suisse High Yield Index, HFRI Composite Index; FTSE/NAREIT Equity REIT Index; Dow Jones-UBS Commodities Index. Geometric mean returns in USD. Private equity outperforms on an absolute and risk-adjusted basis It remains an attractive asset class Please refer to endnotes in Appendix Proprietary and Confi dential Page 17

22 Risk of Loss Less than Publics Investors are more likely to lose principal in equity mutual funds than in Private Equity funds % of Mutual Funds Returning Less Than 1.0x 1 30% 25% Average : 22.9% 20% 15% 10% 5% 0% Inception Year Source: Bloomberg. As of 9/30/2014 (April 2015) % of Buyout Funds Returning Less Than 1.0x 30% 25% 20% 15% Average : 12.6% 10% 5% 0% Vintage Year Source: Hamilton Lane Fund Investment Database. Data as of 9/30/14 (April 2015) 1 The mutual fund sample encompasses 19,000 funds raised between A mutual fund is deemed to have returned less than 1.0x if it has a negative ten year return as of September 30, In the absence of a ten year return, the same criteria is applied to the fi ve year return as of September 30, Page 18 Proprietary and Confi dential

23 Academic Studies Studies support a range of bps of outperformance of public equities Private Equity Annual Outperformance vs. S&P 500 By Academic Study Author(s) 600 Annual Outperformance (bps) Robinson & Sensoy (2011) Higson & Stucke (2012) Harris, Jenkinson, and Kaplan (2013) Jason Malinowski; Blackrock Research (2010) Upper Bound Stated Outperformance Lower Bound Source: Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity (proprietary LP investment database); Performance of Private Equity (Cambridge Associates); Private Equity Performance, What Do We Know? (Burgiss); Do Buyouts Outperform? (Thomson, S&P, Blackrock) Page 19 Proprietary and Confi dential

24 Challenges: Illiquidity Blind Pool Transparency / Valuation Regulations

25 Sample Fund Structures and Terms* Term: Ten-year limited partnership Typically two, one-year extension options, voted on by Advisory Committee Annual Management Fee: Based on committed capital Venture Funds: 2-2.5% Buyout Funds: 1.5-2% Carried Interest: GP profit participation Most often set at 20% of gains Premier funds charge a higher carry Usually above a Preferred Return/Hurdle Date of 5-10% for buyout funds i.e. GP receives $.20 on every dollar of profit after set hurdle Commitment/Investment Period: Capital called over four to five years for investments *The actual fund structure and terms of any given fund investment may vary substantially Proprietary and Confi dential Page 21

26 Historically, PE Databases Unreliable Limited coverage Reach across industry Time frame Inconsistent data Uneven reporting Uncertain values Currency issues Page 22 Proprietary and Confi dential

27 Private Equity Data Collection Hamilton Lane Cambridge Associates Burgiss State Street Preqin Thomson Reuters Pevara/Efront Pitchbook Dow Jones Bloomberg Private Equity Benchmark Provider Data Sources LP Back Office GP Contributed LP Contributed FOIA Data 1 Data Source Considerations Sample restricted to institutional portfolios Few can do this 1 U.S. Freedom of Information Act covers investments made by state and municipal pensions Contribution bias Unaudited Labor intensive Time lag Labor intensive Contribution bias Easy to aggregate Time lag Limited metrics Uncertain currency conversion Proprietary and Confi dential Page 23

28 Inconsistent Benchmarks Fund X is a real vintage year 2001 buyout fund it can be classified in three different quartiles depending on the data provider that is used Fund X Quartile Classification Across Data Providers Vintage Year % 14% 12% IRR (%) 10% 8% 6% 4% 2% 0% -2% -4% -6% Fund X: 7.54% IRR Hamilton Lane Preqin Cambridge Associates Source: Hamilton Lane Fund Investment Database, Preqin, Thomson One/Cambridge Associates. For vintage 2003 Venture Capital. As of 6/30/2014 (December 2014) Differences up to 2x comparing the same returns A lack of consistently reliable data sources continues to plague the industry Page 24 Proprietary and Confi dential

29 Mitigating Private Equity Risks and Concerns Illiquidity Blind Pool Investment Transparency/Valuations Entire commitment is never fully exposed all at once and cash distributions may occur as early as within 2-3 years (see page 12) Invest with GPs who have a proven ability to exit over multiple cycles Active portfolio management and dialogue with GPs/management teams on exit plans Interim distributions/partial realizations from recaps, restructurings, and partial sales Thoughtful portfolio construction through strategic allocations to J-curve mitigating strategies Continuity in GPs strategy over multiple funds is important Invest with GPs with strong and proprietary pipelines of opportunity GP and LP communication is critical Investing in largely funded secondaries provides transparency to underlying company holdings ASC 820 (formerly FAS 157) - Financial Accounting Standards Board guides the alternative investment industry on how they measure and disclose fair value in financial statements SEC registration Annual audits required by GPs Quarterly advisory board calls Annual meetings, update meetings and continuous dialogue with GPs Selecting top-tier managers with premier access, strong and tenured relationships and a superior understanding of PE asset allocations helps mitigate PE risks and concerns Proprietary and Confi dential Page 25

30 What Do We See in Real Portfolios

31 Private Equity vs. Public Equity Performance Private equity outperforms public equities in all but one public pension plan in our sample Much greater dispersion of returns in private equity selection matters 10-Year Public Pension Plan Returns Private Equity Returns vs. Public Equity Returns 20% Public Equity +500 bps Public Equity +300 bps 18% Private Equity Return 16% 14% 12% 10% 8% 6% 6% 8% 10% 12% 14% 16% 18% 20% Public Equity Return Source: Annual reports of 10 of the 50 largest U.S. public DB plans that provided a 10-year private equity return in their filing. Most recent year-end as of September 30, 2014 Proprietary and Confi dential Page 27

32 The Allocation Effect Plans with larger allocations to private equity have had better performance in private equity It takes scale and resources to effectively invest in private equity 10-Year PE Return vs. PE Allocation By $ Allocated to Private Equity 20.0% 10-Year PE Return vs. PE Allocation By % Allocated to Private Equity 20.0% 18.0% 18.0% Private Equity Return 16.0% 14.0% 12.0% Private Equity Return 16.0% 14.0% 12.0% 10.0% 10.0% 8.0% 8.0% 6.0% Current PE Allocation ($B) 6.0% 0% 5% 10% 15% 20% 25% Current PE Allocation (% of Plan Assets) Source: Annual reports of 10 of the 50 largest U.S. public DB plans that provided a 10-year private equity return in their filing. Most recent year-end as of March 31, Page 28 Proprietary and Confi dential

33 How Much to Allocate

34 Traditional Risk Framework Left unconstrained, efficient frontier models call for large allocations to private equity 1 Efficient Frontiers With and Without Private Equity 16% 14% 100% Allocation to PE 12% 75% Allocation to PE Return 10% 8% 26% Allocation to PE 50% Allocation to PE 6% 4% 2% 0% 5% 7% 9% 11% 13% 15% 17% 19% Efficient Frontier with PE Volatility Efficient Frontier without PE Source: Hamilton Lane Fund Investment Database (March 2015) Indices used: Hamilton Lane All Private Equity with volatility de-smoothed; Russell 3000 Index; MSCI Emerging Markets Index; Barcalys Aggregate Bond Index; Credit Suisse High Yield Index, HFRI Composite Index; FTSE/NAREIT Equity REIT Index; Dow Jones-UBS Commodities Index. Geometric mean returns in USD. Please refer to endnotes in Appendix. Page 30 Proprietary and Confi dential

35 Who Invests in Private Equity? Public pension funds make up approximately 29% of all private equity commitments A longer-term asset class, private equity may be suitable for investors who are able to make capital commitments over a multi-year period Percentage of Private Equity Capital by Limited Partner Type Investment Companies 2% Sovereign Wealth Funds 14% Government Agencies 5% Superannuation Schemes 1% Corporate Investors 1% Public Pension Funds 29% Endowment Plans 7% Insurance Companies 10% Banks & Investments 5% Family Offices 6% Private Sector Pension Funds 14% Foundations 6% Source: Preqin Investor Intelligence (January 2015) Proprietary and Confi dential Page 31

36 What is the Appropriate PE Allocation? The largest pension funds allocate approximately 9.0% of their assets to private equity* Asset Class Public Corporate Union Domestic Stock 29.2% 23.7% 30.6% International Stock 19.7% 15.3% 7.3% Global Equity 2.4% 3.5% 8.8% Domestic Fixed Income 20.8% 33.2% 28.3% Globa/International Fixed Income 2.1% 2.2% 0.7% Cash 1.8% 2.1% 0.6% Private Equity 9.3% 6.5% 3.7% Real Estate Equity 7.8% 4.9% 11.1% Alternatvies 5.0% 7.5% 8.2% Other 1.9% 1.1% 0.7% Source: Pensions & Investments: Average Asset Mixes - Top 200 Defined Benefit Pension Funds As of 9/30/2014 (Feb 2015) Page 32 Proprietary and Confi dential

37 Building a Portfolio to Outperform

38 Building Portfolios Designed to Outperform Build customized portfolios from complementary top-tier fund managers In-depth quantitative and qualitative analysis Manager Selection High-quality GPs that allocate through market cycles Flexible commitment pacing to prevailing market opportunities Market Overlay Top-Down + Bottom-Up Approach = Performance Access Access through leading market position, global network Size and scale leads to differentiated deal fl ow and access Portfolio Construction Investment philosophy allows for diversification without indexing returns Selectively allocate to strategies in order to mitigate the J-curve Page 34 Proprietary and Confi dential

39 Tactical Allocation is Crucial Periodic Table of Returns by Vintage Year EU Buyout 24.9% EU Buyout 36.3% EU Buyout 32.8% Secondary FoF 21.6% US Large/ Mega 15.9% Growth Equity 21.8% Multi-Stage VC 9.3% Seed/Early VC 18.2% Seed/Early VC 25.3% US SMID 23.5% Real Estate 25.1% Multi-Stage VC 33.1% US Large/ Mega 19.9% Distressed Debt 26.6% Distressed Debt 20.6% EU Buyout 20.4% US SMID 11.5% Seed/Early VC 17.4% Distressed Debt 8.7% Multi-Stage VC 15.5% Growth Equity 21.3% US Large/ Mega 22.0% Multi-Stage VC 25.0% Seed/Early VC 30.6% Real Estate 19.4% US SMID 21.6% US SMID 19.7% US SMID 18.2% ROW 11.0% ROW 13.1% US SMID 8.2% Growth Equity 15.4% US SMID 16.6% Multi-Stage VC 18.0% Secondary FoF 22.7% Infrastructure 20.8% ROW 13.6% ROW 21.3% Multi-Stage VC 3.3% Mezzanine 12.6% Seed/Early VC 10.7% US Large/ Mega 9.4% Secondary FoF 7.5% US SMID 12.9% US Large/ Mega 15.2% Infrastructure 15.4% Late Stage VC 20.9% Real Estate 20.3% Growth Equity 13.4% Real Estate 20.8% Real Estate 0.9% Real Estate 11.0% Distressed Debt 10.4% Distressed Debt 9.0% US Large/ Mega 7.4% Natural Resources 12.3% Distressed Debt 14.9% Seed/Early VC 14.5% Seed/Early VC 19.3% Natural Resources 17.0% US SMID 11.3% US Large/ Mega 19.3% Seed/Early VC -2.8% Seed/Early VC 3.9% Secondary FoF 8.9% EU Buyout 8.1% Growth Equity 6.7% Secondary FoF 11.7% Late Stage VC 12.5% ROW 13.5% Growth Equity 14.1% US SMID 16.3% Secondary FoF 10.3% Mezzanine 9.0% Multi-Stage VC 7.3% US SMID 7.7% Seed/Early VC 4.2% Distressed Debt 10.6% Multi-Stage VC 12.3% Distressed Debt 12.3% US SMID 13.1% Mezzanine 15.5% Mezzanine 9.7% Multi-Stage VC 4.9% Real Estate 1.0% Mezzanine 6.7% EU Buyout 3.9% Mezzanine 10.2% Secondary FoF 11.7% Real Estate 12.2% Natural Resources 12.8% Growth Equity 13.1% Multi-Stage VC 2.5% Seed/Early VC -0.8% Secondary FoF 6.7% ROW 3.2% US Large/ Mega 9.6% Natural Resources 10.5% EU Buyout 8.0% EU Buyout 12.3% US Large/ Mega 12.3% Late Stage VC 1.0% Multi-Stage VC 3.7% Mezzanine 3.0% Late Stage VC 7.5% EU Buyout 10.4% Natural Resources -7.5% Distressed Debt 10.9% Distressed Debt 8.8% Seed/Early VC -2.4% Real Estate -2.6% Natural Resources 1.9% ROW 6.5% Mezzanine 10.2% Mezzanine 10.5% ROW 8.4% Real Estate 0.3% EU Buyout 4.2% ROW 10.1% ROW 4.4% EU Buyout 4.4% Real Estate 4.1% Real Estate 5.8% Source: Hamilton Lane Fund Investment Database. Pooled Net IRRs as of 9/30/2014 (February 2015) Strategies as designated by Hamilton Lane. Fund size classifi cations (SMID, Large/Mega) may vary by vintage year Strategies with less than three funds in a Vintage Year are not included for the year on the chart Infrastructure 2.6% Proprietary and Confi dential Page 35

40 1985 North America - Buyout Western Europe - Buyout North America - Distressed Debt North America - Real Estate North America - Venture Capital North America - Growth Equity North America - Infrastructure North America - Mezzanine North America - Special Situations ROW - Buyout ROW - Growth Equity WCAS Butler Capital ROW - Real Estate ROW - Venture Capital TCW Forstmann Little Oak KKR Summit Western Europe - Distressed Debt Western Europe - Infrastructure Western Europe - Real Estate FoF Multi-Manager CI Secondary FoF Source: Hamilton Lane Fund Investment Database (August 2014) Page 36 Proprietary and Confi dential

41 2014 Global Infrastructure Partners Oaktree Lexington North America - Buyout Western Europe - Buyout North America - Distressed Debt North America - Real Estate TA Apax TPG Cerberus North America - Venture Capital North America - Growth Equity North America - Infrastructure North America - Mezzanine North America - Special Situations Permira TCV ROW - Buyout ROW - Growth Equity Coller Advent Apollo Silver Lake BC Insight ROW - Real Estate ROW - Venture Capital Western Europe - Distressed Debt Western Europe - Infrastructure Western Europe - Real Estate General Atlantic NEA KKR Bain Goldman Sachs Carlyle Blackstone Hellman CVC Cinven JP Morgan Warburg Pincus FoF Multi-Manager CI Secondary FoF Nordic Source: Hamilton Lane Fund Investment Database (August 2014) Blackstone RE Proprietary and Confi dential Page 37

42 Manager Selection Wide disparity of returns makes manager selection critical Private Equity IRR Quartiles As of September 30, % 30% 25% 20% IRR (%) 15% 10% 5% 0% -5% -10% -15% Vintage Year Upper Quartile IRR Median IRR Bottom Quartile IRR MSCI World Source: Hamilton Lane Fund Investment Database (April 2015) MSCI World, net reinvested dividends. Benchmark calculated as PME (Public Market Equivalent) using All Private Equity pooled cashflows. Page 38 Proprietary and Confi dential

43 PE Manager Access and Selection are Key Vintage Year Since-Inception Returns All PE - As of September 30, 2014 Internal Rate of Return (IRR) 30% 25% 20% 15% 10% 5% 0% -5% -10% Dispersion of Returns Private Equity vs Mutual Funds: 10 Year Time-Weighted Returns Ten Year Return 30% 25% 20% 15% 10% 5% 0% U.S. Buyout European Buyout U.S. Stock Funds European Stock Funds Top Quartile Median Bottom Quartile Source: Hamilton Lane Fund Investment Database. As of 9/30/2014 (March 2015) Upper Middle Bottom Source: Hamilton Lane Fund Investment Database, Bloomberg. (September 2014) SPTR vs. Top Quartile U.S. Buyout Rolling One Year TWR - As of September 30, 2014 Trailing 1Y Time-Weighted Return (TWR) 80% 60% 40% 20% 0% -20% -40% -60% U.S. Buyout Top Quartile S&P 500 Total Return Index Source: Hamilton Lane Fund Investment Database, Bloomberg. As of 9/30/2014 (March 2015) Fund access and selection are crucial to performance in this asset class The performance gap between top and bottom quartile returns is wider in private equity than any other asset class Most managers do not beat the public markets Proprietary and Confi dential Page 39

44 Keys to Private Equity Manager Success A successful manager increases the value of its portfolio companies and is able to exit these companies at prices well above cost How Does a GP Add Value? Low Purchase Price/Higher Sale Price Structure/Financing Earnings Improvement Strategic Reorientation How Do GPs Exit Investments? IPO Strategic/Financial Sale Merger Refi nancing Value Creation 100% 18% 10% 12% 13% 80% 12% 22% 35% 23% 60% 40% 20% 76% 60% 64% 55% 0% It is critical to understand how GPs generate value and distinguish between the realized/unrealized performance in a fund -20% Fund I Fund II Fund III Total EBITDA Growth Multiple Expansion Debt Paydown Example: Private Equity Fund VI - Prior Investment Performance 1 ($mm) Fund Total Portfolio Gross IRR Realized Portfolio Gross IRR Unrealized Portfolio Gross IRR Fund I 31.4% 31.4% Fund II 34.5% 38.9% 8.9% Fund III 27.4% 31.0% 12.4% Fund IV 14.8% 20.3% 13.6% Fund V 15.0% 40.7% 13.9% Total 24.4% 34.1% 13.3% 1 For illustrative purposes only. Actual performance results may vary. Page 40 Proprietary and Confi dential

45 Contact Information Philadelphia One Presidential Blvd., 4th Floor Bala Cynwyd, PA USA Rio de Janeiro Av. Niemeyer 2, Sala 102 Leblon Rio de Janeiro Brasil New York 610 Fifth Avenue, Suite 401 New York, NY USA Tokyo 17F, Imperial Hotel Tower 1-1-1, Uchisaiwai-cho, Chiyoda-ku Tokyo Japan +81 (0) London 8-10 Great George Street London SW1P 3AE United Kingdom +44 (0) San Francisco 200 California Street, Suite 400 San Francisco, CA USA Fort Lauderdale 200 SW 1st Avenue, Suite 880 Ft. Lauderdale, FL USA Las Vegas 3753 Howard Hughes Parkway Suite 200 Las Vegas, NV USA Hong Kong Room , 10th Floor St. George s Building 2 Ice House Street Central Hong Kong, China San Diego 7777 Fay Avenue, Suite 201 La Jolla, CA USA Tel Aviv 14 Shenkar Street Nolton House Herzliya Pituach, P.O. Box Israel Proprietary and Confi dential Page 41

46 Appendix

47 Endnotes Page 10 Please note that the data shown herein represents actual performance data for an investor who committed $10M to the Hamilton Lane Carpenters Partnership Fund L.P. in The return fi gures shown may differ for investors who committed to the partnership at a different time or with different terms. The data shown is intended to provide information about the potential cash fl ows that a private equity fund can provide, and should not be considered a proxy for the performance of all private equity funds. Actual performance will vary depending on, amongst other factors, market and credit conditions and may vary signifi cantly from the data shown herein. Past performance is not a guarantee of future results. Pages 17, 30 The Hamilton Lane All Private Equity Index tracks the performance of private equity strategies including buyout, venture capital, credit, and other special situation strategies. The index excludes real estate, fund-of-funds, and secondary fund-of-funds. The Russell 3000 Index tracks the equity performance of the 3,000 largest U.S. companies. The MSCI World Ex U.S. Index tracks large and midcap equity performance in developed market countries, excluding the U.S.. The MSCI Emerging Markets Index tracks large and mid-cap equity performance in emerging market countries. The Barclays Aggregate Bond Index tracks the performance of U.S. investment grade bonds. The Credit Suisse High Yield Index tracks the performance of U.S. sub-investment-grade bonds. The FTSE/ NAREIT All Equity REIT Index tracks the performance of U.S. equity REITs. The Dow Jones-UBS Commodities Index tracks the performance of a broad basket of commodity futures contracts. Page 43 Proprietary and Confi dential

48 Disclosures This presentation has been prepared solely for informational purposes and contains confi dential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confi dentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane. The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses refl ect our current judgment, which may change in the future. All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable but the accuracy of such information cannot be guaranteed. This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affi liates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein. The MSCI World Index is a free fl oat-adjusted market capitalization weighted index that is designed to measure the equity performance of developed markets. Certain of the performance results included herein do not refl ect the deduction of any applicable advisory or management fees, since it is not possible to allocate such fees accurately in a vintage year presentation or in a composite measured at different points in time. A client s rate of return will be reduced by any applicable advisory or management fees, carried interest and any expenses incurred. Hamilton Lane s fees are described in Part 2 of our Form ADV, a copy of which is available upon request. The following hypothetical example illustrates the effect of fees on earned returns for both separate accounts and fund of funds investment vehicles. The example is solely for illustration purposes and is not intended as a guarantee or prediction of the actual returns that would be earned by similar investment vehicles having comparable features. The example is as follows: The hypothetical separate account or fund of funds consisted of $100 million in commitments with a fee structure of 1.0% on committed capital during the fi rst four years of the term of the investment and then declining by 10% per year thereafter for the 12-year life of the account. The commitments were made during the fi rst three years in relatively equal increments and the assumption of returns was based on cash fl ow assumptions derived from a historical database of actual private equity cash fl ows. Hamilton Lane modeled the impact of fees on four different return streams over a 12-year time period. In these examples, the effect of the fees reduced returns by approximately 2%. This does not include performance fees, since the performance of the account would determine the effect such fees would have on returns. Expenses also vary based on the particular investment vehicle and, therefore, were not included in this hypothetical example. Both performance fees and expenses would further decrease the return. Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorized and regulated by the Financial Conducts Authority. In the UK this communication is directed solely at persons who would be classifi ed as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients. Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specifi c accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein. As of October 1, 2015 Page 44 Proprietary and Confi dential