Quarterly Asset Class Report Private Equity

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1 Quarterly Asset Class Report canterburyconsulting.com Canterbury Consulting ( CCI ) is an SEC registered Investment Adviser. Information pertaining to CCI's advisory operations, services, and fees is set forth in CCI s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at Information provided through CCI s Quarterly Outlook related to market or asset class performance figures is believed to be derived from reliable sources. However, CCI assumes no responsibility for their content or the manner in which the viewer utilizes such information. The performance information presented in certain charts or tables is for informational purpose only and represents historical performance based on available market data results for the quarterly period shown above and does not reflect any performance related to trading in actual accounts. Any recommendations or statement made in the Quarterly Outlook is not to be construed as specific investment advice. The viewer should be aware of the inherent limitations of data derived from the retroactive application of historical data developed with the benefit of hindsight and that actual results may differ. Actual performance with client accounts would be materially less than the stated performance results for the same period when including the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid. Quarter Ending March 31, 217

2 Role in the Portfolio Canterbury Consulting recommends a diversified portfolio of private capital strategies. Consistently committing to private capital drives long-term asset growth, net of inflation, by taking advantage of the illiquidity premium derived from inefficient markets and superior manager selection. Canterbury blends strategic and opportunistic approaches to construct private capital portfolios that are diversified by sector, geography, and vintage year. Strategic: using various market inputs to form a baseline, we create a recommended model portfolio allocation. Opportunistic: we combine top-down and bottom-up analysis to achieve excess risk-adjusted returns through market intelligence and superior manager selection. Role Asset Categories Risks Growth Public and Market Decline Capital Preservation Fixed Income, Hedge Funds Rising Interest Rates, Highly Correlated Markets Inflation Protection Real Assets: Real Estate, Commodities Deflation Over a full market cycle, private equity is expected to generate above-market returns commensurate with risks associated with the asset class (i.e., illiquidity, time horizon, etc.) Given the length of the time required to deploy capital and constant evolution of the opportunity set, investors in private equity must commit consistently across cycles and avoid market timing in order to generate returns. 2

3 Fundraising Overview Global PE Fundraising ,5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Date of Final Close No. of Funds Closed Aggregate Capital Raised ($bn) Source: Preqin Private equity funds closed on approximately $89 billion during Q1 217, roughly the same amount raised in Q1 a year earlier. The five largest funds closed during the quarter were all buyouts funds. Together, these funds closed on 43% of the total private equity raised during the quarter. While figures are still being gathered, it is very likely that PE distributions paid out in 216 broke the 215 record of $472 billion. LPs seeking growth are channeling these dollars back into PE, creating record demand for the asset class. Global PE Funds in Market 2, 1,5 1, 5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Funds in market reached a new high at the end of Q1, though the total amount of capital targeted was just shy of the record $447B seen in Q North America remains the most sought after region for LP dollars. Approximately half of targeted PE dollars are for U.S. funds, while Asia represents approximately 2% and Europe 16%. No. of Funds Raising Aggregate Capital Targeted ($bn) Source: Preqin Source: Preqin, reported as of April 217 3

4 Deal Activity U.S. M&A Valuation & Capital Structure US Add-On % of Buyout Activity 12x 1x 8x 6x 4x 2x x 3,5 3, 2,5 2, 1,5 1, 5 8.1x Debt / EBITDA Valuation / EBITDA 9.1x 8.5x Equity / EBITDA 1.7x 1.8x 1.1x 9.3x 9.2x 3.5x 4.x 3.8x 3.8x 4.x 4.5x 5.3x 4.6x 5.2x 4.7x 5.5x 5.2x 5.7x 5.4x 6.2x * 46% Add-on Non add-on Add-on % of buyout 52% 51% 56% 56% 58% 56% 6% 61% 61% 1,29 1,36 1, , ,37 1,454 1,9 1,2 1,229 1, ,14 1,349 1,523 1,424 1,871 1,936 1, x 64% 66% 7% 6% 5% 4% 3% 2% 1% % Valuation multiples continued to climb to record highs at the start of 217, exceeding the levels experienced at the peak of the last private equity cycle in 27. Factors contributing to increasingly high deal multiples include: cheap debt financing, record capital (dry powder) chasing deals, and more deals in IT businesses, which usually carry higher multiples. S&P 5 companies held more than $1.5 trillion in cash at the end of 216, the highest level in more than a decade. Limited organic growth prospects for these companies and ample cash reserves have led to a strong strategic acquisition market, helping support historically high valuations. Add-ons continue to make up a larger share of acquisitions as PE firms look to bring down their blended acquisition purchase multiples by bolting on smaller companies trading at lower valuations. Source: PitchBook PE Breakdown 1Q 217 *217 figures are through 3/31/217 4

5 Deal Activity U.S. PE Activity by Year $1, $9 $8 $7 $6 $5 $4 $3 $2 $1 $ 2,81 $512 3,499 $889 Deal value ($B) 2,743 $359 1,858 $167 3,68 2,75 $35 # of deals closed $422 3,467 $472 3,354 $514 4,162 4,211 3,871 $66 $653 $ $119 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 During Q1, PE deal making slowed, dropping 8% from the previous quarter. The $118.7 billion in deal value represented the lowest quarterly level since Q It should be noted that such figures can be skewed dramatically by just a few big deals in any given quarter. IPO activity heated up during the quarter, with 13 PE-back companies going public. In Q1 216, not a single PE-backed company was taken public. Exit Deal by Buyer Type Corporate Acquisition IPO Secondary Buyout 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q There were only two mega deals (>$2.5 billion) in Q1, very few compared to the 2 that took place during all of 216. Approximately 2% of PE deals closed in Q1 involved IT companies. This represents an increase from the 1%- 15% that has been typical over the past decade Source: PitchBook PE Breakdown 1Q 217 *217 figures are through 3/31/217 5

6 Horizon Performance Horizon IRRs 2.% 15.% 1.% 5.%.% -5.% 1 year to Jun years to Jun years to Jun years to Jun 216 Private Capital (All) Buyout Venture Fund of Funds Mezzanine Distressed PE (All) Rising valuations and a prolonged economic expansion have resulted in upward-trending rolling returns across most private equity strategies over the past few years. The performance of distressed strategies has lagged that of other private equity strategies recently. The generally favorable economic environment has lifted performance for strategies with beta exposure while providing limited distressed opportunities. 1% Three-Year Rolling Returns 8% 6% 4% 2% % -2% Private Capital (All) Buyout Venture Fund of Funds Mezzanine Real Estate (All) Source: Preqin, May 217 6