Private Equity Market Review and Institutional Investor Survey

Transcription

1 Private Equity Market Review and Institutional Investor Survey N o v e m b e r Probitas Partners

2 2 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

3 C o n t e n t s Introduction... 3 The Private Equity Fundraising Landscape... 4 Private Equity Institutional Investor Survey: Executive Summary... 7 Profile of Respondents... 9 Fundraising and Return Expectations Sectors and Geographies of Interest Niche Private Equity Sectors Structural Issues and Key Terms Investor Fears and Concerns Conclusion Appendix I: Private Equity Funds in Market or Thought to be Coming to Market Over the Next 12 Months Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 1

4 2 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

5 I n t r o d u c t i o n Probitas Partners is a leading independent knowledge, innovation and solutions provider to private markets clients. It has three integrated global practices that include placement of alternative investment products, portfolio management and liquidity management. These services are offered by a team of employee owners dedicated to leveraging the firm s vast knowledge and technical resources to provide the best results for its clients. probity n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character. On an ongoing basis, Probitas Partners offers research and investment tools on the alternative investment market as aids to its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team s broad knowledge of the market. Also on an ongoing basis, Probitas Partners surveys institutional investors in order to determine more directly their perceptions of various aspects of the market, and the survey of private equity investors included here is part of that process. Included within this white paper is our listing of private equity funds in or thought to be coming to market over the next 12 months. A few important user notes on the funds listing: The list does not track funds smaller than $100 million or 70 million, as these are not often targeted by institutional investors; Information is collected from various data sources, but dynamically and accurately tracking when funds are launched and when they are finally closed is a difficult business. We constantly interact with investors and other industry sources in an effort to keep the data updated, and Probitas Partners appreciates receiving any corrections or updates which will help keep this listing as up-to-date as possible; Probitas Partners relies upon its knowledge of the investment pace of previous funds, informal discussions with institutional investors and general partners, and its knowledge of emerging managers. Specifically, we do not seek confirmation of these estimates with general partners in order to avoid SEC public offering prohibitions. For the same reason, Probitas Partners excludes from this listing information on funds it is currently offering; qualified investors seeking information on Probitas Partners placed funds should contact Probitas Partners directly in order to have the most complete picture of all institutional funds currently in the market. Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 3

6 The Private Equity Fundraising Landscape Private equity fundraising has plunged since September 2008 across all geographies and all sectors but one. The fundraising totals for the U.S., Europe and Asia are detailed in Charts I through III. All of these markets are in line to decline some 60% to 70% for the full year. Fundraising in the Asian market, where many economies continue to grow even in the midst of a global recession, is down due to the liquidity problems faced by North American and European LPs, the largest backers of the sector. The decline in fundraising this year has been much sharper than in 2000 at the last market peak, driven by a more sudden and dramatic fall in the public markets. Given the investor sentiment in our latest survey, the fall in fundraising appears to have bottomed out and that 2010 will be better, though a steep rebound is unlikely. Chart I Commitments to U.S. Private Equity Partnerships by Sector $350 $ $ $ in billions $200 $ $100 $ $ Q1 Q3 09 Buyouts/Corporate Finances Secondaries/Other Venture Capital Mezzanine Source: Private Equity Analyst Note: Does not include fund-of-funds 4 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

7 Chart II Commitments to European Private Equity Partnerships in billions Q1 Q Source: Thomson Venture Expert, EVCA, Probitas Partners Note: Does not include fund-of-funds Chart III Commitments to Asian Private Equity Partnerships $ $ $40 $ in billions $30 $20 $10 $ H 09 Source: Asian Venture Capital Journal Note: Does not include fund-of-funds Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 5

8 Secondary specialist funds are the one sector of the private equity market that has reached a new record in As shown in Chart IV, through the first nine months of this year, $18.7 billion has been raised for the sector as LPs anticipate increasing activity in the secondary market at attractive pricing. Though activity in the secondary market declined in the first half of 2009 as increasing discounts caused sellers to back away from transactions, the bid/ask spread in the market is narrowing and transaction volume is increasing. Chart IV Capital Raised by Secondary Fund Specialists $ in billions $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $ Q1 Q Source: Private Equity Intelligence, Private Equity Analyst, Probitas Partners 6 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

9 Executive Summary Probitas Partners administers this survey annually to gauge emerging trends and to compare investors changing views over a longer period of time. A total of 291 institutional investors responded to this year s survey, with results collected in the middle of October. The key trends for 2010: Many investors remain over-allocated to private equity. Even after the rebound in the public markets starting in March, many respondents reported that they are roughly at or over their allocations. While most investors are looking to maintain their exposure to private equity, a significant minority is under-allocated and aggressively investing. New capital is focused on U.S. and European middle-market buyout funds as well as Asian growth capital funds. These sectors have increased in interest over the last year, while on a relative basis distressed debt funds and secondary funds have fallen. In discussions with investors, we have found that many anticipate that 2010 will be a strong vintage year for middle-market buyouts in the U.S. and Europe as those markets rebound from recession; continued economic growth in Asia is attracting interest there as well. China extended its lead as the most attractive Asian market. The inherent stronger growth of the Chinese economy continued to attract investors, lengthening its attractiveness over India. Interest in Japan continues to fall significantly due to fundamental problems in that market. Venture capital interest continues to decline. Interest in U.S. venture capital remains low, especially for life science funds, and interest in the sector has declined significantly from our 2007 survey, falling from third place to eighth over that period. Interest in European venture capital, always very weak in our surveys even amongst European investors, has fallen to a new low this year, with only 0.5% of respondents targeting the area in Mega buyout interest continues to be weak. Only 8% of respondents say they will actively target mega buyouts in 2010, and return expectations on 2010 vintage mega buyouts is quite low compared to the middle-market sectors. Investors are clearly focused on alignment of interest and fees. Both in our questions regarding terms and conditions, and in our questions on investors greatest fears, it was clear that alignment of interest was a key concern and the role of fees in diluting alignment was a strong LP focus. Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 7

10 Chart V Respondent s Profile I represent a % 12.2% 10.4% Fund-of-Funds Manager Public Pension/ Superannuation Plan 29.5% 3.2% 2.1% 4.2% 4.5% 9.0% 10.4% Endowment/Foundation Family Office Insurance Company Consultant/Advisor Corporate Pension/ Superannuation Plan Bank 1.7% Sovereign Wealth Fund Government Entity Other Chart VI Respondents Categorized by Firm Headquarters My firm s headquarters are located in % U.S. Western Europe 46.2% Canada Japan 3.9% 5.6% 4.2% Asia ex-japan Australia Middle East 1.8% 2.5% 8 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

11 Profile of Respondents The profile for this year s survey respondents provides a context for the subsequent results. Respondents to this year s survey included a wide range of institutional investors. As detailed in Chart V, fund-of-funds managers led all respondents at 29.5%, followed by public pensions at 12.8% and endowments/ foundations at 12.2%. Family offices and insurance companies comprised just more than 10% of respondents each. Geographically, institutional investors from more established markets made up the majority of respondents. As outlined in Chart VI, investors from the U.S. and Western Europe accounted for 46.2% and 35.8% of respondents respectively, demonstrating their continued role as the leading providers of capital to alternative investments globally. Although not detailed in Chart VI, the number of respondents from Asia continues to increase year-over-year, nearly doubling from 2009 to 2010, reflecting the continued growth and development of the Asian private equity market. To get a sense for how institutional investors are managing their allocations in the current economic environment, respondents were asked about the state of their current private equity allocations and how they planned to manage those allocations in Last year s survey was administered in November in the midst of the market dislocation. Tumbling public markets had a significant impact on investor s anticipated allocations. Though the public markets have rebounded significantly in 2009, responses to allocation questions in this year s survey were very similar. As outlined in Chart VII, an overwhelming percentage of respondents indicated they are at their target allocation and looking to maintain that level of exposure over the coming year; just over a quarter of respondents reported they are under their Chart VII Current and Target Private Equity Allocations: 2009 vs As far as our current private equity allocation, we are... Roughly at our target and considering increasing it Roughly at our target and looking to maintain it Over our target and looking to reduce exposure Over our target but seeking to increase it Under our target but actively committing to achieve it Looking to reduce our target and exit the asset class Other % 10% 20% 30% 40% 50% Percentage of Respondents Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 9

12 target but actively committing in order to achieve it. Just over 10% of respondents indicated they are at their target allocation but considering increasing their level of exposure to private equity while another 6.5% of respondents indicated that they are over their target and seeking to reduce exposure. For both 2009 and 2010, the percentage of respondents that chose Other seems rather large; however, the majority of these respondents were funds-of-funds or consultants without a specific allocation to the asset class. In comparing the allocations of public pensions and endowments, as shown in Chart VIII, the plurality of public pensions, at 40.5%, are under their target allocation and are actively committing capital, while 60% of endowments indicated they are roughly at or over their target. Not a single respondent from either of these types of institutions reported being over their target allocation and seeking to increase their exposure. There were several respondents in the Other category for endowments, signaling that they were over their target but still considering committing on an opportunistic basis over the next 12 months. From 2008 to 2009 there was a significant drop-off in targeted private equity allocations, a result of the Lehman Brothers collapse and the ensuing global economic crisis. Although the responses were widely spread over targeted allocation sizes, the results from 2009 versus 2010, outlined in Chart IX, remained roughly the same. Given the current economic environment and the pressure to limit exposure to illiquid alternative investments, the trend of targeting smaller annual allocations, as compared to those targeted during the market peak of 2007, will continue into Survey respondents were next asked to indicate what percentage of their commitments in 2010 will be designated for Chart VIII Current and Target Private Equity Allocations: Public Pensions vs. Endowments As far as our current private equity allocation, we are... Roughly at our target and considering increasing it Roughly at our target and looking to maintain it Over our target and looking to reduce exposure Over our target but seeking to increase it Under our target but are actively committing to achieve it Looking to reduce our target and exit the asset class Other % 10% 20% 30% 40% 50% 60% Percentage of Respondents Public Pensions Endowments 10 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

13 re-ups with existing managers. As detailed in Chart X, the majority of respondents are reserving 50% or more of their commitments for re-ups and 10% of that group is reserving 90% or more for re-ups. These results are very similar to 2008 survey results and indicate continued interest in establishing new manager relationships amongst most investors. Chart IX Targeted 2010 Private Equity Allocations: 2009 vs For 2010, we are looking to commit across all areas of private equity (in USD)... 40% 33.9 Percentage of Respondents 30% 20% 10% % <$50 MM $50 MM $150 MM $150 MM $250 MM $250 MM $500 MM $500 MM $1 B >$1 B Chart X Expected Re-Up Allocations with Existing Managers We expect the following percentage of our commitments to be targeted for re-ups with existing managers... 30% Percentage of Respondents 25% 20% 15% 10% 5% % <25% 25% 50% 50% 75% 75% 90% 90% 100% 2010 Allocation Achieved Targeted Re-Ups with Current Managers Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 11

14 Fundraising and Return Expectations The next section of the survey examines investor attitudes regarding the fundraising market as well as investor interest in and return expectations for buyout, venture capital, and niche funds. Respondents were first asked what they expect global private equity commitments to be in As shown in Chart XI, the majority of respondents who stated an opinion believe global commitments will not exceed $250 billion over the coming year. Last year s expectations were roughly the same, though at the current fundraising pace those expectations were optimistic. These results are an indication that investors are still struggling with liquidity issues and a steep rebound in fundraising is unlikely. Investor interest in specific buyout sectors is examined in Chart XII. The majority of respondents actively invest in U.S. middlemarket buyouts with European middle-market buyouts ranking second, and Asian middlemarket buyouts/growth capital ranking third. Opportunistic interest in the sectors was evenly spread over the categories. The least favored buyout sector was mega buyouts with 55% of respondents reporting they do not invest in the sector. The results for North American, European, and Asian investors, although not detailed in Chart XII, all showed similar behavior for buyout investing. Across the board, investors overwhelmingly preferred to invest in their domestic market. Respondents were optimistic regarding return expectations for top quartile 2010 buyouts. As detailed in Chart XIII, a plurality of respondents believe U.S. middle-market buyout funds will have net IRRs of 20 25% with over 20% of respondents expecting returns of 25% and above. European middlemarket buyouts garnered similar results; over 40% of respondents expect net IRRs of 20 25% and nearly 18% expect net IRRs of 25% and above. Return expectations for Asian middle-market buyouts/growth capital were significantly higher; over 45% of respondents anticipate net IRRs above 25%. The lowest return expectations were for mega buyout funds with 37% of respondents anticipating net IRRs of 15 20%, and 34% Chart XI Forecast Global Private Equity Allocations We expect global commitments to private equity to be... 40% 35.3 Percentage of Respondents 30% 20% 10% % <$200 B $200 B $250 B $250 B $300 B $300 B $350 B >$350 B No Opinion 12 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

15 Chart XII Interest in Buyout Funds As far as our interest in this sector, we % Percentage of Respondents 80% 60% 40% 20% % 8.0 U.S. Middle-Market Buyout Funds European Middle- Market Buyout Funds Asian Middle-Market/ Growth Capital Funds Mega Buyout Funds Actively Invest Invest Opportunistically Do Not Invest Chart XIII Expected Buyout Performance, Top Quartile IRR For top quartile buyout funds, I expect IRRs over their lives to be % Percentage of Respondents 80% 60% 40% 20% 0% U.S. Middle-Market Buyout Funds European Middle- Market Buyout Funds Asian Middle-Market/ Growth Capital Funds Mega Buyout Funds <10% 10% 15% 15% 20% 20% 25% >25% Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 13

16 of respondents anticipating returns of only 10% 15%. Respondents clearly anticipate that middle-market buyouts, regardless of geographical focus, will outperform mega buyouts in Investor return expectations for net multiples of top quartile 2010 vintage funds followed their IRR expectations. As detailed in Chart XIV, nearly 20% of respondents expect top quartile mega buyouts to have net multiples below 1.5x and the majority expect multiples will not exceed 2.0x. On the other hand, over 18% of respondents expect top quartile Asian middle-market/growth capital funds to generate multiples higher than 3.0x. The majority of respondents believe that vintage 2010 funds will perform roughly the same as 2009 funds, as shown in Chart XV, but an increasing number of respondents expect that vintage 2010 funds will outperform 2009 funds. Chart XVI outlines respondent s interest in specific types of venture capital funds. Interest in the sector was low across all venture capital strategies with roughly 40% or more of respondents in every case indicating they do not invest in the sector. Life science funds held the least interest for respondents; 56% indicated that they do not invest in late-stage life science funds while 54% did not invest in early-stage life science funds. Investors were most interested in earlystage and late-stage technology funds with 20.7% and 15.4% targeting those sectors, respectively. Respondents who invest opportunistically in the sector preferred most strategies equally, with late-stage technology funds having the edge with 46.7%. Overall, investors prefer technology funds over those focused on life science, with diversified funds covering multiple sectors falling in between. Chart XIV Expected Buyout Performance, Top Quartile Multiple For top quartile buyout funds, I expect multiples over their lives to be % Percentage of Respondents 80% 60% 40% 20% 0% U.S. Middle-Market Buyout Funds European Middle- Market Buyout Funds Asian Middle-Market/ Growth Capital Funds Mega Buyout Funds <1.5x 1.5x 2.0x 2.0x 2.5x 2.5x 3.0x >3.0x 14 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

17 Chart XV Expectation for Overall Buyout Returns In 2010, I expect returns for this sector to be % 80% Percentage of Respondents 60% 40% 20% % U.S. Middle-Market Buyout Funds European Middle- Market Buyout Funds Asian Middle-Market/ Growth Capital Funds Mega Buyout Funds Higher than 2009 Same as 2009 Lower than 2009 Chart XVI Interest in Venture Capital Funds As far as our interest in this sector, we % % Percentage of Respondents 60% 40% 20% 0% Early-Stage Technology Funds Early-Stage Life Science Funds Early-Stage Diversified Funds Late-Stage/ Growth Technology Funds Late-Stage/ Growth Life Science Funds Late-Stage/ Growth Diversified Funds Actively Invest Invest Opportunistically Do Not Invest Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 15

18 Endowments were more interested in venture capital than the overall group of respondents, as detailed in Chart XVII. Over 70% of endowment respondents either actively or opportunistically invest in early-stage technology funds and early-stage diversified funds. There was also more active interest in late-stage/growth diversified funds, though fewer respondents opportunistically targeted the sector. Consistent with the overall respondent group, endowments were less interested in life science funds. As detailed in Chart XVIIII, investor return expectations for top quartile venture capital funds were dispersed, with the plurality of respondents across almost all strategies expecting net IRRs of 20 25%. Early-stage technology funds are the only area in which over 20% of respondents have IRR expectations above 25%, while early-stage life science funds amassed the largest percentage of respondents (14%) who expect returns below 10%, further reflecting the preference for technology funds as the more attractive area of venture capital investing. Investor return expectations for net multiples for top quartile 2010 venture capital funds were fairly uniform, as detailed in Chart XIX. The plurality of respondents across all strategies expect a net multiple of x. Overall return expectations are higher for early-stage funds and lower for late-stage/growth funds. Regardless of specific sector focus, an overwhelming majority of investors believe vintage 2010 venture capital returns will remain consistent with those of 2009 vintages, as shown in Chart XX. Although not detailed in the chart, these expectations are consistent across geographies as well as investor types. Chart XVII Interest in Venture Capital Funds: Endowments As far as our interest in this sector, we % % Percentage of Respondents 60% 40% 20% % Early-Stage Technology Funds Early-Stage Life Science Funds Early-Stage Diversified Funds Late-Stage/ Growth Technology Funds Late-Stage/ Growth Life Science Funds Late-Stage/ Growth Diversified Funds Actively Invest Invest Opportunistically Do Not Invest 16 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

19 Chart XVIII Expected Venture Capital Performance, Top Quartile IRR For 2010 top quartile VC funds, I expect IRRs over their lives to be % Percentage of Respondents 80% 60% 40% 20% % Early-Stage Technology Funds Early-Stage Life Science Funds Early-Stage Diversified Funds Late-Stage/ Growth Technology Funds Late-Stage/ Growth Life Science Funds Late-Stage/ Growth Diversified Funds <10% 10% 15% 15% 20% 20% 25% >25% Chart XIX Expected Venture Capital Performance, Top Quartile Multiple For 2010 top quartile VC funds, I expect multiples over their lives to be... Percentage of Respondents 100% 80% 60% 40% 20% % Early-Stage Technology Funds Early-Stage Life Science Funds Early-Stage Diversified Funds Late-Stage/ Growth Technology Funds Late-Stage/ Growth Life Science Funds Late-Stage/ Growth Diversified Funds <1.5x 1.5x 2.0x 2.0x 2.5x 2.5x 3.0x >3.0x Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 17

20 Chart XXI outlines investor interest in the niche sectors of distressed debt funds, mezzanine/ credit-focused funds, and secondary funds. Distressed debt funds were the leading niche sector of interest with 34.4% of respondents reporting they actively invest in the sector and 43.9% reporting they invest on a purely opportunistic basis. Secondary funds garnered the second most interest with 24.7% of respondents actively investing in the sector and 36.8% that invest opportunistically. Although it is apparent in Chart XXII that respondents from Asia have a clear interest in both distressed debt and secondary funds, they are much more opportunistic in their investment approach to these niche sectors compared to the survey s overall respondents. Over 40% of respondents from Asia indicated that they invest opportunistically in both distressed debt and secondary funds; active investors in distressed debt from this region made up only 16% of the total and active investors in secondary funds made up only 13% of the total. Asian respondents have little interest in mezzanine funds; over 60% indicated that they do not invest in such funds. Chart XX Expectation for Overall Venture Capital Returns In 2010, I expect returns for this sector to be % 80% Percentage of Respondents 60% 40% 20% % Early-Stage Technology Funds Early-Stage Life Science Funds Early-Stage Diversified Funds Late-Stage/ Growth Technology Funds Late-Stage/ Growth Life Science Funds Late-Stage/ Growth Diversified Funds Higher than 2009 Same as 2009 Lower than Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

21 Chart XXI Interest in Niche Capital Funds As far as our interest in this sector, we % Percentage of Respondents 80% 60% 40% 20% % Distressed Debt Funds Mezzanine/Credit-Focused Funds Secondary Funds Actively Invest Invest Opportunistically Do Not Invest Chart XXII Interest in Niche Capital Funds: Asian Investors As far as our interest in this sector, we % % Percentage of Respondents 60% 40% 20% 0% Distressed Debt Funds Mezzanine/Credit-Focused Funds Secondary Funds Actively Invest Invest Opportunistically Do Not Invest Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 19

22 Investor return expectations for distressed debt, mezzanine, and secondary funds are outlined in Charts XXIII and XXIV. Expectations for IRRs were similar for distressed debt and secondary funds, with over half of respondents expecting IRRs of 20% or higher. Only 15% of investors expect mezzanine IRRs at that level. In examining expected net multiples, over 40% of investors expect multiples for distressed debt funds to be x. Mezzanine and secondary fund return expectations are slightly lower a majority of investors in both cases expect multiples of x. As indicated in Chart XXV, most investors anticipate overall returns for niche funds in 2010 to remain consistent with 2009 returns: 43.5% of respondents anticipate the same returns for distressed debt funds, nearly 60% for mezzanine/credit focused funds, and over 55% for secondary funds. More respondents expect distressed debt returns to decline compared to mezzanine and secondary funds. Chart XXIII Expected Niche Fund Performance: Top Quartile IRR For 2010 top quartile niche funds, I expect IRRs over their lives to be % Percentage of Respondents 80% 60% 40% 20% % Distressed Debt Funds Mezzanine/Credit-Focused Funds Secondary Funds <10% 10% 15% 15% 20% 20% 25% >25% 20 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

23 Chart XXIV Expected Niche Fund Performance: Top Quartile Multiple For 2010 top quartile Niche funds, I expect multiples over their lives to be... Percentage of Respondents 100% 80% 60% 40% 20% % Distressed Debt Funds Mezzanine/Credit-Focused Funds Secondary Funds <1.5x 1.5x 2.0x 2.0x 2.5x 2.5x 3.0x >3.0x Chart XXV Expectation for Overall Niche Fund Returns In 2010, I expect returns for this sector to be % Percentage of Respondents 80% 60% 40% 20% % Distressed Debt Funds Mezzanine/Credit-Focused Funds Secondary Funds Higher than 2009 Same as 2009 Lower than 2009 Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 21

24 2010 Sectors and Geographies of Interest In the next section of the survey, investor preferences for sectors, geography and strategy are examined. In order to provide further context for 2010 expectations, respondents were asked to identify those sectors in which they had actually made investments in Over the past year, as detailed in Chart XXVI, the leading sectors respondents committed to were U.S. middle-market buyouts (49.5%), distressed debt (42.8%), and European middle-market buyouts (36.1%). Secondary funds were also a leading sector of focus in 2009, ranking fifth with nearly 30% of responses. Garnering a mere 4.6% of responses, mega buyouts slid from the fourth leading sector of focus in 2008 to the thirteenth in Chart XXVI 2009 Key Areas of Interest During 2009, my major focus was on the following sectors... (choose no more than four) U.S. Middle-Market Buyouts Distressed Debt Funds European Middle-Market Buyouts Growth Capital Funds Secondary Funds Asian Funds Restructuring Funds U.S. Venture Capital Energy Funds Mezzanine/Credit-Focused Funds Cleantech/Green-Focused Funds Infrastructure Funds Mega Buyout Funds Funds-of-Funds Emerging Markets Timber Funds European/Israeli Venture Capital Other % 10% 20% 30% 40% 50% 60% Percentage of Respondents 22 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

25 Investors continue to target roughly the same sectors they committed to in As detailed in Chart XXVII, the top six sectors of investor focus are U.S. middle-market buyouts (62.6%), European middle-market buyouts (44.1%), growth capital funds (39%), Asian funds (35.9%), distressed debt funds (31.3%), and secondary funds (22.1%). Of those top sectors, Asian funds have seen the largest increase in investor interest, gaining nearly 14% not surprising given the optimistic investor return expectations for the region and the positive economic growth it continues to experience in spite of the global recession. Chart XXVII 2010 Key Areas of Interest During 2010, I plan to focus most of my attention on investing in the following sectors... (choose no more than four) U.S. Middle-Market Buyouts European Middle-Market Buyouts Growth Capital Funds Asian Funds Distressed Debt Funds Secondary Funds Restructuring Funds U.S. Venture Capital Energy Funds Mezzanine/Credit-Focused Funds Infrastructure Funds Cleantech/Green-Focused Funds Emerging Markets (ex-asia) Mega Buyout Funds Fund-of-Funds Timber Funds European/Israeli Venture Capital Other % 10% 20% 30% 40% 50% 60% 70% Percentage of Respondents Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 23

26 As shown in Table I, venture capital has seen a marked decline in interest over our last four surveys. In 2007, U.S. venture capital was the third ranked sector of investor interest, targeted by 34% on survey respondents. In the latest survey, it had slipped to the eighth ranked sector, targeted by only 16% of respondents. There is more interest in U.S. venture capital amongst U.S. headquartered institutions, where in the latest survey the sector ranks fifth with 25% of U.S. respondents focusing on the sector. Interest among non-u.s. investors is very weak. European venture capital, on the other hand, has never ranked well in our surveys, even among European investors. In this latest edition, it was selected as an area of interest by less than 1% of respondents, a new low. There is an overwhelming preference for home markets amongst respondents from North America, Europe, and Asia investing in middle-market buyouts, with 75% of North American investors focusing on U.S. middle-market buyouts, 76.5% of European investors focusing on European middlemarket buyouts, and nearly 71% of Asian investors focusing on Asian funds. Investors from Europe and Asia are also extremely active in U.S. middle-market buyouts with the sector ranking second amongst both groups. Endowments are often perceived as thought leaders in the industry. Chart XXVIII outlines the key areas of interest for endowments. Consistent with the overall respondent group, U.S. middle-market buyouts are the leading sector of interest amongst endowments with over 62% targeting the sector (though it should be noted that 85% of the endowment respondents are based in the U.S.). The 41.7% of endowments targeting energy funds in 2010 is in stark contrast to the 13.3% of overall respondents who have shown an interest in the sector, and interest by endowments in U.S. venture capital is nearly twice that expressed in the base survey. Table I Survey Respondents Targeting Venture Capital and Comparative Ranking vs. Other Sectors U.S. Venture Capital European Venture Capital % of Respondents 34.1% 28.8% 12.6% 16.0% Category Rank 3rd 4th 8th 8th % of Respondents 4.7% 5.3% 1.9% 0.5% Category Rank Last Last Last Last 24 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

27 Chart XXVIII 2010 Key Areas of Interest: Base Overall Respondents vs. Endowments During 2010, I plan to focus most of my attention on investing in the following sectors... (choose no more than four) U.S. Middle-Market Buyouts European Middle-Market Buyouts Growth Capital Funds Asian Funds Distressed Debt Funds Secondary Funds Restructuring Funds U.S. Venture Capital Energy Funds Mezzanine/Credit-Focused Funds Infrastructure Funds Emerging Markets (ex-asia) Cleantech/Green-Focused Funds Mega Buyout Funds Funds-of-Funds Timber Funds European/Israeli Venture Capital Other % 10% 20% 30% 40% 50% 60% 70% Percentage of Respondents Base Overall Respondents Endowments Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 25

28 Survey respondents were next asked what factors tend to drive their sector investment focus. The top two drivers, as shown in Chart XXIX, account for almost 75% of the responses. Nearly 50% of respondents will pursue what they believe to be the best funds and managers available in the market and 25% will focus on the private equity sector they believe will outperform all others in Survey respondents were next asked what their geographical focuses were in Over the past 12 months, geographical allocations were predominantly focused on North America and Europe, as shown in Chart XXX, making up 53.9% and 33.2% of investors portfolios, respectively. Asia made up the third largest allocation with 17.1% followed by global commitments with 16.1%. Commitments to Latin America, Central and Eastern Europe, and other emerging markets decreased over the past year, reflecting the unwillingness of investors in more established markets to invest outside their home markets given the current market turmoil, especially in developing markets where perceived additional political and financial risks exist. Chart XXIX Drivers of Sector Investment My sector investment focus in 2010 is being driven by... My institution s pursuit of the best funds and managers available in the market A focus on those private equity sectors I believe will outperform others in this vintage year Maintaining established relationships with fund managers returning to market this year My institution's need to diversify its private equity portfolio Targeting funds that will provide access to co-investments My need to deploy significant amounts of capital allocated to private equity Other % 10% 20% 30% 40% 50% Percentage of Respondents 26 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

29 Chart XXX 2009 Private Equity Geographical Focus During 2009, the geographical allocation of my portfolio by commitment amount in percentage terms was... 25% Pecentage of Portfolio 20% 15% 10% 5% % Global North America Western Europe Asia Latin America Central & Other Emerging Eastern Europe Markets Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 27

30 Investors targeted geographical allocations for 2010 are outlined in Chart XXXI. The bulk of 2010 allocations are focused on North America and Western Europe with a slight increase in those focused on Asia and a slight decrease in those focused on global commitments. The results differ amongst European and Asian investors with the majority of European investors targeting Europe and a plurality of Asian investors targeting Asia, reemphasizing the notion that investors remain focused on their domestic markets. Next, we asked survey respondents to tell us which European markets they find most attractive for As outlined in Chart XXXII, the three markets that topped the list in 2009 are again the leading European markets of interest, with the Nordic region at 40%, the United Kingdom with 37.8%, and Germany with 30%. Investors are finding France much more attractive in 2010, gaining nearly 10% of responses since last year. Investor interest in Central and Eastern Europe, on the other hand, has fallen considerably since last year as those countries have been more impacted by the recession. Interest in the Benelux region, Italy, and Spain has remained consistently low over the past several years. Responses across specific investor types and geographies are fairly consistent with those of the overall group; however, amongst Asian investors there is an overwhelming preference to invest in Europe through pan-european funds. European market preferences from European respondents are outlined in Chart XXXIII. The four most attractive European markets are the same for both types of respondents, though with greater percentages of support from Europeans in each category. European investors also have a much higher interest in the country-focused funds targeting Italy and Spain while displaying a much lower interest in pan-european funds and European fund-of-funds. Chart XXXI 2010 Private Equity Geographical Focus: Overall Respondents vs. European Investors vs. Asian Investors During 2010, I anticipate the geographical allocation of my portfolio by commitment amount in percentage terms to be... 25% 22.8 Pecentage of Portfolio 20% 15% 10% 5% % Global North America Western Europe Asia Latin America Central & Eastern Europe Other Emerging Markets Base Overall Respondents European Investors Asian Investors 28 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

31 Chart XXXII Most Attractive European Country or Regionally-Focused Markets: 2009 vs I find the most attractive European markets to be... (choose no more than three) 45% 40% Percentage of Respondents 35% 30% 25% 20% 15% 10% 5% % Nordic Region United Kingdom Germany France Pan-European Funds Benelux Central Europe Italy Eastern Europe Spain Europe via Fund-of-Funds Do Not Invest in Europe Other Chart XXXIII Most Attractive European Country or Regionally-Focused Markets: Overall Respondents vs. European Investors I find the most attractive European markets to be... (choose no more than three) 70% % Percentage of Respondents 50% 40% 30% 20% 10% 0% Nordic Region United Kingdom Germany France Pan-European Funds Benelux Central Europe Italy Eastern Europe Spain Europe via Fund-of-Funds Do Not Invest in Europe Other Base Overall Respondents European Investors Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 29

32 Investor interest in Asia has increased significantly in the past year. But which markets are driving that interest in 2010? Last year s survey reported divergent views on the most attractive geographies, but the clear leaders were China and India with pan-asian funds coming in a close third. This year although China and India still claim the top two spots, as shown in Chart XXXIV, China has significantly extended its lead at the expense of pan-asian and Japanese funds, which have fallen from 20.8% to 12.5% and 9.1% to 7.1%, respectively. Amongst Asian investors, as noted in Chart XXXV, China and India are by far the most preferred markets with 70.8% and 58.3% of responses, respectively. The only other markets garnering significant interest from Asian investors are the more developed markets of Australia and Japan; none of the respondents expressed interest in the smaller country markets of Vietnam and Taiwan or interest in Southeast Asia. It should be noted that two thirds of the Asian survey respondents are with institutions headquartered in Japan or Australia, and even these investors are more focused on China and India than their home markets. Chart XXXVI details the emerging markets investors are most interested in Investor interest in Eastern Europe has experienced a significant drop-off, falling nearly 25% to the fourth spot after coming in as the most attractive emerging market in last year s survey. Brazil has claimed the top position with just over 34%, followed by Southeast Asia with 18.8%, and pan-latin American funds with 12.5%, the area that saw the greatest increase in investor interest over the past year. Overall, investor interest in emerging markets is down in Brazil is the only market to garner more than 20% of responses. Seven of the ten listed emerging markets drew interest from less than 10% of respondents. Chart XXXIV Most Attractive Asian Country or Regionally-Focused Markets: 2009 vs I find the most attractive Asian markets to be... (choose no more than two) Percentage of Respondents 60% 50% 40% 30% 20% 10% 0% China India Pan-Asian Funds Japan Southeast Asia Australia Korea Vietnam Taiwan Asia via Global Funds Asia via Fund-of-Funds Do Not Invest in Asia Other Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

33 Chart XXXV Most Attractive Asian Country or Regionally-Focused Markets: Overall Respondents vs. Asian Investors I find the most attractive Asian markets to be... (choose no more than two) 80% 70% 70.8 Percentage of Respondents 60% 50% 40% 30% 20% 10% 0% Chart XXXVI Most Attractive Emerging Markets I find the most attractive emerging markets to be... (choose no more than two) 45% 40% % 34.1 Percentage of Respondents 30% 25% 20% 15% 10% 5% % Brazil Southeast Asia Pan-Latin America Eastern Europe Africa Turkey Mexico Middle East Russia Global Emerging Market Funds Do Not Invest in Emerging Markets Other China India Pan-Asian Funds Japan Southeast Asia Australia Korea Vietnam Taiwan Asia via Global Funds Asia via Fund-of-Funds Do Not Invest in Asia Other Base Overall Respondents Asian Investors Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 31

34 Next, survey respondents were asked about their strategic preferences when investing in the U.S. middle-market. As detailed in Chart XXXVII, over 50% of respondents indicated a strong preference for funds with an operational focus that are staffed with professionals who possess operating backgrounds. There was also a notable preference for funds with buy-and-build strategies and restructuring/turnaround funds, with 40% of respondents focusing on each of these sectors. Chart XXXVIII focuses on those venture capital stages and sectors investors find to be most attractive in the coming year. Early- and late-stage funds are the leading stages of interest with seed-, mid- and multistage strategies further behind. As far as industry sector focus, technology focused funds and diversified, multi-sector funds lead with 29.8% each, while cleantech focused funds attracted the least investor interest at 11.8%. Chart XXXVII Most Attractive U.S. Middle-Market Sectors I find the most attractive U.S. middle-market sectors or strategies to be... (check all that apply) Funds focused on operational improvements heavily staffed with professionals with operating backgrounds 50.8 Restructuring/turnaround funds 40.0 Funds focused on buy-and-build strategies 40.0 Growth capital funds 34.1 Funds focused on single industries 18.9 Strategy is irrelevant; a demonstrable superior track record is my only concern 17.3 Regionally-focused funds 12.4 Funds focused on strongly growing companies, often investing without majority control I do not invest in the U.S. middle-market I only invest in the U.S. middle-market through fund-of-funds Other % 10% 20% 30% 40% 50% 60% Percentage of Respondents 32 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.

35 There were noticeable differences in venture capital sector preferences amongst various institutional investors. Endowments, who demonstrate considerably more interest in venture capital, were the biggest proponents of early-stage venture and had absolutely no interest in cleantech funds. Public pensions also showed a considerable amount of interest in early-stage venture capital but nearly a third reported they do not invest in the sector at all. Chart XXXVIII Most Attractive Venture Capital Sectors I find the most attractive venture capital sectors or strategies to be... (check all that apply) 50% Percentage of Respondents 40% 30% 20% 10% 0% Seed-Stage Early-Stage Mid-Stage Late-Stage Multi-Stage Cleantech Funds Life Science Funds Technology Funds Funds Focused on Multiple Sectors Focus Solely on Historic Returns Do Not Invest in Venture Capital Other Confidential & Trade Secret Probitas Partners. Do not circulate or publish. 33

36 Niche Private Equity Sectors There are several strategies within the distressed/restructuring sector that investors can pursue, detailed in Chart XXXIX. Respondents were most interested in distressed debt for control funds and restructuring/turnaround funds, with significantly less interest in distressed debt trading funds and distressed debt hedge funds. Those strategies are both driven by trading rather than a value-added focus and tend to generate lower multiples of return. Though the distressed investment sector has increased in investor interest significantly over the last three years, over 17% of respondents still do not invest in these strategies. There were notable differences in how endowments and public pensions approach distressed investing, as shown in Chart XL. Over three quarters of all public pensions who responded to this year s survey focused on distressed debt for control funds, and all public pension respondents reported that they invest in the sector in some fashion. Responses amongst endowments were more widespread over distressed strategies; however, the clear preference is for restructuring/turnaround funds, with only a quarter of endowments indicating they prefer distressed debt for control funds. Chart XXXIX Distressed Investments Within the distressed debt/restructuring sector, I am most interested in... 50% Percentage of Respondents 40% 30% 20% 10% 0% Distressed Debt for Control Funds Restructuring/ Turnaround Funds Distressed Debt Trading Funds Distressed Debt Hedge Funds Do Not Invest in This Sector Other 34 Confidential & Trade Secret Probitas Partners. Do not circulate or publish.