Private Equity Trends

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Coleen Ellis
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1 Third Quarter 2018 INSTITUTE Private Equity Trends Analyzing private equity activity through all the stages of the investment cycle, from fundraising to exits. Fundraising: Mild Slowdown Driven by Fewer Large Funds The number of funds holding final closes in the third quarter fell by 13 (-6%) in the second quarter, but the total committed increased $32 billion (+30%). Year-to-date, 2018 is running $64 billion (-15%) behind a year ago. The fourth quarter would need to attain a significant $193 billion for 2018 to best 2017 s total. Given that most large-fund general partners have come to market in recent years, 2018 may be a down year, albeit still significant compared to the pre-gfc period peak of $615 billion and recent peak of $566 billion in Limited partners continue to pursue broad diversification, as evidenced by buyouts being less than 50% of total commitments, venture capital and mezzanine hitting double digits (12% each), and the remaining strategies picking up relatively similar shares. While there is a general acknowledgement that the secondary market is at historical peak pricing, new partnership commitments remain strong. Mezzanine ticked strongly upward during the quarter. Largest Funds Holding Final Closes Carlyle Partners VII, buyout, $18.5 billion HillHouse Fund IV, buyout, $10.6 billion Insight Venture Partners X, growth equity, $6.3 billion No. 1 European Fund: ICG Europe VII, mezzanine, $4.3 billion No. 1 Asia-Pacific Fund: HillHouse Fund IV, buyout, $10.6 billion Funds Holding Final Closes: By Quarter Amount raised ($bn) Funds Holding Final Closes: By Strategy YTD Through September 30 Strategy Number of funds # of funds Investments (billions) Share Venture Capital 270 $ % Buyouts 148 $ % Growth Equity 38 $ % Mezzanine 44 $ % Distressed/Restructuring 11 $ % Energy 22 $ % Secondaries 55 $ % Fund-of-Funds 29 $ % Total 617 $ % Knowledge. Experience. Integrity.

2 Global Company Investments: Continued Slowdown Private equity investment into companies in the third quarter Buyout Investments: By Quarter declined by 308 (-18%) from the second quarter, a relatively large fall compared to recent quarters. The announced dollar Amount invested ($bn) Number of deals value dropped by $5 billion (-4%). The year-to-date 2018 figures are also down from Company investments declined by 551 (-10%) and announced value lagged by $141 billion (-26%) Prices Steady, but Leverage Increases Company prices continue to be at highs with the 1 EBITDA average pricing holding steady from last quarter. Through the third quarter, volatility in public equity market pricing has not dented price competition for private companies. A moderation in prices would be welcome and may help support transaction volume if sellers are willing to receive slightly less in a more uncertain environment. With ample, low-cost financing available, average debt levels increased from 5.7x EBITDA to 5.8x, representing a new average high. 1,947 1,884 1,755 1,891 1,890 1,811 1,812 1,447 Largest Buyout Investments Unilever (Spreads Division), food, $13.8 billion Telenor Group, mobile services, $6.8 billion Allegro, asset management, $5.9 billion Leveraged Buyout Purchase Price Multiples This chart breaks down the components of total deal prices by various elements of the capital structure as a multiple of EBITDA. 12% 10% 8% 6% 4% 2% 0% Senior debt/ebitda 3.1x 0.8x 4.5x 5.5x 4.1x 0.8x 4.1x 3.0x Sub debt/ebitda 4.0x 0.2x 4.6x 4.9x 5.2x Equity/EBITDA Others YTD 5.7x 0.2x 4.5x 5.5x 4.5x 5.3x 4.9x 5.7x 4.7x 5.8x Buyout Investments: By Industry YTD through September 30 Industry # of Deals Disclosed Amount Investments (billions) Share B2B 2,201 $ % B2C 842 $ % Energy 141 $ % Financial Services 316 $ % Health Care 584 $ % Information Technology 825 $ % Materials and Resources 173 $ % Undefined Total 5,092 $ % Source: S&P Capital IQ 2

3 Venture Capital Investments: Investments Slow, Prices Rise The number of rounds of financing fell in the third quarter by 1,165 (-23%), and announced dollar volume fell by $19 billion (-26%). Last quarter s unusually large $14 billion megafinancing for Ant Financial explains much of the dollar decline. Year-to-date financings lagged 2017 by 4,884 (-24%), but announced dollar volume was up 61%, a $73 billion increase. Venture Capital Financing Rounds: By Quarter Amount invested ($bn) Number of deals Largest VC Financings Grab, ride hailing and delivery, $2.0 billion, 9th round, led by Toyota and 13 additional investors OYO Rooms, application software, $1.0 billion, 8th round, led by Softbank Opendoor, residential real estate listing software, $725 million, 5th round, led by Access Technology Ventures 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 7,839 6,074 6,049 5,175 5,753 6,205 5,226 3Q18 4,010 Venture Capital Financings: By Industry (YTD 9/30/18) Industry Venture Capital Financings: By Stage (YTD 9/30/18) Stage # of Financings Investments (billions) Share Pre 3, Angel 2, % Seed 2, % Early stage VC 4, % Later stage VC 2, % Corporate % Total 15, % # Financings Disclosed Amount Investments (billions) Share B2B 1, % B2C 2, % Energy % Financial Services % Health Care 2, % Information Technology 7, % Materials and Resources % Undefined Total 15, % Annual Median Pre-Money Valuations of Venture-Backed Companies by Financing Round Millions $300 $250 $200 $150 $100 $50 $ YTD 2018 In 3Q18 there were 36 financings of unicorns (VC companies with valuations of over $1 billion), compared to 26 in 2Q18, with a total of $12 billion being invested, down from $28 billion. Seed Series A Series B Series C Series D Pre-Money Valuation: The value of a company agreed upon prior to new financing. Pricing continued to rise steeply across the board in the third quarter for Series B, C, and particularly D rounds. Regarding industry investment, IT leapt from 20% of invested dollars last quarter to 45% in the third quarter, and B2B fell from 36% the previous quarter to only 8%. Knowledge. Experience. Integrity. 3

4 PE-Backed* M&A Exits: Exits Trend Down for Fifth Quarter Private equity-backed M&A exits fell during the quarter by 166 sales (-27%) and $4 billion of announced value (-3%). Year-to-date, M&A exits were also down, with 542 fewer sales (-24%) and $196 billion less of announced value (-31%). Private Equity-Backed M&A Exits: By Quarter Exit amount ($bn) Number of exits Largest Private Equity-Backed M&A Exits HRG Group, holding company, $10.0 billion Mr. Cooper, thrift & mortgage finance, $3.8 billion Sky Betting & Gaming, software application, $3.6 billion PE-Backed* IPO Exits: Quiet Third Quarter Private equity-backed IPO exits fell in the third quarter by 27 offerings (-51%), and the combined float dropped by $9 billion (-56%). Year-to-date, IPOs were 42 fewer by count (-26%), but raised $4 billion more (+13%) in aggregate. Private Equity-Backed IPO Exits: By Quarter Exit amount ($bn) Number of exits Largest Private Equity-Backed IPO Exits SIG Combibloc, paper packaging, $1.5 billion Cushman & Wakefield, real estate, $465 million Focus Financial, asset management, $600 million * All private equity strategies, excluding venture capital. 4

5 Venture-Backed M&A Exits: M&A Dollar Volume a Bright Spot Venture-backed M&A exits were down for the quarter by 68 Venture-Backed M&A Exits: By Quarter sales (-20%), but announced value rose by $3 billion (+10%). Year-to-date venture-backed M&A exits by count are simi- Exit amount ($bn) Number of exits larly down relative to 2017 with 239 fewer sales (-20%), but announced value rose $28 billion (+42%), driven by some very large deals, such as this quarter s sale of Flipkart to Walmart Largest Venture-Backed M&A Exits Flipkart, internet retail, $16.9 billion AppNexus, business/productivity software, $2.0 billion Adaptive Insights, financial software, $1.6 billion Venture-Backed IPO Exits: Still Strong Venture-backed IPO exits slowed in the third quarter by 16 Venture-Backed IPOs: By Quarter offerings (-23%) and the combined new issuance fell by $5 billion (-26%). Year-to-date 2018 has produced 151 IPOs versus last Exit amount ($bn) Number of exits 19 year s 125 (+21%), and raised in aggregate $24 billion more (+200%). 14 Largest Venture-Backed IPOs Xaiomi, electronics, $4.7 billion Pinduoduo, internet retail, $1.6 billion Nio, electric cars, $1.0 billion Knowledge. Experience. Integrity. 5

6 Performance: Private Equity Returns Double Digit Across Horizons On a private market equivalent (PME) basis, the Thomson Reuters/Cambridge private equity database outperformed broad public equity indices over all but the 10-year horizon. U.S. public markets recovered from slight losses suffered in the first quarter. Private equity continued its advance, gaining 4.5%. Return of Double-Digit IRRs With the second quarter gain, private equity now posts double-digit internal rates of return (IRR) across all of the standard investment horizons. Pooled Horizon IRRs: By Strategy as of June 30 Strategy 3-Mo 1-Yr 3-Yr 5-Yr 10-Yr 15-Yr 25-Yr Venture Capital Growth Equity Buyouts Mezzanine Credit Opp Distressed Source: Thomson Reuters/Cambridge Pooled Horizon Net IRRs: Over Time (as of June 30) Private Equity S&P 500 PME* Russell 3000 PME* Last Quarter 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years 25 Years * PME: Public Market Equivalent is the IRR an investor would have received if the contributions and distribution of the private equity database were instead invested in the public index at the index s valuations. Pooled Horizon Net IRRs, All Private Equity: By Vintage Year (as of June 30) 18.9% 16.3% 16.0% 16.6% 17.0% 16.7% 10.5% 11.6% 8.8% 7.3% 9.5% 13.6% 14.7% 14.0% 14.5%

7 Callan s Private Equity Consulting Services Callan s Private Equity Consulting provides full-spectrum private equity consulting services, including strategic planning, implementation, monitoring, performance measurement, and education. Strategic planning includes investment policies development, portfolio design, commitment pacing, and annual planning. Implementation includes sourcing, screening, due diligence, and evaluation. Our search services cover the full spectrum of available products including direct partnerships, fund-of-funds searches, and establishing separate accounts. We provide ongoing qualitative manager monitoring, and performance measurement return calculation and benchmarking. Research and education is a hallmark of Callan, and Private Equity Consulting provides training and information through customized client presentations, white papers, our quarterly newsletter, blog posts, and workshops. We collaborate with each client to build tailored and lasting solutions. For private markets inquiries contact your Callan Consultant or Gary Robertson at Authors Gary Robertson, Manager of Callan s Private Equity Consulting group, and Ashley DeLuce, a consultant in the group Editor Stephen R. Trousdale Designer Nicole Silva About Callan Callan was founded as an employee-owned investment consulting firm in Ever since, we have empowered institutional clients with creative, customized investment solutions that are backed by proprietary research, exclusive data, and ongoing education. Today, Callan advises on more than $2 trillion in total fund sponsor assets, which makes it among the largest independently owned investment consulting firms in the U.S. Callan uses a client-focused consulting model to serve pension and defined contribution plan sponsors, endowments, foundations, independent investment advisers, investment managers, and other asset owners. Callan has six offices throughout the U.S. For more information, please visit About the Callan Institute The Callan Institute, established in 1980, is a source of continuing education for those in the institutional investment community. The Institute conducts conferences and workshops and provides published research, surveys, and newsletters. The Institute strives to present the most timely and relevant research and education available so our clients and our associates stay abreast of important trends in the investments industry Callan LLC Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily verified the accuracy or completeness of or updated. This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation. Reference in this report to any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Past performance is no guarantee of future results. This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact. The Callan Institute (the Institute ) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to subsidiaries or parents, or post on internal web sites any part of any material prepared or developed by the Institute, without the Institute s permission. Institute clients only have the right to utilize such material internally in their business. Knowledge. Experience. Integrity. 7

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Survey. Asset Managers and ESG. Sensing Opportunity, Bigger Firms Lead the Charge. Firms with a formal ESG policy. (by size) 73% 51% 23%

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