Albourne Update Private Equity SDCERA Board of Retirement February 20 th 2014
Agenda 1) Program History 2) Current allocation vs. targets 3) Portfolio composition 4) Performance 5) Future Pacing 6) Market Update 2
Program History 1996 First Private Equity investment 2009 Private Equity Strategy Review : Move to Increase Private Equity exposure Allocation to 10% Move to Larger investments to produce a focused portfolio Albourne hired to provide Private Equity service 2010-11 Private Equity Secondary Sale of Legacy portfolio 3
Glossary of Terms Drawdown Structure: A vehicle where a given amount is committed then drawn down by the fund manager at its discretion over the fund s investment period which might be as long as six years. Distributed to Paid-In (DPI) Total Value to Paid-In (TVPI) Internal Rate of Return(IRR): A time and capital weighted measure of growth. Net Asset Value (NAV): The estimated market value of the fund s current holdings. Public Market Equivalent Performance (PME): The performance of matched cash-flows to those invested in a private market fund if they had instead been invested in a public index. Vintage Year: The year the fund made its first investment. 4
Glossary of Terms (cont) J-curve: The J-curve is the period of time during the first few years of a fund s life when it typically shows negative returns and cash-flows due to: 1. Front-loaded fees as a % of invested capital 2. Unseasoned investments which are yet to show the benefit of any value-add that may be created by the private market manager 3. Lack of Distributions J-curves are deeper and longer for Buyout & Growth strategies, and shorter and shallower for Distressed & Special Situation strategies Source: Goldman Sachs 5
Funding Status The plan is currently underweight exposure to Private Equity but recent commitments are expected to bring Market Value exposure into the Target Range shortly Target Market Value & Range Target Market Value: $960m As of Q3 2013 Based on Total SDCERA Portfolio NAV of $9.6bn 6
Portfolio Composition by Vintage Year NAV is currently largely made up of immature 2010-11 vintages still in the J-curve, but 1/3 rd is from pre-crash vintages The 2013 vintage will become a significant driver of performance over the next few years Vintage Year Exposure (NAV) Vintage Year Exposure (NAV + Unfunded) As of Q3 2013 Includes Drug Royalty III which has been set as a 2014 Vintage investment based on date of expected first drawdown 7
Portfolio Composition by Strategy The portfolio is predominantly Buyout and Growth although this will gradually shrink as commitments to Niche investments are drawn down Exposure by Asset Class (NAV) Strategy Exposure (NAV) Niche 3% Exposure by Asset Class (NAV+Unfunded) Strategy Exposure (NAV + Unfunded) Niche 10% Distress & Special- Situations 40% Buyout & Growth 57% Distress & Special- Situations 37% Buyout & Growth 53% As of Q3 2013 8
Portfolio Composition by Geography The portfolio is well-diversified globally with a focus on developed markets Geographic Exposure (NAV) As of Q3 2013 Only covers funds which consistently report geographic exposures 9
Private Equity Portfolio Performance In 2010 the underperforming non-strategic parts of the portfolio were sold Including these legacy assets the portfolio has slightly underperformed its benchmark Excluding these legacy assets the portfolio has met its benchmark Until the recent equity rally of the last two years the portfolio was outperforming its benchmark Since Inception Performance 3Q 2003-3Q 2013 Including Terminated Funds Since Inception Performance 3Q 2003-3Q 2013 Excluding Terminated Funds 20.0% Portfolio IRR Russell 3000 + 300bps 20.0% Portfolio IRR Russell 3000 + 300bps 15.0% 15.0% 10.0% 10.0% 5.0% 5.0% 0.0% 0.0% -5.0% -5.0% Portfolio Since Inception Return: 7.2% Russell 3000+300bps PME: 10.4% Portfolio Since Inception Return: 10.7% Russell 3000+300bps PME: 11.2% As of Q3 2013 PME shows performance of a cash-flow matched investment in the Russell 3000 Index + 300bps using Long-Nickels methodology and quarterly cash-flows. 10
Program Performance by Strategy Buyout & Growth: Distress & Special-Situations: Niche: Corporate equity investments where the investment manager may take control of the company or provide capital for expansion. Debt and equity investments in companies and assets that typically cannot be financed in the public markets. Other private market strategies that invest in a variety of non-traditional assets and instruments (e.g. drug royalties) that are often diversifiers to public credit and equity. Funds Committed ($m) Paid In (% of Committed) Unfunded ($m) Distributions ($m) NAV ($m) DPI TVPI IRR PME Buyout & Growth 33 772 49% 400 269 246 0.7x 1.3x 9.7% 10.8% Distress & Special Situations 18 472 60% 218 195 177 0.7x 1.3x 12.5% 13.6% Niche 3 110 21% 86 10 15 0.4x 1.0x 4.7% 20.9% Total Portfolio 54 1,354 50% 705 475 437 0.7x 1.3x 10.7% 11.2% PME shows performance of a cash-flow matched investment in the Russell 3000 Index + 300bps using Long-Nickels methodology and quarterly cashflows. As of Q3 2013 Excludes terminated funds 11
Program Performance by Vintage Vintage Funds Committed ($m) Paid In (% of Committed) Unfunded ($m) Distributions ($m) NAV ($m) DPI TVPI IRR 1997 1 10 100% 0 15 0 1.5x 1.5x 8.4% 1998 2 45 98% 1 69 3 1.6x 1.6x 9.7% 1999 2 21 100% 0 31 0 1.5x 1.5x 12.1% 2000 2 13 100% 0 26 0 2.0x 2.0x 20.5% 2001 4 45 96% 2 78 6 1.8x 1.9x 21.8% 2003 2 25 99% 1 47 15 1.7x 2.2x 28.0% 2004 3 33 96% 1 30 16 0.8x 1.3x 5.9% 2005 3 30 98% 1 24 16 0.8x 1.4x 7.6% 2006 10 98 91% 9 53 64 0.6x 1.3x 5.9% 2007 5 63 82% 12 31 34 0.6x 1.2x 5.6% 2008 3 38 87% 5 19 24 0.6x 1.3x 10.4% 2009 2 30 60% 12 4 18 0.2x 1.1x 6.8% 2010 3 150 72% 48 45 96 0.4x 1.1x 8.8% 2011 7 390 33% 266 3 129 0.0x 1.0x nm 2012 0 0 0% 0 0 0 0.0x - - 2013 4 305 6% 287 0 16 0.0x 0.9x nm 2014 1 60 0% 60 0 0 0.0x - - Total Portfolio 54 1,354 50% 705 475 437 0.7x 1.3x 10.7% As of Q3 2013 Excludes terminated funds Includes Drug Royalty III which has been set as a 2014 Vintage investment based on date of expected first drawdown 12
Fund performance: Buy-out & Growth Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI Capital International PE Fund III 1997 20 100% 0 22% 2.0x 2.0x HarbourVest International Fund III Partnership 1998 35 99% 3 9% 1.5x 1.5x Oak Hill Capital Partners & Bermuda 1998 10 100% 0 12% 1.8x 1.8x Code Hennessy & Simmons IV 1999 10 100% 0 12% 1.5x 1.6x TA IX 2000 8 97% 0 22% 2.4x 2.4x TA Subordinated Debt Fund I 2000 5 100% 0 16% 1.5x 1.5x Thomas H. Lee Equity Fund V 2001 15 98% 2 14% 1.5x 1.6x Blackstone Capital Partners IV 2003 15 97% 9 37% 1.9x 2.4x TPG Partners IV 2003 10 100% 6 16% 1.3x 1.9x Graham Partners Investments II 2004 8 98% 7 8% 0.6x 1.4x Providence Equity Partners V 2004 10 93% 3 2% 0.8x 1.1x Northgate Private Equity Partners II 2005 15 95% 9 8% 0.7x 1.4x Bain Capital Fund IX 2006 7 97% 5 8% 0.7x 1.5x Bain Capital IX Coinvestment Fund 2006 2 98% 1 8% 0.8x 1.6x Blackstone Capital Partners V 2006 13 89% 12 6% 0.4x 1.3x Blackstone Capital Partners V-S 2006 2 96% 2 3% 0.2x 1.1x Charterhouse Capital Partners VIII 2006 14 87% 5-1% 0.5x 1.0x As of Q3 2013 Excludes terminated funds 13
Fund performance: Buy-out & Growth (cont) Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI TA Subordinated Debt Fund II 2006 8 87% 2 7% 1.0x 1.2x TA X 2006 13 97% 8 5% 0.6x 1.2x Hellman & Friedman Capital Partners VI 2006 15 96% 10 9% 0.7x 1.4x Capital International PE Fund V 2007 10 85% 6 6% 0.6x 1.2x Greenbriar Equity Fund II 2007 10 82% 7 3% 0.2x 1.1x Northgate Private Equity Partners III 2007 15 85% 11 5% 0.3x 1.2x Emerging Europe Growth Fund II 2008 10 75% 7-1% 0.1x 1.0x Bain Capital Fund X 2008 15 95% 14 5% 0.2x 1.2x Hellman & Freidman Investors VII 2009 15 1.0x 10 3% 0.1x 1.0x Onex Partners III 2009 15 86% 13 8% 0.2x 1.1x Baring Asia PE Fund V 2011 50 48% 26 8% 0.0x 1.1x Capital International PE Fund VI 2011 50 35% 14-26% 0.0x 0.8x EQT VI 2011 55 36% 16-19% 0.0x 0.9x Blackstone Capital Partners VI 2011 100 26% 29 9% 0.1x 1.1x FountainVest China Growth Fund II 2013 50 14% 6-56% 0.0x 0.8x TPG Asia VI 2013 75 15% 10-45% 0.0x 0.9x New Mountain Partners IV 2013 90 10% 0-100% 0.0x 0.0x As of Q3 2013 Excludes terminated funds 14
Fund performance: Distress & Special Situations Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI OCM Opportunities Fund II 1997 10 100% 0 8% 1.5x 1.5x OCM Opportunities Fund III 1999 11 100% 0 12% 1.5x 1.5x Cerberus Institutional Partners Series 2 2001 10 86% 2 27% 2.7x 3.0x Lexington Capital Partners V 2001 10 100% 2 19% 1.5x 1.7x OCM Opportunities Fund IV 2001 10 100% 0 28% 1.6x 1.6x Paul Capital Partners VIII-B 2004 15 99% 6 9% 1.0x 1.3x Lexington Capital Partners VI-B 2005 10 98% 6 7% 0.7x 1.3x OCM Opportunities Fund VI 2005 5 100% 1 9% 1.4x 1.6x Cerberus Institutional Partners Series 4 2006 15 92% 12 8% 0.6x 1.5x Coller International Partners V 2006 10 78% 6 9% 0.6x 1.4x OCM Opportunities Fund VII 2007 8 100% 2 8% 1.1x 1.4x Paul Capital Partners IX 2007 20 71% 9 5% 0.6x 1.2x OCM Opportunities Fund VII B 2008 13 90% 3 18% 1.5x 1.8x Blackstone/GSO Capital Solutions I 2010 50 86% 48 16% 0.4x 1.2x Gores Capital Partners III 2010 75 59% 38-1% 0.2x 1.0x Gores Small Capitalization Partners 2011 30 22% 5-11% 0.2x 0.9x Oaktree European Principal Fund III 2011 82 40% 36 8% 0.1x 1.2x GSO Capital Solutions II 2013 90 0% 0 0% As of Q3 2013 Excludes terminated funds 15
Fund performance: Niche Fund Year Committed ($m) Paid In (% of Committed) NAV ($m) IRR DPI TVPI Drug Royalty II 2010 25 77% 11 11% 0.5x 1.1x RMF 2 Co-Investment Fund LP 2011 25 19% 4-30% 0.0x 0.8x Drug Royalty III* 2014 60 0% 0 0% As of Q3 2013 Excludes terminated funds *Drug Royalty III set as a 2014 Vintage investment based on date of expected first drawdown 16
Cumulative Cash Flows ($m) NAV as % of Total Plan Future Pacing Total Portfolio Size: $9.6bn Total Portfolio Growth Rate: 7.75% Private Equity NAV Target: 10.0% Commitment pace: $50-350m p.a. Cash flow will likely decrease for a period as commitments are drawn down. Expect a split of allocation between Distressed, Buyout & Growth, and Niche strategies. $m -$100m SDCERA Private Equity Portfolio Cumulative Cash Flows 20% 18% SDCERA Private Equity Portfolio NAV as % of Total Plan (Q4 2013 - Q3 2018) -$200m -$300m -$400m -$500m -$600m -$700m -$800m Historical Cumulative Cash Flows High Case Projected Cash Flows Base Case Projected Cash Flows Low Case Projected Cash Flows -$900m 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 16% 14% 12% 10% 8% 6% 4% 2% Max NAV Target (15%) High Case Projected NAV NAV Target (10%) Base Case Projected NAV Low Case Projected NAV Low NAV Target (5%) 0% 2013 2014 2015 2016 2017 2018 Chart shows possible range of outcomes based on a pace of $250m pa As of Q3 2013 17
Market Update: Buyout and Growth There is a large backlog of PE backed companies waiting to exit The recent IPO market has helped but there is a long way to go Source: Preqin Fund Manager Profiles and Preqin Performance Analyst 18
Multiple of EBITDA Market Update: Buyout and Growth Valuations have remained high driven by the availability of credit US Middle Market Buyouts Average LTM EBITDA Multiple 10.0x 9.0x 8.0x 7.0x 7.5x 7.1x 6.7x 6.4x 6.7x 7.0x 7.2x 8.5x 8.1x 9.3x 8.7x 6.6x 8.4x 8.2x 7.9x 8.8x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Other Source: S&P Capital IQ Leveraged Commentary & Data, January 2014 Note: Middle Market Buyouts defined by companies with TTM EBITDA <$50m 19
Market Update: Buyout and Growth Fundraising has picked up but is still a lot lower than the 2006-8 time period $bn 450 400 U.S. Private Equity Fund Raising Source: Dow Jones LP Numbers may not total exactly due to rounding 350 300 250 200 150 100 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Buyouts/Corporate Finance Funds Of Funds Mezzanine Secondary & Other Venture Capital (Yearly Totals) 20
($bn) Average annual % Distressed of ML HY Index Cov-Lite Issuance $bn Market Update: Distressed and Special Situations Current default rates remain low New issuance of low grade credit is at record levels which will fuel future opportunities US High Yield and Leveraged Loans Market Covenant-Lite Loan Issuance Total Leveraged Debt Outstandings US HY Distressed Ratio 60% 300 2,500 2,000 90 80 70 50% 40% 250 200 1,500 1,000 500 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 60 50 40 30 20 10 0 30% 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Cov-Lite Issuance % of Total Issuance 150 100 50 0 Source: Credit Suisse Leveraged Finance Strategy and Bank of America Source: S&P LCD 21
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