Content Includes: New Methodology Gain insight into the drivers of private equity value creation. Finding Winners: How Advanced Private Equity Benchmarking Can Identify the Skills that Lead to Future Outperformance September 2016 Top Performers View the top performing private equity funds and fund managers. Frequently Asked Questions Find out how to interpret the results. alternative assets. intelligent data.
Introduction Prof. Oliver Gottschalg, Head of Research, PERACS Private equity performance measurement is by design initially about the how much of value creation of a given fund manager. It is implicitly backward looking as today s investors cannot buy a fund s past returns but only commit to a manager s future fund with the hope of obtaining high returns from this investment. Commitment decisions to new funds would benefi t by not only considering the absolute return of a fund but also by assessing the GP skillset, i.e. the nature of value creation, as these skills of the GP are what ultimately persists between funds. To this end PERACS have developed a novel methodology, the PERACS Manager Capability Identifi er (MCI), to measure the distinct components of a fund s performance, leveraging data on tens of thousands of underlying investments made by thousands of funds. This enables us to assess and quantify the performance impact of distinct GP skills, and can thus provide the basis for a deeper understanding of the sources of past returns, as well as the persistence of different return components for a certain GP across fund generations. The methodology uses a combination of performance and deals data from Preqin on 1,119 funds to decompose the relative performance impact of the timing, i.e. how investments were timed over the investment period of the fund; the strategy, i.e. which type of target companies were chosen (industry sector, size category, geography) to acquire at those times; and the implementation, i.e. the strategic development of the business, implementation of the GP s value creation plans and management appointments. Through our analysis of the data, we found that statistically signifi cant positive persistence occurs only in the Implementation component of returns. This is a particularly powerful message for private equity, as this component captures the impact the GP has had during its stewardship of an investment, one of the key differentiators between private equity and other forms of asset management. In this report, we highlight the top performing funds in terms of their Implementation Skill for different vintages and fund size categories as examples of funds that were particularly successful in generating better returns with their investments than those of their competitors, with similar approaches to investment timing and target selection. Further we present the various quartiles by Implementation Skill across the 2000s vintage years, to help in benchmarking a specifi c fund. Finally, we identify consistently top performing managers in terms of this persistent Implementation Skill component. Professor Oliver Gottschalg Professor Oliver Gottschalg is Head of Research at PERACS, a specialized advisory fi rm providing advanced private equity fund due diligence and benchmarking services. He is part of the Strategy Department at HEC School of Management, Paris. He serves as HEC s Academic Dean for the TRIUM Global Executive MBA Program, Director of the Entrepreneurship Track in the HEC MBA program, directs the HEC Private Equity Observatory and teaches courses on strategy, entrepreneurship, venture capital fi nancing and management buyouts. He holds a Wirtschaftsingenieur Diploma from the University of Karlsruhe, an MBA from Georgia State University and a M.Sc. and PhD degree from INSEAD. His current research focuses on the strategic logic and the performance determinants of private equity investments. His work has been published in leading academic journals and in various publications for practitioners and was widely featured over 200 times in the business press, radio and TV. He regularly presents his research at academic conferences and private equity symposia and serves as an advisor to leading investors in the private equity industry. Most recently, he served as an advisor to the European Parliament in the context of the current debate about a possible need for regulation of the private equity industry. www.peracs.com All rights reserved. The entire contents of Preqin Special Report: Finding Winners, September 2016 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special Report: Finding Winners, September 2016 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent fi nancial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Finding Winners, September 2016. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confi rm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special Report: Finding Winners, September 2016 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special Report: Finding Winners, September 2016 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication. 2 2016 Preqin Ltd. / www.preqin.com
Contents On the Methodology 3 Selected Results Top Performing Funds 4 Top Performing Fund Managers by MCI 5 Quartile Boundaries for Implementation Skill 6 Interpreting the Results 7 Frequently Asked Questions 8 On the Methodology The PERACS Manager Capability Identifier ( MCI ) compares the performance of various groups of private equity funds, classified by the nature of their underlying deals, to isolate the components of a fund s outperformance to its peers. It measures four distinct components of a PE fund s performance, three of which are proxies for the underlying capabilities of the fund manager. This approach compares data on tens of thousands of underlying investments made by thousands of funds to identify funds that are similar in three different aspects: (a) similar in the time period in which the fund was raised (three year vintage cycle), (b) similar in terms of when investments were made (based on acquisition years of the underlying deal) and (c) similar in terms of which type of target companies were chosen (industry sector, size category, geography) to be acquired at those times. Starting from the funds raised in the same three-year vintage year cycle, the two remaining peer groups correspond to sequentially fi ltering for funds that are similar to a given fund in terms of two key investment decisions of a PE fi rm: the Timing Choice, i.e. the decision of how investments were timed over the investment period of the fund, and the Strategy Choice, i.e. the decision of which type of target companies were chosen (industry sector, size category, geography) to acquire at those times. It is then possible to assess the impact of each of these decisions by comparing the average performance among peer groups. Finally, the comparison between a fund s performance and the performance of those funds that are similar in terms of what was acquired and when, refl ects the portion of a fund s overall performance that is attributable to Implementation Skill, i.e. the performance of the specifi c investment approaches into specifi c target companies, above the returns of other funds that made similar decisions in terms of timing and strategy. LPs use the methodology to derive new insights on value creation when evaluating potential GPs. GPs use the results to illustrate their relative value add and differentiation. The results should be compared to the GP s articulated investment strategy, and can: Quantitatively help back-up a qualitative assessment Be used as part of additional advanced due diligence with a GP Help fi lter which GP from a number should be prioritized for additional due diligence For a more detailed explanation of the methodology and fi ndings, please see Beyond the Quartiles, a white paper by Oliver Gottschalg, accessible at www.preqin.com/peracs 3 2016 Preqin Ltd. / www.preqin.com
Selected Results Top Performing Funds To determine the best performing funds, PERACS has grouped together funds into two categories: performance of funds greater than $1bn in size; and performance of funds between $250m and $1bn. The report is read as follows: The Peers column represents the average performance of funds (represented by the average MOIC/TVPI) within a two- year vintage window of the target fund; The Timing column represents the impact of the Timing Choice on the returns of the fund; The Strat column represents the impact of the Strategy Choice decision on the returns of the fund; The Implement column represents the impact of the Implementation Skill on the returns of the fund; The TVPI column represents the Total Value to Paid-in Multiple of the target fund i.e. the fund on which the analysis is run. Please see the Interpreting the Results section on page 7 for a more detailed explanation of the Timing, Strategy and Implementation factors. Fig. 1: Top Performing Funds by Vintage: Funds Greater than $1bn Vintage Firm Fund Type 2000 Vista Equity Vista Equity Fund II Region Focus Fund Size ($mn) Peers Timing Strat Implement TVPI Date Reported 1,000 1.92 0.01-0.01 1.20 3.12 31-Mar-16 2001 CVC Capital CVC European Equity III Europe 3,971 1.94 0.04-0.03 0.98 2.93 30-Sep-15 2002 Berkshire Berkshire Fund VI 2003 Onex Corporation Onex 2004 Hellman & Friedman 2005 Goldman Sachs Merchant Banking Division Hellman & Friedman V GS Capital V 1,700 2.00 0.00-0.15 0.68 2.53 30-Jun-15 1,650 1.85 0.04-0.07 1.14 2.96 30-Sep-15 3,500 1.71 0.05 0.01 0.91 2.68 30-Sep-15 8,500 1.64 0.09-0.04 0.92 2.62 30-Sep-15 2006 Triton Triton Fund II Europe 1,438 1.60 0.02-0.16 0.62 2.07 30-Sep-15 2007 Vista Equity Vista Equity Fund III 1,287 1.54 0.00 0.11 0.82 2.47 30-Sep-15 2008 MBK MBK II Asia 1,600 1.49 0.02-0.08 0.76 2.2 30-Jun-15 2009 Odyssey Investment Odyssey Investment Fund IV 1,500 1.46 0.00 0.08 0.84 2.38 30-Sep-15 2010 Lion Capital Lion Capital Fund III Europe 2,038 1.41-0.01 0.01 0.10 1.51 30-Sep-15 TVPI is based on the latest reported fi gure, which covers a two-year date range. Source: Preqin and PERACS Request MCI Metrics Preqin has the data to compare the MCI metrics for over 1,100 funds worldwide. Should you wish to determine the metrics for a specifi c fund, please reach out to us at: clientservices@preqin.com 4 2016 Preqin Ltd. / www.preqin.com
Fig. 2: Top Performing Funds by Vintage: Funds Greater than $250mn and Less than $1bn Vintage Firm Fund Type 2000 GCP Capital 2001 CBPE Capital 2002 Wellspring Capital Management Greenhill Capital CBPE Capital Fund VI Wellspring Capital III Region Focus Fund Size ($mn) Peers Timing Strat Implement TVPI Date Reported 423 1.91 0.03 0.08 1.88 3.9 31-Dec-15 Europe 288 1.94 0.04-0.04 1.56 3.5 31-Mar-16 640 2.00 0.01-0.11 0.30 2.2 31-Mar-16 2003 Altor Altor 2003 Fund Europe 7,099 1.85 0.06 0.01 1.31 3.23 30-Sep-15 2004 Herkules Capital Herkules Private Equity Fund I Europe 329 1.71 0.08 0.03 3.01 4.82 31-Mar-14 2005 Axcel Axcel III Europe 491 1.64 0.00-0.06 4.31 5.88 30-Sep-15 2006 Thoma Bravo 2007 H.I.G. Capital 2008 Thoma Bravo 2009 2010 Egeria Capital Management Wynnchurch Capital Thoma Cressey Fund VIII HIG Capital IV Thoma Bravo Fund IX Egeria Private Equity Fund III Wynnchurch Capital III 765 1.60 0.02 0.07 1.20 2.89 30-Sep-15 750 1.54 0.00 0.07 0.71 2.31 30-Sep-14 823 1.49 0.02 0.10 1.55 3.17 30-Sep-15 Europe 787 1.46 0.01-0.09 0.51 1.9 30-Sep-15 603 1.41 0.00 0.02 0.68 2.11 30-Sep-15 TVPI is based on the latest reported fi gure, which covers a two year date range. Source: Preqin and PERACS Top Performing Fund Managers by MCI PERACS generates quartile rankings for individual funds according to their vintage. The quartile rankings are assigned using the Implementation Skill component of MCI which per PERACS research was identifi ed as the most material and persistent measure of fund manager value add. The tables are compiled using only funds for which PERACS assigns a quartile ranking, and so for this reason, funds with more recent vintages (2013, 2014, 2015 and 2016) have been excluded as these funds are too early in their fund lives to generate meaningful return metrics. Only managers with three or more funds were considered to have enough data to be deemed consistent. The lower the average score, the more consistently the manager has outperformed its peers. The scores are calculated by assigning top-quartile funds with a score of one, second-quartile funds with a score of two and so on, and then an average of the scores is taken. Only fi rms with average an quartile ranking of 2.00 or below are considered. No assurances as to the completeness of this list can be given; PERACS is limited to a sample of 1,100 funds based on the performance and deals data available. Fig. 3: Consistently Top Performing Fund Managers by Implementation Skill Firm Firm Location No. of Funds Average Quartile Ranking of Implementation Skill Altor US 3 1.00 Clayton Dubilier & Rice US 3 1.00 KPS Capital US 3 1.00 Procuritas Sweden 3 1.00 Waterland Netherlands 5 1.20 Leonard Green & US 4 1.25 n Securities US 3 1.33 Archer Capital Australia 3 1.33 Erhvervsinvest Denmark 3 1.33 Harvest US 3 1.33 Nautic US 3 1.33 Odyssey Investment US 3 1.33 Sentica Finland 3 1.33 Source: PERACS 5 2016 Preqin Ltd. / www.preqin.com
Quartile Boundaries for Implementation Skill Fig. 4: Median Implementation Skill and Quartile Boundaries by Vintage Year 0.80 Implementation Skill 0.60 0.40 0.20 0.00-0.20-0.40-0.60-0.80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Vintage Year Bottom Quartile Implementation Skill Boundary Median Implementation Skill Top Quartile Implementation Skill Boundary Source: PERACS Fig. 5: Median Implementation Skill and Quartile Boundaries by Vintage Year Vintage Bottom Quartile Implementation Skill Boundary Median Implementation Skill Top Quartile Implementation Skill Boundary 2000-0.37 0.12 0.50 2001-0.33 0.27 0.62 2002-0.56-0.25 0.15 2003-0.43-0.09 0.42 2004-0.15 0.09 0.51 2005-0.40-0.12 0.15 2006-0.44-0.08 0.27 2007-0.27-0.04 0.20 2008-0.21 0.01 0.27 2009-0.23-0.03 0.26 2010-0.24-0.02 0.14 2011-0.23-0.09 0.11 2012-0.15-0.01 0.14 Source: PERACS 6 2016 Preqin Ltd. / www.preqin.com
Interpreting the Results 1. What does Timing Choice mean? This attribute measures the impact of the timing decision taken by a GP, namely, how investments were timed during the investment period of the fund. 2. What does Strategy Choice mean? This attribute measures the impact of the decision taken by a GP as to which types of company they invest in, i.e. industry sector, investment size, and geography. 3. What does Implementation Skill mean? This attribute measures relative stock selection value add of the GP in addition to the impact the GP has had during its stewardship of an investment i.e. the strategic development of the business, implementation of its value creation plan, management appointments etc; its key ingredients of value creation. 4. What does a positive score indicate? A positive score in a particular dimension indicates that the GP has taken decisions in that dimension that led it to perform better than the average fund s GP in the reference group, as described above in the Timing Choice, Strategy Choice and Implementation Skill descriptions. What a positive Timing Choice score indicates: This GP took timing decisions that improved its performance over the universe of funds raised in the same fi ve-vintage-year period. What a positive Strategy Choice score indicates: This GP made choices related to the industry, size and geography of the acquired assets that improved its performance over those funds raised in the same fi ve-vintage-year period that made comparable timing decisions. What a positive Implementation Skill score indicates: This GP was better able to implement its chosen investment strategy than those funds raised in the same fi ve-vintage-year period that made comparable timing and strategy decisions. 5. What does a negative score indicate? A negative score in a particular dimension indicates that the GP has taken decisions in that dimension that led it to perform worse than the average fund s GP in the reference group, as described above in the Timing Choice, Strategy Choice and Implementation Skill descriptions. 6. Which is more important: Timing Choice, Strategy Choice, or Implementation Skill? While each of these attributes is important, a user needs to fi rstly compare the results to the articulated strategy and approach of the GP in question to help answer questions such as: Is the key skill of this GP its ability to be a great market timer? Only the Implementation Skill shows positive persistence of returns which would imply this characteristic is the most important one when selecting future outperformers. 7. How do I benchmark the relative score sizes? Identify a set of GPs that are comparable from your perspective and look at the relative score they each have in the different MCI components. 8. How do I interpret these scores and apply this to the other diligence I am completing on the target GP? This methodology helps a user identify the sources of value creation by a GP in an objective, formulaic and independent manner. The results need to be compared to the GP s articulated investment strategy, and can either quantitatively help back-up the qualitative assessment of a GP and/or be used as part of additional advance due diligence with a GP and/or help fi lter which GP from a number a user would like to prioritize for additional due diligence. 7 2016 Preqin Ltd. / www.preqin.com
Frequently Asked Questions 1. Why is understanding MCI important? Understanding how a GP creates value is important as it gives a greater insight into the nature of the skills of a particular GP, which can be compared to the way their strategy is articulated. More importantly, performance driven by a GP s Implementation Skill shows persistence over time, and hence is a strong indicator that the GP has a higher chance of continuing to perform in the future. 2. Is a strong Implementation Skill Score an indicative feature to demonstrate persistence? Yes. 3. How is the universe of comparables calculated? A competitor Peer Universe is created by identifying all funds raised in a similar period to the GP in question, i.e. those funds raised in +/- 2 years of the GP s defi ned vintage year. Within this universe we then fi lter to only include funds with similar timing of investments and then fi lter again to only include funds with a similar strategy, i.e. similarity in terms of the size, the industry and the geography of the underlying assets, to the GP in question. 4. What data is needed to run the analysis on a fund? In order to run the analysis we need the net-to-lp performance data of the fund as well as at least fi ve deals from the fund including information on the size, timing, sector and location of that deal. 5. How does this Peer Universe differ from the traditional vintage year approach? This approach creates a Peer Universe based on the similarity of underlying deals done by the GP in question to consider GPs which have also completed similar deals rather than the often used method of creating a peer set based on the vintage year a fund happened to be raised in. 6. How big is the universe for funds? There was suffi cient data to run the analysis on 1,119 PE funds. 7. How big is the universe for deals? Information on 26,771 PE-backed deals was used to support the analysis of the 1,119 funds. 8. How many funds are typically in the five year vintage group peer set? On average fi ve times more than in a typical vintage year. 9. Can I see which funds make up the peer benchmark for a target fund? Identifying similarity based on the underlying deals a fund makes as opposed to vintage year often leads to non-traditional results that require a more detailed explanation of the methodology. To understand more about the peer set for a given fund please contact PERACS directly at info@peracs.com 10. What are the limitations of this methodology? While this methodology has been designed to provide directionally correct insights despite possible imperfections in the underlying data on fund performance and investment activity, the method only considers deals that actually happened. As such it cannot capture that funds may have been in regular competition for similar deals, but eventually ended up making investments that were not very similar as per our defi nition of similarity. Data limitations prohibit us from considering other deal attributes than size, industry and geography, so that we do not capture which fund are similar with respect to their choice of buy-and-build versus standalone buyout strategies. The method uses netto-lp performance data only. Based on the way that similarity is determined the method inherently assumes that deal size and a deal s impact on overall fund TVPI are perfectly aligned. While this may not hold true for individual funds, we fi nd that across a universe of >1000 funds these factors are highly correlated. Given the above, the Strategy choice metric for specialist funds is often understated. For a detailed explanation of the methodology, or the results for a specifi c fund, please contact Preqin client services: clientservices@preqin.com. 8 2016 Preqin Ltd. / www.preqin.com
Preqin Special Report: Finding Winners September 2016 Preqin: Global Data and Intelligence With global coverage and detailed information on all aspects of the private equity asset class, Preqin s industry-leading Private Equity Online service keeps you up-to-date on all the latest developments in the private equity universe. Source new investors for funds and co-investments Find the most relevant investors, with access to detailed profi les for over 6,300 institutional investors actively investing in private equity, including future fund searches and mandates, direct contact information and sample investments. Identify potential investment opportunities View in-depth profi les for over 1,700 private equity funds currently in market, including information on investment strategy, geographic focus, key fundraising data, service providers used and sample investors. Find active fund managers in private equity Search for fi rms actively targeting private equity investments. View information on key contacts, fi rm fundraising and performance history, and applied strategies of the fi rm when investing in portfolio companies and assets. Analyze the latest private equity fundraising activity See which fi rms are currently on the road raising a private equity fund and which will be coming to market soon. Analyze fundraising over time by fund strategy and location. See the latest buyout and venture capital deals and exits View details of more than 153,000 buyout and venture capital deals, including deal value, buyers, sellers, debt fi nancing providers, fi nancial and legal advisors, exit details and more. Identify forthcoming exits and expected IPOs. Benchmark performance Identify which fund managers have the best track records, with performance benchmarks for private equity funds and performance details for over 5,700 individual named funds. Examine fund terms See the typical terms offered by funds of particular types, strategies and geographical foci, and assess the implications of making changes to different fees. For more information, please visit: www.preqin.com/privateequity If you would like any further information, or a demo of our products, please contact us: New York: One Grand Central Place 60 E 42nd Street, Suite 630 New York NY 10165 Tel: +1 212 350 0100 Fax: +1 440 445 9595 London: 3rd Floor Vintners Place 68 Upper Thames Street London EC4V 3BJ Tel: +44 (0)20 3207 0200 Fax: +44 (0)87 0330 5892 Singapore: One Finlayson Green, #11-02 Singapore 049246 Tel: +65 6305 2200 Fax: +65 6491 5365 San Francisco: One Embarcadero Center Suite 2850 San Francisco CA 94111 Tel: +1 415 316 0580 Fax: +1 440 445 9595 Hong Kong: Level 9, Central Building 1-3 Pedder Street Central, Hong Kong Tel: +852 3958 2819 Fax: +852 3975 2800 Manila Pascor Drive Sto. Niño Parañaque City Metro Manila 1700 Philippines Email: info@preqin.com Web: www.preqin.com 2015 Preqin Ltd. / www.preqin.com