Private Equity Institutional Investor Trends for 2013 Survey

Private Equity Institutional Investor Trends for 213 Survey

Probitas Partners is a leading independent knowledge, innovation, and solutions provider to private markets clients. We serve both institutional investors who seek to place capital and select leading fund sponsors who seek to raise capital for private equity, real estate, infrastructure, credit, and hedge funds. 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 all 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 for 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.

Contents The Private Equity Fundraising Environment...2 Private Equity Institutional Investor Survey...3 Overview of Survey Findings...3 Profile of Respondents...4 Sectors and Geographies of Interest...8 Emerging Markets...2 U.S. Middle-Market Funds...24 Venture Capital...26 Niche Private Equity Sectors...27 Fund Structures and Key Terms...31 Investor Fears and Concerns...34 Our View of the Future...38 212 Probitas Partners Private Equity Investor Trends for 213 Survey 1

The Private Equity Fundraising Environment Fundraising in 212 is on pace to meet or slightly exceed 211 s total as the private equity markets adjust to what is becoming the new normal in the wake of the Global Financial Crisis. Underlying the top-line numbers in Chart I are a number of competing data-points: Mega Buyout funds in the United States and Europe are raising large funds that are boosting commitments but most of these funds are targeting significantly less than they did at the market peak. Fundraising in Asia, a relative strong point during the Global Financial Crisis, is now under pressure especially for RMB-denominated Chinafocused funds that had been growing strongly since 26. Fundraising for venture capital funds which had been a driving part of the Internet Bubble remained limited and significantly off their unsustainable peaks. Secondary fundraising is on pace to meet or slightly exceed its 29 peak as transaction volumes increase, in part due to changes in bank regulations that are causing many bank portfolios to be sold. Chart I Global Commitments Private Equity Partnerships 6 5 49 477 4 392 USD in billions 3 2 1 2 27 4 49 64 97 148 175 31 175 94 99 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 3Q YTD 212 138 36 168 17 262 188 Source: Thomson Reuter Private Equity Investor Trends for 213 Survey 2 212 Probitas Partners

Private Equity Institutional Investor Survey Probitas Partners conducted its online survey at the beginning of October 212 to gauge investor interests, opinions, and perspectives on investing in private equity. This survey is administered annually to gauge emerging trends and to compare investors changing views over a longer period of time. Responses were received from senior investment executives globally, representing such institutions as public and corporate pension plans, fund-of-funds, family offices, endowments and foundations, and consultants and advisors, among others. Overview of Survey Findings The following summarizes the top-line findings from the survey: Steady interest in private equity: The rebound from the Global Financial Crisis continues and investors are likely to commit slightly more to private equity in 213 than 212; however, the appetite for new managers remains limited as many established programs remain focused on consolidating current fund manager relationships, with a more limited look at new relationships. Continued focus on small buyout and growth capital funds: Investors remain focused on small and middle-market buyout and growth capital funds in the United States and Europe, backfilling underexposed areas of their portfolios, and on Asian country-focused funds; however, many investors have already established core relationships in these sectors. Interest in emerging markets is under pressure: Investors are increasingly concerned with political risk in the emerging markets and are less convinced of the inherent high-growth story. China and Brazil still dominate interest in the sector; interest in India has declined significantly while Turkey and Indonesia, though smaller markets, are the rising stars of the moment. Credit vehicles (distinct from mezzanine funds) are rising in interest: Creditoriented strategies and vehicles have come into fashion, especially in North America, as the debt markets have remained difficult, creating opportunities in the sector. Venture capital interest remains muted: Even with the increased profile of social media investments, interest in venture capital remains very low, with fewer respondents listing it as a sector of interest. Furthermore, significant numbers of investors are choosing not to invest in the sector at all. Within venture capital, interest in cleantech-focused funds is noticeably weak. Large investors increasingly focus on co-investments: Large investors with the resources to develop co-investment programs are increasingly targeting this sector in an effort to enhance net returns. 212 Probitas Partners Private Equity Investor Trends for 213 Survey 3

Profile of Respondents There were 126 respondents to the survey. As detailed in Chart II, most respondents were from pension plans, funds-of-funds, family offices, and endowments. Respondents were geographically diverse, with strong participation from North America, Europe, and Asia as noted in Chart III. As Chart IV details, many investors are near the top of their allocations (65% of the non-funds-of-funds respondents), though investors have marginally more allocation flexibility this year than they had last year. Funds-of-funds allocations are, of course, different driven by their ability to raise fund vehicles or separate accounts rather than make allocations out of a larger portfolio. The fundraising market for funds-of-funds has continued to be difficult since the Global Financial Crisis. Chart II Respondents by Institution Type I represent a: 8% 7% 9% 6% 1% 3% 2% 1% 12% 33% Fund-of-Funds Manager Consultant/Advisor Insurance Company Corporate Pension/ Superannuation Plan Public Pension/Industry Pension Plan Family Office Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Endowment/Foundation Bank Sovereign Wealth Fund/ Government Entity Other Private Equity Investor Trends for 213 Survey 4 212 Probitas Partners

Chart III Respondents by Firm Headquarters My firm is headquartered in: 43% Western Europe 35% 16% North America Asia/Middle East 6% Australia Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Chart IV Current and Target Private Equity Allocations As far as our current private equity allocation, we are: Roughly at our target and are looking to maintain that level of exposure 29 35 Under our target allocation and actively committing to private equity to achieve that target Over our target and are looking to reduce exposure to meet that target Roughly at our target and considering increasing the target Over our target but seeking to increase the target Looking to reduce our target and exit the asset class 2 1 1 6 6 6 7 14 17 A fund-of-funds or consultant to which the question does not apply Other 1 2 34 39 15 3 45 213 212 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 5

What drives investors to invest? As detailed in Chart V, consistent with our past surveys, all other reasons are secondary to pursuing the best available managers and funds, though the focus on best managers has become more important to more investors since the Global Financial Crisis. Proven top quartile managers can be difficult to access, and since funds only come to market every three to five years, many investors feel compelled to commit to these managers when they are available and open. As covered in Chart VI, more respondents increased deployment as 213 approached, continuing the allocation rebound after the bottom of the fundraising market was reached in 29. Chart VII shows that two thirds of respondents are focused on their current general partner relationships, with only 28% strongly focused on developing new general partner relationships. Based on our discussions with investors, many continue to triage general partner relationships, determining which to continue to back and choosing not to re-up with others and/or looking to sell positions with stale relationships in the secondary market. Among investors new to private equity (especially in Asia) that are not burdened by large legacy portfolios built during the Liquidity Bubble, there is much more interest in building new fund manager relationships. Only 3% of respondents targeted separate accounts as their primary means of investing in private equity. Chart V Drivers of Sector Investment My sector investment focus in 213 is driven by: My institution is pursuing the best funds and managers available in the market 46 A focus on those private equity sectors I believe will outperform others in this vintage year 14 Maintaining established relationships with fund managers returning to market this year 12 My institution s need to diversify its private equity portfolio 8 Targeting funds that will provide access to co-investments 5 My need to decrease exposure to private equity 1 My need to deploy significant amounts of capital allocated to private equity The strategies that my clients have directed us to pursue 13 Other 1 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 1 2 3 4 5 Private Equity Investor Trends for 213 Survey 6 212 Probitas Partners

Chart VI Private Equity Allocations For 213, we or the clients we advise are looking to commit across all areas of private equity (in USD): 4 34 3 2 1 19 19 26 16 15 17 1 13 12 9 1 <$5 MM $5 MM $15 MM $15 MM $25 MM $25 MM $5 MM $5 MM $1 B >$1 B 213 212 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Chart VII Manager Relationships During 213, we would expect our major focus to be: Evaluating re-ups with current GP relationships, looking to decrease the number of relationships significantly 54 Evaluating re-ups with current GP relationships with a limited look at new relationships 8 Evaluating re-ups with current GP relationships 5 Actively pursuing relationships with new managers 28 Pursuing separate accounts with a smaller number of managers 3 Our 213 allocation is already completely allocated 2 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 1 2 3 4 5 6 212 Probitas Partners Private Equity Investor Trends for 213 Survey 7

Sectors and Geographies of Interest Chart VIII details the sectors of interest to investors for 213: As has been the case in most of our previous surveys, middle-market buyout and growth capital in the United States and Europe dominate interest at the top of the survey. For the first time, we asked about interest in credit strategies separate from interest in mezzanine funds. Credit strategies ranked very high sixth among all sectors as continuing problems in the debt markets make this sector more Chart VIII Private Equity Sectors of Interest During 213, I plan to focus most of my attention on investing in the following sectors (choose no more than five): U.S. Middle-Market Buyouts ($5 MM $2.5 B) 58 Growth Capital Funds U.S. Small-Market Buyouts (<$5 MM) European Middle-Market Buyouts (Country-Focused) 4 4 39 European Middle-Market Buyouts (Pan-European) 35 Credit Strategies Asian Country-Focused Funds Distressed Debt Funds 23 24 26 Energy Funds 21 Mezzanine/Credit-Focused Funds 19 Infrastructure Funds Pan-Asian Funds 17 17 Secondary Funds U.S. Venture Capital U.S. Large Buyouts ($2.5 $5 B) 13 15 14 Restructuring Funds 11 Fund-of-Funds Emerging Markets (Ex-Asia) 8 8 Mega Buyout Funds (>$5 B) 7 Cleantech/Green-Focused Funds Mining Funds Agriculture Funds 3 3 4 European/Israeli Venture Capital Timber Funds 1 1 Other Niche Sectors 4 1 2 3 4 5 6 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Private Equity Investor Trends for 213 Survey 8 212 Probitas Partners

attractive to private equity investors; interest by North American investors was particularly strong. Even with strong social media IPOs in late 211 and early 212, global interest in U.S. venture capital remained weak, ranking 14th on the overall list. At the margin, there is increased interest in hard asset strategies, but the interest is scattered amongst infrastructure, agriculture, mining, and timber funds strategies that may or may not be part of private equity allocations for respondents. Mega-buyout funds continued to rank very low in interest, continuing the results of our prior surveys, even at the peak of the market. Table I compares the top-ranked areas of interest from our 27 survey just before the Global Financial Crisis and the current survey (slightly adjusted as the 213 results included more sub-categories). The findings are not surprising: U.S. and European middle-market buyout funds scored extremely well before the Global Financial Crisis as they still do now. Interest in U.S. venture capital has fallen significantly since 27, with various problems in the sector still playing out. Even at the very early stages of the Global Financial Crisis, interest in distressed debt increased as investors began to hedge their bets in what they saw as an increasingly frothy environment. The rise of interest in growth capital and credit strategies into the upper ranks has been propelled by persistent difficulties in debt markets. Table I Investors Focus of Attention Among Private Equity Sectors Top five responses: 27 213 Sector % Targeting Sector % Targeting U.S. Middle-Market Buyouts 49% U.S. Middle-Market Buyouts 58% European Middle-Market Buyouts 42% Growth Capital 4% U.S. Venture Capital 34% European Middle-Market Buyouts 39% Distressed Debt 3% Credit Strategies 26% Asian Funds 25% Asian Funds 24% Source: Probitas Partners Survey of Institutional Limited Partners, 27 & 213 212 Probitas Partners Private Equity Investor Trends for 213 Survey 9

U.S. middle-market buyouts top ranking in the survey partially reflects the fact that 43% of the respondents are from North America. This continues to be a trend for most investors to prefer local funds and strategies generally, and then extend their portfolios geographically as they gain knowledge and experience, and seek greater diversification. Charts IX and X provide a look at the private equity world solely through the eyes of European or Asian respondents. Not surprisingly, Chart IX shows European country-focused middle-market buyouts as the top ranked interest for European investors while pan-european funds also did well. Chart IX Private Equity Sectors of Interest; European Respondents During 213, I plan to focus most of my attention on investing in the following sectors (choose no more than five): European Middle-Market Buyouts (Country-Focused) 76 U.S. Middle-Market Buyouts ($5 MM $2.5 B) 55 European Middle-Market Buyouts (Pan-European) 45 Growth Capital Funds 33 U.S. Small-Market Buyouts (<$5 MM) Asian Country-Focused Funds Infrastructure Funds Credit Strategies 19 19 21 29 Mezzanine Funds Distressed Debt Funds Pan-Asian Funds Restructuring Funds Emerging Markets (Ex-Asia) Secondary Funds Energy Funds U.S. Large Buyouts ($2.5 $5 B) Mega Buyout Funds (>$5 B) Fund-of-Funds Cleantech/Green-Focused Funds U.S. Venture Capital 2 7 7 14 14 14 12 1 1 1 1 1 European/Israeli Venture Capital Mining Funds Agriculture Funds Timber Funds Other Niche Sectors 5 2 4 6 8 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Private Equity Investor Trends for 213 Survey 1 212 Probitas Partners

While U.S. middle-market buyouts were also of interest to Europeans, credit strategies were less interesting, and U.S. venture capital was of little interest. As shown in Chart X, Asian investors look at their home markets more favorably, though U.S. middle-market buyouts are still the major sector of choice. European-based funds and U.S. venture capital are of significantly less interest to Asian investors, although they are much more interested in infrastructure funds, which some of them are investing in through private equity allocations. Asian respondents were also much more focused on core private equity markets with little interest in alternative sectors like timber, mining, or European venture capital. Chart X Private Equity Sectors of Interest; Asian Respondents During 213, I plan to focus my attention on investing in the following sectors (choose no more than five): U.S. Middle-Market Buyouts ($5 MM $2.5 B) Asian Country-Focused Funds Infrastructure Funds Growth Capital Funds European Middle-Market Buyouts (Pan-European) Pan-Asian Funds Distressed Debt Funds Secondary Funds U.S. Small Market Buyouts (<$5 MM) Mezzanine Funds European Middle-Market Buyouts (Country-Focused) Credit Strategies Energy Funds U.S. Large Buyouts ($2.5 $5 B) Mega Buyout Funds (>$5 B) Restructuring Funds U.S. Venture Capital Cleantech/Green-Focused Funds Timber Funds Fund-of-Funds Emerging Markets (Ex-Asia) European/Israeli Venture Capital Mining Funds Agriculture Funds Other Niche Sectors 6 6 12 12 12 12 18 24 24 24 24 24 29 29 41 41 65 1 2 3 4 5 6 7 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 11

As far as general geographic interest, the three major geographies of North America, Western Europe, and Asia continue to dominate investor interest. As discussed above, though not detailed in Chart XI, respondents from each of these territories favor their home markets as their most important targets. There was less interest in Asia generally in this year s survey, with the percentage of respondents targeting Asia falling modestly from 65% last year to 53% this year. There is very little interest in MENA and Africa, though Central and Eastern Europe is beginning to rebound after being hurt by the Global Financial Crisis. Private Equity Investor Trends for 213 Survey 12 212 Probitas Partners

Chart XI Private Equity Geographical Focus During 213, I anticipate that the three major geographical focuses of my program will be: 9 84 8 7 74 6 5 4 3 2 53 18 1 8 3 1 2 2 North America Western Europe Asia Latin America Central and Eastern Europe Middle East/ North Africa Africa Emerging Markets Globally Other Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 13

As far as European markets, for the sixth consecutive year, institutional investors preferred to invest in the Nordic Region by a significant margin. As covered in Chart XII, Germany and the United Kingdom once again rounded out the top three geographies of interest, though interest in both countries increased compared to last year. Italy and Spain are the least interesting to investors, as both countries continued to deal with significant macroeconomic issues. Interest in France fell noticeably compared to last year; the French government s recently announced tax plan and its potential effects on private equity became widely discussed just as the survey was opening for responses, and the issue might have had a greater impact if it had been known before the survey opened. Private Equity Investor Trends for 213 Survey 14 212 Probitas Partners

Chart XII Most Attractive European Markets For European country/regionally-focused funds, I find the most attractive markets to be (choose no more than three): Nordic Region Germany 44 48 62 61 United Kingdom Benelux 2 19 34 4 I only invest in Europe through Pan-European funds France Central Europe (Poland, Czech Republic, Hungary, etc.) Eastern Europe (Russia, Ukraine, Georgia, etc. ) Spain 3 2 6 4 7 7 9 12 13 13 Italy I only invest in Europe via fund-of-funds I do not invest in Europe Other 2 1 4 4 5 11 1 11 1 2 3 4 5 6 7 213 212 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 15

As Chart XIII highlights, European investors view their home market similarly to global investors in terms of greatest areas of interest, but with even more focus on the Nordic Region and Germany. Europeans, as with global investors, remain leery of Southern Europe given the current economic problems there. There is significantly more interest in Central Europe from Europeans than there is from overall respondents. Private Equity Investor Trends for 213 Survey 16 212 Probitas Partners

Chart XIII Most Attractive European Markets; European Respondents For European country/regionally-focused funds, I find the most attractive markets to be: (choose no more than three) Nordic Region 62 83 Germany 48 68 United Kingdom 43 4 Benelux 2 28 France 9 15 I only invest in Europe through Pan-European funds 3 12 Central Europe (Poland, Czech Republic, Hungary, etc.) Eastern Europe (Russia, Ukraine, Georgia, etc.) Spain 3 3 7 8 6 13 Italy 2 5 I only invest in Europe through fund-of-funds I do not invest in Europe Other 3 4 3 4 1 1 2 3 4 5 6 7 8 9 European Respondents Overall Respondents Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 17

Chart XIV highlights global respondents interest in Asian geographies going into 213. China remains the top Asian geography of interest among all parties, though the interest fell significantly from 55% of overall respondents and 72% of Asian respondents last year. The biggest difference between Asian respondents and overall respondents this year is a much greater interest locally in Japan; however, there were a disproportionate number of Japanese respondents in the survey this year focused on their home market, slightly skewing the Asian results. Last year 3% of overall respondents targeted India, while this year 13% of overall respondents and only 9% of Asian respondents were focused there. Chart XIV Most Attractive Asian Markets; Asian Respondents Which Asian markets do you find most attractive at the moment? (choose no more than three): China Southeast Asia Australia Pan-Asian funds Indonesia South Korea India Japan Taiwan Vietnam Asia via global funds Asia via fund-of-funds I do not invest in Asia Other 1 1 1 6 6 6 9 13 12 13 12 13 14 15 19 18 18 18 21 25 3 35 44 53 1 2 3 4 5 6 Overall Asian Respondents Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Private Equity Investor Trends for 213 Survey 18 212 Probitas Partners

Table II highlights how interests within the Asian market have changed since the Global Financial Crisis started. In 27, China, India, and Japan were nearly tied in investor interest. Since then, interest in India has fallen precipitously as investors grew increasingly concerned over lack of exits. The appetite for Japan has been impacted by a similar problem. Interest in Southeast Asian funds has increased over the last two years, driven in part by investor focus on Indonesia and a desire to diversify away from China exposure, while Australia benefits in the survey from a disproportionately large number of Australian respondents targeting their home market. Notably, in 27 a quarter of respondents did not invest in Asia; that number declined to only 15% in 213. Table II Which Geographies in Asia are of the most interest in private equity? Top four responses: 27 213 Country/Region % Targeting Country/Region % Targeting China 28% China 44% India 28% Southeast Asia 25% Japan 25% Australia 21% I do not invest in Asia 25% Pan-Asian funds 19% Source: Probitas Partners Survey of Institutional Limited Partners, 27 & 213 212 Probitas Partners Private Equity Investor Trends for 213 Survey 19

Emerging Markets As detailed in Chart XV, China and Brazil clearly lead investor interest in emerging markets, though interest in China has declined noticeably over the last year. The biggest change, however, is the fall of interest in India. In all our previous surveys, China, Brazil, and India have held the top three positions in the survey, though the rank among the three sometimes shifted. This year, however, the percentage of respondents targeting India fell to 13% from 3% last year, dropping India into the seventh position. In conversations with investors, the most frequent complaint was that, after making a number of bets on Indian funds in the middle of the last decade, they were still waiting for exits and were unwilling to make new commitments to India until they had received more capital back. Interest in Turkey and Indonesia has surged in the last two years, and as far as individual geographies, they now round out the top five along with Southeast Asia. The other BRIC country Russia continued to trail significantly in the survey, as it has for a number of years. Limited partners tell us that they are concerned about de facto investors rights and alignment of interest in the Russian market. Private Equity Investor Trends for 213 Survey 2 212 Probitas Partners

Chart XV Most Attractive Emerging Markets I find the most attractive emerging markets to be (choose no more than two): China Brazil Turkey Southeast Asia Indonesia Pan-Latin America India South Korea Central Europe Colombia Mexico Pan-Asia Russia Peru Eastern Europe Chile MENA I only invest in global emerging market funds Vietnam Sub-Saharan Africa Mongolia Other I do not invest in emerging markets 1 2 2 2 2 3 4 4 3 3 3 3 3 4 4 4 4 5 5 6 7 7 8 8 8 1 1 1 11 15 16 13 2 2 18 17 19 13 18 21 29 3 33 38 47 1 2 3 4 5 213 212 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 21

As detailed in Chart XVI, the driving factor attracting investor interest in emerging markets was the prospect of strong long-term economic growth that was likely to positively impact returns. However, the percentage of respondents who felt compelled to invest in emerging markets on that theory dropped from 77% last year to 6% this year. Over the last year the percentage of respondents saying that they were not interested in emerging markets generally, but rather chose to focus on a few specific countries with large opportunities, increased from 11% to 28%. As depicted in Chart XVII, the reasons investors avoid emerging markets were led by concerns about political, currency, and economic risks. This year, the number of respondent citing those concerns increased by nearly two-fold. Private Equity Investor Trends for 213 Survey 22 212 Probitas Partners

Chart XVI Interest in Emerging Market Private Equity My interest in emerging market private equity is driven by (check all that apply): Strong long-term economic growth in a number of these countries 6 Desire to diversify my private equity portfolio by geography to achieve the benefits of lack of correlation 33 I am less interested in emerging markets in general than in exposure to a few specific countries with large opportunities 28 Lower forecast returns in the established markets of private equity make this sector more attractive 12 As an institutional investor from an emerging market I am looking to support my home markets 1 Other 7 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 1 2 3 4 5 6 7 Chart XVII Disinterest in Emerging Market Private Equity For those not interested in emerging markets, I am not interested because (check all that apply): I am uncomfortable with the degree of political, currency, or economic risk in emerging markets 52 These markets are not developed enough, and it is difficult to find experienced managers with strong track records 36 I am not staffed properly to perform due diligence on these markets that basically offer emerging manager risk as well as emerging markets risks 21 As an organization, we are satisfied with getting emerging markets exposure through publicly-traded securities 18 My private equity program is relatively new and we are focused on building exposure in our core, home markets before diversifying 15 Other 9 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 1 2 3 4 5 6 212 Probitas Partners Private Equity Investor Trends for 213 Survey 23

U.S. Middle-Market Funds In many sectors, geography is a major strategic differentiator between funds but not in the large, homogeneous market for buyouts in the United States. Instead, this market is predominantly differentiated by various investment strategies. As detailed in Chart XVIII, a majority of respondents indicated a strong preference for funds that generated returns via operational improvements and were staffed with operating professionals. This is consistent not only with past survey results but also across all investor types. Interest in restructuring/turnaround funds has fallen into fourth place this year, with only 26% of investors targeting it. These funds are the most volatile in investor interest over time, fluctuating significantly with market cycles. Private Equity Investor Trends for 213 Survey 24 212 Probitas Partners

Chart XVIII Most Attractive U.S. Middle-Market Sectors Which of these sectors/strategies in the U.S. Middle Market do you find most appealing? (check all that apply): Funds focused on operational improvements heavily staffed with professionals with operating backgrounds 58 Funds focused on buy-and-build strategies 4 Funds focused on single industries (i.e., retail, healthcare, media) 3 Restructuring/turnaround funds 26 Strategy is irrelevant, a demonstrable superior track record is my only concern Funds focused on strongly growing companies, often investing without majority control 2 2 Regionally-focused funds 11 I only invest in the U.S. middle market through fund-of-funds 4 I do not invest in the U.S. middle market 16 Other 2 4 6 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 25

Venture Capital Venture investor interest in stage and sector has remained static over our last several surveys, though interest in cleantech-focused funds has continued to dwindle to a very low level for 213 projections as detailed in Chart XIX. Endowments and foundations remain much more active in venture capital than other investors and are focused on early stage investments, with 5% of respondents targeting that stage. Since 27, the percentage of respondents who stated that they do not invest in venture capital has more than doubled, from 17% to 39%. Europeans are the most negative on the sector, with 54% of respondents saying they do not invest at all, while endowments are the most positive, with only 12% not targeting the sector. Chart XIX Most Attractive Venture Capital Sectors In venture capital I focus on funds active in the following sectors or stages (choose all that apply): Funds investing in multiple sectors 19 Technology only funds 18 Life science only funds 8 Cleantech only funds 2 Multi-stage 21 Late-stage 21 Mid-stage 17 Early stage 25 Seed stage 17 Focus solely on historic returns 6 I only invest in venture capital through fund-of-funds 9 I do not invest in venture capital 39 Other 3 1 2 3 4 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Private Equity Investor Trends for 213 Survey 26 212 Probitas Partners

Niche Private Equity Sectors There are several distinct distressed strategies, but many fund managers pursue a combination of these approaches within the same fund. As noted in Chart XX, most respondents prefer strategies with a value-added focus that generates higher multiples of return. Consequently, distressed debt for control funds had the strongest interest. For the first time this year, we asked investors to rank separately opportunistic credit funds. They clearly differentiated between this strategy and the others and investors were much more interested in opportunistic credit over trading strategies. 26% of respondents said that they do not invest in the distressed sector at all, including 32% of European respondents. Chart XX Distressed Investments Within the distressed debt/restructuring sector, I am most interested in (choose no more than two): Distressed debt for control funds ( Loan-to-Own ) 48 Restructuring/turnaround funds (focused on equity, not debt) 4 Opportunistic credit (mispriced debt, small loan portfolios, etc.) 29 Distressed debt active/non-control funds (often hold through restructuring) 18 Distressed debt trading funds 5 Distressed debt hedge funds 2 I do not invest in this sector 26 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 1 2 3 4 5 6 212 Probitas Partners Private Equity Investor Trends for 213 Survey 27

212 has been an extremely active year for both secondary fundraising and transaction volume, driven in part by regulatory changes impacting bank portfolios. Chart XXI reflects very few changes in investor preferences since last year, with a large number of respondents actively purchasing secondary positions directly or investing through secondary funds. The most frequently mentioned Other strategy was purchasing secondary positions in funds where the buyer had an established relationship with the general partner and sought to increase its exposure in funds, where investors sought to gain strategic as well as financial benefit. Chart XXI Secondary Market Investments In the secondary market my firm (choose all that apply): Actively purchases direct positions in the secondary market 41 41 Actively invests in secondary funds 33 38 Is not active in secondaries in any manner Has sold or is considering selling funds in our portfolio for portfolio management purposes 14 24 22 21 Provides advice to clients on secondaries 12 11 Actively purchases direct positions in companies in the secondary market 6 6 Other 4 4 1 2 3 4 5 213 212 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Private Equity Investor Trends for 213 Survey 28 212 Probitas Partners

As Chart XXII details, the majority of institutional investors do not pursue co-investments or direct investments, or only do so opportunistically because of staff or capital limitations. The largest investors are much more likely to have an active co-investment program; nearly half of these large respondents have an active internal coinvestment program, while another 11% have outsourced programs and 16% invest directly in companies. Chart XXII Directs and Co-Investments Regarding directs and co-investments, my firm (choose all that apply): Does not invest in co-investments nor directly invests in companies 26 39 Has an active internal co-investment program Provides advice to clients on co-investment or direct investments Invests directly in companies Requires or prefers a co-investment as a means of diligencing a new fund manager Has an outsourced co-investment program Only opportunistically pursues co-investments 5 6 9 9 11 11 16 16 16 25 28 48 Other 5 1 2 3 4 5 6 All Respondents Large Investors Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Note: Large Investors denotes those survey respondents who plan to commit $1 billion or more to private equity in 213 212 Probitas Partners Private Equity Investor Trends for 213 Survey 29

Coming out of the Global Financial Crisis, there has been some renewed activity in publicly-traded vehicles, either at the management company level or the investment vehicle level. However, as detailed in Chart XXIII, there remains little interest in this sector generally among institutional private equity investors, across all types or geographies of investors. One interesting difference from last year s survey is that more investors previously active in publicly traded private equity vehicles are now decreasing or eliminating their exposure. Chart XXIII Publicly Traded Private Equity Vehicles As far as publicly traded private equity vehicles, my firm (choose all that apply): Has not made an investment in the sector in the past and has no plans to do so 83 79 Previously invested in the sector but is decreasing or eliminating our exposure 2 9 Has invested in publicly traded private equity fund-of-funds and plans to maintain or build this exposure in the future Has not made an investment in the sector in the past but is considering doing so 3 3 5 1 Has invested in publicly traded private equity vehicles that invest directly in companies and plans to maintain or build this exposure in the future 2 2 Other 2 1 2 3 4 5 6 7 8 9 212 213 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Private Equity Investor Trends for 213 Survey 3 212 Probitas Partners

Fund Structures and Key Terms The ILPA Principles have had a significant impact on fund terms and have been widely adopted as a starting point for negotiations. As it has been in most of our past surveys, the level of general partner financial commitment to a fund has been the most important term for most investors as covered in Chart XXIV; the exception this year was for insurance companies, who were more focused on the level of management fees and on carry distribution waterfalls than general partner commitment level. The distribution of carried interest between senior professionals an issue investor believe is important to team stability rose in importance from fourth last year to second this year. As far as the Other responses, the most frequently cited term was simply all of the above. Chart XXIV Issues Regarding Fund Structure The issues I focus on most as far as terms or structure of a fund are (choose no more than three): Level of general partner financial commitment to the fund 54 Distribution of carried interest between the senior investment professionals Overall level of management fees 38 38 Carry distribution waterfalls 35 Cap on fund size 32 Structure or inclusion of a key man provision 3 Ownership of the management company 22 Transaction fee splits 21 Level of carried interest Structure or inclusion of a no-fault divorce clause 13 14 Sharing of carry and/or investment decision making with a third-party sponsor 9 Other 5 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 1 2 3 4 5 6 212 Probitas Partners Private Equity Investor Trends for 213 Survey 31

There were some very distinct differences in investor views on key structural issues by geography. Chart XXV lays out the differences between Asian and European investors. Asian investors are much more concerned about capping fund size as many of the successful fund managers in Asia have been growing quickly and raising much larger follow-on funds. They are also focused on key man clauses given the relatively high level of senior staff turnover in Asia historically. Both Asians and Europeans remain very focused on the general partner financial commitment to the fund. Chart XXV Issues Regarding Fund Structure; Asian Respondents vs. European Respondents The issues I focus on most as far as terms or structure of a fund are (choose no more than three): Level of general partner financial commitment to the fund Cap on fund size Structure or inclusion of a Key Man clause 21 26 44 48 52 52 Overall level of management fees 35 48 Distribution of carried interest between the senior investment professionals Carry distribution waterfall 22 3 36 41 Transaction fee splits Structure or inclusion of a no-fault divorce clause Sharing of carry and/or investment decision making with a third-party sponsor Level of carried interest 5 9 13 13 13 12 19 26 Other 2 1 2 3 4 5 6 Asian Respondents European Respondents Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey Private Equity Investor Trends for 213 Survey 32 212 Probitas Partners

After a pause during the Global Financial Crisis, there has been a resurgence in third-party investment in private equity management companies. Similar to our previous surveys, Chart XXVI shows that limited partners strongest reaction is that these investments create possible conflicts of interest between investors who acquire positions in general partner management companies and limited partners in the funds. Prompted by conversations with limited partners, we decided this year to specifically ask whether such an investment would lead them to reject committing to the underlying funds of a manager who sold a position in its management company: 41% of the respondents said that it would. Only 7% of respondents felt that investing in a private equity management company represented an attractive opportunity. Chart XXVI Third-Party Investments in Private Equity Management Companies I believe third-party ownership of private equity management companies (choose all that apply): Raises the possibility of conflicts of interest between limited partners and investors 72 Leads me to reject investing in the underlying private equity funds 41 Is a natural response to succession issues in private equity funds Is better handled through private as opposed to public structures 2 2 Is likely to expand significantly beyond the large funds that have such relationships 17 Is irrelevant to the fund investment process 8 Presents an interesting investment opportunity 7 Other 5 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 1 2 3 4 5 6 7 8 212 Probitas Partners Private Equity Investor Trends for 213 Survey 33

Investor Fears and Concerns As detailed in Chart XXVII, the greatest fear of most private equity investors was that macro-economic difficulties would have a widespread impact on all alternative investment returns. Exceptions to this dominant fear were pension plans, whose greatest fear was that management fees and transaction fees on large funds were destroying alignment of interest between general partners and limited partners, and endowments and foundations, who most feared that there was too much money coming into all sectors of private equity relative to investable opportunities. The biggest difference on a geographic basis was in Asia, where the second greatest concern (mentioned by 36% of respondents) was that too much money was chasing too few experienced private equity professionals in what are becoming over-heated emerging markets. Interestingly, 25% of all respondents were still concerned that the high purchase price multiples paid by buyout funds for companies from 25 through 27 would continue to drag down their portfolio returns. We also encouraged respondents to state their own greatest fears or concerns not included in our pre-set list. Answers included the following: Private equity is fast becoming a mainstream rather than an alternative asset class. This will lead to a further erosion of returns. In a low rate environment our denominator is not increasing while private managers are coming back to market. We will be unable to continue to commit to private managers at the same level due to concerns about illiquidity. Regulation Venture is well poised to generate superior returns for elite managers. My concern is uneducated LPs allocating into the asset class blindly. For now I think there is sufficient friction to moderate this, but a perennial concern. Increasing number of secondary transactions between sponsors. How to source and diligence international managers, especially in emerging markets. The private equity industry remains highly competitive and is maturing, leading to a compression of returns. Value trapped in mature funds by illiquidity. Lack of exits by private equity. Private Equity Investor Trends for 213 Survey 34 212 Probitas Partners

Chart XXVII Greatest Fears Regarding the Private Equity Market My three greatest fears regarding the private equity market at the moment are: Economic difficulties will have widespread impact on all alternative investment returns 48 Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers 39 Large firms in the market are becoming generalized asset managers and moving away from key investment strengths 33 Too much money pursuing too few experienced private equity professionals in the hot emerging markets Private equity is most effective as a niche market too much money is being raised in all private equity sectors 28 3 High purchase price multiples paid for buyout portfolio companies in 25 through 27 will dramatically impact my long-term returns 25 Investment by third parties into fund management companies is decreasing alignment of interest between limited partners and general partners Commitment overhang and allocation pressure will continue to impact my ability to invest in attractive opportunities in 213 Continued volatile IPO markets will negatively impact venture capital returns 14 15 17 The venture capital investing model is broken and future strong performance is unlikely to return I find myself increasingly at odds with other limited partners due to preferential treatment 1 1 Decreased leverage availability will hurt companies needing working capital or re-financing Access to top quartile ventures capital managers is impossible without a previous relationship, and new managers are unattractive 7 8 The number of funds in my portfolio is too large for my firm to effectively monitor 5 Decreasing opportunities are limiting my access to co-investments 5 Another technology bubble is in the process of forming 5 We do not have adequate staff in place to deal with issues in my current portfolio 5 Other 7 1 2 3 4 5 6 Source: Probitas Partners Private Equity Institutional Investor Trends for 213 Survey 212 Probitas Partners Private Equity Investor Trends for 213 Survey 35

Table III takes us back to the beginning of 27 and highlights investors concerns before the Global Financial Crisis was fully developed and compares them to fears going into 213. Though concerns about management fees and transaction fees destroying alignment of interest were among the top three concerns pre- and post- Global Financial Crisis, in 27 investors were very aware that there was too much debt and equity available in the buyout market and that the strong returns leading up to 27 were unlikely to continue. In the survey for 213 planning, a third of respondents are concerned that large firms in the market are becoming asset managers focused on AUM growth and are moving away from their key investment strengths an issue that was not topical in 27. Private Equity Investor Trends for 213 Survey 36 212 Probitas Partners

Table III What keeps you up at night? Top three responses: 27 213 Issue % Targeting Issue % Targeting Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors. 51% Economic difficulties will have widespread impact on all alternative investment returns. 48% The amount of leverage in the buyout market is unsustainable, and over the next two years credit problems will hurt performance of recent vintage funds. 48% Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors. 39% There is too much money available in the large buyout market and that will dramatically impact future returns. 44% Large firms in the market are becoming generalized asset managers and are moving away from their key investment strengths. 33% Source: Probitas Partners Survey of Institutional Limited Partners, 27 & 213 212 Probitas Partners Private Equity Investor Trends for 213 Survey 37

Our View of the Future Several key trends for 213 emanate from the survey and our ongoing conversations with investors: We are approaching a new normal in private equity. Fundraising globally is on pace to meet or slightly exceed 211 s totals, and interest for 213 seems to be slightly stronger than 212. Fundraising totals at the last market peak seem more clearly a cyclical aberration. Many investors are still dealing with pre-global Financial Crisis legacy portfolio issues and will continue to in 213. In our experience, many investors with large legacy portfolios built before the Global Financial Crisis are still triaging current general partner relationships: deciding who to continue to back (and usually at increased allocations) and who to sell or manage out, with a limited look at new relationships. The new performance metric distributed cash. Many investors have added a key metric of performance to IRR and Multiple of Capital and that is cash returned, both in absolute terms and as a percent of capital drawn down. As fund managers who last raised money just before the Global Financial Crisis return to market in 213, investors will increasingly demand to see more returned capital as a precursor to commitments to new funds. Investors are becoming more cautious on emerging markets. Interest in emerging markets has declined as the past 18 months have shown that emerging markets have not decoupled from the developed markets and that while the growth story in emerging markets over the next 25 years seems strong, what will happen in private markets over the next five years is much more uncertain. Interest in venture capital will remain weak. Though the mixed success of venture-backed social media companies over the 18 months in the public markets has brought more attention to the sector, poor returns over the last decade still put the sector out of favor. A number of investors have already given up on venture capital entirely, moving their interest to other sectors. Individual funds with very strong track records will still be of interest, but allocations for the shrinking universe of active investors will remain small. Though not a major factor in our survey, we see increasing interest by certain limited partners in hard asset plays. Certain sophisticated investors, worried about economic uncertainty and potential inflation, are turning to hard asset sectors such as mining, agriculture, and timber. Many of these investors are creating separate inflation-linked allocations outside of their private equity, real estate, and debt allocations, but many of them also express frustration because there are few products in these sectors available with experienced management teams and deep track records. However, investor interest in these sectors is attracting new managers that are bringing staff with corporate sector experience to the table to try and address these issues. Private Equity Investor Trends for 213 Survey 38 212 Probitas Partners