State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL 61820-7333 (217) 378-8800 (217) 378-9802 (FAX) To: Investment Committee From: Douglas C. Wesley, CFA Date: May 28, 2010 Re: Pantheon Ventures Private Equity Annual Review Investment Department Overview Pantheon Ventures, Inc. has managed a private equity portfolio for SURS since January 2002. As of March 31, 2010, Pantheon managed $531 million in private equity for SURS, which represents approximately 49.8% of the total private equity assets and 4.0% of SURS total investment program. In addition, Pantheon manages the Private Opportunities Fund, which is valued at $6 million as of March 31, 2010. The Private Opportunities Fund represents 7.7% of the Opportunity Fund and 0.05% of SURS total investment portfolio. Pantheon Ventures receives an evaluation ranking of B+, which results in our retention recommendation. SURS staff attended the Pantheon Annual Investor Meeting in November, 2009, and conducted an on-site due diligence meeting with Pantheon in San Francisco during March, 2010. Following is a summary of the factors leading to the manager s evaluation ranking. The following table shows the cumulative commitments, contributions, distributions and current valuation of all accounts within the Pantheon private equity portfolio. Investment Commitment ($MM) Contributions ($MM) Distributions ($MM) 12/31/09 Mkt Value ($MM) Separate Account $598.8 $489.1 $160.8 $438.3 Pantheon Europe Fund III 89.7 70.6 44.6 $57.6 Pantheon Global Secondary Fund II 25.0 20.9 12.1 $13.0 Pantheon Europe Fund VI 43.8 9.0 0.0 $7.7 Pantheon USA Fund VIII 103.3 14.5 0.0 $14.4 Total Pantheon Ventures $860.6 $604.1 $217.5 $531.0 The Pantheon private equity portfolio currently combines the following six investments:
Pantheon Ventures Portfolio. Invests in new private equity partnerships in a separate account environment. The separate account program ended its commitment period in June 2007. Pantheon made 68 fund investments for a total commitment of $598 million. Pantheon Europe Fund III (PEURO III) invests in the private equity markets in Western Europe. This fund will be weighted toward later stage and buyout funds, but will also involve commitments to venture capital funds and special situations. In March 2002, SURS made a commitment to the Pantheon Europe Fund III of 68.1 million. The fund held its final close on December 19, 2002. PEURO III is 100% committed to underlying funds. SURS is a member of the Advisory Committee for the Pantheon Europe Fund III. Pantheon Global Secondary Fund II (PGSF II) was formed to acquire portfolios of secondary interests in established venture capital, buyout, mezzanine and special situation funds on a global basis. In June 2002, SURS authorized an investment of up to $25 million into the PGSF II. PGSF II held its final close in July 2004 and is now fully committed. Pantheon USA Fund VIII (PUSA VIII) invests in a diversified portfolio of U.S. venture capital, buyouts, special situations and opportunistic investments in secondary interests and co-investments. This fund held its final close in December 2008. In October 2007, SURS committed of $103.3 million to this fund. SURS is a member of the Advisory Committee for PUSA VIII. The final close for Pantheon Europe Fund VI (PEURO VI) was held on December 23, 2008. The fund is currently 60% committed and 20% drawn. PEURO VI is predominantly buyout focused, with an emphasis on mid-sized and large deals in the more mature Western European markets. There is also some limited exposure to Central & Eastern Europe and selected venture funds. SURS is a member of the Advisory Committee for Pantheon Europe Fund VI. Private Opportunities Fund. Invests in both private and public securities of emerging growth companies, primarily in the software, technology and healthcare industries. SURS committed $25 million to this cross-over strategy, all of which has been drawn. Pantheon assumed responsibility for this portfolio in July 2005. As of December 31, 2009, the Private Opportunities Fund was valued at $5.8 million. Since inception, SURS received distributions from the Private Opportunities Fund totaling $18.55 million. Organization Pantheon was founded in 1982 as the private equity arm of GT Management and became independent in 1988 through a management team buyout. In March 2004, Pantheon was acquired by Russell Investment Group (Russell) and became a wholly owned subsidiary of the global financial services company. Pantheon s management and operations remained largely unchanged under Russell ownership while Pantheon assumed responsibility for Russell s global private equity fund of funds business.
On February 10, 2010, AMG announced it had reached an agreement with Russell to acquire the private equity fund of funds business of Pantheon. AMG is a Boston-based asset management company that takes equity ownership stakes in small- to mid-sized investment management firms. As of the date of this announcement, AMG held equity stakes in more than two dozen investment management firms. Pantheon marks AMG s first foray into the private equity industry. Following the closing of the transaction, which is expected late in the second quarter of 2010, Pantheon s management team will own approximately 15% of the equity in the partnership and continue to direct the firm s day-to-day operations. Carried interest is assigned to most employees across all Pantheon funds, based on role, contributions, and performance. Carry is allocated by a Compensation Committee appointed by the Pantheon Board. By giving employees a share in the total pool, while rewarding individual performance, Pantheon seeks to motivate its employees to focus both on their specific responsibilities and the firm s overall performance. Pantheon assigns carry points to employees for pools of capital raised in each financial year. Twenty percent of an individual s carry vests immediately on award and vests another 20% per year to a maximum of 80%. Staffing Primary contacts for SURS on Pantheon s investment team include Susan Long McAndrews and Matt Curran. Pantheon s total staff complement remains unchanged at 143 as of March 31, 2010. Listed below is the staffing distribution for Pantheon Ventures: Professionals Number of Employees Investment Professionals 64 Administration/Legal/Compliance/Finance 20 Marketing/Client Services 27 Operations 18 Other 14 Total Staff 143 Pantheon s investment professionals work in specialist teams organized by investment type (primary or secondary) and regional focus (U.S., Europe or Asia). Individuals are located in San Francisco, New York, London and Hong Kong. During the past year, Pantheon had a net reduction of three investment professionals to the firm, adding four new individuals, while losing seven, as shown in the following tables.
Additions Name Title Focus David Hui Analyst Asia Primary Investments Brian Lim Principal Asia Primary Investments Tony Vainio Analyst Europe Primary Investments Melissa Yeung Analyst US Primary Investments Departures Name Title Investment Reason for Departure Focus Leah Lui Analyst Asia Primary To pursue other interests Ericka Herrera Associate US Primary To pursue other interests Amit Sanghvi Analyst Europe Primary To pursue other interests Caitlin Hoertkorn Analyst US Primary Two year Analyst program Kai Lui Senior Associate Asia Primary Returned to full-time education Serge Raicher Partner Europe Primary To pursue other interests Gary Hiatt Managing Partner US Primary Retirement Clients/Assets Over the past year, Pantheon experienced a modest decline in assets under management. As of December 31, 2009, Pantheon managed 394 accounts for a total of $22.6 billion in market value, a decrease of $500 million from one year ago. Pantheon gained nine new client accounts during the year. All new investors committed to the Pantheon Global Secondary Fund IV. Pantheon currently has 25 fund-of-funds programs globally, including Pantheon Global Secondary Fund IV and Pantheon Global Infrastructure Fund, which are both open for investments. Pantheon is planning to launch the next series of regional primary funds during the second quarter of 2010 these funds will be the Pantheon Europe Fund VII, Pantheon USA Fund IX and Pantheon Asia Fund VI. Investment Process Pantheon serves as a manager of managers for SURS. The investment process is designed to seek high rates of return, while at the same time managing the risks in the portfolio. Their philosophy is to manage risks not avoid them. In managing the risks, client portfolios are built using the following elements. Investing the majority of the client s portfolio in the best, proven private equity managers. Traits of these managers include clear investment strategies, excellent returns, appropriate skills as well as experience, and negligible management risk. Investing a modest amount of the client s assets with exceptionally good people early in their careers or first time funds, when the general partners are particularly driven to excel. These emerging managers frequently bring fresh insight, imagination and creativity to their investments, and these are the characteristics of managers that generate very high returns. Additionally, an investment in what may be a first time
fund also ensures the ability to continue investing in future funds managed by the group. Create a portfolio of the best managers in different sectors, time and geographic regions. Opportunistically take advantage of other investors liquidity needs through the purchase of secondary partnership interests. Early distributions from these purchases mitigate the J-curve effect associated with private equity, and the relative maturity provides a way to diversify back in time. Pantheon adopts a quantitative and qualitative approach to investment selection, which includes bottom-up and top-down approaches to investment evaluation and due diligence. The portfolio s top-down allocations reflect a strategy of creating a portfolio of high quality private equity funds appropriately diversified by fund state, manager, vintage year, industry sector and geographic region. Pantheon is not bound by allocations if a top-tier manager in the particular sector or geography cannot be found. Pantheon evaluates approximately 500 investment opportunities each year. Due diligence in varying degrees is carried out for the bulk of funds reviewed but full due diligence is only performed on funds fitting Pantheon s investment criteria and requirements. Pantheon considers the following factors beyond investment track record when considering potential investment opportunities: Organizational strength and process Sustainability of investment strategy and deal sourcing capability Differentiation and evidence of adaptability Integrity and management of conflicts Pantheon works to ensure that its deal flow is very broad. The firm uses an extensive network of relationships coupled with a proactive program of networking with private equity management teams. Pantheon investment professionals review all fund offering materials to assess whether the fund is consistent with Pantheon s investment criteria. Pantheon s investment professionals attend annual meetings and maintain advisory board seats as often as possible. Pantheon currently has over 180 Advisory Board seats globally. The firm believes that careful monitoring is very important and considers it to be a critical part of Pantheon s on-going fiduciary role in managing the fund. Client Service Matt Curran, Vice President, serves as primary client service contact to SURS. Mr. Curran is supported by Ms. Jessica Takeuchi. Pantheon has provided SURS with a satisfactory level of client service. Performance Overall, the performance of the Pantheon private equity separate account portfolio has been above expectations. Where appropriate measures can be made, the portfolio returns have exceeded their benchmark returns, acknowledging that this type of analysis is imperfect. The
table that follows indicates the returns from the Separate Account portfolio, Pantheon Europe Fund III, the Pantheon Global Secondary Fund and the total Pantheon relationship. Due to the more recent commitments in Pantheon USA VIII and Pantheon Europe Fund VI, performance is not included for these funds. Returns through December 31, 2009 Portfolio Inception Date Since Inception Portfolio Return Since Inception Benchmark Return Separate Account Portfolio 03/2002 8.5% 7.8% Pantheon Europe Fund III 01/2003 17.0% 12.4% Pantheon Global Secondary Fund II 03/2004 7.2% 8.5% Total Pantheon Relationship 03/2002 8.4% 7.8% Pantheon Separate Account Vintage year analysis is a better measure to evaluate performance of private equity investments. Vintage year analysis compares the returns of the individual partnerships with similar partnerships formed during the same year. The table that follows contains a summary of the vintage year analysis on each of the separate account primary partnerships formed prior to 2007. The ending point is chosen since returns from many partnerships are not yet available until the 3 rd full year of the partnership s existence. The quartile rankings were prepared using data compiled by Venture Economics, a leading source of private equity analysis tools. Separate Account Partnership Investments Vintage Year 2002-2006 As of December 31, 2009 Quartile Partnerships Commitment Amount % of Total Commitment 1 st 16 partnerships $ 148,185,863 28.90% 2 nd 19 partnerships $ 192,837,429 37.70% 3 rd 13 partnerships $ 124,059,076 24.20% 4 th 5 partnerships $ 47,100,000 9.20% TOTAL $ 512,182,368 100.0% Fifty-three of the partnership investments have been around for sufficient time to be included in this vintage year analysis. The vintage year analysis indicates that 66% of the portfolio between 2002 and 2006 has been invested in partnerships that have generated above median returns. A closer look at the underlying numbers indicates that two-thirds of the partnership commitments between 2002 and 2006 are above median. Pantheon Europe Fund III As shown above, performance has been strong to date when compared to the public market benchmark. The Fund s return ranks in the first quartile of the Vintage Year analysis.
Consultant Comments Pantheon seeks to provide investors with superior risk-adjusted returns through a process that combines top-down analysis with bottom-up manager selection. The core strategy is to create a portfolio that consists of high quality private equity funds appropriately diversified by fund stage, manager, vintage year, industry sector, and geographic region. Pantheon targets managers that exhibit sustainable strategies in different stages of investment, vintage years, industries, and geographic locations. Pantheon s portfolios include early and late-stage venture capital, mid-size buyout and growth capital, leveraged buyouts and special situations, such as restructuring strategies or mezzanine investments. The funds may also invest up to 20% in secondaries or co-investments. Capital will typically be committed over a three- to four-year period in the U.S. and Europe funds, and a three- to five-year period in Asia funds. In addition, Pantheon diversifies investments into prior vintage years through the purchase of secondary interests. Pantheon is considered one of the first fund of funds managers in the private equity industry to focus on the European and Asian markets. The firm s long-term physical presence in local markets allows them to build strong relationships with funds and perform deeper diligence. Pantheon structures its fund offerings by geography, which allows its investors the ability to weight their exposures according to their internal guidelines or preferences. Pantheon typically raises funds on a three year schedule that provides investors with diversification across vintage year. Pantheon s historical fund performance is quite strong relative to its peers and its management fee is one of the lowest in the industry. On February 10, 2010, Affiliated Managers Group, Inc. ( AMG ) announced it had reached an agreement with Russell Investments ( Russell ) to acquire the private equity fund of funds business of Pantheon Ventures ( Pantheon ) for $775 million. EnnisKnupp participated in separate conference calls with representatives from Pantheon and AMG to learn additional insights into the acquisition. The acquisition is expected to close during the second quarter of 2010 with the final purchase price as much as $225 million more than the $775 million announced due to conditional payments subject to Pantheon meeting specific growth milestones over the next three to five years. AMG will assume Russell s commitments to funds still being raised, while Russell will maintain responsibility for any unfunded commitments to funds that have already closed. EnnisKnupp conducted an onsite visit in the San Francisco office of Pantheon in February of this year. At this time we are comfortable with the acquisition but will continue to monitor developments. We agree with staff s assessment of Pantheon. Recommendations SURS staff and EnnisKnupp jointly recommend that: Pantheon Ventures be retained as a private equity manager; That the limited partnership interest in the Pantheon Europe Fund III L.P. be retained; That the limited partnership interest in the Pantheon Global Secondary Fund II L.P. be retained; That the limited partnership interest in the Pantheon USA Fund VIII L.P. be retained;
That the limited partnership interest in the Pantheon Europe Fund VI L.P. be retained; and That the limited partnership interest in the Private Opportunities Fund L.P. be retained. Exhibit 11