An Increasingly Attractive Global Secondary Opportunity D ECEMBER 2015 REAL ASSETS:

An Increasingly Attractive Global Secondary Opportunity D ECEMBER 2015 REAL ASSETS:

2 HarbourVest Partners In recent years, global real assets sectors such as energy, power, infrastructure, and natural resources have seen increases in capital raised, the number of active managers, and breadth and complexity of strategies deployed. This market expansion has largely been driven by the expanding opportunity set as well as institutional investors who have been drawn to the steady yield and diversification benefits of the underlying assets. At the same time, this growth within the real assets market has been mirrored by dramatic growth in the global secondary market in limited partner interests. These two trends are coming together to provide the basis for a dynamic and attractive secondary market for real assets. Real Assets Market Profile The real assets market consists of private market strategies dedicated to investment in tangible underlying assets and the businesses that support them. Many of these strategies are real return focused with an income component and inflation linkage, while others simply focus on applying private equity growth equity or buyout approaches to a more specialized market. Real assets sectors include infrastructure, energy, power, and different natural resource sectors such as timberland, farmland, and mining. 1 Strategies within these sectors cover a diverse and deep opportunity set. As indicated in Chart 1, the continuum can range from lower risk core infrastructure and timber which have experienced increased asset allocations due to the low volatility and yield profile of the underlying assets to upstream energy, which has grown due to private equity s ability to finance the capital intensive growth of the unconventional oil and gas market. The strategies and fund offerings available in the real assets universe continue to expand as the range of opportunities increases. As of Q2 2015, there were 215 real assets funds seeking over $130 billion across the infrastructure, energy, power, and natural resource sectors. 2 CHART 1: PRIVATE MARKETS RISK / RETURN PROFILE Timberland Utilities Transport (shadow tolls) Contracted Power Midstream Infrastructure Upstream O&G Production Communications Midstream O&G Merchant Power Transport (traffic risk) Upstream O&G (E&P) Upstream Mining Farmland Energy Infrastructure & Power Natural Resources Source: HarbourVest Partners, 2015

REAL ASSETS An Increasingly Attractive Global Secondary Opportunity 3 Growth Of The Real Assets Market The growth in real asset allocations by institutional investors has been fueled by increased demand for capital as economic and population growth has accelerated the need for infrastructure, energy, raw materials, agriculture land, and timberland. McKinsey Global Institute, for example, estimates that global infrastructure needs will top $57 trillion through 2030. 3 Another important boost to the real assets market has been provided by long-term investors such as pension and sovereign wealth funds who have increasingly become drawn to the attractive benefits these strategies provide, as outlined in Chart 2. CHART 2: REAL ASSETS BENEFITS Real assets allocations have grown due to the attractiveness of asset class fundamentals Portfolio Diversification Inflation Linkage Return Composition Total Risk / Return Profile Low correlation to traditional asset classes Distinct asset return drivers Cash flows tend to increase in inflationary environment Assets with contracted revenues typically pegged to inflation Equity-like upside to most strategies Attractive current income component Compelling absolute returns with downside protection Source: HarbourVest Partners, 2015 Increasing capital allocation to real assets has led to the growth in primary partnership fundraising and direct investment activity among an expanding number of real assets managers and funds. These fund interests and assets are typically held by many of the same investors that are already accessing the private equity secondary market, and the size and maturity of their holdings is now leading those investors to look to the secondary market to achieve liquidity needs and meet changing investment objectives. Increasing Portfolio Allocations The growth in real assets allocations is evident through broad strategic allocations as well as targeted have steadily increased from an average of 4.9% in 2011 to 5.7% in 2014. 4 Similarly, allocations to alternative assets among U.S. state pensions increased from 10% in 2006 to 25% in 2013, with real assets now comprising 7% of such alternative allocations. 5 Finally, real assets comprise an average of 15% of U.S. endowment portfolios. 6 The relatively strong performance of real assets and the growth of the underlying investment opportunity are expected to drive continued interest in these strategies. Industry research suggests that real assets allocations will reach an average of 20% to 30% of institutional investors portfolios by 2030. 7

4 HarbourVest Partners Fundraising Growth Rising investor allocations to real assets have spurred significant growth in the amount of private capital raised for investment partnerships. For example, an estimated $223 billion has been raised by private market funds focusing on energy real assets alone since 2006 8 (see Chart 3). Private capital has played a leading role in the transformation of the North American unconventional oil and gas market, and several sector-focused managers have grown to be among the larger private equity managers globally. The global growth of the infrastructure market (including the power sector), has generated increasing demand for new capital and a range of investment strategies. Private market investments have emerged as a key source to fill the capital void left by constrained government and corporate balance sheets, providing liquidity for new build assets and financing to improve existing assets in both developed and emerging markets. CHART 3: GROWTH OF THE REAL ASSETS MARKET $50b $40b Energy Fundraising Infrastructure Fundraising Number of Funds Number of Funds 80 70 60 $30b $20b 50 40 30 (number of funds) $10b 20 10 $0 06 07 08 09 10 11 12 13 14 Source: 2014 Preqin Global Infrastructure Report On a smaller but growing scale, the timberland, agriculture, and mining sectors have shown steady percentage increases among sector-focused private market funds. The timberland sector has an estimated $45 billion of assets under management, $27 billion of which are held in fixed life, commingled funds. 9 There is an estimated $15 billion of assets under management in agriculture-focused funds. 10 The mining sector has seen increased activity from private equity as well, with $12 billion raised in just the past two years. 11 0

REAL ASSETS An Increasingly Attractive Global Secondary Opportunity 5 A New Opportunity: The Real Assets Secondary Market Capital Maturity With over a decade of increased allocation and capital flows into primary partnerships in the real assets sector, the aggregate amount of investment capital has grown tremendously and has now matured to a point where it is attractive from a secondary market perspective. Typically, the behavior of the underlying portfolio becomes more attractive for a secondary transaction as funds are raised and then deployed over the investment period of a primary partnership. This is due to the progression of the fund past the J-Curve period when a fund manager s capital calls are exceeded by distributions to investors. In addition, over time blind pool risk is reduced as the ability to underwrite existing assets improves, and the date to potential liquidity nears. As a diverse group, investors have a number of different motivations for seeking an early exit to their partnership interest in a fund. Among those often mentioned include: Re-balancing or optimizing their asset portfolios Meeting regulatory requirements (e.g., financial institutions governed by Solvency II, Basel II, and Volcker Rule constraints) Implementing new asset allocation strategies Reacting to changing views of market dynamics Generally, after the fifth year of a fund s capital deployment investor demand for and supply of secondary liquidity increases. At this time, the quality of the cash flows of the underlying assets becomes more certain, enabling secondary investors to more accurately value the assets. In addition, with the passage of time the objectives and needs of the original investors may change, increasing the likelihood that they will value the option to sell their commitments. Within real assets, the underlying NAV (net asset value) in the energy sector with more than five years of maturity has grown from $11 billion to over $70 billion in the past 5 years, with a projected market size of $100 billion or greater by 2017 (see Chart 4). 12 A similar trend exists in the infrastructure sector, where there has been a threefold increase in the amount of NAV that is more than 5 years in maturity, growing from $50 billion in 2012 to over $100 billion in 2014. HarbourVest believes that the market size should continue to increase to over $150 billion or greater by 2017. CHART 4: ENERGY SECONDARY MARKET OPPORTUNITY $200b NAV Outstanding NAV > 5 Years $150b $100b $50b $0 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Preqin, Cambridge Associates, Q3 2014 report generated April 22, 2015

6 HarbourVest Partners Other natural resource sectors include the established timberland market, where approximately $15 billion of assets were acquired by managers between 2005 and 2009, 13 and thus are nearing fund maturity. The agriculture and mining markets are relatively immature with respect to specialist managers, but have shown similar growth rates in recent years. The Emerging Global Opportunity The growth of the global private equity secondary market over the past three decades has been dramatic. Today, it is a $40+ billion subset of the $1.3 trillion global private equity market. 14 Over this period of time, the market s growth rate has significantly exceeded that of new fundraising in the primary private equity market. Key drivers have included: An increase in the turnover ratio of limited partnership interests The broader acceptance of the secondary market as a portfolio management tool, and The increasing range of transactions that have been created by investors liquidity needs as they realize that liquidity does exist for a previously illiquid asset class. Two important factors driving recent deal activity include public pension plans seeking to sell large portfolios of fund interests, and the recent trend of general partner-led whole fund liquidity solutions where a fund manager allows its existing investors to sell to a secondary buyer in a single transaction. The market dynamics that led to a large, active secondary market within private equity are now developing within the real assets market. The fund structures and institutional investors within real assets are generally similar to private equity, and the growth of the secondary market is a natural consequence of the real assets market s growth and recent maturity. The structural growth within real assets is leading to a range of deal types, which include not only the purchase of traditional LP interests but complex transactions including manager spinouts, asset-led deals, and fund restructurings, again mirroring the evolution of the traditional secondary space (see Chart 5). CHART 5: SECONDARY TRANSACTION TYPES TRADITIONAL COMPLEX VOLUME Single Partnership Interest Portfolio of Partnership Interests Captive Team Spinouts GP For Hire Trans. Joint Ventures Take Private Trans. Source: HarbourVest Partners, 2015 Successfully finding, structuring, and negotiating transactions in the growing and often increasingly complex real assets secondary market requires a unique skill set: Deep domain knowledge of the asset sector and market dynamics Network of GP, investor, and intermediary relationships across real asset space Secondary market sourcing, deal execution, and structuring expertise

REAL ASSETS An Increasingly Attractive Global Secondary Opportunity 7 Conclusion By offering investors important benefits such as portfolio diversification, a stable yield component, and inflation linkage, global real asset sectors such as energy, power, infrastructure, and natural resources, have attracted increasing amounts of capital. Concurrently, the dramatic recent growth of the private equity secondary market both in the volume and the types of deals being created to provide liquidity to investors and opportunities for secondary buyers is coinciding with the growth and maturity of the real assets sector. In our view, the emerging global real assets secondary market should benefit both existing investors of real assets considering liquidity options and new investors searching for targeted options for entering the space. As with the broader private equity secondary market, the real assets secondary market is expected to continue to grow, evolve, and become increasingly dynamic over the coming years. 1 Institutional investors vary as to whether real estate is included in a real assets allocation or as a stand-alone asset class. For the purposes of this paper, real estate is considered separate and not included in any of the market data or analyses unless otherwise noted. 2 According to Preqin, by mid-2015, there were 64 natural resource funds seeking over $34 billion and 151 infrastructure funds targeting $99 billion. See Preqin Natural Resources Fundraising, July 2015 and The Q2 2015 Preqin Quarterly Update, Infrastructure. 3 McKinsey Global Institute, Infrastructure Productivity: How to Save $1 Trillion a Year, January 2013. 4 Preqin Quarterly Infrastructure, Update Q2 2015. 5 Cliffwater 2014 Report on State Pension Asset Allocation and Performance, August 4, 2014. 6 Ibid. 7 Brookfield Asset Management, Real Assets the New Essential, November 2013. 8 2014 Preqin Global Infrastructure Report. 9 R&A Investment Forestry, U.S. Timberland for the 2014 Private Investor, January 2014. 10 The Economist, Barbarians at the Farm Gate, January 3, 2015. 11 Jesse Riseborough and Firat Kayakiran, Metals Slump to Unleash Surge in Private-Equity Mining Deals, Bloomberg, February 8, 2015. 12 Cambridge Associates, Net Asset Value History Horizon Report, Q3 2014. 13 KPMG, Timberland Investment Case, September 2013. 14 HarbourVest Partners, Market Overview Q1 2015. REAL ASSETS SECONDARY CASE STUDY A Complex Liquidity Solution for Oil & Gas Investors A large family office in the process of winding down its internal private equity team sought to sell its existing oil & gas assets and spin out its team, during a volatile market environment. A secondary private equity buyer stepped in to structure, negotiate, and execute a transaction that benefited the seller, the GP, and the buyer. Assets Portfolio of three E&P (upstream) companies and one oilfield services company Transaction Type Complex secondary direct portfolio purchase Geographic Coverage North America Risk Mitigation The key risks included deal execution involving gaining seller agreement to terms and structure as well as asset pricing amid commodity price volatility. These were mitigated through intensive diligence on the underlying companies and assets, ground up valuation work, extensive reference checking, and deal structuring. Exit $220+ million transaction to energy-focused private equity manager Three Steps to Unlocking Value: New fund created to acquire portfolio with additional capital provided to continue to support growth of existing assets Transaction structured to acquire oil & gas portfolio at a material discount to co-investor valuations Secondary private equity investor was the largest investor in the syndicate of investors, which signaled commitment and quality assets Conclusion Transaction was a shared success among the three parties: the original investors achieved liquidity, the GP achieved a successful spin out with a quality portfolio to manage, and the secondary buyers gained ability to invest into an appealing pool of assets at attractive valuations.

HarbourVest Partners, LLC is an independent private markets specialist, partnering with investors to provide investment programs and customized solutions focused on venture capital, buyout, mezzanine debt, and credit through primary fund investments, secondary purchases, and direct co-investments. HarbourVest has more than 300 employees, including 80 investment professionals, deployed in Asia, Europe, Latin America, and the U.S. During more than 30 years of investing in private markets, the team has committed more than $25 billion to newly-formed funds, completed over $11 billion in secondary purchases, and invested $4 billion directly in operating companies. HarbourVest partners with pension funds, endowments, foundations, and financial institutions throughout the U.S., Canada, Europe, Australia, Latin America, and Japan to provide complete private market solutions. These materials shall not constitute an offer, solicitation or recommendation in relation to any securities or any fund sponsored by, or any investment services provided by, HarbourVest or its affiliates in any jurisdiction where it is unlawful to do so. It has been prepared on the basis that you are an investment professional, is for the sole use of your organization, and should not be shared with any other parties. Information is current at the time of issue. Unless otherwise noted, HarbourVest is the source of all data. Any opinions expressed are those of HarbourVest and not a statement of fact. This document does not constitute investment advice. For additional legal and regulatory information please refer to important legal disclosures. Beijing Bogotá Boston Hong Kong London Seoul Tel Aviv Tokyo Toronto www.harbourvest.com 20151125