Initiated by Rajaa Mekouar, of Fuchs & Associés, this event aims to provide a unique insight into Private Equity as a viable investment alternative for private investors. At a time of volatile markets and rising macro uncertainty we are witnessing the dislocation of the traditional allocation model of Fixed Income+ Equities mix. This brings about the advent of a new investment allocation paradigm where investors are pushed to explore new asset classes in the search for yield. In this context, Private Equity is gaining ground as a viable alternative that offers an attractive risk/return profile to the well-advised investor.
Organiser/Moderator: Rajaa Mekouar
Keynote speaker: Ian Prideaux, CIO, Grosvenor Estate
Surprise Guest: Yaron Valler, Partner, Target Global
Panelists:
Stephanie Delperdange, SOFINA
Matthias Ummenhofer, Mojo.Capital
Jerome Wittamer, Expon Capital
Fuchs & Associes - LPEA: "Private Equity, the Long Term Investor Journey"
1. Welcome to our
1st joint event on Private Equity
Luxembourg, 5th July 2016
1
2. “PE Investing: The Long Term Investor Journey”
❖ Agenda: WELCOME !
❖ Rajaa Mekouar: PE Back to Basics!
❖ Ian Prideaux: The Role of Private Equity Within a Long Term Portfolio !
❖ Surprise guest: The 7 deadly sins!
❖ Panel: Different ways to PE exposure: First hand feedback from experts!
❖ Jerome Wittamer: Conclusion !
❖ Cocktail: All invited to join to continue the debate around a drink/canape
2
3. This is NOT today’s topic
Brexit and PE
But you can ask the panelists later…!
!
Two of whom are actually mentioned in
the recent media stories quoted here.. !
!
!
!
3
Nota Bene…
4. Back to Basics…
Private Equity 101
(from my 15 years of first hand exposure to PE)
This presentation is for the
wealth manager, private
investor, asset manager who is
intrigued but not too familiar
with PE (Apologies to the more
experienced ones…)
4
5. Setting the mood…
Food for inspiration
With the current market
context of excessive liquidity
and central bank intervention,
private strategies make sense
as an “optionality”
5
23 July 2015
6. PE Today’s Big stats
Global Private
Capital*AuM
exceeds over
$4 trillion
Source: Preqin - Figures at June 2015 unless otherwise specified - * Includes Private Capital ie Private debt, Real Estate, Infra and Natural Resources!
Total capital
raised by 1,062
funds reached
$551bn (full
2015)
Total
unrealised
value stands
at $2.8trillion
$2.4 trillion AuM!
$288bn raised (689 funds)!
$189bn distribution!
$755bn dry powder (+9%)
$411bn deal value!
$416bn exit value!
(for the year 2015)
$136bn deal value!
$73bn exit value!
(for the year 2015)
6
7. PE is cyclical too…
PE’s journey through times
PE reached its peak in terms of
amounts raised pre 2008 crisis
and has sustained high activity
levels since - Funds are getting
fewer but raising more!
Source: ThomsonOne, 31.12.2015*!
*Includes other private capital strategies
7
8. PE has a wide base of investors
Who invests in PE?
Large institutions especially
Pension Funds and Sovereign
Wealth Funds are the
dominant force (close to 60%
of total investments)
8
Source: Preqin, 2014
$bn invested!
in PE by investor
type and as a % of
total AuM
9. Family Offices are relatively over allocated in PE v institutions
How much do they
invest in PE?
Family Offices are a growing
source of funding for PE in
general, with an increasing
proportion entering the asset
class across the world (US bias)
9
Source: iCapital, 2015
% allocation to PE
11. ❖ PE outperforms public markets (Illiquidity
premium + Alpha generation)!
❖ PE provides effective risk/return diversification
for a typical portfolio !
❖ PE is a great way of accessing differentiated
investment opportunities!
!
❖ Does PE require to stay “stuck” for 10 years?!
!
❖ PE seems for the high risk takers only!
!
❖ It seems PE is for the “very rich” investors with
large tickets to invest
PE: Perception v Reality
11
13. PE encompasses different investment stages with different risk/return profiles
PE stages
LBOs remain the largest
segment in PE, but VC has
recently developed
substantially, in Europe and
elsewhere
13
€1-1m
€1m-100m
€20m-1b
€5m-1b+
€5m-1b+
Source: Goldman Sachs
14. 10-year manager performance dispersion
PE performance driven
by quality of manager
PE outperforms all other asset classes but
only if the right managers are selected
14
Source: Hewitt EnnisKnupp’ eVestment Alliance,
Thomson Reuters, NCREIF, The Townsend Group, Hedge
Fund Research Inc (2013) - US
Dispersion of
returns
15. Annualised compound returns on Calpers’ 20 years returns
PE Economics
Management fees: 2% typically, for a PE/VC
fund, on committed capital (but varies)!
Carried interest: 20% on profits generated, 80%
to investors (also varies)!
Other considerations: !
Alignment of interests: Co investments,
Hurdle rate (most cases)!
Fund of Funds!
15
Source: State Street via Calpers
16. It is about long term investing….
PE “J curve”effect
Chart shows evolution of cash
in/out and cashflows in a
typical PE cycle
Commitments
Capital calls
Distributions
Net cumulative
cash flows
(US$m)
Source: Pictet
16
17. Commenting the “J Curve” effect
❖ Commitment drawdown and allocation: over time unlike with hedge funds!
❖ Net contributions (of distributions) rarely exceed 2/3 of committed capital !
❖ Key performance measures: !
❖ IRR* (Internal rate of return)!
❖ Multiples (without time factor) / TVPI** (Total value to paid-in capital)!
❖ DVPI (Distibuted to paid in capital)!
❖ Pre distribution, negative IRR* due to:!
❖ Impact of management fees!
❖ Conservative valuations (eg illiquidity discount / upside via realisation)!
❖ Ways to smooth the J Curve effect:!
❖ Fee reduction !
❖ Secondary investments (Trade off)
17
*The IRR is the discount rate that makes the net present value of all cash flows equal to zero!
**Total value to paid-in (TVPI) ratio represents the fund’s total value as a multiple of its cost basis. TVPI is calculated by dividing the realised amount added to the net asset value of unrealised investments by
the investment cost
20. Different routes to investment in PE
Hurdle 2:
Structuring
Consider carefully the pros
and cons of each vehicle and
evaluate feasibility
20
Increasing risk and complexity
21. Hurdle 3: Decision making
21
Go-no Go: Evaluate your short and mid term liquidity needs
Decide the % allocation that brings you closest to “efficient frontier”!
Together with the investment stages that fit your risk/return profile!
Opt out of strategies that don't fit your risk/return profile
Add liquidity spin where/when possible
Maximise bargaining power !
Negotiate fees
Choose the optimal investment vehicle also based on your ticket size
!
!
!
!
TRUSTED!
!
!
!
Partners
Ongoing!
monitoring
22. Have we helped
clarify the PE picture?
Please reach out for questions!!!
!
Now more enlightening facts and
stories from our guest speaker…
22
24. Ian Prideaux
Our Guest Speaker
CIO
24
❖ Ian is deploying money in assets other than real
estate, with a view to diversification over a
long term time horizon. He puts forward an
asset allocation plan and select the appropriate
managers for the different parts of that plan.!
❖ The investment portfolio includes public
equities and fixed income, private equity, hedge
funds, absolute return instruments, cash and
has in the past included commodities. !
❖ All assets are run by third party managers, with
assistance of Cambridge Associates as
investment consultants who also carry out
monitoring and performance reporting.
25. Who is it…
Grosvenor Estate
❖ International property business
Grosvenor Group Ltd!
❖ Direct investment business of the
Wheatsheaf Group !
❖ Family Investment Office which
supports the private interests of the
family of The Duke of Westminster and
associated family trusts.
25
26. Key advantages of private equity as an asset class in portfolios…
Well-selected private equity is a proven driver of portfolio growth
Private equity and venture capital has demonstrated long-term
outperformance of public equity markets as underlying investments are fully
realised
Cambridge Associates (CA) research shows that clients with high allocations
have outperformed those with smaller allocations over the longer term
Grosvenor’s private equity portfolio has already generated a premium of 3.6%
p.a. above public markets since inception (2006)
!
Improves diversification and ability to access strategies that are under-
represented by public markets
Access to developing and disruptive technologies, which are not available
through the public markets
Exposure to sectors, geographies and parts of the capital structure that are
not available through traditional markets
Low correlation with traditional asset classes and other alternative asset classes 26
27. …Key advantages of private equity as an asset class in portfolios
The outlook for private equity is challenging today but there are
more options for generating strong returns than ‘plain-vanilla’
buyouts.
Ability to generate outsized absolute returns due to inherent inefficiency
in how investments are sourced, capital is deployed, management is
reorganised and companies are operated
Capacity for skilled managers to make mid-long term decisions away
from the glare of the public markets and short term benchmarks
CA still expect premium returns (3-5% above public equity over the
long-term) for a diversified programme and net IRRs of 10-15%+ today
!
Excellent investment opportunities for long-term investors with
limited liquidity needs
A 15% allocation to PE & VC is average for large sophisticated,
internationally focused families, colleges and endowments
Grosvenor’s current allocation stands at around 11.2% on a ‘fully drawn’
basis
27
28. Private equity can help diversified portfolios earn better risk-adjusted returns
A private equity programme
containing exposure to all
sub-classes adds considerable
efficiency through greater
risk-adjusted returns
!
Improved efficiency results
in a tighter range of returns
over time (important in
managing annual payouts and
budgets)
!
The probability of
experiencing a return
shortfall is lower with the
diversified portfolio
Past performance is not indicative of future performance. Returns are nominal and assume 3% inflation.
Source: Cambridge Associates
CLIENT XYZ
EFFICIENT REGION ANALYSIS
ASSET CLASSES ALLOCATIONS
Simple
Diversified
Portfolio
Without PI
Diversified
Portfolio With
PI
U.S. Equity 50.0% 30.0% 15.0%
Global ex U.S. Equity 20.0 20.0 15.0
Emerging Markets Equity - - - 6.0 6.0
Absolute Return - - - 6.0 8.0
Equity Hedge Funds - - - 10.0 12.0
Venture Capital - - - - - - 5.0
Private Equity - - - - - - 8.0
Commodities - - - 4.0 1.0
Natural Resource Equity - - - 3.0 - - -
REITs - - - 3.0 2.0
Real Estate - - - - - - 8.0
Oil & Gas - - - - - - 4.0
Timber - - - - - - 3.0
U.S. Fixed Income 30.0 12.0 8.0
U.S. TIPS - - - 3.0 2.0
Global Fixed Income - - - 3.0 2.0
High Yield Bonds - - - - - - 1.0
Nominal Arithmetic Return 8.8% 9.1% 9.6%
Standard Deviation 12.2% 11.5% 11.0%
Nominal Compound Return 8.1% 8.5% 9.1%
Sharpe Ratio 0.39 0.44 0.51
8.0%
8.5%
9.0%
9.5%
10.0%
9% 10% 11% 12% 13%
ArithmeticAverageReturn(%)
Standard Deviation (%)
Diversified Portfolio With PE
Diversified Portfolio Without PE
Simple
28
29. Top performing institutions had the highest average allocation to private equity
Institutions with the lowest average allocations to alternative investments were in the bottom quartile
29
Ten-Year Asset Allocation of Top and Bottom Performers As of March 31, 2016
30. The importance of adopting a clear and consistent strategy
Consistent pacing
Need to maintain an ongoing search and investment discipline to maintain exposure, due to the
pattern of capital calls and distributions rather than a single, up-front, lump sum allocation
!
Portfolio positioning
Given it functions as a series of cash-flows over time, there is an ability to over-commit to the
asset class, particularly considering many commitments do not get drawn-down in full and that
early distributions can be used to fund later calls
!
Diversification to manage return dispersion
A rolling programme, taking in an appropriate number and mix of funds by vintage, strategy,
geography and manager should be maintained at all times
!
The importance of manager selection
In this asset class, more than any other, track record in relation to the best performing managers
and one’s ability to select them is strongly indicative of likely future returns
30
31. Long-term private equity returns are compelling and the top 2 quartiles even more so
CA US Private Equity: Periodic Rates of Return
As of December 31, 2015
Sources: Data is calculated in US dollars and sourced from Cambridge Associates LLC, Frank Russell Company, Standard & Poor's, and Thomson Reuters Datastream.
Notes: Pooled private investment periodic returns are net of fees, expenses, and carried interest. Multi-year annualized returns are generated for time periods ending December 31, 2015.
PeriodicRatesofReturn%
0
9
18
26
35
15-Year 10-Year 5-Year 3-Year
11.65
9.19
6.807.28
15.13
12.57
7.31
5.00
13.2613.03
11.1710.89
20.30
18.73
17.0417.17
CA US Private Equity (Top Two Quartiles) CA US Private Equity Index S&P 500 Russell 2000®
31
Here we observe returns within the US market, which depicts the additive impact of high quality manager selection
32. Longer-term, good manager selection has added a further 500-700bps of annual performance
Here we observe returns within Europe, which shows that good manager selection remains key across every region
Sources: Data is as at December 31, 2015, calculated in Euro. Sourced from Cambridge Associates LLC, Frank Russell Company, MSCI and Thomson Reuters Datastream.
Notes: Pooled private investment periodic returns are net of fees, expenses and carried interest. Multi-Year Annualised Returns are generated for time periods ending December 31, 2015.
PeriodicRatesofReturn%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
15-Year 10-Year 5-Year 3-Year
11.48
8.36
4.22
2.47
15.33
13.15
12.12
12.88
19.99
17.47
16.70
18.14
CA Europe Private Equity (Top Two Quartiles)
CA Europe Private Equity Index
MSCI Europe Index
CA European Private Equity: Periodic Rates of Return
As of December 31, 2015
32
33. Diversification across strategy is important. US VC returns are making a come-back
As of December 31, 2015
CA US Venture Capital Periodic Rates of Return
PeriodicRatesofReturn%
0
9
18
26
35
15-Year 10-Year 5-Year 3-Year
11.65
9.19
6.807.28
15.13
12.57
7.31
5.00
21.18
16.23
10.90
4.21
30.00
24.04
17.01
8.35
CA US Venture Capital (Top Two Quartiles) CA US Venture Capital Index S&P 500 Russell 2000®
Sources: Data is calculated in US dollars and sourced from Cambridge Associates LLC, Frank Russell Company, Standard & Poor's, and Thomson Reuters Datastream.
Notes: Pooled private investment periodic returns are net of fees, expenses, and carried interest. Multi-year annualized returns are generated for time periods ending December 31, 2015.
33
45. Let’s engage in a group discussion to reflect the diversity of PE as an investment class
The Panel
Stephanie Delperdange!
Ian Prideaux!
Jerome Wittamer!
Matthias Ummenhofer!
45
46. Funds, Directs, Co Invests - !
GLOBAL
Stephanie
Delperdange
Director, !
SOFINA
CIO, !
Grosvenor Estate
Founding Partner, !
Expon Capital
Founding Partner,
Mojo.Capital
Funds, Co Invests -
GLOBAL
Venture Fund, early stage -
EUROPE
Fund of VC Funds and Co
Invests - EUROPE
Ian
Prideaux
Matthias
Ummenhofer
Jerome
Wittamer
Our panelists
46
Rajaa
Mekouar
Funds of Funds!
GLOBAL
Head of PE &
Advisory, !
Fuchs Group
47. ❖ What is your own definition of Private Equity?!
❖ Describe your current approach/allocation to PE and achieved performance to date? !
❖ How should Risk be attributed to the different asset classes in today’s environment?!
❖ Alternative strategies: How should an investor decide:!
❖ Funds or Directs or Fund of Funds?!
❖ Developed markets v emerging markets?!
❖ Listed PE?
❖ Biggest “lesson” learned from “mistake” made in PE investing?!
❖ Illiquidity premium: Is it justified on a risk adjusted basis? Is listed PE viable?!
❖ Advice for the entry level PE investor? !
❖ BREXIT (For Ian only): Will there be an impact on PE as an industry?
Panel Questions
47
55. The growing challenge : Too much capital
!
!
”The relationship between the financial economy ↑ and the underlying real
economy ↓ has reached a decisive turning point.”!
!
Global capital has swollen to $700+ trillion in 2015 tripling since 1995 and equating
10x the value of global output of all goods and services ($73T).
The Bigger Picture