The Overhang: Over-Hyped? - Privcap

1 This publication is exclusively for Privcap subscribers 2013 Privcap LLCprivate equity performanceA Privcap PublicationVolume 2 | Q3 2013In this issue Bios of expert participants / 3 About the ILPA Benchmark / 4 benchmarking Niche Funds / 5 How Does Growth equity Perform? / 6 The Overhang: Over-Hyped? performance experts talk capital imbalances and perverse GP incentives / 10 private equity performance Q3 / Vol. II 2013 / 2 This publication is exclusively for Privcap subscribers 2013 Privcap LLCE ditor s Noteprivate equity performancePrivcap LLC David Snow Co-founder and CEO Gil Torren Co-founder and PresidentContentMatthew Malone Editorial DirectorProduction Artist Vasheena Doughty DesignerContributors Tom Stein Tim DevaneyContacts Editorial David Snow / / Malone / / & Sales Gill Torren / / Measurement MandateYou shouldn t invest in something that can t be measured this axiom stands as a hurdle to some alternative investment strategies finding broader institutional acceptance.

2 In this issue of private equity performance we take a look at two strategies that fall into very different places on the measurability the one end of the spectrum is growth equity the collection of private equity funds that invest in the space between late-stage venture and buyouts. As we learn from Andrea Auer-bach, Michael Elio and Stefanie Langer, the performance history of growth equity funds is long enough, and the funds similar enough to each other by way of target investment, that investors have access to illuminating data that shows how individual firms have performed relative to each other, to other private equity sub-strategies, and do other asset the other end of the spectrum are niche strategies.

3 The trouble with niche strategies, of course, is that they are many and wildly different from each other, ranging from trailer parks to debt instruments to violins. The challenge faced by an investor given the chance to invest in a violin fund is one of measurability there simply haven t been enough violin funds to build a credible benchmark. You might show me your track record of generating 50% growth per year in a Stradivari collection, but how do I know whether that makes you an expert or incompetent violin collector?Enjoy Volume 2 of the private equity performance report, David Snow CEO & Co-Founder, Privcap equity performance Q3 / Vol. II 2013 / 3 This publication is exclusively for Privcap subscribers 2013 Privcap LLC/ Andrea Auerbach Managing Director and Head of private equity Research Cambridge AssociatesAndrea Auerbach is a managing director at Cambridge Associates LLC in the Boston office.

4 She heads the private equity research team, which performs due diligence on investment opportunities in private equity , mezzanine and distressed markets. Her responsibilities include visiting investment firms and their portfolio companies and tracking the industry. Auerbach and her team also advise the firm s investment consultants on new and existing firms raising and managing to joining Cambridge Associates in 2001, Andrea was a senior director at Prudential private equity . Over the course of her eight years with Prudential in New Jersey, New York and London, Auerbach invested and managed over $1 billion of capital in buyouts, venture capital, real estate, and European mezzanine and private equity .

5 She also led early efforts to benchmark Prudential s $5 billion buyout portfolio, and domestic and European fund investment portfolios. Auerbach was also an equity research associate focused on technology at Harris Nesbitt Michael Elio Managing Director, Industry Affairs ILPAM ichael Elio recently joined the ILPA as its managing director for industry affairs. Prior to joining the ILPA, he was a managing director at LP Capital Advisors and led the firm s Boston office ,where he served as the lead consultant to East Coast and European institutional investors. Mike served as the primary consultant for many of the firm s largest clients, including public and pri-vate pension plans.

6 He was also a vice president at State Street Corporation and vice president at Credit Suisse First Boston private equity , where he oversaw the Funds Management Stefanie Langer Head of Investor Relations Independence Capital PartnersStephanie Langer is Head of Investor Relations for the Independence Capital Partners affili-ated funds and oversees fundraising, transfers, investor data management, performance report dissemination, compliance and new business development. Stefanie was a Managing Director at Hamilton Lane Advisors where she was responsible for key client portfolio management, manager selection related to all non-buyout or venture private equity funds in the and abroad.

7 She previously worked for Ernst & Young as a Principal in the Corporate Finance division overseas. Stefanie is a graduate of Franklin and Marshall College and completed the Ernst & Young Executive equity performance Q3 / Vol. II 2013 / 4 This publication is exclusively for Privcap subscribers 2013 Privcap LLCB enchmarkingThe ILPA private Markets BenchmarkPerformance is paramount in private equity , but important as it is, LPs struggle to measure it. To help them in one sector, Cambridge Associates and the Institutional Limited Partners Associa-tion (ILPA) recently released the ILPA private Markets Benchmark, which includes over 1,800 institutional funds and is distributed to ILPA benchmark is a subset of the overall Cambridge benchmark.

8 ILPA asks its members for their portfolios, aggregates the list and passes all the information to Cambridge, which then runs its benchmark on the institutional fund set. The results are interesting, said ILPA s Michael Elio. Our medians tend to be slightly higher than the Cambridge medians but our top quartiles tend to be slightly lower. So if you think of the band that institutional investors are investing in, it s a little tighter, which is a testament to the skill of the institutional investor. Managers are clamoring to contribute. We ve been getting calls from GPs, saying, We know we re contributing to the Cambridge benchmark, but we d also like to hop over and be part of the ILPA benchmark, said Andrea Auerbach of Cambridge ILPA private Markets Benchmark shows the private equity asset class has done better by way of median performance than other benchmarks might suggest.

9 GPs might see this as a higher performance hurdle to clear, but Elio pointed out the upside. The reality is we target top quartile funds when investing, not median, he said. And our top quartile is slightly lower, so there s a little more room in there for general partners. Components of the ILPA private Markets Benchmark private equity (buyout, growth, private equity energy and mezzanine) Venture Global Distressed Global Natural Resources Global private equity and Venture Global Fund of Funds/Secondary FundsRecent ResultsAs of September 30, 2012, the most recent quarter available, the ILPA private Markets Benchmark for private equity reported a ten-year return. performance for international funds, excluding private equity and venture capital funds, was over the same ten-year to watch this video at equity performance Q3 / Vol.

10 II 2013 / 5 This publication is exclusively for Privcap subscribers 2013 Privcap LLCP erformance is a GP s best marketing tool. But demonstrating performance isn t always easy, especially for managers with niche strategies that don t fit into neat categories for benchmarking against peers. STEP ONE in successfully marketing a niche strategy is to figure out who your audience is and how receptive they ll be. If you re in front of a person who s interested in private equity strategies with private equity returns, it s probably not a good idea to talk about a niche debt strategy which has a private equity structure, said Stefanie Langer of Independence Capital TWO is to determine what other selections the investor will evaluate when vetting your strategy.