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Private Equity:
A frontier or nearing
center stage?
Professor Eli Talmor
November 2016
Private equity: 5X increase in AuM over 12 years
Source: 2016 Preqin Global Private Equity Report.
861 952 1224
1691
2258 2277 2480
2791
3084
3327
3823 3972
4165
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2003 2005 2007 2009 2011 2013 2015
NAV
Dry Powder
All private equity AuM
US$ Billions
2
Record distributions and positive net cash flows to LPs
3
2015 distributions (35% more than in 2007) 443 US$ bn
5th year
0
1
2
3
2008 2009 2010 2011 2012 2013 2014
US Europe Asia-Pacific
Net cash flows to LPs in 2015 217
US$ bn
4
Pension fund investment return by asset class
Median 10 year annualized return as of June 2015
Source: Bison, October 2016
Private equity: Resilience and alpha in downturns
2.8
6.2
PE-backed companies Speculative gradecompanies
Annualized rate of default in the 2008–09 recession:
Consistent with long-term annualized default rate (1970-2002):
1.2 1.6
4.7
PE-backed companies All corporate bondissuers
Speculative gradecompanies
5
Sources: Endowment filings as of June-2014, and the 2014 NACUBO-Commonfund Study of Endowments
Largest US Endowment Funds SIZE US$ bn
10-year Return
PE Target Allocation *
PE Long-Term Annualized Return
Harvard $36.4 8.9% 18% (+7%) 20-yr @ ~ 24%
Yale $23.9 11.0% 31% (+10%) 20-yr @ ~ 36%
Stanford $21.4 9.9% 23% (+9%) 10-yr @ ~ 17%
Princeton $21.0 10.5% 25% ( - ) [actual @ 32%]
10-yr @ ~ 14.3%
University Endowments – Leaders in PE Investing
* 2015 Target allocation (relative to 2008 allocation)
Average allocation
to PE among US
Endowments 11%
£1.7bn Oxford Endowment Fund:
• 18% in private equity in 2014
• Up from 8% in 2012, and just 2% in 2008
• Returning 13.6% net annualised since
2009
7
Private equity expansion around the world (in ‘000)
2016
2015
33 - 40%
25 - 30% Shadow Capital
Co-investment
Separate managed accounts
Direct investments
8
2014 10 - 20%
Private equity secondaries
9
10 funds raised $19bn in 2015
8% average discount to NAV of funds sold in 2015 (18% for VC)
Secondaries transactions 1998 – 2015F (in $bn)
Source: Coller Capital, Dow Jones
0
5
10
15
20
25
30
35
40
45
1998 2000 2002 2004 2006 2008 2010 2012 2014
968 541 361 201 195 193 83 57 223
Private Capital: Types, sub-asset classes etc.
10
Natural Resources Energy / Power Oil & Gas (upstream, midstream &
downstream) Agriculture / Farmland Timberland Metals & Mining Other / Diversified
Private Debt Direct lending Senior debt (acquisition) Senior debt (origination) Distressed debt Unitranche Subordinated / Mezz (acquisition
vs. origination) CLO Royalty financing Asset-backed financing Venture debt Funds-of-funds
Real Estate Core Core-plus Value added Opportunistic Distressed Debt Mezz FoF’s / Secondaries
$ 2.8 trillion NAV ($ bn, Jun-2015)
PE debt assets under management
11 Source: Preqin Private Debt Online, 2015
12
Challenges ahead
Positive net distributions
Shift in long-term retirement pools
Increasing regulatory initiatives
Asset allocation and portfolio construction
Thank You