The 2016 Global Outlook & Review Dow Jones Analyst • Dow Jones Private Equity News

The 2016 3 Global Outlook & Review To the Reader

From the Desk of LAURA KREUTZER

when we published the first edition of what has become our annual outlook In late 2006, supplement, the private equity was deep in the biggest boom in its history. With the publication of the 10th edition of this supplement, some aspects of the market bear an eerie resemblance to those days. Debt is cheap. Deals are not. Firms that can point to a solid track record have been able to raise funds with relative ease. Those in the midmarket, in particular, can often raise amounts that are considerably larger than their prior offerings. But many limited partners remember all too well the carnage that followed the excesses of the 2006 and 2007 boom years. No doubt, memories of the difficult period that followed the boom contributed to the faint current of caution that appears to have crept back into limited partner mindsets as 2015 drew to a close. Whether LP concern will translate into a slower fundraising year in 2016 remains to be seen. Over the years, this supplement often has tried to tap into our inner psychics to pinpoint future trends. We weren’t always right in our predictions for the year to come. Back in 2006, for example, several members of our editorial team predicted private equity fundraising would level off or even slow down in subsequent years so general partners could digest all of the money they raised in 2006. Boy, did we get that one wrong! However, more recently, we have gotten a few things right. Last year, we foresaw the increased appetite among LPs for first- time funds and spinouts and also pointed to a movement toward larger funds and faster fundraising periods in the middle market as well as the growing influence of co-investment capital on market dynamics. All of these trends intensified in 2015. As we look ahead to 2016, we foresee a continued appetite for new funds but also a growing number of LPs adopting more defensive strategies with their commitments. Although small and midmarket funds remain the darlings of the LP community, 2016 may be the year things finally begin to look up for distressed debt and funds as more LPs seek to their bets against a frothy deal environment. As we head into a new year, we believe the air will eventually start to come out of the high pricing that has developed in the past 18 to 24 months. Whether or not we are right in the timing of our predictions will have to wait until next year’s supplement. contents

Fundraising u Investors Prep for Active 2016, but Many Plan to Proceed Cautiously...... 4

Secondary u Uncertainty Could Complicate Secondary Deals in 2016...... 12

Venture Capital u Herd of Venture-Backed Startups With Billion-Dollar Valuations Could Thin in 2016...... 14

Rising Stars u Select 2015 profiles excerpted from Private Equity Analyst...... 18

Timeline u 2015: The Year in Private Equity...... 20

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55% Recycled Fiber 30% Post Consumer Fiber The 2016 4 Global Outlook & Review

Investors Prep for Active 2016, but Many Plan to Proceed Cautiously

By LAURA KREUTZER and JENNIFER BOLLEN last year if not their hard caps, often with more investor demand than they could accommodate. At the same time, firms are fundraising engine returning to market with new funds sooner than expected, often Private equity’s chugged at full throttle seeking larger amounts of capital, a trend that is particularly in 2014 and remained steady in 2015, fueled largely by a pronounced among small and midmarket firms. healthy supply of cash flowing back into investor portfolios. As 2016 unfolds, investors expect that engine will continue to run All of this activity has stoked fears recent vehicles for both small and large funds, thanks partly to the volume of will produce disappointing returns. A slowdown in the volume capital seeking higher returns. of initial public offerings in recent months, along with signs of a more challenging leveraged market and an economic However, underneath the fundraising furor, more investors slowdown in many emerging market economies has injected a have begun to question how much longer the good times degree of uncertainty into investor mindsets that was not as can last. prevalent at the end of 2014.

“It’s been a really healthy and active fundraising environment “There is big divergence between private multiples and where for a number of years now, and the music is going to stop people think the value ought to be for deals,” said David Fann, eventually,” said Kevin Campbell, managing director and president and chief executive at TorreyCove Capital Partners. portfolio manager at DuPont Capital Management. “But the “Really good companies are trading at 13-times cash flow in big question is how long can it keep going, and how does the buyout space, and historically, nobody made a reasonable the industry absorb the capital?” rate of return on private equity when multiples were more than 10 times. People are pricing these deals for perfect execution.” Limited partners, placement agents and fund formation attorneys said they expect U.S. private equity fundraising to Some investors also question whether all of the money limited remain busy in 2016, with many of the same trends that partners have recycled back into the asset class will put some emerged in 2015 continuing into the year ahead. Firms that at risk of hitting or exceeding their allocations, should the public generated strong returns in prior funds quickly hit their targets markets experience another dramatic downturn. The 2016 5 Global Outlook & Review

A Small and Midmarket Cornucopia LPs have plenty of funds to choose from in the coming year, particularly in the small and midmarket segments. U.S. A Look Back midmarket buyout shops that returned to the fundraising trail 10 Years of Memorable Outlook Quotes in late 2015 or that expect to return in 2016 include Arsenal Capital Partners, , , 2007 “Nobody is making any more predictions and there is no Thoma Bravo, Kohlberg & Co., Leonard Green & Partners and outlook at this point. Last year, they kept saying it would be the Vista Capital Partners. end of this year…but larger deals keep getting done…There is no letting up.” A survey of 104 investors conducted by placement agent –Robert Polenberg, a director with S&P Capital IQ’s Leveraged Commentary and Data, speaking about the potential for a credit found U.S. midmarket buyout funds, defined market downturn as funds ranging from $500 million to $2.5 billion in size, ranked as the most popular strategy among LPs in 2016, 2007 “Management teams are refusing to take that much . followed closely by U.S. small buyout funds, defined as less They are telling us, ‘I don’t feel like running a company if you’re not than $500 million. going to do something to lower that leverage.’” –Joe Nolan, a principal at what was then GTCR Golder Rauner Strong investor demand has allowed certain midmarket (now GTCR), speaking about portfolio company resistance to the firms to raise much larger pools than they did last time high debt loads buyout firms wanted to place upon them around, a trend LPs predict will continue into 2016. Audax Group, and American Industrial Partners 2007 “I don’t expect anything to come out of this investigation, all raised funds in 2015 that were significantly larger than but I do foresee PE funds putting in place safeguards and their prior offerings. guidelines for how they invest with other PE firms.” –Marco Masotti, a partner with Paul Weiss Rifkind Wharton & Although investors say some firms can successfully Garrison LLP, on the Department of Justice investigation into possible anticompetitive practices associated with club deals manage a fund-size increase, particularly if it is accompanied by a matching increase in investment staff, 2008 “The biggest opportunity [in 2008] is to take advantage of others contend LPs need to tread carefully. Dan Cahill, a the carnage: Take advantage of pendulum swings and people’s managing partner at midmarket-focused fund-of-funds emotions.” manager Constitution Capital Partners, said his firm –Mark St. John, CVC Capital Partners declined to re-up with at least one manager in its portfolio due to concerns over fund-size inflation. 2008 “Every time you heard a whiff of a problem, it used to be that you had to stay out of emerging markets. Now that things in the U.S. “Some groups will get out there and their overall numbers have gone south, people say: ‘At least I have emerging markets.’” look strong, but they have a lot of volatility in the portfolio,” –Jennifer Choi, then research director for the Emerging Markets said Mr. Cahill. “A lot of groups look good until you drill down Private Equity Association, on the relative attractiveness of into the portfolio.” emerging markets private equity to investors

As some midmarket firms raise larger amounts for their core 2008 “It’s very hard to buy today knowing that it may be cheaper strategies, others are launching funds to target smaller deals, tomorrow. As a result, everyone waits, prices drop and you create a vicious cycle.” following in the footsteps of groups such as Vista Equity Partners and Riverside Co. Thoma Bravo, TSG Consumer –Steve Smith, then head of coverage at UBS AG, on the potential exit environment in 2008 Partners and Alvarez & Marsal have all pitched new funds in the past year that target investments that are smaller than 2009 “We’re in the baby pool right now. For a $100 million credit those they back through their flagship funds. facility, you can still get a club [of banks] together. But if you get much bigger than that, it’s a lot more difficult.” “It’s an opportunity for GPs to leverage the halo that they –John Neuner, a managing director at midmarket investment bank already have in certain sectors or [strategies],” said Eric Zoller, Harris Williams & Co., on the difficulty in securing deal financing co-founder and partner at placement agent Sixpoint Partners. 2009 “It will take some time for the fear and paralysis to dissipate. Investors also say they expect more firms to return to market Hopefully, it’s a matter of months and not quarters, but it’s not a earlier than anticipated, even before they have reached the matter of days.” threshold at which they would be allowed to start raising a new –Daniel S. Evans, a partner with law firm Ropes & Gray LLP, on fund, typically when they’ve invested two-thirds to three- prospects for the deal environment quarters of the prior fund’s capital. In such cases, the firms typically don’t start charging management fees on the new fund 2010 “There is a pulse back. We do see a lot of signs of life, until they make the first investment. though the recovery is by no means robust.” –Herald Ritch, then chief executive of advisory firm Sagent “The really good GPs have a well-refined nose for sniffing Advisors LLC, on the resumption of deal activity out money and raising it when they can,” said Mr. Fann of see more memorable quotes on p. 11 > TorreyCove, “It’s like a sixth sense they’ve developed.” The 2016 6 Global Outlook & Review

Brighter Skies for Distressed Debt? “They aren’t buying flood or fire just yet,” said Peter Although distressed debt and turnaround firms struggled Martenson, partner at placement agent . “They to win over investors in recent years amid low totally agree with the thesis that a recession should happen in rates and an abundance of cheap credit, the tide may start about two years, but the cops haven’t showed up and there’s to turn in 2016. The pressure low commodity prices have no fire yet.” placed on the energy and mining sectors and an expected rise in default rates may bolster distressed debt fundraising A Change of Heart for this year. After several years of robust venture fundraising, the bloom Standard & Poor’s Ratings Services predicts the U.S. may start to come off of the venture capital rose in 2016. corporate trailing 12-month speculative-grade default rate will increase to 3.3% by September 2016 from 2.5% in “There are going to be some folks that will be attracted to the September 2015 and 1.6% in September 2014, according shiny objects in terms of some of the numbers and some of the to a report issued in December. companies that have been developed,” said Eric Harnish, a principal on the research group at NEPC LLC. “But I think there “It’s worth considering having capital ready to go, if the credit are a lot of investors that are extremely cautious right now.” cycle does turn,” said John Haggerty, managing principal and director of private markets at Meketa Investment Group. As the market for initial public offerings of venture-backed startups has cooled and some mutual fund managers have Among investors surveyed by Probitas Partners, 31% said written down the value of certain startups in their portfolios, they will focus attention on distressed debt funds in 2016, up late-stage venture firms, in particular, may find it tougher to from 20% of investors that favored distressed debt in a similar win over LPs. survey in 2014. However, some limited partners said the environment would Some LPs say they are seeing more distressed managers raise need to deteriorate far more before it really puts a serious their funds in what they call dry closings. In such cases, the dent in fundraising. manager locks in the capital commitments under an agreement that it will not start charging fees or drawing capital until the “If you look at the performance of venture funds and growth market turns and investment opportunities pick up or if default funds, they’re doing extremely well,” said Christian Kallen, a rates reach a certain level. principal in the fund investment group at Hamilton Lane. “It’s mostly unrealized, but still pretty good. Not every deal depends on the public market to be a successful deal.”

Europe Preps for 2016 Fundraising Surge Across the Atlantic in , investors hungry for large pan- European buyout funds are gearing up for the region’s biggest round of fundraising since 2013.

According to data provider Preqin Ltd., 58 Europe-based buyout funds raised a total of €52.1 billion that year, dropping to 48 raising a total of €29.6 billion in 2014 and, as of early December, 39 raising an aggregate €29.6 billion in 2015.

Market participants expect fundraising figures to surge in 2016 – there are currently 68 Europe-based buyout funds attempting to raise an aggregate €10.4 billion, with fresh launches from a string of firms, including , BC Partners and , expected to add to the competition next year.

In the broader market, is attempting to raise the buyout industry’s largest vehicle that includes Europe as a geographic focus. Advent has set a $12 billion target for a fund that will invest in the region and in North America, according to Preqin. and the Georgian Co-Investment Fund are currently trying to raise the next largest Europe- focused buyout funds, each with a $6 billion target.

Antoine Dréan, founder and chairman of advisory firm Triago, described fundraising prospects as “bright” against a The 2016 7 Global Outlook & Review

In Their Own Words North American LBO/

u DAVID KESSENICH, co-founder and managing u ANDRE BURBA, managing director, Pine Brook partner, Excellere Partners What surprised you the most about 2015? What surprised you the most about 2015? As an investor focused on the energy sector, The most surprising thing to me about 2015 was the entering the year I believed oil price volatility would unabated trend of increasing multiples for be a dominant theme throughout 2015. Though lower midmarket businesses. Amidst the backdrop of conventional wisdom anticipated a v-shaped pending interest rate hikes, global geopolitical recovery in oil prices up until the midyear point, the upheaval and the ongoing predictions of a U.S. market speed with which sentiment around oil prices then shifted was correction, we would have expected to see valuations taper off a bit. surprising. It was interesting to see universal expectations change Clearly, we’re seeing pricing that’s being driven by the record-level almost overnight, as the market seemed to fall into line with a supply of capital chasing supply of opportunities. “lower for longer” outlook.

What do you think will be the biggest challenge the What do you think will be the biggest challenge private equity industry will face in 2016? We are preparing for the potential investors will face in the energy sector in 2016? I believe the of broad-based misalignment between valuation expectations distress created by lower commodity prices will further encourage and the values that can be responsibly underwritten. Several private equity energy investors to seek out investment times in the back half of 2015, we heard about or directly opportunities to capitalize on the fluid market conditions. I also experienced full auction processes that produced multiple high anticipate the already intense competition for management talent single-digit bids, where the sellers elected to wait – in the oil and gas industry will only intensify in the year ahead. presumably, to grow into a higher value. In these instances, the market spoke, but the sellers and their advisers [didn’t accept] What do you think will be the biggest drivers (or potential the results. This misalignment has the potential to create a drivers) of in 2016? in the energy challenging near-term deal environment. That being said, we sector is likely to be a substantial deal flow driver in 2016. As the are extremely optimistic that, as we have proved in the past, we degree of this distress increases, and the gap between buyers’ will find a few great entrepreneurial companies that meet our and sellers’ expectations continues to shrink, I think there will be investment criteria that will view Excellere as their “partner of an even greater number of attractive and actionable investment choice” and will be new investments for us in 2016. opportunities in the year ahead.

u ROBERT (BOB) BALTIMORE, u SCOTT EDWARDS, managing director, managing director, Harris Williams & Co.

What surprised you the most about 2015? What surprised you the most about 2015? Deal activity for private equity typically follows the I don’t know that anyone anticipated such a peaks and troughs as does much of the financial prolonged period of low oil prices. We and other markets. 2015 marked a return to significant M&A firms have seen some benefit from that as the on a dollar basis as we saw multiple large deals profitability at some portfolio companies has been announced and consummated. That said, the volume of deals was enhanced by lower transportation, energy and input costs. In largely in line with 2014 and has remained relatively stable. addition, we believe lower gasoline prices have continued potential to stimulate consumer spending as they may create What do you think will be the biggest challenge the industry greater disposable income. will face in 2016? The lending market has been more volatile over the last two to three months, with some large financings having to What do you think will be the biggest challenge the industry reprice in order to fully syndicate. [During the fourth quarter we will face in 2016? The superabundance of capital in the market continued] to see high-quality deals being successfully executed, will continue to be a challenge that impacts firms across the and we believe that the lending market will remain active [into spectrum of size and strategy. As a result, I expect valuations to 2016]. In addition to an active debt market, the equity funding remain high and firms to face strong competition for not only capability from both strategic buyers and PE sources is ample. winning but finding deal opportunities. Firms will have to Strategic buyers have been very active across all of our industry differentiate to get deals and generate returns. groups and we expect that to continue in 2016. What do you think will be the biggest drivers (or potential What do you think will be the biggest drivers of midmarket drivers) of distressed deal flow in 2016? Liquidity. deal flow in 2016? Assuming the debt market remains active, we Distressed and underperforming business with more access to believe that 2016 will be another year of strong deal flow. Ample liquidity can “kick the can” and continue operations as they debt and equity capital and commensurate high valuations will attempt to right their ship. We’ll likely be more focused on continue to drive strong deal activity. Harris Williams & Co. acquiring performing companies where there is opportunity for anticipates continued strength across each of our 10 industry us to have a positive impact in helping them transform potential groups, consistent with the activity over the last 12 months. into business results. The 2016 8 Global Outlook & Review backdrop of low interest rates and increasing market huge amount of dry powder that remained in the market – volatility. He said this condition gave private equity an currently $145.2 billion among Europe-focused buyout funds, opportunity to outperform other asset classes, and large according to Preqin. buyout firms with good records should do well. Fund terms and fees, which many firms have already overhauled “The effort to invest with maximum efficiency and minimum since the crisis, are set to change even further. BC Partners, for overlap has favored larger GPs for some time and has raised instance, has offered investors in its latest, €7 billion fund a the bar in terms of investor expectations when it comes to discounted if they accept a deal-by-deal smaller managers,” Mr. Dréan said. structure.

Rachel Matharu, a vice president at placement agent Mr Dréan said investors would benefit from a broader range of Acanthus, said the market expected strong results for the fee and carry choices in the future. latest round of large-cap European fundraisings. She said Advent’s global fund was widely expected to be “GPs are operating in an intensely competitive fundraising oversubscribed and that upcoming launches by Apax and market, with more than 2,500 vehicles seeking capital,” he BC Partners were expected to reach the finish line swiftly. said. “Other forms of private equity investing that come with lower fees and expenses will continue to grow in popularity, This optimistic fundraising outlook comes as large pan- notably no-fee co-investing and low-fee managed accounts.” European vehicles are set to meet growing demand for European private equity among North American investors. Ms. Matharu described the menu of fund terms as a “cyclical phenomenon,” adding it “is never so varied that it indicates a “The European sovereign debt crisis, which coincided with sea change or permanent shift on standard fund terms.” that last fundraising round, resulted in a large-scale retrenchment of North American investors looking to commit Mr. Barr said that while the most sought-after funds would capital to Europe,” Ms. Matharu said. “More recently, retain a certain level of pricing power over investors, offering a sentiment has grown considerably more positive.” choice of terms and fees “is about being relevant to your customer base, and investors are looking for more flexibility However, Rob Barr, a partner at fund-of-funds manager about how they invest money.” Pantheon, said fundraising for most vehicles may slow in 2016 after many investors returned to private equity last year Meanwhile, the denominator effect – which caused many and fulfilled their allocation requirements. He highlighted the investors to withdraw from private equity when slumping The 2016 9 Global Outlook & Review

In Their Own Words European LBO/Corporate Finance

u GUY HANDS, chairman and chief investment u MICHAEL KALB, senior managing director, officer, Terra Firma Capital Partners Sun European Partners

What surprised you the most about 2015? What surprised you the most about 2015? Based on the opinion polls, I, like most people, The asset valuation bubble continued to go on thought the Conservatives had no chance of unabated, even in the midst of global political getting an overall majority [in the U.K. parliament]. uncertainties including the Middle East and During the campaign, I said that a Labour-SNP Ukraine, currency exchange rate volatility, a government would be better for businesses that focus on collapse of oil prices and an economic slowdown in and essential industries like wind farms and care homes. other emerging markets. Unfortunately, while I got the election result wrong, to date I have been proved right with regard to industries that employ large What do you think will be the biggest challenge the industry numbers of people and provide essential services. will face in 2016? The return of market volatility in light of more recent global events including terrorism, expected interest rate What do you think will be the biggest challenge the industry rises in the and the pending referendum on U.K. will face in 2016? The biggest challenge the industry will face membership [in the European Union], to name a few. in 2016 will be finding good ways to invest a huge mountain of dry powder, now well over $1 trillion. It is very difficult to find Which single asset class offers the best value going into 2016 value in this market. To do this in a way that aligns ourselves with and why? Private equity, of course! our investors, Terra Firma has made three large changes in 2015: First, we will not charge investors fees on uninvested capital; In 12 words or less, what will be the single biggest theme of second, we are going to invest at least 10% in any strategy or 2016? The need to remain nimble, responsive and decisive in an fund we do; third, in order to attract the most entrepreneurial and evolving market. creative talent out there, I will be sharing ownership of Terra Firma going forward. u THOMAS VON KOCH, managing partner and chief executive, EQT Partners Which single asset class offers the best value going into 2016 and why? This question is largely dependent on what What surprised you the most about 2015? happens with interest rates. If they continue to stay low and Firstly, China: We knew growth at 7%-8% per liquidity continues to increase, then a lot of year couldn’t go on forever. Still, it was infrastructure assets, though appearing today expensive, would in surprising how fast time caught up, with more the years to come look to be of good value. On the other hand, if “normal” growth affecting both commodities and interest rates go up, they will look overpriced in the future. the machine industry. Secondly, the energy sector: The geopolitical events combined with the progress in alternative In 12 words or less, what will be the single biggest theme of energy leaves you with no reason to believe that oil prices will 2016? Larger LPs continuing the move to look more like GPs. reach previous levels again.

u WILLIAM JACKSON, managing partner, What do you think will be the biggest challenge the industry Bridgepoint will face in 2016? Proving to society that we earn our license to operate. In this environment, with zero interest rates and the What surprised you the most about 2015? industry being questioned in many markets, there is a need for David Cameron returning to Downing St. to lead a reinvention. We have to show that we are as good at creating majority conservative government. value as we have been historically.

What do you think will be the biggest challenge Which single asset class offers the best value going into the industry will face in 2016? High transaction pricing fueled 2016 and why? Direct lending. Small and mid-size businesses by robust, but more volatile, debt markets will challenge us all in have difficulties accessing capital because banks don’t find the sector. them that interesting. This creates interesting opportunities for firms like us. Which single asset class offers the best value going into 2016 and why? Private equity will continue to outperform on an In 12 words or less, what will be the single biggest theme of absolute and relative basis as the ongoing European recovery 2016? How tech will change mature industries. delivers good euro returns and strong cash back to investors.

In 12 words or less, what will be the single biggest theme of 2016? Volatility: U.S. elections, the Brexit debate, interest rates, concerns, currency movements. The 2016 10 Global Outlook & Review equity markets led to disproportionate allocations to the asset Slower economic growth rates in many emerging markets, along class – is not expected to create issues in the next fundraising with weaker currencies and greater public market volatility have cycle. Mr. Dréan said this is a result of a more sophisticated weighed on returns. At the same time, the prospect of higher approach to portfolio management since the crisis. interest rates and the strong dollar has attracted more institutional capital back to North American funds. “Barring a full-blown rout, private equity’s popularity should intensify if public markets lose ground,” he said. “It has been a particularly buoyant period in the United States and a positive environment for U.S. private equity, and in the Ms. Matharu added that although investors did not consider rest of the world, we’ve seen a very different and almost inverse performance an immediate concern, they picture,” said Steve Cowan, managing director at 57 Stars, a continued to assess the market and “the picture may well Washington, D.C.-based firm that focuses exclusively on change in the second half of next year.” emerging markets private equity. “Whereas money is flowing back into the U.S., you’ve seen the listed markets go down in most [emerging market] jurisdictions, and most major Emerging Markets’ Double-Edged Sword currencies have fallen vis-a-vis the U.S. dollar.” A strong U.S. dollar and slower economic growth in many emerging markets may translate into a tough fundraising Investor appetite for new commitments in emerging markets may environment – but a potentially promising investment climate depend partly on how much exposure they already have to those – for many countries in 2016. markets from prior vintage years, said NEPC’s Mr. Harnish.

Private equity fundraising for emerging markets reached “If they have an existing portfolio, they probably need to think $29.74 billion through the first three quarters of the year, about how stable these businesses are,” he said, adding putting 2015 on pace to be the slowest fundraising year for investors with new capital to deploy “may think this should be emerging markets since 2010, according to data released by a great time to deploy at lower valuations and get capital into the Emerging Markets Private Equity Association. countries that have higher growth rates.”

In Their Own Words North American LBO/Corporate Finance

u RICHARD LAWSON, managing director and events. Private equity firms will be pressured to achieve realizations, chief executive, HGGC nudging high-quality companies onto the market. Locating these situations before the company is engaged in an active auction What surprised you the most about 2015? process can result in a deal that provides a realization to the seller, as Increased access to debt financing drove a well as an opportunity to make an acquisition where the seller remains significant uptick in corporate M&A activity, in size a minority owner of the company, aligning incentives for the buyer. and scope of deals, while the PE market for large initial deals, by comparison, was relatively quiet. Driven by credit investor comfort in corporate “brands,” serial u CHARLIE MOORE, senior partner, North acquirers helped push the return of corporate megadeals with American operations, Trilantic Capital Partners large add-ons and transformative mergers, including Dell/EMC, Kraft/Heinz, Home Depot/Interline, etc. The impact has been What surprised you the most about 2015? readily visible, with only 5% of deals in 2015 being PE-backed, Competition among private equity firms for down from 9% in 2014. attractive assets ratcheted up another notch from the already robust levels seen in 2014. What do you think will be the biggest challenge the industry will face in 2016? The macroeconomic climate and resulting What do you think will be the biggest challenge the industry choppy debt market will be the biggest challenges in 2016. faces in 2016? The realization that high prices are here to stay, Following robust deal activity in 2015, slowing global growth will notwithstanding a likely Fed rate increase. result in valuation declines as investors become more risk adverse. This uncertainty will lead to the tightening of credit Where do you think the valuation of midmarket companies markets, further reducing buyout valuation expectations. Although will be headed in 2016? I expect valuations for middle market unlikely during a period of economic slowdown, if the Fed stops companies to remain generally at their current levels in 2016, holding interest rates near zero, further pressure will be placed adjusted for a modest rise in rates, absent an exogenous risk-off upon buyout valuations as return profiles change. event. A near-term recession in the U.S. is unlikely; our economy is healthier than most of the rest of the world’s. But there is What do you think will be the biggest drivers (or potential always a possibility of the unforeseen – war in the Middle East, drivers) of deal flow in 2016? We believe the capital that has terrorism at home, China unraveling – that can surprise markets continued flowing into private equity will begin to demand liquidity and put risk capital on the sidelines. The 2016 11 Global Outlook & Review

The strong dollar has weighed on portfolio company exits by emerging market managers, particularly those that raised dollar-denominated funds. Brazil has been among the A Look Back hardest hit, with the Brazilian real declining against the dollar 10 Years of Memorable Outlook Quotes by some 30% in 2015. Investment in the nation has been hurt by a series of corruption scandals over the past year. 2010 “We are on the same path again as people start to push the Private equity fundraising for Brazil reached just $1.54 billion envelope. We’ve seen the movie – we lived in it.” during the first three quarters of 2015, off pace from some –Andy O’Brien, then co-head of syndicated and leveraged $4.21 billion raised for Brazilian funds in all of 2014, finance at J.P. Morgan Chase & Co., on the nascent recovery according to EMPEA data. in the debt markets

However, some investors remain convinced private equity 2011 “If fund terms do not change now, they never will. It is a managers in Brazil will ultimately still perform over the long term. buyer’s market. LPs are more willing to look under the bonnet and will seek greater transparency and lower fees.” “The relative underperformance there is mainly a currency –Ian Bagshaw, then a partner and co-head of private equity at law issue, rather than an underlying portfolio company issue,” said firm Linklaters LLP, on fund terms and conditions Mr. Kallen of Hamilton Lane. “Private equity with [its] five-to- 10-year hold period should equal out over time.” 2011 “Now discounts are very thin and NAVs are very full. It feels like a feeding frenzy for secondary guys out there.” Although economic growth in China also poses some –Tjarko Hektor, then a partner at AlpInvest Partners, on the fundraising challenges for managers in 2016, investors view secondary deal environment that market more favorably than Brazil, thanks partly to its size 2012 “Those managers who knew they could get it done came out and buoyant growth rate compared to other markets. However, to market in 2011, but those managers that didn’t think they could they add the types of funds investors favor are shifting away get it done didn’t even come out.” from those focused on export manufacturing or resource –Mel Williams, a general partner at TrueBridge Capital Partners, on intensive investments. the venture capital fundraising environment

“You see continued demand around consumer-driven 2012 “Not infrequently, managers state that they have complementary strategies, or special situations and distressed strategies,” backgrounds – for example, private equity, consultant and banking said Mr. Zoller of Sixpoint Partners. He added that although experience. However, the industry is still made up predominantly of the latter is relatively difficult to do, given China’s regulatory white males, with sadly little diversity by race, gender and age.” regime, LPs still find it attractive. –Rhonda Ryan, then head of the Europe private funds group, PineBridge Investments Among locales for emerging markets private equity, investors say they also see a few bright spots in the year ahead, 2013 “It’s like watching an approach path to an airport. One plane including Mexico, thanks partly to a high correlation between after another, they’re all coming in to land.” Mexico’s economy and the U.S. economy. The nation has –Andrea Auerbach, head of private investment research at consulting implemented economic reforms in industries such as energy firm Cambridge Associates, on the crowded fundraising market and education and has become a growing center for manufacturing exports. 2013 “It’s sort of like the lottery in a way. There always will be big winners. But predicting it is getting harder than ever because of the number of companies in the Petri dish.” “Mexico has been one of the significant beneficiaries of the increasing costs of exporting from China,” said Mr. Cowan of –Harry Weller, a general partner at New Enterprise Associates, on investing in consumer Internet startups 57 Stars. 2014 “I’m not sure everyone remembers the lessons learned from the great financial crisis. Investor memories tend to be .” Staying Disciplined –David Fann, president and chief executive of TorreyCove Capital Overall, even as investors predict a busy fundraising year over Partners, on a resurgence of LP commitments the next 12 months, the similarities between the current environment and the heady days of the buyout boom in 2006 2014 “We’ve had financial sponsors being approached by banks and 2007, particularly in the U.S., give some cause for concern. for [listing] assets they hadn’t even thought about selling yet because they only bought them a few years ago,” Amid high pricing, abundant debt and ever increasing fund –David Jennison, a partner at equity capital markets adviser STJ sizes, many investors say that the coming months will test Advisors, on renewed popularity of PE-backed initial public offerings LPs’ ability to remained disciplined in their commitment pacing and manager choices. 2015 “It worries me [when] LPs look at a portfolio and try to make a determination on a manager’s ultimate success based just on “Part of the problem is people think the good times will keep the black and white numbers in front of them. There’s a lot of desk rolling,” said Brian Gallagher, a partner at Twin Bridge Capital diligence being done.” Partners. “But when the markets turn, it’s often for reasons –Tim O’Gara, founder of Shannon Advisors, on investor due diligence that neither you nor I could ever predict.” n The 2016 12 Global Outlook & Review

Uncertainty Could Complicate Secondary Deals in 2016

By LAURA KREUTZER Concern over a potential slowdown in distribution activity, however, might reduce buyer willingness to pay the high prices sellers have come to expect. A slowdown also could hinder Secondary deal making general partners’ ability to effect fund , which have remained strong for much of 2015, but public market volatility accounted for a growing percentage of deal volume in the past during the third quarter and uncertainty over the future of the couple of years. Fund restructurings typically have priced at their global economy could complicate deals in the year ahead. underlying net asset value or at slight discounts, according to some secondary intermediaries and secondary buyers, who “We have seen a change in the momentum of the market in added that fund investors now evaluate them with a much more which buyers have become a little more selective,” said Tom critical eye than they did when such deals were relatively new. Kerr, managing director on the secondary team at Hamilton Lane. “There are some signs that the volatility has introduced “These transactions, in particular, are sensitive to pricing, and a little more uncertainty and made the market a bit more [limited partners] are only doing them if they’re getting full challenging for both buyers and sellers.” value,” said Mr. Kerr. “It’s not a motivated seller most of the time. If pricing in these transactions remains very full, then LPs will High prices on the secondary market helped drive massive sell into them, and you’ll see a lot of activity.” amounts of deal volume in 2014 and much of 2015, particularly for large portfolio transactions from banks and Slower distributions also could lower returns on deals levered fiduciaries, such as pension funds. A large volume of with debt. Robust distributions have enabled secondary capital available for secondary deals, a strong exit buyers to easily cover the interest payments on debt added to environment in which distributions far outpaced deals with enough left over to return to LPs, thus bolstering investments and an abundance of cheap leverage all the return on their equity. But if those distributions slow down, supported robust pricing. As 2015 drew to a close, some a greater percentage will have to go to servicing the debt. secondary buyers and intermediaries were predicting deal volume for the year could end up reaching between $30 “Things would have to get really bad for the banks to get hurt, billion and $36 billion. but they only have to be fairly bad for the equity holders to get The 2016 13 Global Outlook & Review hurt,” said Jason Gull, a partner and head of secondary “There are some signs that the investments at Adams Street Partners. volatility has introduced a little Despite latent concerns about future distributions, buyers said more uncertainty and made the the volume of potential sales remains strong. However, unlike 2014, when large billion-dollar transactions drove deal market a bit more challenging for volume, midsize transactions – involving perhaps a dozen both buyers and sellers.” funds or so – currently dominate the market. Tom Kerr, managing director on the “Those aren’t motivated by some grand scale event but are secondary team at Hamilton Lane more the result of routine re-evaluation and purging of portfolios and trying to clean up the ,” said Fadi Samman, partner at law firm Akin Gump Strauss The capital pile only stands to increase given the number of Hauer & Feld LLP. firms that pitched new secondary funds in late 2015 or early 2016. Firms in the market or planning to start marketing in The need for ongoing portfolio management as well as the 2016 include Adams Street, Hamilton Lane, HarbourVest large amount of capital raised by secondary firms in recent Partners, , Portfolio Advisors and years could continue to support higher deal prices, even if Willowridge Partners. distributions start to slow, some industry participants said. Secondary firms in the U.S. and Europe raised a total of more “The amount of capital chasing deals is a kind of a counter than $10 billion in 2015 through Nov. 30, on top of more than lever,” said Mr. Samman of Akin Gump. “It will be interesting $23 billion such firms raised in 2014, according to data to see how the economic drivers on pricing co-exist with a provider Dow Jones LP Source. real need to deploy capital.” n

In Their Own Words In Their Own Words Venture Capital Secondary

u JORDAN GASPAR, managing partner, u DAVID WACHTER, managing director, AccelFoods W Capital Partners

What surprised you most about 2015? What surprised you the most about 2015? The pleasant surprise of 2015 is the caliber of The expectation that high valuation private rounds first-time food and beverage entrepreneurs are a precursor to near-term exits and IPOs. Private entering the space. We’ve seen sophisticated market valuations have been bid up to multiples entrepreneurs leaving other sectors like tech and significantly higher than those in the public markets to come and start businesses in this industry. due to the search for growth investment opportunities. This spread These founders bring a unique aspect and approach to how they has effectively caused a narrowing of the IPO window and M&A produce their product, go to market and engage with consumers. market as companies need several years to grow into their private valuations. As a result, investors who signed up for a quick flip will What do you think will be the biggest challenge the need to settle in for the long haul. industry will face in 2016? From retailers increasing shelf space for natural products to online and mobile platforms What do you think will be the biggest challenge the industry creating direct-to-consumer sales strategies to large will face in 2016? Managing expectations among shareholders, corporates shifting focus to emphasize fresh divisions or management and employees in an environment where capital investing in and supporting early-stage companies, the entire becomes more costly and exits become more uncertain. Many industry is rethinking how to approach the next generation of growth companies have business plans that rely on additional innovative brands. With the industry at a defining moment of financings or an IPO within one to two years. Companies that unprecedented change, it remains to be seen how so many need money may have to modify their business plan, raise more strategic shifts will play out. expensive capital or both, and all stakeholders will have to adjust their expectations of the timing and valuation of an exit. Do you expect a change in competition at your level of investing? Why or why not? We are now investing out of a How do you think secondary deal volume in 2016 will new fund that is substantially larger, allowing us to continue compare with 2015? Secondary deal volume is highly running a next-generation accelerator while committing larger dependent upon the perception of market conditions and volatility. sums of capital in companies generating $1 million to $3 million- If rates rise and the overall markets experience significant volatility, plus in revenue. While there is always competition for great co-investors and other recent entrants to the private markets will deals, we primarily invest in the AccelFoods “graduates,” a need to re-evaluate their objectives for their private investment strong group of high-quality potential portfolio companies. The portfolios. Investors that are less comfortable with a long-term AccelFoods platform allows us to offer unique, proprietary hold period or supporting their investments with additional capital partnerships to our companies. will drive increased interest in secondary directs. The 2016 14 Global Outlook & Review

Herd of Venture-Backed Startups With Billion-Dollar Valuations Could Thin in 2016

By RUSS GARLAND Still, investors said many of these companies have promising, substantial businesses that will prevail in the long run. in the venture capital The big story industry for 2015 was the Here are some of the newcomers to the billion-dollar club that stampede of companies joining the club of startups raising are worth watching in 2016 to see if they can live up to the capital at valuations of $1 billion or more. lofty expectations of their backers:

As of early December, 59 companies had joined the ranks in 2015, and the total number of private, venture-backed JET.COM INC. companies world-wide valued at $1 billion or more stood at 131, according to data provider Dow Jones VentureSource. This online marketplace is taking on ecommerce But as the year drew to a close, VCs and others were giant Amazon.com Inc. questioning whether such valuations were sustainable. by offering lower prices. It plans to have The verdict from the public markets was decidedly mixed, as only a few warehouses, some billion-dollar babies, also known as unicorns, priced initial relying instead upon its public offerings at valuations lower than their final venture rounds, suppliers to fulfill and others saw their post-IPO share price drop below the value orders. Jet is led by at which they last raised capital as a private company. founder and Chief Executive Marc Lore, who sold his former company, Quidsi Inc., the parent of Diapers.com, to Amazon in Payments company Square Inc., for instance, priced its IPO in 2010. The Hoboken, N.J., company raised $350 million in November at $9 a share, sharply below the $15.46 private November at a valuation of $1.35 billion. Mutual-fund investors paid in its last round of venture capital in 2014. company Fidelity Investments led the round. Other backers include venture heavyweights Partners, Another bad sign for the billion-dollar club was that some Ventures, Partners, New Enterprise of the mutual funds that helped fuel the wave of high-priced Associates and . Jet will need their financings cut their estimates of several companies’ worth, firepower because its business plan relies heavily on according to public records. marketing to capture consumers’ attention. The 2016 15 Global Outlook & Review

club includes other companies in similar lines of business, DRAFTKINGS INC. including -based Blue Apron Inc., which also delivers meal kits; and Delivery Hero Holding GmbH, also based in This company is one of Berlin, which delivers meals from restaurants. Besides two members of the , HelloFresh operates in the U.S., U.K., Australia, the billion-dollar club that , Belgium and Austria. A €75 million round in enables people to play September valued the company at €2.6 billion, or about $2.93 fantasy sports online on billion at the time. Its majority shareholder is Rocket Internet. a daily basis (the other Other backers include Scotland-based money manager Baillie being FanDuel Inc.). Gifford and Insight. Both companies have been in the news lately because of disputes with U.S. regulators about whether their UDACITY INC. offerings violate gambling laws. The companies claim an exemption under federal law that deems fantasy sports a An online university, this game of skill, not chance. The New York attorney general, for Mountain View, Calif., one, disagrees and is looking to prevent them from operating company joined the in the state. Boston-based DraftKings raised $300 million in billion-dollar club after July at a valuation of $1.2 billion. Its backers include Atlas shifting its business Venture and a host of sports and media industry heavies, model to working with including Fox Networks Group and Major League Baseball. technology companies such as Inc. and Google Inc. to BLABLACAR develop courses. It offers “nanodegrees” that require students to complete projects in technical subjects that are in high Although Uber demand, such as machine learning. With its latest financing, a Technologies Inc. is the $105 million round in November that valued the company at $1 best-known ride billion, Udacity plans to move back into nontech areas. service, the billion- Sebastian Thrun, a Stanford University professor, co-founded dollar club has several the company in 2011 to make higher education more such companies, affordable. Backers include Andreessen Horowitz, Google including this - Ventures and German media conglomerate SE. based startup that raised a fresh round of venture capital in September at a valuation of about $1.5 billion. New York-based Insight Venture Partners led the €180 million investment in the company, also known as Comuto SA. Accel and are also backers. Unlike Uber, which competes with taxi companies and has battled them in many places, including Paris, BlaBlaCar concentrates on the intercity market, matching riders with trips posted by drivers. It has expanded beyond Europe to countries such as Mexico, and Turkey. It bought its biggest European competitor, Carpooling.com, in 2015. BlaBlaCar’s name comes from a feature of the service that enables customers to choose how chatty they want their car mates to be.

HELLOFRESH GMBH

Food delivery is one of the hottest consumer- Internet sectors, and Berlin-based HelloFresh is one of the leading players. The startup delivers meal kits weekly to subscribers’ homes. These include recipes and measured amounts of the ingredients necessary to prepare each meal. The billion-dollar The 2016 16 Global Outlook & Review

Capital, & Co., RRE Ventures, Tiger DATTO INC. Global Management and Peter Thiel, the co-founder of This business software PayPal Holdings Inc. looks to a market that big company aims to give banks largely avoid. It concentrates on middle-class con- small and midsize busi- sumers of middling creditworthiness. The company uses its nesses cheaper access own money and outside capital from the likes of KKR to to data backup and make . Such alternative lenders aim to shake up the recovery services than banking industry, but competition is fierce and customer they get from Amazon acquisition costs are high. Web Services, a branch of Amazon.com Inc. Datto uses cloud computing, a popular Internet-based THUMBTACK INC. technology that is supplanting on-premise data centers. The SMB market can be difficult to crack, however, and founder Technology is changing and Chief Executive Austin McChord took a cautious how people find and approach, bootstrapping the business on his hire tradespeople, and before taking venture capital in 2013, six years after its start. this is one of the By that time, Datto was profitable, he said. General Catalyst companies leading the led its , and in November, the Norwalk, Conn., charge. It differs from company brought in Technology Crossover Ventures to lead a recommendation sites $75 million investment at a $1 billion valuation. such as Angie’s List and service providers such as TaskRabbit in that within hours it introduces users to AVANT INC. local professionals who then provide estimates for painting a house or other projects. The San Francisco startup raised a Venture investors loved $125 million round in September that valued it at $1.3 billion. online lenders in 2015, The deal, however, illustrated some of the strains these pricey and one of their big- valuations are placing on the market for venture capital. gest bets was on this Thumbtack sought a $2 billion valuation but couldn’t get Chicago company that investors to bite after it was caught violating Google search courts borrowers with rules, reported. Thumbtack swiftly credit scores that addressed its search misstep and Google lifted a penalty. aren’t top rate. General Baillie Gifford, which is new to such deals, led the September Atlantic contributed round. and are most of a $325 million round in September that valued the also investors in the company, as is Google Capital, the company at $2 billion. Other Avant investors include August growth-investment arm of Google Inc. n

In Their Own Words Venture Capital u STEVE HARRICK, general partner, have not been forced to ask the difficult questions regarding their Institutional Venture Partners expense structures and operating models. In 2016, I believe that burn rate will become a central issue for many of these What surprised you the most about 2015? businesses, and only those that are metrics-driven will thrive. I was surprised by the aggregate amount of investing activity and the persistent pursuit of growth What do you plan to focus on in the coming year? I continue without regard for risk. The capital that was typically to be excited by the opportunities for next-generation, enterprise- reserved for companies when they go public had focused technology companies. The current pace of innovation is been moving to the private markets for several years – and I believe accelerating the obsolescence of the traditional vendors and that we witnessed the peak of this trend in 2015, at least for this offering startups a foothold in some really important markets. cycle. Currently, we are seeing numerous signs of price sensitivity Virtually every business wants to take advantage of analytics at and a pullback from traditionally public investors in private growth scale, run their networks more securely, support mobility and move rounds, but I thought this would have happened before now. applications to the cloud. Entrepreneurs who take a fresh approach to using software to solve problems for businesses will What do you think will be the biggest challenge the industry be rewarded with rapid growth and a high percentage of recurring will face in 2016? Counseling companies to find the right revenue. The recurring revenue (via subscription) makes it easier balance between growth and sustainability. For several years, for these companies to forecast their business more accurately growth companies have been afforded the luxury of abundant and plan appropriate expense structures for the years to come. If capital without the scrutiny that typically comes with milestone- they do this well, they will become the great public companies of based financings or filing to go public. Accordingly, many of them the future. IVP’s mission is to help them succeed. The 2016 17 Global Outlook & Review

In Their Own Words Venture Capital

u DAVID PAKMAN, partner, u JARED KESSELHEIM, partner, Bain Capital Ventures What surprised you the most about 2015? First, 2015 was the year where tools that were What surprised you the most about 2015? originally developed for software teams really The historic announcement made by the crossed over into adoption by general knowledge Centers for Medicare and Medicaid Services workers. Slack is the lead example here. I was also to tie 50% of payments to alternative payment surprised by how fast artificial intelligence is models by 2018. This includes bundled appearing in mainstream products. Suddenly, we are all used to payments and accountable care organizations. Because talking to our devices, from Siri to Amazon Echo and Alexa, to Medicare is the single largest payer in the U.S., this Google Now or Cortana. AI-powered virtual assistants have announcement has the potential to dramatically accelerate the spread far more quickly than I would have expected. And we will country’s shift from fee-for-service to value-based care. In see many more years of innovation in this area. addition, the strategy will create substantial opportunities for a new breed of startups, helping the U.S. deliver better care more What do you think will be the biggest challenge the venture indus- efficiently and for less capital. try will face in 2016? Liquidity, liquidity, liquidity. There have been far fewer IPOs in recent years as compared to the voluminous amount of What do you think is the biggest challenge the venture financing activity. This industry cannot survive without liquidity events, industry will face in 2016? The number one challenge will be and M&A cannot be the only way out. The often tepid public market finding the talent to enable portfolio companies to scale. The reaction to tech IPOs was not a welcome development in 2015. struggle for qualified human capital, particularly in engineering, shows no signs of abating. To cope, both new and mature startups How should venture firms change the way they do business in must strongly focus not only on attracting but also retaining talent. 2016 and why? Ratcheting back on some of the bad behavior – no A secondary challenge will be heightened pressure on venture more high-priced rounds without thoughtful comps just to get into the capitalists to be more disciplined investors amid robust venture deal. No more big employee liquidity events before the company has fund raising and soaring valuations. a scaled business model. And hopefully, much less obsession with the “are we in a bubble or not?” conversation. I also am hopeful there A record amount of venture funding went into health care in will be more comfort taking big swings on nonconsensus ideas. 2015. Can that pace be sustained? Absolutely, and for two reasons. First, health care is undergoing key structural changes u STEPHEN KRUPA, managing partner and in the use of electronic data, reimbursement procedures and the chief executive, Psilos Group Managers methodology of care delivery, creating a golden era of opportunity for disruptive startups that do these things better. What surprised you the most about 2015? Second, the venture industry is likely to raise as much or more as The Rock Health data from 2014 [showed there it did in 2015. was] $4.3 billion in venture investment in digital health. The data in the first three quarters – $3.3 u KATHLEEN UTECHT, managing partner, billion – would suggest we’re going to do at least Core Innovation Capital that much in 2015. To maintain that pace is not what I expected. It’s representative of a new financing environment for digital health, What surprised you the most about 2015? and it’s sustained itself now for two years. The amount of really smart people tackling insignificant problems. This number should be What do you think will be the biggest challenge the health-care zero and there are hundreds. We have serious venture industry will face in 2016? The success distribution of challenges in this country and the world, and deals in venture is not going to change: For one success, there’s there’s marginal utility to another me-too app or ad tech often one failure. There’s a significant amount of competition across company. I am encouraged by what I see happening in financial the board for investment and for customers for these companies. services, health, education and space technology. The challenge this industry faces is rationalizing all this investment and carefully [weighing] which companies have a chance to win. What do you think will be the biggest challenge the venture industry will face in 2016? Where there is challenge, there is Can the pace of digital health investments be sustained? opportunity. Many people are going to lose a lot of money. A lot Digital health is going to evolve like any emerging-technology of dumb money that was filling syndicates will fall out. market, where investment will go through cycles. It’s the first time Companies that don’t have businesses with solid unit that computing can step into health care and really make a economics, fundamentals or another weapon will disappear. difference. There’s going to be a lot of optimism and a lot of deals Those that came into startups because it was the cool thing to that will be tried, but the trend will be up the next 10 years do will happily go back to their corporate job, which we need. because digital technologies are going to add a lot of value to the Bad investors will fall out. There will continue to be money for health-care system. It will take time for companies to get their solid companies and for disciplined investors. Investors are products and value propositions right. I don’t think we can declare investing over five years, not 12 months. There’s room to make any one company [as] getting it right for the long term yet. a lot of money in 2016. The 2016 18 Global Outlook & Review

Rising Stars This year’s list of rising stars features private equity executives investing in a range of industries, including the health- care, consumer and sectors, as well as telecommunications, technology and industrial companies. These profiles are excerpted from longer versions that appeared in our regular monthly feature in Private Equity Analyst.

Key Deals: Giordano’s, which Victory Park acquired in early H MATTHEW CAINE, Solic Capital Advisors 2012, and online lender Avant Inc., in which Victory Park is both an equity owner and lender. Mr. Caine has taken a leading role in building the firm’s relationships within the health-care sector, including among community hospitals and for- H ANDY DAWSON, Advent International profit hospital providers. He worked at Robinson- Humphrey Co., then at corporate Mr. Dawson built his reputation and and financial adviser Casas Benjamin & White LLC, which was relationships in the consumer and retail sector, acquired by Navigant Consulting Inc. He later joined a group of working on many of Advent’s highest-profile Navigant professionals that struck out in 2013 to form Solic. deals ahead of his promotion to managing director in December 2014. Reputation: Solid, calm, makes an effort to keep all parties informed. Reputation: Has technical and analytical skills that complement his ability to motivate and encourage people. Key Deals: The merger of Rockford Health System with Mercy Health System. Mr. Caine helped bring about the deal Key Deals: DFS Trading Ltd., which Advent floated on the after Rockford’s merger with another company fell through. Stock Exchange in March 2015. He also worked on Advent’s acquisition of an $845 million stake in Canadian sportswear brand Lululemon Athletica Inc. in 2014. H BRENDAN CARROLL, Victory Park Capital All three co-founders of Victory Park Capital – H GLENN JACOBSON, Mr. Carroll, Richard Levy and Matthew Ray – Trilantic Capital Partners previously worked together at Magnetar Capital, where they specialized in The economics major didn’t have knowledge of lending directly to midmarket companies. energy investing or private equity prior to work- ing as an energy-focused investment banker at Reputation: Mr. Carroll is articulate and self-disciplined, said Holdings Inc. in 2003. Fast Yorgo Koutsogiorgas, chief executive of Giordano’s, a Victory forward 12 years, and Mr. Jacobson has been promoted to Park-backed pizza restaurant chain. partner at Trilantic. The 2016 19 Global Outlook & Review

Reputation: A wide skill-set, which translates into an ability to Key Deals: He oversaw Blackstone’s acquisition, alongside learn new skills quickly. Hellman & Friedman, of a 70% stake in the German classified advertisement business Scout24 Holding GmbH. Key Deals: He conceived the idea of setting up an energy He also led the acquisition of corporate services provider platform at Trilantic to buy stakes in nonoperated assets, or Intertrust Group BV and its subsequent merger with assets the owner doesn’t operate. European fiduciary manager ATC Group.

H CHRIS O’BRIEN, Wynnchurch Capital H LUCIAN SCHÖNEFELDER, Kohlberg Kravis Roberts & Co. Mr. O’Brien was promoted to partner at the firm this year. He began his career in consulting at In 2014, Mr. Schönefelder, a London-based Deloitte & Touche LLP and IPC Group, joining martial arts enthusiast specializing in Krav Maga Wynnchurch in 2000 as an associate and the – a form of self-defense developed for the firm’s third employee. He rose steadily through Israeli military – was tasked with establishing the ranks, rejoining in 2005 as a vice president after receiving the European arm of KKR’s new growth equity business. his master of business administration degree. Reputation: Highly productive, hardworking and versatile, Reputation: A laid-back team player. with an impressive deal count over the past two years.

Key Deals: The 2012 carveout of U.S. Pipe and Foundry Co. Key Deals: The $55 million acquisition of a minority from Mueller Water Products Inc., in which he helped the stake in IT software company Arago GmbH and the company become independent and make five add-on firm’s $35 million investment in Israeli Internet business acquisitions. ClickTale Ltd.

H SCARLETT OMAR-BROCA, H CHELSEA STONER, Battery Ventures Group Inc. The first female general partner at Battery Ms. Omar-Broca is one of the few women in Ventures, Ms. Stoner has developed a Goldman Sachs’s principal investments area knack for helping portfolio companies grow, unit, which houses its private equity and debt often by identifying potential add-on investments. She has worked across both acquisitions that could carry the companies equity and debt investments for the team since joining into new markets, according to colleagues and portfolio Goldman in 2007. In 2014, Ms. Omar-Broca was handed company executives. responsibility for leading the bank’s private equity investments in France, having already been in charge of European Reputation: “Her intellect and analytical rigor are off the telecommunications and media sector deals. charts,” said fellow Battery General Partner Neeraj Agrawal.

Reputation: A consistent top performer. Key Deals: Battery’s investment in Data Innovations LLC as well as add-on acquisitions for the company. Also add-on Key Deals: Played a key role in the sale of Get AS, Norway’s deals for Brightree LLC. second-largest cable operator. H JAY WILKINS, Harvest Partners H JUERGEN PINKER, Blackstone Group The executive oversees Harvest’s health-care German-born Mr. Pinker was promoted to team with another senior managing partner, Ira managing director in Blackstone’s London office Kleinman. After a six-year period in which in late 2013 and has been leading the firm’s Harvest didn’t make any health-care investment strategies in Germany, as well as in investments, the firm’s senior management European industrials, chemicals and logistics. team decided U.S. health-care spending was too large to He started his career in the industrials sector covering ignore as an investment thesis. Harvest hired Mr. Wilkins in German for Carlyle Group in 2001, relocating to 2010 and he became a member of the senior management London in 2007 to cover European industrials and chemicals. team in January 2015. By 2009, Mr. Pinker had moved to distressed debt specialist Strategic Value Partners before joining Blackstone. Reputation: Straightforward, intense and passionate.

Reputation: He has “an exceptional ability to drive value- Key Deals: He helped Harvest land an investment in adding investment opportunities,” said Lionel Assant, head of AxelaCare Holdings Inc. in April 2013. The company has European private equity at Blackstone. doubled its earnings since then. n The 2016 20 Global Outlook & Review 2015The Year in Private Equity

JANUARY APRIL 21st: Kohlberg Kravis Roberts & Co. says it refunded 14th: Doughty Hanson abandons efforts to raise a new fund. money to investors after regulators found it overcharged them. 15th: New Enterprise Associates announces it 22nd: Securities and Exchange raised $3.15 billion for a Commission official Igor pair of funds, the largest Rozenblit says the private equity venture capital fundraising industry has improved its of the year. transparency “markedly.”

21st: Lexington Partners says it collected $10.1 billion for its new fund, the largest secondary fund ever raised. FEBRUARY 27th: Securities filings show Blackstone Group co-founder and Chief Executive Stephen Schwarzman collected about $690 million in income for 2014. JULY MARCH 21st: A group of U.S. states and cities ask the SEC to require more disclosure by private equity firms. 15th: A consortium including KKR strikes a deal for GE 30th: Private equity pioneer Jerome Kohlberg Jr. dies at Capital’s Australian and age 90. New Zealand consumer lending arm, paying about $6.3 billion, making it the biggest deal in the - AUGUST Pacific region in 2015. 3rd: The private equity arm of 27th: A judge rules against Allianz SE leads a group Ellen Pao in her high- of investors buying profile sex discrimination German highway services suit against Kleiner operator Autobahn Tank & Perkins Caufield & Byers. Rast Holding GmbH. At the equivalent of $4.4 billion, it’s the biggest European deal of the year.

30th: SEC accuses Lynn Tilton and Patriarch Partners of 11th: Symantec Corp. agrees to sell its Veritas Software fraud, which Ms. Tilton and the firm dispute. Corp. data-storage business to Carlyle Group and other investors for $8 billion in the largest deal of the year. THE FOLLOWING APPEARS AS A MATTER OF RECORD ONLY

GILDE BUY-OUT FUND V € 1.1 BILLION

NOV 2015

Raised by Gilde Buy Out Partners to make buyout investments in middle-market companies in the Benelux and DACH regions

THE UNDERSIGNED ACTED AS EXCLUSIVE THE UNDERSIGNED ACTED AS THE UNDERSIGNED ACTED AS DUTCH & STRATEGIC FUNDRAISING ADVISER LEAD LEGAL COUNSEL LUXEMBOURG LEGAL COUNSEL The 2016 22 Global Outlook & Review

12th: Dell Inc., which is backed SEPTEMBER by Silver Lake, strikes a $67 billion deal for EMC 8th: Guy Hands says he will share ownership of Terra Corp. Firma Capital Partners with Justin King as part of a succession plan.

9th: Chinese ride-hailing company Didi Kuaidi Joint Co. closes a $3 billion 15th: KKR’s Corp. lists on the New York Stock funding round, the largest Exchange in the largest IPO of the year. ever for a venture-backed startup in a single 26th: Dow Jones placement. VentureSource reports venture investing in China 16th: KKR’s Samson Resources Corp. files for chapter reached $31.47 billion for 11 protection, a sign of the distress in the the first three quarters of energy sector. the year, blowing away previous records.

OCTOBER 30th: SEC approves rules allowing individual investors to participate in backing startups via . 7th: Blackstone agrees to pay $39 million to the SEC over fee practices. NOVEMBER 23rd: says it collected $12 billion from outside investors for its 12th private equity fund.

25th: California Public Employees’ Retirement System for the first time releases its payment of private equity fees, which amounted to $3.4 billion over 17 years.

DECEMBER Dec. 3: Uber Technologies Inc. raises a new round of funding that could value the company as high as $64.6 billion.

Dec. 3: Thai Union Group PCL cancels its proposed $1.5 billion acquisition of Lion Capital-backed rival Bumble Bee Seafoods LLC following antitrust objections from the Justice Department.

Dec. 7: Terra Firma Capital Partners offers to put up capital to invest alongside secondary investors to secure a deal to purchase secondhand stakes in the firm’s 2007-vintage third fund. The 2016 23 Global Outlook & Review

In Their Own Words Limited Partners

u BRIAN GALLAGHER, partner, to demonstrate they are viable in that kind of environment. Twin Bridge Capital Partners There’s a Warren Buffet saying that “you only find out who is swimming naked when the tide goes out.” There’s a little bit of What surprised you the most about 2015? that phenomenon. I was surprised by how many spinout groups there were coming out of the big bulge bracket firms. It’s Are there any particular segments of the market in which you an interesting trend. Many of these firms are being expect to see more opportunities and why? We are very early- founded by experienced but still younger partners stage focused, and we believe that we are in an incredibly exciting who have made a lot of money, so it is not the classic innovation cycle – the amount of innovation and the velocity of entrepreneurial risk scenario. These groups are finding very innovation. It really doesn’t cost a lot today to start a company and receptive LPs because there is conviction that experienced test and validate an idea without having to build scale right away, partners from the largest, most successful firms are very likely to whereas 15 years ago, we didn’t have the technology we have succeed with their own smaller fund. Like most LPs, we have today – Web services and the cloud – which dramatically reduces invested in spinout groups and are always looking for the up and the cost of starting a company. coming middle-market firms. It is an area that has to be pursued. I was also surprised by the number of average funds that were u KEVIN CAMPBELL, managing director, private oversubscribed. Many groups that raised funds pretty easily did markets group, DuPont Capital Management not seem to have elite returns or truly differentiated strategies. What surprised you the most about 2015? What do you think will be the biggest challenge investors will There have not been many surprises in 2015. face in 2016? Right now, the biggest challenge is getting The private equity markets remained active. The allocations to the best funds. The best funds usually are pretty well industry continued to raise capital and maintained known and people are all chasing the same ones. Trying to get the a steady pace of new investments and exits. If best terms is also a little challenging right now. If you’re going to anything, given the amount of capital raised over the past two to take a dogmatic approach to terms, you’re going to miss some three years, we were pleasantly surprised to see PitchBook’s data funds, because they just don’t need you. that showed the median purchase price multiple for U.S. leveraged buyouts was 8.3 times earnings before interest, taxes, depreciation What’s an issue that will provoke a tough conversation and amortization for the nine months ended Sept. 30. In 2014, this between LPs and GPs over the next year? The toughest number was 10.7 times. conversations remain re-up decisions. Over the last several years, many LPs have come to realize that their private equity portfolios What do you think will be the biggest challenge the industry have too many funds and too many positions. So, the ongoing will face in 2016? Some private equity strategies have raised a effort to trim names, while sometimes still selectively adding funds, significant amount of capital over the past 12 to 24 months. has led to a lot of “no” decisions on re-ups. This trend is waning, Capital raised for dedicated private equity secondary funds is an but is still there. These are the toughest conversations because example. How this new capital is deployed and absorbed into the GPs and LPs are people and form relationships and delivering bad system will be a challenge in some areas of private equity. news, no matter how justified, is always difficult. As an active fund investor, we always try to remain close to funds where we elected What’s an issue that will provoke a tough conversation not to re-up and will help them as much as possible. It is the right between LPs and GPs over the next year? Fee disclosure. thing to do as circumstances always change in this industry. You With the Securities and Exchange Commission’s continued want to make sure it is possible to invest with that sponsor again scrutiny of private equity firms and their treatment of various fees, at some point down the road. LPs and GPs will likely be discussing how future fees will be allocated, how they will flow through the and, u PETER DENIOUS, head of global venture most importantly, the disclosure of these fees. capital, Aberdeen

What surprised you the most about 2015? I’ve been surprised by the persistence of late-stage valuations and the lack of late-stage fear. I am referring to the unicorns and the amount of capital that’s being directed at those companies. This year, some private companies have gone public at or below private valuations, and this has more recently caused investors to rethink late-stage valuations. I would argue that is a healthy thing.

What do you foresee will be the biggest challenge in 2016? Given high valuations, some of the unicorns will be tested in 2016. The challenge I see on the horizon is one where private capital is getting more expensive, meaning businesses will have LP FirstOrder Ad HFA+PEA DR120515.pdf 1 12/5/15 8:54 AM

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