HarbourVest Partners
Private Equity Market Overview HarbourVest CONFIDENTIAL 1 Private equity overview
Multi-billion dollar asset class offering the potential for superior long-term returns through investments in private companies*
Institutional investor participation since the 1970s
Returns generated through a sale or IPO
Includes venture capital, buyout, mezzanine, and distressed debt funds – Venture capital: Equity investments in start-up, early stage, and growth companies – Buyouts: Equity investments in established companies which include debt in their capital structures – Mezzanine: Investments in debt securities often with equity kickers, typically in mature companies – Distressed debt: Investments in debt securities of troubled companies HarbourVest CONFIDENTIAL 2 Investor allocation to private equity
Average Private Equity Allocation by Investor Type (% of AUM)
35% Avg. Current Allocation 31.7% Avg. Long-Term Target Allocation 30% 28.0%
25%
20%
15% 12.9%13.0% 11.6%11.9% 10% 7.3% 6.5% 6.4% 6.2% 5.7% 6.3% 5% 2.7% 3.3%
0% Family Offices Endowments Foundations Superannuations Public Pensions Private Pensions Insurance Companies
* Source: Preqin Investor Intelligence 2014 HarbourVest CONFIDENTIAL 3 Reasons investors utilize alternative investments
% of Respondents
Diversification 90%
Volatility Management / Lack of Correlation 64%
Alpha Generation 45%
Long-term Growth Potential of Alternatives 45%
Relationship with Inflation 30%
Other 5%
0% 20% 40% 60% 80% 100%
Source: Russell Investment’s 2012 Global Survey on Alternative Investing HarbourVest CONFIDENTIAL 4 Why invest in private equity?
Long-term historical performance exceeds public markets
Upper quartile funds significantly outperform the private equity index and public markets
Accessing high quality managers is key to long-term success in private equity
Dow Jones S&P 500 U.S. Private Equity U.S. Private Equity - Upper Quartile Funds
60% 55.7% 50% 40% 31.0% 28.6% 30.3% 30% 16.1% 15.7% 20% 12.9%14.1% 13.3%14.5% 12.4% 14.4% 10.6% 8.6% 8.7% 8.1% 9.1% 8.7% 10% 7.1% 6.4% 0% FTSE 100 European Private Equity European Private Equity - Upper Quartile Funds 50% 39.7% 40% 35.5% 31.9% 30% 25.0% 21.2% 20.2% 20.4% 20% 14.6% 11.7% 14.1% 12.1% 14.1% 7.6% 10% 5.7% 6.8% 0% 1 Year 5 Year 10 Year 15 Year 20 Year As of March 31, 2015 Source: Cambridge Associates through ThomsonOne. The U.S. or European Private Equity return is a pooled IRR based on the combined cash flows of all private equity funds in the benchmark The Private Equity-Upper Quartile Funds return is a pooled IRR based on the combined cash flows for the private equity funds in the benchmark that achieved upper quartile performance. Public market comparison also provided by ThomsonOne based on a methodology of buying and selling the index with the same timing of cash flows as the All Private Equity return. The securities comprising the public market benchmarks have substantially different characteristics than the private equity benchmarks, and the comparison is provided for illustrative purposes only. Investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that future private equity investments will achieve similar results. Global Market Perspective HarbourVest CONFIDENTIAL 6 Global private equity market – Summary
Continued macro-economic tailwinds in a number of regions, albeit environment more uncertain with recent equity market shocks
2015 fundraising pipeline remains strong
Intense competition for GP allocations, especially in the mid-market
Investment activity expected to modestly improve, but pricing discipline essential
Debt markets continue to be receptive to new deal activity
Recent growth and innovation in private credit, particularly in Europe
Liquidity environment favourable, although IPOs could be more challenging in 2H 2015 HarbourVest CONFIDENTIAL 7 Investment pace remains modest
887
$800
$600 581
390 $400 381 $ Billions $ 353 317 294 262 273 200 $200 138
$0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H '15 U.S. Buyout U.S. Venture Europe Asia EM
Source: Thomson Reuters, Incisive Media, and HarbourVest analysis of Asia from AVCJ, APER, EMPEA, and GP reporting HarbourVest CONFIDENTIAL 8 GPs treading carefully in high price environment
Global Buyout EV / EBITDA Multiples Avg. Entry EV / EBITDA 11.0x 2014 1H 2015 U.S. 9.7x 10.3x Europe 10.0x 9.9x 10.0x Asia Pacific 8.7x
9.0x
8.0x
7.0x
6.0x
5.0x ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15
U.S. Buyout European Buyout Asia Pacific
Source: S&P Capital IQ Q2 2015, HarbourVest analysis of Asia from AVCJ, APER, EMPEA, and GP reporting HarbourVest CONFIDENTIAL 9 2014 – Record year for exits
+27% $600 573
500
$400 363 367 349 325 283 $ Billions $ 271
214 195 $200 137
$0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 14 1H '15 U.S. Buyout U.S. Venture Europe Buyout Asia
Source: Thomson Reuters, Mergermarket, Incisive Media, and HarbourVest analysis of Asia from AVCJ, APER, EMPEA, and GP reporting HarbourVest CONFIDENTIAL 10 Exits and strong equity markets driving fundraising recovery
Global Private Equity Funds Raised
314
$300 270 248
194 212 $200 179
153 153
$ Billions $ 123
$100 77 81
$0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H '15 U.S. Buyout U.S. Venture Europe Asia EM
Source: Thomson Reuters, Incisive Media, and HarbourVest analysis of Asia from AVCJ, APER, EMPEA, and GP reporting U.S. Market Overview HarbourVest CONFIDENTIAL 12 Stages of U.S. private equity
VENTURE BUYOUT MEZZANINE DISTRESSED DEBT DEBT GROWTH/ SEED EARLY EXPANSION REVENUES None Limited Growing Yes Yes Yes
PROFITS Loss Breakeven Yes Yes Yes No
FUTURE CAPITAL High Moderate Low Low to Low Low to REQUIREMENTS Medium Medium
RISK OF LOSS Highest Moderate Lower Moderate Low Moderate
EXPECTED TIME 7+ Years 4-8 Years 2-5 Years 2-5 Years 4-8 Years 4-8 Years TO LIQUIDITY RETURN Very High High High Moderate to Moderate Moderate POTENTIAL High HarbourVest CONFIDENTIAL 13 Buyout investment activity remains consistent
Disclosed Transaction Value Despite strong financing markets, GPs # of Deals with Disclosed Value remain selective 434 – Asset prices remain high, supported by public valuations and $300 225 debt markets
# of Deals # of – Gap between seller and buyer $200 150 expectations
$ Billions$ $100 75 – Environment more conducive to selling than buying $0 0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H ’15 2014 volume was concentrated in middle 1H 2015 Transaction Size market with no deals above $5 billion – GP reluctance to participate in By Value By Count club deals 2% 6% – High priced public market comps Greater than $5B 15% 16% 28% – Strategic competition $1B-$5B 20% With the PetSmart deal closing in March, $250M-$999M 64% 2015 has seen a return of the greater 50% than $5 billion deal. However, based on Less Than $250M count, greater than 60% of transactions in 1H2015 remain less than $250 million Source: S&P Capital IQ Leveraged Commentary & Data and S&P Capital IQ, Closed deals only HarbourVest CONFIDENTIAL 14 U.S. buyout pricing remains elevated
Purchase Price Multiple of EBITDA* Elevated pricing levels driven by 11.0x
Run up of public market comparables 10.3 10.0x Availability of cheap credit 9.6 Competition from strategic and financial acquirers 9.0x
Increase in sources of non-traditional capital (including co-invest) driving demand for 8.0x 7.8 deals higher
7.0x Market leading companies with reliable cash flow and strong management teams commanding premium multiples 6.0x
Traditional buyouts are being underwritten to low-teens returns 5.0x ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H ’15 Outperformance found in high growth, “storied”, and EV <$250M EV $250-500M EV >$500M transformational transactions Source: S&P Capital IQ Leveraged Commentary & Data * HarbourVest estimates for EV<$250M in 2009, 2012, 2013, 2014, 1Q15 and for EV $250-$500M in 2009 HarbourVest CONFIDENTIAL 15 U.S. credit issuance near all-time highs
U.S. High Yield and Leveraged Loan Volume $700 Investor demand for yield fueling near record issuance $600 $500 Record covenant-lite issuance providing $400 borrowers with “cheap and benign” debt creating forgiving capital structures $ Billions $ $300 $200 Low interest rates give borrowers ample $100 payment coverage $0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H 1H ’15 impacted by Fed regulation and Leveraged Loans High Yield Bonds '15 energy dislocation
Credit Statistics Typical Leverage Levels
7.0x <$50M of >$50M of >$100M of EBITDA EBITDA EBITDA 6.0x Debt / 5.0x 4.0x-6.0x+ 5.0x-6.5x+ 6.0x-7.0x EBITDA 4.0x Equity % 3.0x 40%+ 30%+ 25%+ 2.0x 1.0x ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H Debt / EBITDA EBITDA / Cash Interest ’15
Sponsored loan volume includes leveraged buyouts, acquisitions, refinancings, and recaps Source: Credit Suisse (High yield data); S&P Capital IQ Leveraged Commentary & Data (Leveraged loan data) HarbourVest CONFIDENTIAL 16 U.S. buyouts – Shaping up to be another strong year of liquidity
IPO Offer Amount The strong public markets of the last two years # of IPOs have supported robust buyout-backed IPO volume $60 100 – 2014 IPO volume nearly doubled 2013 record +73% $45 75 level – With 29 IPOs in the first half, 2015 is lagging $30 50 the record setting pace of 2014, however
$ Billions $ activity did increase in the second quarter $15 25 of#IPOs
$0 0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H '15
Public Market Sales Secondary share sales continue to generate $50 meaningful liquidity for investors $40 – Mega buyout deals drive volume $30 – 2015 is on pace to exceed 2014 volume with $29 billion of share sales in the first half
$20 $ Billions $ $10
$0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H '15 Source: IPOs from Thomson Reuters include all companies with at least one U.S. investor that trade on U.S. exchanges, regardless of domicile; S&P Capital IQ Leveraged Commentary & Data HarbourVest CONFIDENTIAL 17 Rise of the tech buyout
Attractive Buyout Targets – Enterprise Software
Large and Growing Opportunity Set The Leaders 80,000+ companies globally $3.3 trillion market cap
Growth Rates Well Ahead of GDP 6.9% in 2014 7.3% forecast in 2015
Low Working Capital / Capital Expenditures Exceptional Returns Cash Flow Predictability Global customers across varied industries High switching cost Subscription / Maintenance revenue
Multiple Exit Options
HarbourVest has invested in over 140 companies creatingTV/TC of 2.5x
Source: Gartner Group. Examples of private equity investments in which HarbourVest funds invested. Investors should bear in mind that past performance is not necessarily indicative of future results HarbourVest CONFIDENTIAL 18 U.S. buyout fundraising healthy
Amount Raised # of Funds 2015 fundraising YTD is on pace to exceed 2014 $250 150 despite the number of funds raised being down
$200 120
# of Funds # of LP demand driven by $150 90 – Confidence in the asset class – Distributions outpacing capital calls $100 60 $ Billions $ – Influx of new investors from retail to $50 30 sovereign wealth
$0 0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1H Fundraising trends continue as 87% of PE fund '15 closing hit their targets in 1H2015, compared to 62% in 2011 Top Tier Managers Enjoy Rapid Fundraises – Rapid fundraises across market from mega- Amount Closed funds to small funds – Manager access is key due to supply / $18,000 demand imbalance
$12,000
17,000
$ Millions $ $6,000 10,900 5,750 3,662 1,050 775 $0 1,750 April ’15 Nov ’14 Oct ’14 May ’14 Q3 ’15* Nov ’14 Dec ’14 * As reported in press. Not yet closed. Source: Thomson Reuters, Preqin HarbourVest CONFIDENTIAL 19 U.S. buyout outlook
Fundraising Investments
Pipeline remains robust Economy continues to strengthen, GPs remain highly selective due to elevated pricing
LP demand is up and increasing Managers attracted to opportunities where they have an edge – Clear paths to operational improvement Access is key and cash flow growth Investment activity expected to modestly improve, but catalyst needed for a significant increase – corporate M&A may be the key
Liquidity Companies to Watch
Anticipate another strong full-year of distributions, but may fall below the last two years of record liquidity due to the recent volatility in capital markets
Examples of investments across the private equity industry. Private equity investments involve significant risks, including loss of the entire investment. HarbourVest funds may not have participated in all of these investments. Investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that future private equity investments will achieve similar results. HarbourVest CONFIDENTIAL 20 Additional information
The information contained herein is highly confidential and is being provided to you at your request for informational purposes only and is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment sponsored by HarbourVest Partners L.P. or it’s affiliates (the “Fund”). A private offering of interests in the Fund will only be made pursuant to a confidential private placement memorandum (the “Memorandum”) and the Fund’s partnership agreement and subscription documents, which will be furnished to qualified investors on a confidential basis at their request for their consideration in connection with such offering. The information contained herein will be superseded by, and is qualified in its entirety by reference to, the Memorandum, which will contain information about the investment objective, terms and conditions of an investment in the Fund and will also contain tax information and risk disclosures that are important to any investment decision regarding the Fund. No person has been authorized to make any statement concerning the Fund other than as will be set forth in the Memorandum and any such statements, if made, may not be relied upon. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest Partners L.P. (together with its affiliates, “HarbourVest”). Investment in the Fund will involve significant risks, including loss of the entire investment. Before deciding to invest in the Fund, prospective investors should pay particular attention to the risk factors contained in the Memorandum. Prospective investors should make their own investigations and evaluations of the information contained herein. Prior to the closing of a private offering of interests in the Fund, HarbourVest will give investors the opportunity to ask questions and receive additional information concerning the terms and conditions of such offering and other relevant matters. Each prospective investor should consult its own attorney, business advisor and tax advisor as to legal, business, tax and related matters concerning the information contained herein and such offering. Certain information contained herein (including financial information and information relating to investments) has been obtained from published and non-published sources. Such information has not been independently verified by HarbourVest. Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof. In considering any performance data contained herein, you should bear in mind that past performance is not indicative of future results. Certain information contained herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, “continue” or “believe” (or the negatives thereof) or other variations thereof. Due to various risks and uncertainties, including those discussed above, actual events or results or actual performance of the Fund may differ materially from those reflected or contemplated in such forward- looking statements. As a result, investors should not rely on such forward-looking statements in making their investment decisions. None of the information contained herein has been filed with the Securities and Exchange Commission, any securities administrator under any state securities laws or any other governmental or self-regulatory authority. No governmental authority has passed on the merits of the offering of interests in the Fund or the adequacy of the information contained herein. Any representation to the contrary is unlawful.