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Private Equity Institutional Investor Trends for 2016 Survey probity ¯¯˘ n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character. On an ongoing basis, Probitas Partners offers research and investment tools for the alternative investment market to aid its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team’s broad knowledge of the market. Contents The Private Equity Fundraising Environment ....................... 2 Private Equity Institutional Investor Survey .......................... 3 Overview of Survey Findings .................................................... 3 Profile of Respondents .............................................................. 4 Sectors and Geographies of Interest .................................... 10 Emerging Markets ................................................................... 22 U.S. Middle-Market Funds ...................................................... 26 Venture Capital ........................................................................ 28 Distressed Private Equity ........................................................ 29 Credit-Focused Funds .............................................................. 30 Real Asset Funds ...................................................................... 31 Secondary Market .................................................................... 32 Co-Investments and Direct Investments .............................. 33 Fund Structures and Key Terms ............................................. 34 Investor Fears and Concerns ................................................. 37 Our View of the Future ............................................................ 40 © 2015 Probitas Partners Private Equity Institutional Investor Trends for 2016 Survey 1 The Private Equity Fundraising Environment Fundraising in 2015 slowed significantly in the third quarter, though a boom in fourth quarter fundraising, as has happened in the last two years, could bring the “A boom in full-year total up to 2014’s level. fourth quarter The trends that underlie the top line numbers in Chart I: fundraising, as Funds targeting North America make up more than 50% of all fundraising. has happened in Mega buyout funds in the United States and Europe are raising large funds the last two years, that are boosting overall commitments — but most of these funds are targeting smaller funds than they raised at the last market peak. could bring the After rebounding significantly in 2014, interest in Asia has slowed so far in full-year total up 2015 due to increased concerns about China. to 2014’s level.” The overhang of undrawn commitments has also increased over the last two years, reaching an all-time high of $1.3 trillion. Chart I Commitments to Global Private Equity Partnerships 500 452 450 420 400 367 371 372 350 300 267 241 250 250 226 229 199 193 200 USD in billions 148 150 136 106 80 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3Q YTD 2015 Source: PREQIN, does not include funds-of-funds Private Equity Institutional Investor Trends for 2016 Survey © 2015 Probitas Partners 2 Private Equity Institutional Investor Survey Probitas Partners conducted its annual online survey in late September/early October 2015 to gauge investor interest, opinions, and perspectives on investing in private equity. This survey is designed to track emerging trends and to compare investors’ changing views over a longer period of time. One hundred and four responses were received from senior investment executives globally, representing such institutions as public and corporate pension plans, funds-of-funds, insurance companies, family offices, endowments and foundations, and consultants and advisors. Overview of Survey Findings The following summarizes the top-line findings from the survey: Steady interest in private equity. Investors are focused on redeploying the large amounts of capital that have been returned to them over the last three years, though the strong pace of new commitments over this period means a number of investors are nearing the top of their allocations. . though one of investors’ strongest fears is that the market is nearing the top of the cycle. This fear runs across geographies and across different types of investors. Continued focus on smaller buyout and growth capital funds. Investors remain focused on smaller and middle-market buyout and growth capital funds in the United States and Europe that pursue strategies where they believe managers can deliver recurring added value. . but many investors fear that purchase price multiples in these sectors are too high. Even as investors express interest in the sector, they are concerned that the high prices now being paid will drive down future returns. Buyout and growth capital sector-focused funds are of interest to investors. Though interest in the energy sector has fallen with turmoil in the oil and gas markets, there is strong interest in healthcare and technology- focused funds. Interest in emerging markets has remained fairly steady overall. However, certain countries, like Russia, attract little interest due to political issues and falling oil prices, while interest in Brazil has also fallen significantly with economic problems and political turmoil. Despite the advent of Unicorns, interest in venture capital remains muted. Interest in the sector mainly comes from North American investors focused on U.S. venture capital; European and Asian investors remain unimpressed. © 2015 Probitas Partners Private Equity Institutional Investor Trends for 2016 Survey 3 Profile of Respondents There were 104 respondents to the survey; most respondents were from pension plans, funds-of-funds, insurance companies, and family offices (Chart II). Respondents were geographically diverse, with strong participation from the United States, Europe, and Asia (Chart III). As Chart IV details, more investors are near their target allocations, with less room to back new relationships. Funds-of-funds are different — allocations are not really relevant as their ability to invest is driven by their ability to raise fund vehicles or separate accounts. Chart II Respondents by Institution Type I represent a: Funds-of-Funds Manager 29% 1% 1% 3% Consultant/Advisor 3% 17% Insurance Company 5% 8% Family Office 13% 10% Public Pension 10% Endowment/Foundation Corporate Pension/ Private Pension Plan Sovereign Wealth Fund/ Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey Government Entity Taft-Hartley or Industry Pension Plan Bank Other Private Equity Institutional Investor Trends for 2016 Survey © 2015 Probitas Partners 4 Chart III Respondents by Firm Headquarters My firm is headquartered in: 47% United States Canada 5% Western Europe 3% 5% Japan 22% 8% Asia ex-Japan 10% Australia Middle East Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey © 2015 Probitas Partners Private Equity Institutional Investor Trends for 2016 Survey 5 Chart IV Current and Target Private Equity Allocations As far as our current private equity allocation, we are: Roughly at our target and are looking to 27 maintain that level of exposure 23 Under our target allocation and actively committing 17 to private equity to achieve that target 29 Roughly at our target but considering 16 increasing the target 6 Over our target and are looking to reduce 2 exposure to meet that target 2 1 Over our target but seeking to increase the target 2 0 Looking to reduce our target and exit the asset class 0 A fund-of-funds or consultant to which 33 the question does not apply 38 4 Other 0 0 5 10 15 20 25 30 35 40 Percentage of Respondents (%) 2016 2015 Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey Private Equity Institutional Investor Trends for 2016 Survey © 2015 Probitas Partners 6 What drives investors to invest? Consistent with Probitas Partners’ past surveys, all other reasons are secondary to “pursuing the best available managers and funds,” though the focus on best managers has become increasingly important to investors since the Global Financial Crisis (Chart V). Proven, top quartile managers can be difficult to access, and since funds typically come to market every three to five years, many investors feel compelled to commit to these managers when they are available and open. Pension plans are more likely to target funds that will provide them access to co- investments, with 25% of them focused on this strategy. Chart V Drivers of Sector Investment Our sector investment focus in 2016 will be driven by (choose no more than two): My institution simply pursues the best funds 40 and managers available in the market A focus on those private equity sectors I believe 16 will outperform others in this vintage year Maintaining established relationships with fund 14 managers returning to market this year Targeting funds that will provide 11 access to co-investments The strategies that my clients 10 have directed us to pursue My need to deploy significant amounts 5 of capital allocated to private equity My institution’s need to diversify 4 its private equity portfolio My need to decrease exposure 0 to private equity Other 2 0 10 20 30 40 50 Percentage of Respondents (%) Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey © 2015 Probitas

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