PRIVATE EQUITY NAVIGATOR

Private Equity Analysis from INSEAD’s Global Private Equity Initiative

September 2015 ABOUT US

INSEAD GLOBAL PRIVATE EQUITY INITIATIVE PEVARA (www.insead.edu/gpei) (www.pevara.com)

The Global Private Equity Initiative (GPEI) drives Pevara is a division of eFront (www.efront.com), teaching, research and events in the field of a leading software provider of end-to-end private equity and related alternative investments solutions dedicated to the financial services at INSEAD, a world-leading business school. It industry with a recognized expertise in alternative was launched in 2009 to combine the rigour and investments, enterprise risk management, and reach of the school’s research capabilities with customer relationship management. eFront’s the talents of global professionals in the private solutions serve more than 800 customers in 48 equity industry. The GPEI aims to enhance the countries, including companies in the private equity, real estate investment, banking and productivity of the capital deployed in this asset insurance sectors. eFront’s primary product suites class and to facilitate the exchange of ideas and offer tightly integrated solutions for streamlining best practice. the management of alternative investments and INSEAD's global presence – with campuses in corporate risk. Founded in 1999, eFront services France, Singapore and the UAE – offers a unique clients worldwide from offices in Asia, Europe, advantage in conducting research into established the Middle East and North America. markets for private equity, while at the same time Pevara’s data is obtained from actual LP cash exploring new frontiers in emerging markets to flows as opposed to surveys or relying on the arrive at a truly global perspective on this asset Freedom of Information Act to source data. LPs class. The GPEI also focuses attention on newer who wish to contribute data to the Pevara Private areas shaping the industry such as impact Equity Index can do so by sending an email to investing, growth equity, infrastructure PE, and [email protected], after which a Pevara data specific groups of LPs like family offices and specialist will discuss the process with them. sovereign wealth funds. The GPEI looks to partner with stakeholders in the private equity industry to collaborate on research ideas and projects. Its core supporters are:

This report is authored by Michael Prahl, Executive Director of the GPEI, Adjunct Professor of Entrepreneurship and Family Enterprise; and Siddharth Poddar and Bowen White, Research Associates at GPEI; under the supervision of Claudia Zeisberger, Academic Director of the GPEI, Senior Affiliate Professor of Decision Sciences and Entrepreneurship & Family Enterprise at INSEAD. We thank Rishi Kotecha from Pevara and Hazel Hamelin, Senior Editor at INSEAD, for their invaluable support. INDEX

The Private Equity Navigator seeks to balance the presentation of raw data and minimal accompanying commentary with a more engaging (if less rigorous) approach to illustrate key concepts in private equity. Our findings are presented in five sections:

01 Executive Summary

02 Detailed Market Analysis - INSEAD & Pevara Database

03 PE News @ INSEAD

04 Research by INSEAD’s PE Centre

05 Insights from GPEI's Model Portfolios

1 Executive Summary

Welcome to the seventh edition of the INSEAD- typically reported with a six-month lag - do not Pevara Private Equity Navigator. yet reflect the changing macroeconomic landscape (notably in China) nor the change in In addition to a review of global PE fund activity investor sentiment over the last several months. and PE-related news and research at INSEAD, When Q2 and Q3 fund NAVs are reported, we we put the spotlight on private equity in China, expect PE returns to take a downward turn (again, with up-to-date performance figures for a more particularly in China), although less sharply than robust assessment in contrast to the anecdotal those of public markets. discussion in the broader business media. The key findings from our analysis are as follows: Is China more risky • Global PE fund investment activity has been slowing for some time, while PE exits maintain As with other emerging markets, China’s private a steady pace equity market tends to be seen as volatile by investors, but is that really the case? When we • The recent sharp dip in global public equity investigated, we found that per annum returns markets presents headwinds for PE returns in from Chinese funds in our dataset were indeed the near future - to be analysed in upcoming more volatile than those of the global PE industry. editions of the Private Equity Navigator This was due to a host of factors, including dramatic swings in sentiment and public market • Chinese PE funds have a better risk-return performance, large capital inflows and outflows, profile than both North American and European and a shifting regulatory environment. However, funds, despite higher volatility in annual returns, this is only half the story. based on our data set. Where are the deals? or less? Despite ample fundraising, private equity investors When we took a closer look at the cumulative have faced an uphill battle deploying capital since return of PE fund vintages from 2005 to 2012, 2011, and the first half of 2015 was no different. the range of returns for funds investing in China In fact, capital called by PE fund managers during was markedly lower than for funds investing in this period declined to its lowest level in over Europe, North America, or indeed globally. five years, with the amount called during the first Moreover, the pooled mean for Chinese funds quarter of 2015 at the lowest quarterly level since of these vintages was almost three percentage Q2 2004. While deal activity is down, recent points higher than the pooled mean for global stock market corrections in emerging markets funds (and higher than each of the three key (and a few developed markets) may entice PE regions individually). In other words, Chinese PE investors looking for more reasonable entry price funds of these vintages outperformed the global points to step up investment in the second half PE industry on average and on a risk-adjusted and beyond. basis. The PE-Public Market Investing in PE as an asset class is a long-term commitment and locks up capital across business (dis)connect cycles; in the end, only cash-on-cash returns tell As indicated in earlier editions, the PE industry the whole story. Since investors base decisions has consistently provided higher returns than on their view of the future, our report offers public markets over a medium- to long-term guidance and food for thought based on hard horizon (using MIRRs that allow for proper data for the concerned investor in Private Equity. comparison); however, private and public equity are correlated. The latest PE market returns - As always, we welcome your feedback.

Claudia Zeisberger Michael Prahl Senior Affiliate Professor of Decision Sciences Adjunct Professor of Entrepreneurship and Family and Entrepreneurship & Family Enterprise, Enterprise, Academic Director, GPEI Executive Director, GPEI

2 Detailed Market Analysis – INSEAD & Pevara Database

The following pages provide an update on the PE market during the first half of 2015.

With Q2 distribution and capital call numbers in, we are able to review activity levels from the first two quarters.

We then compare recent industry returns against long- term trends and, more importantly, against public markets to gauge the industry’s proposition of outperformance.

3 PE Market Update (Activity in H1 2015)

Two key indicators of private equity activity in any of approximately $2.3 trillion, a more-than-adequate market are the amount of capital called and the amount proxy for industry activity levels.1 Similar to the global of capital distributed by fund managers. These PE industry, the number of funds and total AUM in our represent the real cash inflows and outflows generated dataset are both weighted heavily towards the U.S. by fund managers’ investment and divestment activity. and Europe, with a smaller contribution from Asia and The analysis that follows is based on data provided the rest of the world.2 The dataset in this edition of by 2,746 private equity funds investing around the the Navigator reflects an increase of 276 funds world, with combined assets under management (AUM) compared to our last report in April.

Capital calls down to 2009 levels, distributions remain healthy

level since H1 2009. The $19.1 billion of capital called Fig 1 Global and regional calls and distributions during the first quarter of 2015 was the lowest amount in a quarter since Q2 2004.

2012 2013 2014 2015 This divergence between investment and divestment activity produced a ratio of capital distributed to capital called of 2.72x, a healthy increase from the 1.78x posted during 2014. The gap was particularly pronounced in the first quarter of 2015, where three times as much capital was distributed by fund managers as was called ($57.3 billion vs. $19.1 billion) relative to a ratio of 2.51x in the second quarter. In absolute terms, however, the gap between capital distributed and called was only marginally wider in Q2, at $39.0 billion, than the $38.3 billion gap in Q1. These metrics reflect the difficulties faced by fund Since 2011, the capital distributed by fund managers managers in deploying capital since the global financial in our sample has comfortably exceeded the amount crisis, due in part to quantitative easing and asset price called by them, reflecting their ability to capitalise on inflation witnessed in many key markets. However, the attractive exit valuations and reduce the size of fund same factors and robust global M&A activity have portfolios. enabled fund managers to exit portfolio investments at healthy valuations. The first half of 2015 was no different. Private equity Perhaps a better comparison, and one that proxies funds distributed $122.2 billion to investors during the industry performance, is that of capital called in the first half, relative to total capital calls of $45.0 billion past and current distributions. If we assume a fixed over the period. The level of distribution was roughly holding period and look at capital called during the in line with the totals of $124.9 billion in H1 2013 and last two quarters of 2009 relative to H1 2015 $126.3 billion in H1 2014. distributions, the figures are as follows: $58.2 billion Capital called during the first half of 2015 – the lifeblood called vs. $122.2 billion distributed, or a multiple of of the industry – looked anaemic, reaching its lowest 2.10x.3

Ratio of distributions to calls is highest in North America Among the key regional PE markets, the divergence ratios reflect a continued trend from 2013 and 2014, between capital distributed and capital called by fund during which years North America was the only region managers during the first half of 2015 was highest in to produce a capital distributed to capital called ratio North America at 3.05x, compared to 2.53x in Europe, of more than 2.00x. 1.75x in Asia, and 1.27x in all other markets. The current

1 While the PE industry is larger and the data in this report is a representative proxy, the advantage of our dataset is that it is obtained directly from LPs and is hence more accurate than data obtained from a range of other sources. 2 Our dataset is comprised of North America (56.0% of funds and 63.3% of global PE AUM in the Pevara dataset); Europe (34.4% of funds and 30.5% of AUM); Asia (6.1% of funds and 5.0% of AUM); and other regions. 3 We do not have access to portfolio company level data that would allow us to perform this matching exercise on a more granular basis. The average holding period of portfolio companies by PE funds has increased over the years from 4.1 years for companies exited in 2008, to 5 years for companies exited in 2012, and to 5.9 years for companies exited in 2014. For companies exited till May 2015, however, the average holding period has decreased to 5.5 years, according to data provider Preqin.

4 While global distributions during the first half of 2015 delivered, with a 38.7% ($17.4 billion) and 8.2% ($3.7 were broadly in-line with those of H1 2014, there were billion) share of global capital calls compared to a large geographic variations. Of particular note were 30.5% and 5.0% share of global AUM respectively. distributions in Europe – which increased by 39.5% Distributions were more in-line with global AUM, as YoY – while distributions in North America and Asia North American, European and Asia funds distributed fell by 18.5% and 8.3% respectively. Global capital calls, 58.0%, 36.0% and 5.3% of the global total. on the other hand, were down sharply across all geographies from H1 2014 levels, led by a 48.0% fall Fig 2 Capital calls and distributions by region (in $bn) in North America, a 40.5% fall in Europe, and a decline of 22.7% in Asia. Although private equity investment activity in North America outpaced that in other geographies during H1 2015, it under-delivered relative to its share of global AUM. As reflected in Figure 2, North American funds called 51.6% ($23.2 billion) of global capital calls during the first half of 2015 compared to its 63.3% share of global AUM. European and Asian funds both over- Private Equity Returns & Variance

The second section of this edition presents the We then delve deeper into industry performance by evolution of private equity performance through the analysing global quarterly PE returns and comparing first half of 2015. We employ the modified internal rate PE and public market returns across geographies, and of return (MIRR) as the main performance statistic conclude with a variance analysis of PE returns across wherever available, due to its more realistic re- funds investing in different geographies. Given the investment assumptions for investors in the industry.4 recent extreme volatility in Chinese public equity The more conventionally applied – but theoretically markets, we isolate and analyse China-specific PE unsound – internal rate of return (IRR) and the Modified performance throughout this section. Dietz IRR (the Pevara Index) are presented in Figure 3 for comparison purposes.5

Despite strong realisations, a drop in returns

In the first quarter of 2015,6 the private equity industry equity markets and moderating global economic activity recorded an MIRR of 3.34%, significantly higher than suggest a more challenging environment for the the 2.54% return registered over the same quarter a remainder of the year. year ago, and a marked improvement on the Q4 2014 return of 2.57%. Fig 3 Annual PE Returns Full-year 2014 fund NAVs and performance have now been finalised, with industry MIRR of 11.14% strongly outperforming the 8.91% estimate presented in our last edition. Nevertheless, this return appears more modest when compared with full-year performance in 2013 (MIRR of 16.76%) and 2012 (MIRR of 12.50%). Over the last 10 years, industry performance was lower only in 2011 (8.38%), 2009 (9.72%) and 2008 (-17.50%). While strong Q1 performance hints at attractive full- year 2015 PE results, the sharp drop in global public

4 This edition uses the net MIRR where possible. It uses a discount rate for capital calls of 12% with a 10-year horizon, and equally assumes a re-investment rate of 12%. For more details, refer to the December 2013 issue of Private Equity Navigator. 5 The two main issues with IRR are the re-investment hypothesis on intermediary distributions and the cost of uncalled capital. The Pevara Index, a performance measure that calculates fund IRRs using the Modified Dietz Method, improves on the IRR by accounting for the timing of cash flows within a period. For more details, refer to our inaugural December 2013 issue. 6 We consider returns as of Q1 2015 as opposed to Q2 2015 as our numbers do not yet include NAV adjustments for Q2, and providing H1 2015 returns will not be very accurate as a result.

5 Chinese PE returns significantly more volatile than the global average

Investing in China provides exposure to a volatile While global MIRR stood at 16.76% in 2013, Chinese source of PE returns. While quarterly global PE funds generated an MIRR of 21.30%. Similarly, while performance has fluctuated during the last three years, global private equity returns stood at 11.14% in 2014, Figure 4 shows that returns from Chinese private equity returns from Chinese funds stood at 14.81%. have been significantly more volatile over the same period. During the last year and a half, this volatility translated into higher returns relative to the global Fig 4 Quarterly MIRR returns Chinese vs Global PE industry. For instance, in Q4 2014, the MIRR for Chinese PE stood at 3.80% (compared with 2.57% for global PE), and further increased to 4.76% in the first quarter of 2015 (compared with 3.34% for global PE). However, as can be seen from the returns during portions of 2012 and 2013, volatility cuts both ways, as, for example, Chinese PE produced an MIRR of just 2.63% during Q3 2013 relative to 4.12% for global private equity. An extreme example of this volatility was on display the following quarter, as MIRR for China funds spiked to 13.46% while global industry MIRR rose more moderately to 5.95%. Overall, Chinese private equity has outperformed the global industry on an annual basis in recent years.

PE outperforms public markets globally

A comparison of MIRR performance7 and public market ACWI was down 3.18% year-to-date. While turmoil in returns provides a clear understanding of the relative the global markets has led to a sharp fall in the index, performance of the private equity industry. this has not yet been reflected in PE returns because We compare global private equity with performance NAVs as of 30 June are not yet included in our database. We therefore expect a decline in global PE of the MSCI ACWI.8 We saw in our last edition that the PE industry comfortably outperformed public market returns, albeit with a time lag for fair market valuation indices over both 15- and 10-year horizons, and that and reporting. outperformance was somewhat more marginal when PE and public market returns - Global 5-year returns were compared. In the year 2014, while Fig 5 the PE industry recorded an MIRR of 11.14%, the public market index generated a return of 4.71%. The most recent quarterly MIRR figure we have for the global PE industry is 3.34% as of Q1 2015 (NAVs for the next quarter are not yet available). The MSCI ACWI return in the same period stood at 1.83%. While we do not have PE returns through Q2 and the beginning of Q3, the recent turn in public markets diminishes return expectations from those posted in Q1. At the time of writing (31 August 2015), the MSCI

and China is no exception Having compared PE returns with public markets across Over the eight year period starting in 2007, Chinese the key regions of North America, Europe and Asia in PE outperformance is also strong, with an industry our last edition, let’s look more closely at the Chinese MIRR of 11.42% compared to a return of 5.87% market. We compare Chinese PE returns with returns generated by the public market index. This trend is on public equity as measured by the MSCI China Index reflected across Asia, as the geography is the only (USD).9 major region in which the industry MIRR outperformed The MSCI China Index (USD) has provided returns of the public market index (as measured by the MSCI AC 2.07% over the five years ending December 2014, Asia ex Japan Small Cap Index) over the last five compared to a 10.81% MIRR for Chinese private equity. years.10

7 Unlike IRR the MIRR can be used for comparison with public markets as it accounts for the cost of capital until investment and assumes reasonable re-investment rates (we use a reinvestment rate of 12%). For a discussion of the qualities of MIRR please see our inaugural Private Equity Navigator. 8 The MSCI ACWI (All Country World Index) is used for reference only. The index has 2,471 constituents from 23 developed markets and 23 emerging markets and covers approximately 85% of the global investable equity opportunity set. 9 The MSCI China Index (USD) covers large- and mid-cap representation across China H shares, B shares, Red chips and P chips. It is comprised of 144 constituents and covers about 85% of this China equity universe. 10 This is perhaps to be expected as China drives a large part of the Asian private equity market.

6 Interestingly, while Chinese PE returns have been and suggests that PE returns in China, like global funds, more volatile than global returns, Figure 6 shows that will decline as Q2 and Q3 performance is announced. Chinese public markets have been even more so, with massive swings producing highly variable annual returns of 66.24% in 2007, -50.83% in 2008, and Fig 6 PE and public market returns - China 62.63% in 2009. Over the same period,Chinese PE returns were significantly less volatile, with MIRRs of 12.91%, -11.25% and 24.40% respectively in those three years. Note, however, that this is partly due to PE firms’ conservative and delayed accounting, while public markets reflect real-time returns. As of 31 March 2015, Chinese PE produced an MIRR of 4.76%. However, the Chinese public market index has fallen 9.48% year-to-date (as of 31 August 2015). This is largely due to a sharp fall of 21.18% in July and August and a 29.63% fall from its peak in late April,

Investing in a portfolio of Chinese PE funds offers the best risk-return profile

Figure 7 displays the variance in returns according to 9.98%, 10.23% and 8.30% respectively, underscoring geography for PE funds in our database from vintages China’s outperformance and suggesting that the rest 2005-2012.11 A closer look at funds investing in China of Asia has performed substantially below the 8.30% reveals some interesting insights.12 First, while quarterly pooled average. and annual returns from Chinese private equity are more volatile than global funds, the cumulative fund Benchmark IRR Quartiles (vintages 2005-2012) Fig 7 by region performance of Chinese private equity is less volatile than that in the three main regions (and by extension the world). The range of returns between the best and 29% the worst-performing funds by region is the lowest for 24% China – a high of 28.20% and a low of -2.56%, while Europe has the best-performing (top quartile at 30.04%) 19% as well as the worst-performing funds (-14.38%). 14% This suggests that the volatility of quarterly and annual 9% IRR returns can be smoothed over the course of a fund 4% term, producing a relatively even return profile. -1%

These Chinese private equity fund vintages have -6% performed well relative to global private equity through Q1 2015. Global funds of vintages 2005-12 have a -11% pooled mean of 9.92%, compared to Chinese funds’ -16% Global Europe North America Asia China 12.51%. Funds of the same vintages investing in North America, Europe and Asia have pooled means of 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Pooled Mean

Summary The first half of 2015 has seen the continuation of a than global PE returns. Surprisingly, while PE returns strong seller’s market in global private equity, with in China are significantly more volatile on a quarterly capital calls falling significantly compared to the first and annual basis, Chinese funds in our dataset half of 2014 and distributions remaining largely produced the least volatile returns on a cumulative unchanged. The asset class continues to provide basis. However, the stock market crash in China over higher, less volatile returns than public markets. the months of July and August may not augur well for Returns from PE funds investing in China are greater Chinese PE returns during the rest of the year.

Global China Long-term Short-term Outlook Long-term Short-term Outlook PE Returns Declined Stable Lower Stable Declined Lower Compared with Public Comfortably Marginally Outperform Comfortably Comfortably Outperform Equity outperformed outperformed outperformed outperformed Variance for funds of same Greater volatility, with comparatively lower Lower volatility in annual returns, both over vintages aggregate returns the short- and long-term Performance variance by Lower volatility in annual returns, both over Greater volatility, with comparatively lower time period the short- and long-term aggregate returns

11 We do not include funds from younger vintages as they are still in the investment period, hence preliminary returns are likely to change substantially. 12 The analysis is based on a total of 48 Chinese private equity funds.

7 PE News @ INSEAD

This section presents a roundup of the latest in private equity at INSEAD, from what is happening in our classrooms to an update on PE-related events and activities.

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9 “How to create value when faced with high valuations.”

INSEAD PE Club (IPEC) 13th Annual Private Equity Conference, May 2015

Every year in May, INSEAD’s PE Club (IPEC) organises what has become Europe’s largest MBA-led private equity conference. This event has evolved into an exceptional forum for discussion of the latest industry developments within the setting of a collegial campus environment. Each fall, IPEC holds an equivalent on- campus conference in Singapore with a focus on the latest trends impacting PE in Asia. This year’s conference in May ran under the theme of: “How to create value when faced with high valuations.” INSEAD’s dean Ilian Mihov, a renowned economist, opened the conference with deliberations around liquidity, cycles and the recent strong performance of the PE industry. In order to prepare for headwinds in the global economy, he urged PE practitioners to focus on building better companies ready to weather cyclical downturns. The emphasis of focusing on “traditional” private equity strengths was echoed by the conference’s first key-note speaker, INSEAD alumnus and Co-CEO of Apax Partners, Andrew Sillitoe. Andrew walked through the lifecycle of PE, from investing to value creation during the holding period to exit, placing emphasis on how discipline, focus, transformation and readiness to sell during favourable market conditions combine to deliver strong, defensible returns. Some of Andrew’s points were further deliberated and challenged during the subsequent LBO panel, while the concurrent VC panel explored the role VC plays in Europe and to what extent there is opportunity to find and support truly innovative companies in the region. The next round of panels discussed opportunities in growth investing in Africa and global distressed investing, in which panellists shared their approaches to selecting investments in the wide and varied African market context and restructuring company balance sheets and turnarounds. The second key-note speakers, Céline Méchain and Charles-Eduard van Rossum from Goldman Sachs, gave a comprehensive and fascinating perspective on energy and oil and its implications on private equity. Their rather sombre outlook on the price of oil has in the meantime been overtaken by a stronger downward development than forecasted, and commodity prices have become a main source of uncertainty and volatility across global markets. The operational value panel in the afternoon circled back to the morning sessions, covering different approaches to improving portfolio company performance, from top line to cash flow management. The infrastructure panel explored the strong secular investment trends of resource efficiency and alternative energy investment. The last panel of the day, held in parallel to a well-attended session on Careers in PE, consisted of a group of senior LPs – all INSEAD alumni – who talked about different ways of staying disciplined in this industry environment. They provided both global and European perspectives and acknowledged the unique challenges of building a portfolio in times of high liquidity.

The conference was well attended by more than 350 participants, the majority of whom were alumni, investment professionals, general and limited partners, and C-level executives. We thank AlpInvest for sponsoring the conference and congratulate the student team on putting together another great event! Thanks also go out to the alumni chapter of IPEC for their support and for maintaining a strong link with their alma mater. The next IPEC conference will take place on November the 6th in Singapore.

The student organising committee for the European Conference consisted of Guillaume Adnot (Head of Conference), Andrew Holt (Co-President IPEC), Liza Azu, Arka Banerjee, Arnaud Bosquet, Onur Candar, Leonardo Canepa, Josee Carignan, Aditi Chand, Amyn Kassam, Walid Kenaissi, Vadym Kononenko, Gideon Ochar, Omur Onk, Frank Opono, Roman Protasevich, Dushyant Sahani, Siddharth Rao, Natalia Rybakova, Patrick Steuer.

10 PE Events @ INSEAD

Future PE Events

IPEC Asia Conference EMI Conference 2015, Singapore IPEC is pleased to invite you to the 7th INSEAD Asian The INSEAD Emerging Markets Institute and PwC invite Private Equity conference on 6 November 2015, at the you to join the inaugural Emerging Markets Conference INSEAD Asia Campus. The theme of the conference on 12 - 13 November 2015 at INSEAD’s Asia Campus is ‘Asian Private Equity - Adjusting to the New Normal,’ in Singapore. The inaugural conference will discuss and we will cover on-going industry dynamics and key perspectives on today’s most critical business issues issues that confront the industry in Asia today. This affecting the emerging markets including innovation, year’s conference will feature speakers from KKR, product and service adaptation, political risk, leadership Riverside, Morgan Stanley, Sequoia and KV Asia, among development and governance, with a particular focus others (pending finalisation). Learn more and register on the Asia-Pacific region. Learn more here. here.

AVCJ Private Equity & Venture Forum 2015, Hong Kong The 28th Annual AVCJ Private Equity and Venture Forum will be held from 3 - 5 November 2015. The conference will cover the big issues facing the PE and VC industries in Asia and across the globe, the day-to-day business and operational challenges faced by PE and VC fund managers in Asia, and a one-day programme for limited partners to meet, network and discuss investment opportunities and challenges. Learn more and register here. Use the discount code INSEAD_HK15 to enjoy a 15% discount off the regular price. Past PE Events

TBLI CONFERENCE ASIA 2015 13th Annual INSEAD PE Conference, Europe Over the past 18 years, TBLI Conference has convened The INSEAD Private Equity Club (IPEC) hosted its annual 28 international events across Europe, Asia and the PE conference in Fontainebleau this spring. In its 13th US dedicated to building a global community of ESG year, the conference has grown into the largest private & Impact Investors. The 2015 event in Asia was held equity event hosted by an academic institution in on 29 - 30 April in cooperation with INSEAD and Europe. This year’s conference – held on 22 May addressed topics for investors and finance under the headline of “How to create value when professionals striving to better align profits with impact faced with high valuations” – was no different, attracting across all asset classes. Learn more here. more than 350 attendees. Learn more here.

7th Annual SuperReturn Emerging Markets AVCJ Forum 2015, Singapore 2015, Amsterdam The world-renowned Super Return series has been The 5th Annual AVCJ Singapore Forum, held on running for over a decade and its events are now well 20 - 21 July, gathered nearly 300 of the PE and VC established as global, must-attend Private Equity and industries’ leading figures from 20 different countries. Venture Capital conferences. GPEI regularly speaks The theme for this year's event was Navigating the and presents research at their events and focused risks and rewards of the ASEAN opportunity and this year on the topic of Family Offices in Asia. The 7th featured distinguished speakers from government, Annual Super Return Emerging Markets conference fund management and institutional investment was held from 29 June - 2 July in Amsterdam. Learn organisations as well as an interactive VC competition more here. showcasing a new crop of start-ups. Learn more here.

11 PE Recruitment @ INSEAD

INSEAD ranked #1 for ” ts latest employment report suggests that 13% of the emerging markets PE I class of 2013 secured a job in private equity or venture recruitment among MBA capital. The average salary for those employed by PE firms programs with dedicated was €102.7k ($111k), with a sign on bonus of 17%, while campuses in emerging markets, VC recruits received the biggest average salary of any and #3 among global programs. financial sector (€112.3k), with a 33% sign on bonus.” EMPEA Efinancialcareers

INSEAD has more than 1,800 alumni in the private equity industry with both GP and LP organizations. Many of these alumni are in senior roles and, in some cases, were founding members of what would become large and influential investment firms. INSEAD prepares students for a career in Private Equity through a unique curriculum and maintains an ecosystem for continued engagement through the INSEAD Private Equity Club. Notable alumni (small selection) include:

Adam Barron (Founder Bregal Capital), Alex Fortescue (Chief Investment Partner Electra Partners), Andrew Sillitoe (Co-CEO Apax Partners), Christoph Ruebeli (Co-CEO Partners Group), Conni Jonnson (Founder EQT), Eric Siew (Chief Investment Officer IFC), Graham Wrigley (Chairman CDC), Ian Riley and Mark Harford (Founders Vitruvian), John Singer (former Chairman Advent International Europe), Justin Bateman (Managing Partner BC Partners), Kurt Bjoerklund (Co-Managing Partner Permira), Nicholas Bloy (Co-Managing Partner Navis Capital), Richard Anton (Partner Amadeus Capital Partners), and Rod Richards (Managing Partner Graphite Capital)

Engaging with INSEAD Candidates: Contact the INSEAD Career Recruitment Process Development Centre • Off-campus recruitment: job board, targeted Please do not hesitate to contact us if you would search in CV database, hosting treks (small like to know more about recruitment at INSEAD: groups of students coming over to your office for a presentation of the fund), sector-specific • Financial Services, Europe Campus: private equity CV book Christelle Cuenin [email protected] • On-campus recruitment (Fall & Spring): company presentation, networking nights, coffee chats +33(0)1 60 72 92 15 and interviews • Financial Services, Asia Campus: • Through the two intakes and the 48,400+ alumni pool, you will find candidates for all your needs: Shweta Gandewar [email protected] • MBA/EMBA/MFIN graduates available for +65 6799 5422 full-time roles • MBA students available for summer internships • Experienced PE professionals in the alumni community • Experienced business profiles for operational roles in your portfolio companies

12 Research by INSEAD’s PE Centre

INSEAD’s PE Centre regularly engages in research covering a wide range of topics salient to the private equity industry. The next few pages contain summaries of the latest research activity and findings from INSEAD.

13 Case Studies

When times are good, (almost) anyone can lead; How do Private Equity firms compete in the it is leading at a difficult time that separates the market for large intermediated transactions, in wheat from the chaff. particular for public assets? "Crisis at the Mill: Weaving an Indian Turnaround “Going Places: The Buy-out of Amadeus Global - Alvarez & Marsal" was developed to provide an Travel Distribution” explores how private equity opportunity for professionals to try their hand at firms develop different business strategies for a challenging turnaround situation in which portfolio investments and evaluate each strategy’s financial distress is exacerbated by allegations impact on a company’s risk-return profile and of fraud. Add India to the mix, a country known optimal financing structure. to have a tricky business environment, and the Unlike financial and strategic advisors, PE firms circumstances could be described as a 'perfect need to have the conviction of investing their storm'. and their investors’ capital in an opportunity, crystallized in the form of a winning bid. In times The case follows two senior executives from of highly intermediated deal flow and Alvarez & Marsal’s India practice as they deal commoditized financing structures, real value has with an urgent request from one of their US to come from operational value creation and/or private equity clients, Sapphire Capital. A former strategic repositioning of businesses. employee is claiming that irregular activities by senior management are at the root of the This case focuses on BC Partners’ participation company’s financial difficulties. The turnaround in the 2004 auction for Amadeus, a major IT team needs to act quickly yet must tread carefully player in the global airlines and travel industry. In order to win in a very competitive auction, BC in case the accusations prove unfounded. The Partners needs to evaluate two distinct business second part of the case describes how the A&M strategies, one stable, the other a potentially high team deals with the situation and the action they risk/high return approach. Stakeholder take to restore and restructure the ailing Indian (management, sellers) and deal process (financing company. structure) considerations play into the decision The case will be featured in INSEAD’s upcoming as well. P4 Private Equity elective. For more information, The case has been taught in INSEAD’s LBO please visit the dedicated case site here. Course and in the Executive MBA program.

14 New Equities for Infrastructure Investment

By Justin Yifu Lin, Kevin Lu & CledanMandri-Perrott, Published in Project Syndicate on March 4, 2015

Infrastructure projects can be among the most construction risk and have demonstrated their productive investments a society can make, with potential to generate stable cash revenues. clear links to a country's economic growth. For In order to overcome the obstacles to investment, private investors, however, the situation is more we propose the creation of an asset class that complicated. Infrastructure projects can offer we call “buy-and-hold equity" (BHE). This asset reliable – if lower-than-average – returns. But class would sit between traditional equity and existing asset classes all too often fail to provide debt, with investors able to hold it for 15 years or the structure needed for these projects to longer. It would offer returns close to those yielded compete with traditional equity or debt. by equity investments, but with some of the risk At the World Economic Forum's annual meeting offset by its long-term nature. in Davos, Switzerland, in January, Walter Kielholz, Risk would be further mitigated through the Chairman of Swiss Re, and former British Prime participation of large, influential investors, Minister Gordon Brown advocated for the creation including sovereign wealth funds, pension funds, of a new asset class for infrastructure – as we and possibly international financial institutions. have done previously, as well. So how, exactly, Public contributions, likely backstopped by can the world harness the potential of private multilateral lenders, would provide projects with money for infrastructure? something close to sovereign risk profiles. Finally, The size of the pie is huge, and so are the the regulated nature of cash flows would allow opportunities for private investors. The pipeline for better pre-defined return structures than for infrastructure projects in emerging markets traditional private or public equity can offer. is estimated to have surpassed $1 trillion – $150 The development of BHE would require a new billion of which is expected to be raised from private-sector investment platform, structured to private sources. In mature markets, infrastructure provide bespoke returns for its different investment is projected to reach $4 trillion by participants. The private sector would bring in 2017. infrastructure investment expertise, while Our analysis of investment deals over the past sovereign funds and international financial 18 months shows that public-private partnerships institutions would provide the bulk of the capital increasingly rely on capital markets to source and stability. [ ] The platform would act not only funds, even as banks rein in lending in order to as an investment vehicle, but also as a project comply with the regulatory provisions set out by initiator, mining opportunities around the world the Third Basel Accord. Liquidity remains limited and identifying and classifying them according in the wake of the 2008 financial crisis, the legacy to a systematic approach. Both greenfield and of which includes a regulatory regime that is not brownfield developments would be considered. conducive to long-term investment. Though Designed properly, a new BHE asset class for financing for public infrastructure has returned private and public infrastructure could unleash to 2008 levels, little of it is being funneled into the power of the market in the interest of the new projects. Most funds have targeted existing public good. Given fiscal and other constraints infrastructure – investments that are considered on governments' capacity, it is an asset well worth relatively safe, because they entail little or no having.

* This article has been slightly shortened to fit the layout of this report. For the full version, see Project Syndicate or GPEI’s website.

15 Working for a PE-backed Company Is it for You?

By Claudia Zeisberger, Published in INSEAD Knowledge on July 29, 2015

Managing a private equity-backed firm brings a • Break downs in transparency and accountability unique set of opportunities and challenges for senior executives. On the one hand, private equity • Poor business performance. (PE) owners provide a degree of freedom and Despite this potential for discord an overwhelming generous compensation unmatched by publicly- number of CEOs - more than 90 percent of those held corporations; on the other, PE investors’ surveyed for a BCG report - believed that PE focus on results and their limited tolerance for ownership had a positive effect on performance under-performance can result in rapid turnover and enabled them to be successful in their role. of management teams if the interests are not aligned. When it comes to compensation, managers of Senior executives must be focused, driven and PE-backed companies are incentivised from the willing to roll up their sleeves to do whatever it start, one of the fundamental reasons for the takes to improve the respective portfolio success of private equity transactions. Not only company. In addition to managing the balance is management encouraged to invest alongside sheet, they will be expected to implement the PE owners, but remuneration packages for strategic change, grow the top line, and align the senior executives and the second layer in the company for exit four to six years down the track organisation usually include a significant share - often while learning the business on the fly. [ ] of equity, aligning economic interests of owners To succeed in private equity executives must and managers. While adding a portion of their develop a transparent and collaborative net worth brings an element of downside risk for relationship with PE owners, who are very hands management, the co-investments are typically on and expect answers to questions fast. “No “sweetened”; for example management may surprises” – is the best advice one can give receive an equity share five to seven times the CXOs. Interaction between owners and company value of its investment giving them the opportunity managers is most concentrated in the early to generate outsized returns through upside months post-investment (when PE firms work closely with managers to implement strategic leverage. [ ] change, organisational redesign and processes Private equity is a place where executives get to to track performance) and later in preparation for test every professional skill in their portfolio and exit. [ ] prove that they make a difference and execute Despite best intentions regarding roles and fast. While there are definitely risks, executives responsibilities, differing opinions can at times who have confidence in their abilities, a result in tensions between management teams preference for high-pressure, fast-paced work and PE owners most notably due to: and the emotional intelligence to work with a • Differences of opinion regarding planning and very focused, hands-on owner, will find the KPI definition rewards are certainly worth it.

* This article has been slightly shortened to fit the layout of this report. For the full version, see INSEAD Knowledge or GPEI’s website.

16 Family Offices in Asia, the Middle East to Double, Insead says

By Klaus Wille, Published in Bloomberg Business on April 27, 2015

The number of family offices in Asia and the between $300 million and $1 billion in Europe or Middle East will more than double to about 400 the U.S. over the next eight years as the ranks of wealthy individuals swell, Michael Prahl of Insead business Family Interference school said. Family office teams in Asia also have to cope Driven by the region’s economic expansion, the with interference by family members in how their number of wealthy individuals is expected to rise assets are invested, according to Prahl. 40 percent by 2023, Prahl, executive director at “Oftentimes, the principal has his network of Insead in Singapore, said in an interview on April friends and advisers who provide him with 24. investment ideas,” Prahl said. “Those investment Asia is lagging behind the U.S. and Europe in ideas can be erratic as they may not fit the family-office services. Seventy-six percent of portfolio and get in the way of a structured and Asia’s family offices were started since 2000, strategic asset allocation.” according to UBS Group AG, whereas they took This unpredictability and interference remain off in Europe and the U.S. in the second half of among the biggest roadblocks to attracting top the last century. Insead estimates that there might talent with institutional background in Asia, he be as many as 200 family offices in Asia currently, compared to about 1,000 in Europe and 3,000 said. in the U.S. “Asset managers, coming from a top-tier bank “Given the youth of the family-office industry in and joining a family office, don’t like being Asia, there is a big desire and need to catch up micromanaged by the principal,” Prahl added. to professionalize,” said Prahl, who does research Maturing Faster and regularly hosts conferences on family offices. Wealthy families’ businesses in Asia are often Family offices manage assets as well as provide too integrated with their asset management, tax, legal, accounting and philanthropy services meaning that some employees are taking on to the wealthy. roles they might not have experience or be In Europe and the U.S. they typically have one qualified for, Prahl said. or two family members involved in asset allocation decisions, generally engaging through the “As an example, the chief financial officer of the investment committee, according to Prahl. family business becomes the chief investment Activities such as managing trading positions and officer of the family wealth organization,” he said. manager selection are left to that body or the Asia’s family offices have the chance to mature investment professionals themselves. In Asia, the faster than their peers in Europe and the U.S. did, family is much more in control of investment Prahl said.“What we are seeing among Asia’s decision making, Prahl said. family offices, is a huge interest in learning,” Prahl In the average Asian family office, just three said. “That and the benefit of being able to investment professionals manage about $400 observe the evolution of the family office model million of assets, according to Insead. That in the U.S. and Europe means they can in some compares with five to six professionals managing instances move forward faster.”

17 Insights from GPEI's Model Portfolios

In this section, we track the evolution of our two model portfolios to provide insights into their construction and management and the challenges associated with a growing and maturing portfolio.

18 Summary Observations

We began the management of our two, $1 billion hypothetical portfolios containing real funds in December 2013.1 The objective was to put ourselves in the shoes of a large institutional investor in an attempt to understand the challenges that come with managing a portfolio and how these challenges are addressed.

When we set out to construct our portfolios, we decided to make Portfolio 1 largely representative of the global PE market, which implied a strategic focus on buyouts and a geographic focus on North America. For a different perspective, we built Portfolio 2 with a larger exposure to growth capital- focused strategies, and a larger allocation to Europe and the emerging markets (mostly Asia). Moreover, in selecting our funds, we “skewed” our portfolios by only selecting funds from the top three quartiles, implicitly assuming selection skill.2 However, since constructing our portfolios, some of the funds selected have moved into the fourth quartile, reducing our initial advantage.

Key Insights

In the past six months, there have been key changes in the composition of our portfolios, the returns generated, and the amount of capital deployed in each.

To maintain a gross capital commitment of $1 billion to private equity, we made several new commitments to PE funds in both portfolios during the first half of 2015. We allocated $60 million to two new funds in Portfolio 1, and $70 million to two new funds in Portfolio 2. We now have 26 funds in Portfolio 1, and 28 funds in Portfolio 2.

The continued growth of funds in our portfolios underscores a challenge highlighted in the last edition of this report – that of a ballooning portfolio. We began with $50 million commitments to 20 funds in each portfolio, and have since added 6 and 8 funds to Portfolios 1 and 2 respectively. Increases of this nature present a real challenge for LPs, as additional commitments require significant internal resources both for selecting attractive investment opportunities and managing GP relationships. One way we could address this issue is to dispose fund stakes via one or more PE secondary transactions, a possibility we will examine in future editions.

While the J-Curves in our original Portfolios 1 and 23 have risen above the low point reached in 2013 and 2014 respectively as distributions begin to outpace capital calls, capital calls exceeded distributions in Portfolio 1 during the first half of 2015. The J-curve for Portfolio 2, on the other hand, continued its upward momentum as distributions exceeded calls by roughly $16 million in the first two quarters of 2015, leading to a continuation of the trend started a year ago. With an average portfolio age of 5.4 years across both portfolios, we expect to see an upward turn in the J-curve for Portfolio 1 that will persist in subsequent quarters.

After an improvement in the performance of both our (full) portfolios over the course of 2014, the first six months of 2015 saw a divergence in returns. At the end of 2014, the MIRRs for Portfolio 1 and Portfolio 2 stood at 13.05% and 11.69% respectively. By 30 June 2015, the MIRR for Portfolio 1 had declined marginally to 12.84%, while the MIRR for Portfolio 2 increased substantially to 13.37%. If we consider all Asia-focused funds across both portfolios (merely as an exercise in line with the earlier section of the edition), we see that they have generated an MIRR of 11.38% as of Q2 2015.

1 You can see a detailed summary of the current geographic and strategy spread our two portfolios in the Appendix, including the IRR, MIRR, TVPI and NAV of all individual funds. 2 For a more detailed look at how the portfolio was created and is managed, and portfolio allocation strategies, please refer to the Private Equity Navigator Methodology on GPEI’s website. 3 For the J curve analysis we only include the original 40 funds to avoid distortion.

19 J-Curves and Comparison of Portfolio Returns

The diagrams below illustrate the cash flows resulting net cash positions (the J-Curve). Only associated with our two portfolios, reflecting the original 20 funds in each of the two portfolios drawdowns (capital called), distributions and the are included in this analysis.

Fig 8 Portfolio 1: Cash flows and J-curve Fig 9 Portfolio 2: Cash flows and J-curve

In the first two quarters of 2015, the original funds capital calls of $67.4 million over the first two in Portfolio 1 saw capital calls of $68.1 million and quarters, as compared with distributions of $83.8 distributions of $37.3 million, again sending our million. Indeed, this portfolio has seen more accumulated cash flow curve downwards capital distributed than called for four successive following an upward swing in Q4 2014. The net quarters, hence the continuation of the upward drawdown for this portfolio stands at $448.7 trend in the accumulated cash flow curve. The million. net drawdown to date for this portfolio stands at In contrast, Portfolio 2’s original 20 funds saw $501.7 million.

Comparison of portfolio returns Our full portfolios (including funds from 2008- recent vintages not included in this chart (2013- 2013) are now on average about four years old. 2015). In fact, this is true even of funds of vintage The value of Portfolio 1 stands at a Total Value to 2011 and 2012 in our two portfolios. Paid-In Capital (TVPI)4 of 1.36x – compared to Of particular note is the performance of Asian 1.34x at the end of 2014 – implying a return of funds of these vintages in our two portfolios, about 36%, or $316.2 million, on invested capital. which outperform the market (all funds in the The TVPI for Portfolio 2 is significantly higher, at Pevara database) with an MIRR of 11.47% as of 1.46x, as compared to 1.29x at the end of 2014, June 2015. implying a return of 46%, or $430.6 million, on MIRR comparison as of June 2015 for funds of invested capital. The superior performance of Fig 10 the latter portfolio can be attributed in part to a vintages 2008-2012 vast improvement in performance during the last six months, when its MIRR increased from 11.69% to 13.37%. This compares with a decline in Portfolio 1’s MIRR from 13.05% as of year-end 2014 to 12.84% as of Q2 2015. However, when we only consider returns from the more mature funds (vintages 2008-2012), Portfolio 1 comfortably outperforms Portfolio 2, implying that Portfolio 2’s overall outperformance is due to the superior performance of funds from

4 TVPI = Cumulative Distributions + Period NAV divided by paid-in capital. While distributions and calls are in “real time”, NAVs trail by a quarter due to the lengthy internal valuation process at PE funds.

20 APPENDIX

Portfolio 1: • Strategy: Buyouts 82.6%; Growth 3.0%; Venture 4.1%; Others (Distressed & Mezzanine) 10.4% • Geography: North America 71.5%; Europe 22.2%; Asia 4.1%; Other Emerging Markets 2.2%

Portfolio 2: • Strategy: Buyouts 63.0%; Growth 19.7%; Venture 6.3%; Others (Distressed & Mezzanine) 11.0% • Geography: North America 41.7%; Europe 33.1%; Asia 20.5%; Other Emerging Markets 4.7%

21 Published by StoneBench